10-K 1 v179137_10k.htm Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-K
 
 
(mark one) 
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009

OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
COMMISSION FILE NO. 001-33746
 
CHINA MEDIAEXPRESS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
DELAWARE
 
20-8951489
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
Room 2805, Central Plaza, Wanchai Hong Kong
(Address of principal executive offices)
 
+852-2827-6100
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
Common Stock, Par Value $0.001 Per Share
 
NYSE Amex
(Title of Class)
 
(Name of exchange on which registered)
 
Securities Registered Pursuant to Section 12(g) of the Act: None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o  No x
 
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes o No x
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o
Accelerated Filer x
Non-Accelerated Filer o
Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
 
The aggregate market value of the 10,255,000 voting and non-voting common equity stock held by non-affiliates of the Registrant was approximately $79,476,250 as of June 30, 2009, the last business day of the Registrant’s most recently completed second fiscal quarter, based on the last sale price of the registrant’s common stock on such date of $7.75 per share.
 
There were a total of 32,909,845 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding as of March 9, 2010.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
(2)           Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2009 Annual Meeting of Shareholders, to be held on June 15, 2010, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.
 

 
PART I
     
2
 
ITEM 1
Business
 
2
 
ITEM 1A.
Risk Factors
 
31
 
ITEM 1B.
Unresolved Staff Comments
 
52
 
ITEM 2
Properties
 
53
 
ITEM 3
Legal Proceedings
 
53
 
ITEM 4
(Removed and Reserved).
   
PART II
     
53
 
ITEM 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
   
   
Purchases of Equity Securities
 
53
 
ITEM 6
Selected Financial Data
 
54
 
ITEM 7
Management’s Discussion and Analysis of Financial Condition and Results of
   
   
Operations
 
54
 
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
 
68
 
ITEM 8
Financial Statements and Supplementary Data
 
69
 
ITEM 9
Changes in and Disagreements with Accountants on Accounting and Financial
   
   
Disclosures
 
69
 
ITEM 9A.
Controls and Procedures
 
70
 
ITEM 9B.
Other Information.
 
71
PART III
   
72
 
ITEM 10
Directors, Executive Officers and Corporate Governance
 
72
 
ITEM 11
Executive Compensation
 
72
 
ITEM 12
Security Ownership of Certain Beneficial Owners and Management and Related
 
 
   
Stockholder Matters
 
72
 
ITEM 13
Certain Relationships and Related Transactions, and Director Independence
 
72
 
ITEM 14
Principal Accountant Fees and Services
 
72
PART IV
   
73
 
ITEM 15
Exhibits, Financial Statement Schedules
 
73
   
Index to Consolidated Financial Statements
   
   
Consolidated Financial Statements
   
 
i

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements and information relating to China MediaExpress Holdings, Inc., that are based on the beliefs of our management as well as assumptions made by and information currently available to us. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions, including among many others: a general economic downturn; a downturn in the securities markets; Securities and Exchange Commission regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Important factors that may cause actual results to differ from those projected include the risk factors specified above. Notwithstanding the above, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. Because we may from time to time be considered as an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.
 
All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding new and existing products and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors mentioned in the “Risk Factors” section of this Form 10-K; and any statements or assumptions underlying any of the foregoing. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report, or that we filed as exhibits to this report, completely and with the understanding that our actual future results may be materially different from what we expect.
 
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
 
USE OF CERTAIN DEFINED TERMS
 
Except as otherwise indicated by the context, references in this report to:
 
 
·
“we,” “us,” “CME,” “the Company” or “our Company” are references to China MediaExpress Holdings, Inc. and its subsidiaries;
 
 
·
“China” and “PRC” are a reference to the People’s Republic of China;
 
 
·
“RMB” is a reference to Renminbi, the legal currency of China;
 
 
·
“U.S. dollar,” “$” and “US$” are a reference to the legal currency of the United States;
 
 
·
“SEC” is a reference to the United States Securities and Exchange Commission;
 
 
·
“Securities Act” is a reference to Securities Act of 1933, as amended; and
 
 
·
“Exchange Act” is a reference to the Securities Exchange Act of 1934, as amended;
 
1

 
PART I
 
ITEM 1 Description of Business
 
Corporate Structure and History
 
The following diagram illustrates CME’s corporate structure as of the date of this report:
 
china
 
We were formerly a Delaware blank check company incorporated on May 1, 2007 under the name TM Entertainment and Media, Inc. (“TM”) in order to serve as a vehicle for the acquisition of an operating business in the entertainment, media, digital and communications industries. On October 15, 2009, pursuant to the terms of a Share Exchange Agreement, dated as of May 1, 2009, as amended on September 30, 2009 (the “Share Exchange Agreement”), we acquired all of the issued and outstanding capital stock of Hong Kong Mandefu Holding Limited (the “HKMDF) and as a result, HKMDF became our direct wholly-owned subsidiary (the “Transaction” or “Share Exchange). The Share Exchange represents a reverse acquisition involving a public blank cheque company and has been accounted for financial reporting purposes as the issuance of shares by HKMDF in exchange for the assets and liabilities of the Company, accompanied by a recapitalization.  As a result of the Share Exchange, HKMDF is the continuing entity for financial reporting purposes, and is deemed to be the accounting acquirer.  Accordingly, the accompanying consolidated financial information of the Company prior to the Share Exchange reflects the results, assets and liabilities of HKMDF whereas the assets and liabilities are recorded at their carrying amounts. In addition, HKMDF’s shares and earnings per share have been restated retroactively to reflect the share exchange ratio as at the date of the Share Exchange in a manner similar to a recapitalization.
 
2

 
HKMDF, through contractual arrangements with Fujian Fenzhong Media Co., Ltd (the “Fujian Fenzhong”), an entity majority owned by HKMDF’s former majority shareholder, operates the largest television advertising network on inter-city express buses in China.  While HKMDF has no direct equity ownership in Fujian Fenzhong, through the contractual agreements HKMDF receives the economic benefits of Fujian Fenzhong’s operations.
 
Pursuant to the Share Exchange Agreement, TM purchased 100% of the outstanding equity of HKMDF and issued 20.915 million newly issued shares of common stock and paid $10.0 million in three year, no interest promissory notes.  Such promissory notes were settled subsequent to December 31, 2009. In addition, the former shareholders of HKMDF may earn up to an additional 15.0 million shares of common stock subject to the achievement of the following net income targets for 2009, 2010 and 2011:

Year
 
Net Income (RMB)
 
Net Income (US$)(1)
 
Shares
2009
 
287.0 million
 
$42.0 million
 
1.0 million
2010
 
570.0 million
 
$83.5 million
 
7.0 million
2011(2)
 
889.0 million
 
$130.2 million
 
7.0 million
 

(1)
Based on current exchange rate of 6.83 RMB/US$.
 
(2)
If CME’s adjusted net income for 2009, 2010 or 2011 does not equal or exceed the targeted net income threshold for such fiscal year, the earn-out shares in respect of such fiscal year will not be issued; provided, however, that if CME’s adjusted net income in the fiscal year immediately succeeding such non-achieving fiscal year exceeds the sum of (i) the targeted net income threshold for such immediately succeeding fiscal year (which, for the fiscal year ending December 31, 2012, the targeted net income threshold shall be RMB1,155,700,000 ($169.2 million)) and (ii) the shortfall amount for the non-achieving fiscal year, then the earn-out shares in respect of such non-achieving fiscal year will be issued.
 
In addition, the Share Exchange Agreement required that a portion of the proceeds received by CME upon the exercise of outstanding public warrants be paid to the former shareholders of HKMDF up to a total of $20.9 million.
 
In connection with the approval of the Transaction at the October 15, 2009 Special Meeting of Stockholders of TM, we changed our name to “China MediaExpress Holdings, Inc.”
 
Business Summary
 
Overview
CME, through contractual arrangements with Fujian Fenzhong, an entity majority owned by CME’s majority shareholder, operates the largest television advertising network on inter-city express buses in China. All references in this Report to “CME’s advertising network”, “CME’s customers”, CME’s operations in general and similar connotations, refer to Fujian Fenzhong, an entity which is controlled by CME through contractual agreements and which operates the advertising network. While CME has no direct equity ownership in Fujian Fenzhong, through the contractual agreements CME controls the activities and receives the economic benefits of Fujian Fenzhong’s operations.  CME generates revenue by selling advertising on its network of television displays installed on inter-city express buses in China. As of July 31, 2008, CME’s advertising network accounted for 81% of all inter-city express buses installed with hard disk drive players, and 55% of all inter-city express buses installed with any type of television display, according to CTR Market Research. CME commenced its advertising services business in November 2003 as one of the first participants in advertising on inter-city express buses in China. CME believes its early entry into this business has enabled them to achieve an audience reach that is highly attractive to advertisers.
 
3

 
CME’s extensive and growing network covers inter-city express bus services originating in China’s most prosperous regions. As of December 31, 2009, CME’s network covered inter-city express bus services originating in fourteen regions, including the five municipalities of Beijing, Shanghai, Guangzhou, Tianjin and Chongqing and nine economically prosperous provinces, namely Guangdong, Jiangsu, Fujian, Sichuan, Hubei, Anhui, Hebei, Shandong and Shanxi. These fourteen regions in aggregate generated more than half of China’s gross domestic product, or GDP, in 2007, according to the National Bureau of Statistics of China. CME’s network is capable of reaching a substantial and growing audience. In the first seven months of 2008, a monthly average of 53 million passengers traveled on inter-city express buses within CME’s network, representing 57% of all passengers traveling on inter-city express buses installed with television displays in China, according to CTR Market Research.  Many of the cities connected in CME’s network are major transportation hubs, which serve as points of transfer for large numbers of leisure, business and other travelers in China to other modes of transportation. CME’s network also includes airport buses connecting major cities to airports and tour buses traveling on routes that connect major cities with popular tourist destinations in China. As of December 31, 2009, CME’s network covered all of the transportation hubs designated by the Ministry of Transport, and CME expects to further increase this percentage as it continues to expand the geographic coverage of its network. In addition to major transportation hubs, the network also covers small to medium-sized cities in China, some of which rely on highway transportation as the primary transportation option for connection outside these cities.
 
CME has entered into long-term framework agreements with 45 bus operator partners for terms ranging from five to eight years. Pursuant to these agreements, CME pays the bus operators concession fees for the right to install its displays and automated control systems inside their buses and display entertainment content and advertisements. CME’s entertainment content is provided by third parties and advertisements provided by its clients. CME obtains a wide range of free entertainment content from Fujian SouthEastern Television Channel and Hunan Satellite Television each month and purchases a limited amount of copyrighted programs from the Audio and Video Publishing House of Fujian Province. As of December 31, 2009, the number of inter-city express buses within CME’s network is 20,161.
 
In October 2007, CME entered into a five-year cooperation agreement with Transport Television and Audio-Video Center, or TTAVC, an entity affiliated with the Ministry of Transport of the People’s Republic of China, to be the sole strategic alliance partner in the establishment of a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China. The cooperation agreement also gave CME exclusive rights to display advertisements on the system. In November 2007, TTAVC issued a notice regarding the facilitation of implementation of the system contemplated under the cooperation agreement to municipalities, provinces and transportation enterprises in China. CME believes its status as the sole strategic alliance partner designated by TTAVC and the exclusive rights to display advertisements on the system has facilitated its historical expansion and is expected to continue to provide them with a competitive advantage in the future.
 
CME believes its network is a highly effective advertising medium. The network is capable of reaching audiences on inter-city express buses while they remain in a comfortable and enclosed environment with minimal distraction. The majority of the inter-city express buses within the network are equipped with leather seats and air-conditioning, providing a comfortable environment which makes the audiences more receptive to the content displayed on CME’s network. Inter- city travel in China typically takes a number of hours. Audiences are therefore exposed to the content displayed on its advertising platform for a significantly longer period of time than on shorter-distance travel. In addition, CME’s patented automated control systems ensure that the programs and advertisements are displayed continuously throughout the journey.
 
CME has grown significantly since it commenced its advertising services business in November 2003. During the year ended December 31, 2009, more than 450 advertisers had purchased advertising time on CME’s network either through advertising agents or directly from CME. Some of these clients have purchased advertising time from CME for more than three years, including Hitachi, China Telecom, Toyota, Siemens and China Pacific Life Insurance. CME has attracted several well-known international and national brands to its advertising network, including Coca Cola, Pepsi, Wahaha, KFC, Siemens, Hitachi, Haier, China Telecom, China Mobile, Nokia, China Post, Procter & Gamble, Bank of China, China Constructing Bank and China Pacific Life Insurance. While CME is unable to determine the exact dollar amount paid by these individual advertisers who purchase advertising through third party agencies, CME is able to determine, based on the number of ads run for these advertisers, that these advertisers comprise a significant portion the advertising on CME’s network. For the years ended December 31, 2007, 2008 and 2009, CME generated total net revenue of $25.8 million, $63.0 million and $95.9 million, respectively. During the same periods, CME had net income of $7.0 million, $26.4 million and $41.7 million, respectively.
 
4

 
Recent Developments
 
On December 29, 2009,  the Company announced the redemption of all the outstanding common share purchase warrants issued in the public offering of TMI.  In accordance with the Warrant Agreement governing the warrants, the Company was entitled to redeem the public warrants because the last sales price of its common shares was $11.50 or more for at least 20 trading days within the 30 trading day period ending on December 23, 2009, and because there was a current and effective registration statement covering the common shares underlying the warrants.  At the time of the notice, there were 8,355,000 public warrants issued and outstanding.  Each warrant entitled the holder to purchase from CME one share of the Company’s common stock at an exercise price of $5.50.
 
On January 12, 2010, Starr Cayman Investments II, LP (“Starr”), the Company and certain subsidiaries and stockholders of the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”), pursuant to which Starr acquired shares of Series A Convertible Preferred Stock (the “Preferred Stock”) and warrants to purchase shares of common stock for an aggregate purchase price of $30 million at a closing that occurred on January 28, 2010 (the “Closing”).  Concurrently, certain stockholders of the Company transferred 150,000 shares of common stock to Starr for no additional cash consideration.  The warrants entitle the holder thereof to purchase up to 1,545,455 shares of the Company’s Common Stock at an exercise price of $6.47 per share at any time and from time to time prior to January 28, 2015.  Until 6 months after the Closing, Starr is not permitted to transfer or otherwise dispose of its interest in the Preferred Stock, warrants or such 150,000 shares of common stock or in any shares of common stock issued upon conversion of the Preferred Stock or exercise of such warrants (other than to certain permitted transferees or pursuant to certain other customary exceptions).

So long as Starr beneficially owns at least 3% of the Company’s Common Stock on a fully-diluted and as-converted basis, the holders of at least a majority of the shares of Series A Preferred Stock outstanding will be entitled to designate one individual (the “Preferred Director”) to the Company’s board of directors (the “Board”).  For so long as Starr is entitled to designate the Preferred Director, Starr will also have the right to appoint one director to each of the boards of directors of certain subsidiaries of the Company.  

In addition, for so long as Starr owns at least 3% of the Company’s Common Stock on a fully-diluted and as-converted basis, the affirmative vote or consent of the holders of at least a majority of the shares of Preferred Stock then outstanding is necessary for effecting: (i) any amendment of the Certificate of Incorporation or Certificate of Designations or Bylaws of the Company or any subsidiary in a manner adverse to the rights, preferences or privileges of the holders of the Series A Preferred Stock; (ii) increase or decrease the total number of authorized shares of Series A Preferred Stock; or (iii) any material amendment of the agreements pursuant to which the Company controls its operating entities in the People’s Republic of China (“PRC”).

Each Series A Preferred Stock is convertible into a number of shares of the Company’s Common Stock in an amount equal to $30 divided by the then applicable conversion price.  The initial conversion price is $10 per share and is subject to customary anti-dilution adjustments for issuances of shares of Common Stock as a dividend or distribution on shares of the Common Stock.  In addition, each share of the Series A Preferred Stock shall be subject to mandatory conversion at the then applicable conversion price into shares of Common Stock upon the earliest to occur of the following: (i) the closing price of the Company’s Common Stock is greater than or equal to $25 per share for a period of 20 consecutive trading days over any 30 trading day period, (ii) the Company’s market capitalization equals or exceeds $1.2 billion, or (iii) January 28, 2014.

The holders of the Series A Preferred Stock are entitled to vote with the holders of shares of Common Stock on all matters submitted to a vote of the stockholders of the Company.  The holders of the Series A Preferred Stock will be entitled to the same number of votes as the number of shares of Common Stock that the Series A Preferred Stock are then convertible into, subject to a cap mandated by the closing price of the Common Stock on NYSE Amex LLC on January 12, 2010.

In addition, for so long as Starr owns at least 3% of the Company’s Common Stock on a fully-diluted and as-converted basis, Starr will have the right to purchase a pro rata portion of any additional shares of capital stock proposed to be issued by the Company, and will have the right to join certain stockholders in their sale of capital stock of the Company on a pro rata basis, in each case in proportion to Starr’s then current percentage of ownership of the issued and outstanding shares of Common Stock, on a fully diluted, as-converted basis.  As long as Starr owns at least 3% of the issued and outstanding shares of Common Stock, on a fully diluted, as-converted basis, it will also have the right to require certain stockholders to purchase its Preferred Stock and the Common Stock held by Starr or issued upon the conversion of Preferred Stock or exercise of the Purchased Warrants upon the occurrence of the Company’s failure to achieve audited consolidated net profits (“ACNP”) for 2009, 2010 or 2011 are less than $42 million, $55 million and $70 million, respectively (each, a “Profits Target”) or to fulfill certain of its obligations under the Purchase Agreement.  The Performance Adjustment Amount payable in any of 2009, 2010 or 2011 will be a fraction of $343,462,957 which is proportionate to the amount by which the Company’s ACNP in such year falls short of the then applicable Profits Target. The Performance Adjustment Amounts will be payable in cash or stock, but only to the extent such stock, together with the shares of Common Stock acquired or acquirable as a result of Starr’s ownership of the Preferred Stock, the Purchased Warrants and the Transferred Shares, will not exceed 19.9% of the total number of shares of Common Stock of the Company issued and outstanding as of the date of the Purchase Agreement.  In the event that the stockholders subject to the obligation to purchase Starr’s shares under the put right or to obligations under the performance-based adjustment provisions do not comply therewith, Starr will have the right to require such stockholders to sell up to all of the Companys’ capital stock directly or indirectly held by them to a third party pursuant to a managed sale process.
 
5

 
After the Closing, the Company is obligated to, among other things, (i) within 3 months effect the transfer of certain of the assets held in the PRC to other companies controlled by it in the PRC and enter into licensing arrangements with respect thereto, (ii) within 3 months amend the terms of the agreements pursuant to which it controls its operating entities in the PRC to the reasonable satisfaction of Starr, (iii) seek approval from the State Administration for Radio and Television for the broadcasting of certain video programming not later than December 31, 2010 and (iv) implement a program regarding compliance with the US Foreign Corrupt Practices Act not later than April 30, 2010.
 
On January 29, 2010, CME completed the redemption of its publicly-held warrants and its publicly traded warrants and units ceased trading on the NYSE Amex.  Prior to the Redemption Date, a total of 8,659, 907 warrants were exercised, or approximately 99.68% of all warrants held by the public.  The remaining 27,718 warrants were extinguished at redemption and the holders of those warrants were paid the sum of $0.01 per warrant.  CME received total proceeds from all warrant exercises of approximately $47 million, of which $20.9 million was paid to the former shareholders of HKMDF in accordance with the terms of the Share Exchange Agreement.
 
Corporate Information
 
CME’s principal executive offices are located at Room 2805, Central Plaza, Wanchai Hong Kong. CME’s telephone number at this address is (852) 2827-6100.
 
Industry
 
Advertising on inter-city express buses represents a new and emerging segment of the advertising market in China. CME believes the growth in demand for advertising and continued development of the express bus sector in China will continue to drive the growth of inter-city express bus advertising.
 
The Advertising Market in China
 
One of the Largest and Fastest Growing Advertising Markets
 
China has the largest advertising market in Asia, excluding Japan, and is the fifth largest advertising market in the world in 2007 by media expenditure. According to ZenithOptimedia, advertising spending in China in 2007 was approximately $15.4 billion, accounting for 15.6% of the total advertising spending in the Asia-Pacific region. ZenithOptimedia also projected that the advertising market in China will be one of the fastest growing advertising markets in the world, at a CAGR of 12.8% from 2007 to 2011. By 2011, China is projected to account for 19.6% of the total advertising spending in the Asia-Pacific region.
 
The growth of China’s advertising market is driven by a number of factors, including the rapid and sustained economic growth and increases in disposable income and consumption in China.
 
CME believes the advertising market in China has significant potential for future growth due to relatively low levels of advertising spending per capita and as a percentage of GDP compared to more developed countries or regions.
 
The following table sets forth the advertising spending per capita and as a percentage of GDP in 2007 in China compared to more developed countries or regions:
 
   
Advertising Spending in 2007
 
   
Per Capita (US$)
   
As a % of GDP
 
China
  $ 11.62       0.5 %
Hong Kong
    438.63       1.5 %
South Korea
    206.71       1.0 %
Japan
    320.76       0.9 %
Asia Pacific (weighted average)
    29.98       0.8 %
United States
    586.11       1.3 %
United Kingdom
    419.79       0.9 %
 
Source: ZenithOptimedia (December, 2008)
 
6

 
Advertising Spending Driven by Rapid Growth in GDP and Disposable Income
 
The growth of China’s advertising market is driven by a number of factors, including the rapid and sustained growth of China’s GDP and increases in disposable income and consumption of urban residents in China. According to the National Bureau of Statistics of China, China was the third largest economy in the world in 2008 with a GDP of RMB30.1 trillion, which amounted to US$4.4 trillion. In addition, the annual disposable income per capita in urban households increased from RMB7,703 in 2002 to RMB15,781 in 2008, representing a CAGR of 12.7%.
 
Increasing Significance of New Out-Of-Home Advertising Medium
 
The advertising market in China can generally be divided into television, newspaper, radio, magazine, Internet, cinema and out-of-home advertising media. Out-of-home advertising is the third largest advertising medium in China after television and newspapers, accounting for 16.7% of total advertising spending in 2007, according to ZenithOptimedia. The percentage is larger than that of Europe, the United States and some other countries in Asia Pacific. Total advertising spending on out-of-home media in China was $2.6 billion in 2007, and is projected to grow to $5.0 billion in 2011, representing a CAGR of 18.0% from 2007 to 2011.
 
CME believes out-of-home advertising networks are gaining increasing acceptance in China. Out-of-home advertising networks offer advertisers alternative new media to reach audiences more effectively and supplement traditional advertising media such as television, magazine and radio, which may have more limited geographic coverage. Moreover, due to the high cost of advertising on traditional advertising media, in particular, during peak hours on television, out-of-home advertising offers advertisers a more cost effective alternative.
 
Express Bus Travel in China
 
The overall economic growth and development of highway systems in China have resulted in increased leisure and business travel among cities in China through highways. According to the National Bureau of Statistics, the total number of passengers traveling on highways reached 22.1 billion in 2008, representing a 7.6% growth from 2007.
 
Express bus travel is a primary means of transportation in China due to various reasons, including the more comprehensive coverage of highway networks compared to other modes of transportation and relatively low private vehicle ownership in China. Many cities in China are highly dependent on highway transportation and many small and medium-sized cities in China rely on highways as the primary means of transportation outside cities and towns. Inter-city buses on highways also offer the advantages of lower cost, higher frequency and point-to-point convenience relative to rail and air travel, an additional factor which explains the prevalence and continued growth of this mode of inter-city transportation. According to the Ministry of Transport, as of July 31, 2008, there were over 43,000 inter-city express buses with a seating capacity of more than 27 passengers in China. The average monthly passenger traffic on inter-city express buses totaled over 158 million in the seven months ended July 31, 2008. In addition to its large size and continued growth, the express bus market is highly fragmented, with a large number of small-scale operators operating services primarily within certain provinces or regions. At present, there are few large operators with nationwide networks.
 
China intends to outlay significant expenditures on highway infrastructure construction to promote balanced development in urban and rural areas in China. CME believes the sustained economic growth and a more comprehensive, efficient and convenient highway system will continue to drive express bus travel in China.
 
Advertising on Inter-City Express Buses in China
 
Advertising on inter-city express buses represents a new and emerging segment of the advertising market in China, and can be considered part of the out-of-home advertising market. Given the high fragmentation of the express bus market, few bus operators possess the scale to operate a sizable advertising services business by themselves. The large advertising network operators on inter-city express buses therefore tend to be independent advertising companies who have entered into concession agreements with numerous bus operators to display advertising inside their buses. The advertising market on inter-city express buses is itself also highly fragmented, with only a few large players known to possess significant market share in China. According to the Ministry of Transport, as at July 31, 2008, over 90,000 television displays were installed on inter-city express buses in China.  Out of these, over 37,000 television displays utilized hard disk drive players, and the remainder used DVD players, CF cards and other audio-visual technologies. CME believes hard disk drives represent the most effective technology at present to operate television advertising on inter-city express buses.
 
7

 
As an advertising medium, CME believes advertising on inter-city express buses possesses the following characteristics:
 
 
·
Effective audience reach.  The large number of passengers on inter-city express buses in China provide advertisers with a large and growing target audience. The displays installed on inter-city express buses are often the only form of media provided in such environments. Passengers are more willing to watch the programs on the displays and the accompanying advertisements.
 
 
·
Cost effectiveness.  Advertising placed on inter-city express buses, where a large number of people congregate, can reach consumers at a lower cost than most other traditional media advertising, such as on television at home.
 
 
·
Attractive target demographics.  Most of the passengers traveling on inter-city express buses belong to China’s emerging middle class, with higher than average income and purchasing power. Many of the passengers are business travelers, including distributors who own their businesses in small- and medium-sized cities and frequently travel to larger cities to engage in wholesale procurement and trading. These passengers have strong purchasing and decision-making power for their businesses, presenting wholesale and long-term business opportunities to advertisers in addition to retail sales. The volume and the quality of such target audience are attractive to advertisers for the promotion of their products and services.
 
 
·
Increasing acceptance.  CME believes that television advertising networks on inter-city express buses have gained increasing acceptance among three major groups: express bus operators, highway travelers and advertisers. CME believes many express bus operators have chosen to partner with digital media companies to reduce their operational costs, and improve the overall passenger experience. Digital media networks provide passengers with informative and entertaining content or otherwise provide an outlet to fill idle time, which may help to enhance the overall passenger experience and add value to the services provided by express bus operators. CME believes advertisers have increasingly chosen digital media advertising on inter-city express buses due to their high receptivity among passengers and ability to reach large audiences with favorable demographics in a cost effective manner.
 
Competitive Strengths
 
The largest television advertising network on inter-city express buses with an early entrant advantage in China
 
CME believes it operates the largest television advertising network on inter-city express buses in China. According to CTR Market Research, as of July 31, 2008, CME’s advertising network accounted for 81% of all inter-city express buses installed with hard disk drive players and 55% of all inter-city express buses installed with any type of television display. In the first seven months of 2008, a monthly average of over 53 million passengers traveled on inter-city express buses within CME’s network, representing 85% and 57%, respectively, of the passenger traffic on inter-city express buses installed with hard disk drive players and with any type of television display, respectively. CME believes its large-scale network capable of reaching a sizeable audience traveling within economically prosperous regions in China presents an attractive proposition to advertisers.
 
The ability to maintain and enhance CME’s leading market position
 
CME believes it has the following competitive strengths that would allow it to maintain and enhance its position as the largest television advertising network on inter-city express buses in China:
 
 
·
Early entrant advantage.  CME commenced its advertising services business in November 2003 and was amongst the first companies to engage in digital television advertising on inter-city express buses in China. CME rapidly established a sizeable nationwide network, occupying a significant market share. CME’s early entry into the
market has also enabled it to accumulate a significant amount of knowledge and experience in this nascent segment of the advertising industry.
 
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·
Long-term agreements with a large number of bus operators.  CME has entered into long-term framework agreements with a large number of bus operators, enabling it to occupy a significant market share and to create significant entry barriers for potential competitors. CME has entered into long-term framework agreements with 40 inter-city express bus operators for terms ranging from five to eight years. As of July 31, 2008, the number of buses within CME’s network accounted for 81% of all inter-city express buses installed with hard disk drive players and 55% of all inter-city express buses installed with any type of television display, according to CTR Market Research.
 
 
·
Scale of operations.  CME believes it has achieved the scale of operations that is not only attractive to advertisers but also allow it to capitalize on cost synergies. CME’s network with over 16,000 inter-city express buses covers all four municipalities and seven economically prosperous provinces in China. The large number of inter-city express buses in CME’s network in economically prosperous regions in China has enabled it to attract a significant number of clients. During 2009, more than 450 advertisers directly or indirectly purchased advertising time on CME’s network.
 
 
·
The sole strategic partner designated by an entity affiliated with the Ministry of Transport.  In October 2007, CME entered into a five-year cooperation agreement with an entity affiliated with the Ministry of Transport of the People’s Republic of China to be the sole strategic partner in the establishment of a nationwide in-vehicle television system displaying copyrighted programs on buses traveling on highways in China. The cooperation agreement gave CME exclusive rights to display advertisements on the system. In November 2007, this entity issued a notice regarding the facilitation of implementation of the system contemplated under the cooperation agreement to municipalities, provinces and transportation enterprises in China.
 
A highly effective and efficient advertising network
 
CME believes its network is a highly effective and efficient. According to a survey conducted by CTR Market Research in July 2008 on bus services originating in eight major cities, on average, 81% of all passengers said they had watched the television displays on CME’s network, and almost 80% said they regularly watched the displays on the network. CME believes the effectiveness of its advertising network is demonstrated by the following characteristics:
 
 
·
Enclosed and comfortable environment with minimal distraction.  The majority of the inter-city express buses within CME’s network are equipped with leather seats and air-conditioning, providing a comfortable environment which makes the audiences more receptive to the content displayed. Passengers are required by law to be seated during journeys on expressways, thereby enabling passengers to view the content displayed on CME’s network with little view obstruction.
 
 
·
Inter-city travel increases length of exposure.  Inter-city travel in China typically takes a number of hours. Audiences are therefore exposed to the content displayed on CME’s network for a significantly longer period of time than on shorter-distance travel. According to a survey conducted by CTR Market Research in July 2008 on bus services originating in eight major cities, the average duration of a journey on buses within CME’s network took two and a half hours. As CME displays advertisements in ten-minute blocks after every 30 minutes of entertainment content, the audiences can potentially view the same advertisement up to three times per journey. CME believes repeated exposure to the same advertisement significantly increases its effectiveness.
 
 
·
CME’s patented automated control systems ensure uninterrupted display.  CME’s patented automated control systems are designed to ensure the automatic initiation of the entertainment content and advertisements on the displays whenever the driver opens the doors of the buses, and ensure continuous display throughout the journey. This prevents interruption due to actions of bus drivers or passengers during the journey.
 
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The audience reach of CME’s network
 
CME believes its network allows its clients to launch campaigns for both products with mass appeal as well as campaigns targeting specific geographies and audience profiles. Clients who wish to promote widely consumed products such as food and beverage are able to reach a large number of passengers through CME’s network. Clients wishing to promote luxury or high-end products and services may focus their advertising on airport shuttle buses, or in selected municipalities and provinces with more affluent travelers.
 
In addition, CME believes many advertisers are drawn to its network because of the penetration of small to medium-sized cities in China. Due to the penetration of CME’s network, advertisers are able to target wholesalers and distributors in small to medium-sized cities who travel frequently to larger cities to engage in wholesale procurement and trading. Many wholesalers and distributors rely on inter-city express buses as their primary means of transportation between cities. The ability to target such distributors further enhances the appeal of CME’s advertising network.
 
CME believes that the effectiveness and extensive coverage of its network will continue to allow it to maintain its existing clients, enhance client loyalty and attract new clients.
 
A highly price competitive advertising medium
 
The CPM, or cost of reaching a thousand viewers, of advertising on CME’s network is significantly lower than that of other advertising media, including local television channels and other out-of-home advertising media. According to CTR Market Research, as of July 31, 2008, the CPM for every 15 seconds of advertising on CME’s network in eight major cities represented only a small fraction of the CPM for advertising on local television channels in those cities. CME believes the low CPM of advertising on its network presents a highly compelling proposition to advertisers, and presents potential room for future increases in its rates.
 
City
 
CPM of Advertising on CME’s Network
   
CPM of Advertising on Local Television Channels
 
   
(In RMB for every 15 seconds)
 
Shanghai
    3.61       140  
Guangzhou
    3.22       114  
Xiamen
    3.06       255  
Fuzhou
    2.61       268  
Nanjing
    2.58       153  
Changzhou
    2.58       317  
Tianjin
    2.56       59  
Beijing
    2.14       133  
 
Source: CTR Market Research as of July 31, 2008
 
Strong Value Proposition
 
CME believes its success has resulted from its strong value proposition to various parties involved in its business, including its clients, the inter-city express bus operators participating in its network, and the content providers of entertainment programs. CME provides its clients with an alternative advertising medium that it believes is more effective and price competitive than other advertising media. In addition, CME provide its bus operator partners with a source of incremental revenue from concession fees, and a source of entertainment for their passengers which enhances their service, without the need for them to invest in and incur ongoing costs of operating the displays. Moreover, CME’s extensive network in China offers its content providers an alternative channel to effectively promote their brand to a wider audience otherwise more difficult or expensive to reach through conventional distribution channels. CME believes its strong value proposition to various parties involved in its business will enable it to sustain its long-term business growth.
 
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Strong Management Team with Extensive Experience
 
CME has an experienced management team. In particular, Zheng Cheng, its founder, chairman and chief executive officer has over ten years’ experience in business management. He demonstrated his entrepreneurship and business leadership by starting up CME’s business in November 2003 and having successfully grown CME’s business to become the largest digital television advertising network operator on inter-city express buses in China with a strong client base and significant financial growth in less than five years. He also secured CME’s status as the sole strategic alliance partner of TTAVC and initiated the invention, application and registration of patent protection for its automated control systems. In order to successfully manage and expand CME’s business in an efficient and cost effective manner, he exerted significant efforts in the refinement of its management system and business process. Fujian Fenzhong received recognition in December, 2007 by the China Advertising Association, an independent industry association, as a first-class media advertising enterprise in China. CME believes its certification demonstrates its ability to pass stringent evaluation standards, including its scale of operation, quality of human resources, quality of services and influence in the industry. In addition, on January 17, 2008, Fujian Fenzhong received ISO 9001:2000 certification according to the standards of China National Accreditation Service and International Accreditation Forum. CME believes such ISO certification demonstrates its ability to meet international standards in its management system. In addition to Mr. Cheng, CME’s management’s team includes Jacky Wai Kei Lam, its Chief Financial Officer, Jian Yu, its Chief Operating Officer, Jinlong Du, its Chief Marketing Officer, Biaoxing Chen, its Chief Technology Officer, Weisheng Liu, its Chief Administration Officer and Zhuofeng Zheng, its financial controller.  CME believes a well established management system allows it to operate its business to the satisfaction of clients in an efficient and cost effective manner.
 
CME Strategies
 
CME’s objectives are to strengthen its position as the largest digital television advertising network on inter-city express buses in China and continue to achieve rapid growth. CME intends to achieve these objectives by implementing the following strategies:
 
Expand the Coverage and Penetration of its Advertising Network on Inter-City Express Buses
 
CME intends to expand the coverage and penetration of its out-of-home digital televisions advertising network on inter-city express buses to further grow its revenue. CME intends to achieve this through the following means:
 
 
·
Increase the number of inter-city express buses within its network.  CME intends to enter into new long-term framework agreements with other express bus operators not already participating in its advertising network. Such efforts would enable CME to have a more comprehensive coverage and deeper penetration into small and medium-sized cities in China.
 
 
·
Expand the geographic converge of its network.  CME intends to expand into new regions to increase the geographic coverage of its network. For example, CME expects to enter into new provinces and regions in the future, including Shandong, Zhejiang, Hunan, Heilongjiang, Jilin, Liaoning, Yunnan, Guangxi, Shanxi. To further increase the penetration of its network, CME intends to increase the coverage of its advertising network to county level cities in various provinces in China highly dependent on highway transportation for connection outside these cities. CME believes the breadth and penetration of its advertising network with nationwide coverage would provide its clients with a wider and more diverse distribution network for their advertisements.
 
 
·
Increase coverage of routes connecting prosperous coastal cities.  CME intends to expand the fleet of inter-city express buses traveling in economically prosperous coastal cities and provinces, including those traveling to and from airports and tour buses, to enhance the reach of its network to more affluent and business travelers with strong purchasing power.

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Broaden Revenue Sources
 
CME aims to seek to broaden its revenue sources to further augment its potential revenue growth through providing additional advertising channels to advertisers and new services to passengers:
 
 
·
Separately package advertising time slots on airport shuttle buses, tour buses and buses servicing the commute between supermarkets and residential communities for sale to its clients.  CME intends to separate advertising time slots on buses based on the purpose of travels for sale to its clients. This will enable advertisers to effectively target more specific audience profiles. For example, advertisers who wish to promote luxury and high-end products and services may focus their advertisings on airport shuttle buses, or in selected municipalities and provinces with more affluent travelers. To further increase the number of airport shuttle buses carrying its network, CME intends to enter into contracts with bus operators that connect Beijing, Tianjin and Xiamen with the airports servicing these metropolitan areas. Advertisers in the hotel, dining and travel and leisure industries are able to purchase advertising time slots on tour buses carrying CME’s network. Advertisers with their products for sale on supermarket shelves are able to purchase advertising time slots on buses that service the commute between supermarkets and residential communities. CME believes the development of these separate networks would enable it to broaden its revenue sources and generate incremental revenue.
 
 
·
Generate revenue from the display of soft advertisements packaged as entertainment content.  CME seeks to generate revenue from displaying entertainment programs which are effectively soft advertisements, for a variety of products and services. Examples of such advertisements include travel programs featuring hotels, restaurants and tourist destinations, and fashion shows featuring lines of clothing being the subject of promotion.
 
 
·
Establish stationary advertising media.  CME intends to establish stationary advertising media at inter-city express bus terminals to complement its business. These include digital billboards or liquid emitting diodes, or LEDs, installed at bus terminals to target passengers during their waiting time. CME expects this expansion would increase the value of its network by increasing the size of the audience reachable and by extending the exposure for advertisers. In addition to providing an additional source of revenue, CME believes this initiative would increase demand for its services and enable it to charge higher rates.
 
 
·
Offer new services to advertisers and passengers.  CME intends to feature hotels, spa resorts, local restaurants on its network while displaying the logo, telephone numbers and other contact information of relevant service providers and charge advertising fees. In addition, CME plans to handle bookings through call centers or short messages for the convenience of passengers who are attracted to relevant services featured on its network. CME plans to share revenue resulting from bookings through call centers or short messages with relevant service providers participating in its value-added service programs. CME may also seek to provide drinks sponsored by advertisers or offer other merchandise for sale on the inter-city express buses carrying its network.
 
Increase CME’s Average Advertising Rates
 
CME aims to maximize its average advertising rates through the following means:
 
 
·
Sell first few minutes of the advertising time slots at higher rates.  Advertisers generally consider the first few minutes of each advertising time slot to be more effective than the remaining few minutes toward the end of the advertising time slot. As a result, CME intends to separately package the first few minutes of each advertising time slot for sale at a higher price, which CME believes would increase its average advertising rates.
 
 
·
Expand the coverage and penetration of its advertising network.  CME believes expanded coverage and penetration of its advertising network would increase the effectiveness and attractiveness of its network to advertisers, thereby enabling it to increase its average advertising rates.
 
 
·
Capture increased advertising spending on its advertising network from its clients.  CME intends to compete for a larger portion of its clients’ advertising budget relative to other media. CME believes increased demand for advertising time on its network will enable it to charge higher average advertising rates. CME’s network is capable of reaching a large audience in transit who are otherwise more difficult or expensive to reach through conventional media. Currently, the CPM of advertising on CME’s network is significantly lower than that in other advertising media, including both traditional and new out-of-home media. Compared to other out-of-home advertising networks with coverage limited to buildings, airplanes, airports or public transportation of a particular city, CME’s network has a wider geographic coverage with lower CPM. In light of the characteristics of its advertising network, CME believes it will be able to capture an increasingly larger portion of its clients’ advertising budgets while charging higher advertising rates, as the acceptance of its advertising medium continues to grow.
 
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·
Enhance the effectiveness of its advertising network.  CME intends to continue to improve the environment in inter-city express buses by installing additional digital television displays on each bus and offering a wider range of content attractive to the target audience. CME believes such enhancements will make its advertising network more effective and attractive to advertisers and advertising agencies.
 
 
·
Attract national and international brand name advertisers to purchase its advertising time.  CME believes the effectiveness of its network would continue to attract more international and national brand name advertisers to purchase advertising time slots from it through advertising agencies or directly. CME believes increased demand from advertising agency clients and direct clients would enable it to charge higher average selling price. CME also intends to penetrate further the local advertising markets by appealing to local advertisers who typically utilized other types of advertising media.
 
Seek and Maintain Strategic Partnerships and Merger and Acquisition Opportunities
 
CME intends to continue to maintain and pursue strong relationships with government authorities in China in charge of regulating the industries related to its business. CME seeks to maintain communication channels with the Ministry of Transport to facilitate the delivery of its services and implementation of the government’s policy initiatives with respect to the display of copyrighted programs on inter-city express buses. CME seeks to leverage its government relationships and industry connections to increase the penetration of its services in its existing and prospective advertising network.
 
CME aims to continue expanding the scale of its advertising network and the type of media platforms it employs through strategic relationships and mergers and acquisitions. CME seeks to enter into strategic relationships or merger and acquisition agreements with local companies capable of delivering customized, time-specific and local-oriented content. CME believes strategic partnership and merger and acquisition opportunities would allow it to utilize their resources to facilitate local penetration.
 
CME’s Advertising Network
 
CME displays entertainment programs and advertisements on inter-city express buses carrying its network. Inter-city express buses refer to buses traveling directly in between cities through expressways in China with a seating capacity of more than 27 passengers per bus. Typically, two to three digital television displays are installed on each inter-city express bus participating in CME’s network. As of June 30, 2009, CME’s digital television advertising network consisted of over 16,000 express buses and over 34,000 digital television displays. For the seven months ended July 31, 2008, on average 53 million passengers traveled on inter-city express buses within CME’s network every month.
 
According to reports CME commissioned from CTR Market Research, CME had an approximate 85% share of passenger traffic on inter-city express buses installed with hard disk drive players, and an approximate 57% share of passenger traffic on inter-city express buses installed with all types of display technologies in China. The following table sets forth CME’s market share for inter-city express buses installed with hard disk drive players, and inter-city express buses installed with all types of display technologies, in terms of the number of buses, the number of displays and passenger traffic, as of July 31, 2008.
 
As of July 31, 2008
 
Inter-City Express Buses Installed with Hard Disk Drive Players
   
Inter-City Express Buses Installed with all Types of Television Display Technologies
 
CME’s share in terms of number of buses
    81 %     55 %
CME’s share in terms of number of screens
    82 %     57 %
CME’s share in terms of passenger traffic
    85 %     57 %
 
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Source: CTR Market Research
 
As of December 31, 2009, CME’s network covered inter-city express bus services originating in fourteen regions, including the five municipalities of Beijing, Shanghai, Guangzhou, Tianjin and Chongqing and nine economically prosperous provinces, namely Guangdong, Jiangsu, Fujian, Sichuan, Hubei, Anhui, Hebei, Shandong and Shanxi]  These fourteen regions in aggregate generated more than half of China’s GDP in 2007, according to the National Bureau of Statistics of China. Many of the cities connected in CME’s network are major transportation hubs, which serve as points of transfer for large numbers of leisure, business and other travelers in China to other modes of transportation. CME’s network also includes airport buses connecting major cities to airports and tour buses traveling on routes that connect major cities with popular tourist destinations in China.
 
CME’s Advertising Services
 
CME displays entertainment programs interspersed with advertisements, with a ten-minute block of advertising shown after every thirty minutes of entertainment programming. The entertainment programs enable CME to capture the attention of the passengers to increase the effectiveness of advertisements displayed on its platform. The passengers traveling on inter-city express buses included in CME’s advertising network are the target audience of its clients.
 
The advertisements displayed on CME’s network are provided by its clients approximately seven days prior to their display on CME’s network. The design and production of advertisements displayed on CME’s network are undertaken by independent third party professional advertising agencies. CME inspects the content of the advertisements for purposes of compliance with applicable laws and regulations and reserves the right to request a revision of content it believes may be in violation of applicable laws and regulations and to reject the display of such advertisements if the content is not revised or if the content may still be, in CME’s view, in violation of applicable laws and regulations after revision. CME’s in-house production department combines the entertainment programs provided by CME’s content suppliers with advertisements provided by CME’s clients for display on CME’s platform.
 
Audience Profile
 
According to the surveys conducted by the CTR Market Research in selected cities, namely, Shanghai, Beijing, Guangzhou, Tianjin, Nanjing, Fuzhou, Xiamen and Changzhou, in July 2008, the audience of CME’s network have the following overall characteristics:
 
 
·
the average age is 30 years old;
 
 
·
the average household income is over RMB5,800 per month and the average individual income is over RMB3,300 per month;
 
 
·
the primary purposes of travel include business, travel and leisure and visiting families and friends;
 
 
·
over 50% of the target audiences have received a diploma, college degree or higher education;
 
 
·
over 40% of the target audiences are professionals, managers, executives and business owners; and
 
 
·
over 40% of the target audiences are frequent travelers that take inter-city express buses for more than once a month.
 
CME believes its network is highly attractive to advertisers because they are capable or reaching large amounts of relatively young, income generating, well-educated and successful passengers who travel frequently on inter-city express buses in China.
 
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Clients
 
CME derives all of its revenue from selling advertising time slots to its clients. CME generates revenue from two types of clients: advertising agencies which purchase advertising time slots from it and resell such time to advertisers and advertising clients which directly purchase advertising time slots from CME. CME generates a majority of its revenue from selling advertising time slots to advertising agencies which in turn sell such time to advertisers. For the year ended December 31, 2009, CME derived 78.6% of its revenue from selling advertising time slots to advertising agencies and the remaining 21.4% of its revenue directly from advertisers. During the same period, CME’s top ten clients and the single largest client accounted for 45.0% and 6.9%, respectively, of its total revenue.
 
Sales and Marketing
 
As of December 31, 2009, CME employed an advertising sales force of 65 employees. CME’s sales force focuses their efforts on studying CME’s clients’ sales and marketing strategies, analyzing their needs and providing tailored advertising solutions to suit their needs. CME also utilizes its network to promote its own brand and business.
 
To provide assurance to its clients that CME performs its contractual obligations by displaying their advertisements on CME’s network according to CME’s contracts, CME commissions CTR Market Research each month to conduct independent verification studies. In this connection, CTR Market Research dispatches personnel to take the inter-city express buses carrying CME’s network to conduct random inspections of CME’s advertising services without its knowledge and compiles reports based on the findings they gathered. CME provides such reports to its clients on a monthly basis.
 
Advertising Contracts
 
CME typically enters into one-year contracts with its advertising agency clients. CME’s advertising agency clients usually enter into contracts with it at the beginning of the year and purchase a specified amount of advertising time for the entire year.
 
The key terms of one-year contracts with advertising agency clients include:
 
 
·
the average advertising rate for every thirty seconds;
 
 
·
the number of minutes the advertisements will be displayed each month; and
 
 
·
the aggregate advertising fees payable in that year.
 
CME has also entered into long-term framework agreements with two of its advertising agency clients for a term of three years starting from January 1, 2008 to December 31, 2010. In addition to the contract terms typically included in the contracts with advertising agency clients, the long-term framework agreements also specify the permissible range of annual increase in the average selling prices, which is between a minimum of 20% and a maximum of 50%.
 
CME usually enters into six-month or short-term contracts with its direct advertising clients. Such short-term contracts are intended to give the clients flexibility to purchase advertising time slots or increase orders for CME’s advertising time slots as the clients introduce new products or services or when they augment their marketing efforts during peak seasons. The key terms of such short-term contracts include:
 
 
·
the municipality or province in which the advertisements will be displayed;
 
 
·
the number of buses on which the advertisements will be displayed in any given municipality or province;
 
 
·
the duration of advertising time in terms of seconds;
 
 
·
the number of months in which the advertisements will be displayed; and
 
 
·
the aggregate advertising fees payable.
 
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CME sells advertising time slots by the number of minutes or seconds in a particular municipality or province for a period of a few months to one year. Moreover, although inter-city express buses carrying CME’s network frequently travel across municipalities and provinces in China, it sells advertising time slots based on the municipality or province from which the buses depart. Further, CME typically uses the price to display advertisements for thirty seconds per month as the unit price. As a result, the total contract price payable by CME’s clients is calculated by multiplying the unit price with the units contained in the number of minutes displayed per month and the number of months in which the advertisements are displayed. The outstanding advertising fees are typically paid by clients on a monthly basis.
 
List prices are set by reference to a combination of factors, including local economic conditions, the advertising fees charged by other advertising media, including local satellite television operators, and the number of inter-city express buses carrying CME’s network. Generally, the list prices in Shanghai and Jiangsu are higher than those in Beijing, Tianjin, Guangdong and Fujian, which, in turn, are higher than those in Sichuan and Hebei. The actual selling prices are lower than the list prices because CME usually offers its clients discounts at a certain discount rate based on negotiations with its clients. These discounts will net of the actual selling price to determine the final invoiced price and the revenue will be recorded based on the discounted price.
 
CME adjusts advertising fees each year based on a number of factors, including the advertising fees charged by traditional advertising platforms such as television operators, the advertising fees charged by other out-of-home advertising network operators, the number of inter-city buses carrying CME’s network, the extent of coverage of CME’s network and the estimated number and characteristics of audiences reachable through CME’s network.
 
CME generally requires its clients to submit advertising content at least seven days prior to the first display for compliance review. CME also reserves the right to refuse to disseminate advertisements that are not in compliance with applicable laws and regulations.
 
Bus Operator Partners
 
As of December 31, 2009, CME has entered into long-term framework agreements with 45 inter-city express bus operators in China with terms ranging from five to eight years. As of December 31, 2009, a total of over 20,000 inter-city express buses, including airport shuttle buses and tour buses, carry its network.
 
The long-term framework agreements give CME the concession rights to install its patented automated control systems on the inter-city express buses carrying CME’s network. CME installs such equipment and control systems at its own cost. CME has also purchased from the bus operators digital television displays previously installed in a portion of the inter-city express buses carrying CME’s network. These equipment and control systems serve as CME’s advertising platform. CME enters into contracts with the inter-city express bus operators participating in its network each year to update the number of buses carrying CME’s advertising network and the concession fees payable per bus for that year. The concession fees payable to the inter-city express bus operators are subject to an increase at a minimum of 10% and a maximum of 30% per year. CME settles its concession fees with the inter-city express bus operators on a monthly basis based on the actual number of buses carrying CME’s network in the preceding month.
 
Cooperation Agreement with the Transport Television and Audio-Video Center
 
In October 2007, CME entered into a five-year cooperation agreement with the Transport Television and Audio-Video Center, or TTAVC, an entity affiliated with the Ministry of Transport of the People’s Republic of China to be the sole strategic alliance partner in the establishment of a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China. TTAVC was first established in 1989 and restructured as a division under the China Communications News Press by the Ministry of Transport in November 2007. TTAVC is the only film and television production entity affiliated with the Ministry of Transport and is in charge of reporting of important news through the transportation industry. Under the cooperation agreement, CME is responsible for the installation of hard disk drives and audio and visual equipment, including their repair and maintenance, at its own cost. CME retains ownership and the right to operate such equipment and systems. CME is also obligated to ensure the display of copyrighted programs on the system. The cooperation agreement gives CME exclusive rights to display advertisements on the system. The cooperation agreement also provides CME the rights to display its logo on the buses carrying its network.
 
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To implement a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China, TTAVC is obligated to reaffirm CME’s status as the sole strategic alliance partner in documents it enters into with relevant bus operators. TTAVC is also obligated to notify and coordinate meetings with relevant bus operators to facilitate CME in the implementation of a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China. TTAVC has the right to inspect whether content displayed on the system is copyrighted, whether CME performs its obligations to provide content and whether the equipment and systems CME provides function properly.
 
TTAVC is obligated to ensure CME’s status as its sole strategic alliance partner. In the event TTAVC enters into agreements with third parties to engage in the same type of project in breach of such obligations, it is liable for damages at ten times the value of the equipment and systems, which is equivalent to RMB40,000 per unit.
 
In November 2007, TTAVC issued a notice requesting municipalities, provinces and transportation enterprises in China to facilitate the implementation of the system contemplated under the cooperation agreement.
 
Suppliers
 
Content Suppliers
 
Currently, the content displayed on CME’s network includes a wide range of free entertainment content obtained from Fujian SouthEastern Television Channel and Hunan Satellite Television and a limited amount of copyrighted programs obtained from the Audio and Video Publishing House of Fujian Province. CME seeks to secure additional content suppliers in the future to enhance the diversity and attractiveness of its content as it continues to expand its business.
 
On September 1, 2006, CME entered into a cooperation agreement with Fujian SouthEastern Television Channel operated by Fujian Radio, Film, and Television Group. Under this agreement, CME obtains five to ten hours of free entertainment content from Fujian SouthEastern Television Channel each month. CME is obligated to display Fujian SouthEastern Television Channel’s logo while showing the content on its network. Currently, CME is the only in-vehicle advertising network operator to receive free content from Fujian SouthEastern Television Channel. The agreement with Fujian SouthEastern Television Channel has a term of nine years starting from September 1, 2006 to August 31, 2015 and CME expects to renew the agreement upon expiration.
 
On August 25, 2008, CME entered into a cooperation agreement with Hunan Satellite Television operated by Hunan Satellite Programming Company Limited to obtain additional entertainment content to further enhance the variety of its programming. Under this agreement, Hunan Satellite Television provides CME with five to twelve hours of free entertainment content each month. In addition, the agreement authorized CME to act as the agent to source advertisers within Fujian to show advertisements on Hunan Satellite Television. CME expects to enter into additional agreements with Hunan Satellite Television to separately govern the arrangement and pricing of such advertising agency business. The agreement with Hunan Satellite Television has a term of two years starting from September 1, 2008 to August 31, 2010 and CME expects to renew the agreement upon expiration.
 
The arrangements with Fujian SouthEastern Television Channel and Hunan Satellite Television allow CME to obtain quality entertainment programming at no cost. In addition, CME’s network offers its content providers a new alternative channel to promote their brands to a wider audience which would otherwise be more difficult or expensive to reach through conventional distribution channels.
 
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Equipment Supplier
 
The primary equipment and control systems required for the operation of CME’s business consists of digital television displays, hard disk drives and firmware, and CME’s patented automated control systems. Maintaining a steady supply of such equipment and control systems is important to its operations and the growth of its digital television advertising network. CME purchases all of CME’s equipment and control systems exclusively from Hangzhou Yusong, an independent third party. On August 1, 2008, CME entered into a patent license agreement with Hangzhou Yusong which contains specific provisions on Hangzhou Yusong’s strict confidentiality obligations as regards the information of CME’s patent to protect its patented technology. See the section entitled “RISK FACTORS — Risks Relating to CME’s Business — CME relies on one equipment supplier, Hangzhou Yusong Electronic Technology Co., Ltd., or Hangzhou Yusong, to manufacture its patented automated control systems”. Other than certain components incorporated in CME’s equipment and control systems, such as hard disk drives and integrated circuit chips that are imported from overseas, Hangzhou Yusong manufactures CME’s equipment and control systems in house.
 
Hangzhou Yusong is a supplier of audio and visual equipment and control systems for bus companies and out-of-home advertising network operators on intra-city public mass transportation and inter-city long-distance buses in China. Hangzhou Yusong has approximately 25 branch offices and more than 300 service centers in China to meet CME’s after-sale service needs. The equipment and control systems provided by Hangzhou Yusong are covered by a warranty period of five years, after which CME pays for the cost of replacement of parts for repair and maintenance. Hangzhou Yusong has been CME’s supplier since 2003 and CME has not experienced any material delay or interruption in the supply of its digital television displays or its patented automated control systems in the past.
 
CME’s Equipment and Patented Automated Control Systems
 
Digital Television Displays
 
CME uses liquid crystal displays, or LCDs, on its digital television advertising network. LCD is a thin and flat digital display device. The sizes of digital television displays installed on CME’s network range from 15 by 15 inch to 17 by 17 inch. On average, two to three digital television displays are installed on each inter-city express bus within CME’s network. For the years ended December 31, 2006, 2007, 2008 and 2009, the number of digital television displays installed on CME’s network was 2,252, 22,361, 33,306 and 41,216, respectively.
 
Hard Disk Drives and Firmware
 
CME employs hard disk drives and firmware therein to store entertainment programs and advertisements. Hard disk drives are connected to the digital television displays to deliver image. Hard disk drives are also connected to amplifiers for connection with the audio systems to deliver sound.
 
The employment of hard disk drives and firmware therein enables CME to upload and download data in high volumes, ensure the display of advertisements for ten minutes after every thirty minutes’ display of entertainment programs. Compared to the employment of DVDs or CF cards, the employment of hard disk drives and firmware make the quality of image and sound display on CME’s system less susceptible to interruptions while the buses are in motion.
 
Patented Automated Control Systems
 
The principal components of CME’s patented automated control systems include a switch, a decompressing and pressure stabilizing device and a transmitter. The switch is connected to the electric doors of the buses, making it possible to initiate CME’s equipment and systems whenever the driver opens or closes the electric doors of the buses in preparation for departure. The decompressing and pressure stabilizing device lowers the voltage from the switch from 24 to 12 voltage and keeps the voltage at that level. The transmitter is connected to the hard disk drive, the amplifier and the digital television displays to deliver image and sound.
 
The advantage of CME’s utility patent is that the switch is connected with and automatically controlled by the opening and closing of the electric doors on the buses and there are no separate switches affixed to the hard disk drive and related equipment installed on the buses carrying CME’s network. By automatically controlling its equipment and systems through the opening of the electric doors, CME is able to ensure initiation of its entertainment programs and advertisements whenever the driver opens the electric doors of the buses in preparation for departure and continuous display of the programs throughout the long-distance journey. Moreover, the lack of separate switches affixed to the hard disk drive and related equipment makes it less likely for drivers or passengers to turn off the program during the journey.
 
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Programming
 
Fujian Fenzhong holds the Permit to Produce and Distribute Radio and Television Programs issued by the Fujian Provincial Bureau of Radio and Television on May 4, 2009 with a validity period of 2 years, which allows Fujian Fenzhong to produce and distribute a series of programs, including TV dramas, special coverage, entertainments and cartoons. CME expects that upon expiration, the Permit to Produce and Distribute Radio and Television Programs will be renewed by the Fujian Provincial Bureau of Radio and Television. CME intends to submit the annual audit information to the Fujian Provincial Bureau of Radio and Television, which the bureau will use to assess the annual operation of CME as a producer and distributor of radio and television programs for the purpose of determining whether CME has the ability to produce good quality radio and television programs. No costs are expected to be incurred in connection with such renewal.
 
CME has an in-house production department in charge of combining the entertainment programs provided by its content suppliers and advertisements provided by its clients. CME pays royalties to obtain the right to display certain foreign and domestic films on its network and obtain other copyrighted content for free from SouthEastern Satellite Television and Hunan Satellite Television. Currently, CME has the following major categories of entertainment programs:
 
 
·
Express Phantom, a movie channel with foreign and domestic films, movie preview and information on recent box office hits;
 
 
·
Express Tunes, a music video channel with pop songs of artists from Hong Kong, China and Taiwan, classical music and other types of music;
 
 
·
Express Opera, a channel with classical Chinese opera and drama, talk shows, dancing shows and circus shows;
 
 
·
Express Travel Companion, a travel channel with introduction of popular foreign and domestic destinations and travel information; and
 
 
·
various other entertainment programs provided by SouthEastern Satellite Television, such as Super Star Face.
 
Currently, CME manually updates its entertainment programs on twice a month and advertisements once a month. CME expects to upgrade its existing equipment and control systems to automatically update its entertainment programs upon arrival of the express buses included in its advertising network at the bus terminals. CME believes such upgrade would not only allow for more frequent updating of the content to increase the attractiveness of its advertising network among the target audience and the advertisers but also enable it to reduce cost of overhead incurred from manual update.
 
Supporting Services
 
CME strives to deliver its services to the satisfaction of all relevant parties, including inter-city express bus operators, its clients and passengers. Pursuant to CME’s agreement with Hangzhou Yusong, its local service centers would respond to CME’s repair and maintenance request within 3 hours in the event of a bus operator notifies CME of a breakdown of its equipment and control systems. In addition, CME has a client service hotline to handle clients’ feedback on the display of their advertisements, including whether their advertisements are displayed according to agreements and the color and sound quality of the display of their advertisements. Further, CME has two toll free 24-hour service hot lines to handle feedback from or complaints by passengers.
 
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Intellectual Property
 
Copyright
 
CME obtains copyrighted entertainment programs from Fujian SouthEastern Satellite Television and Hunan Satellite Television. Unless the copyright protection for the content CME displays on its platform has expired and belongs to the public domain where payment of royalties is no longer required, CME pays royalties to relevant copyright holders, currently the Audio and Video Publishing House of Fujian Province, to obtain the right to display the content on its advertising platform. For example, CME pays royalties to obtain the right to display certain copyrighted films on its network. Such business practice complies with the policy initiative by the TTAVC under the Notice to establish a nationwide television system that displays copyrighted programs on buses traveling on highways in China.
 
Patent
 
CME’s automated control systems received utility patent protection granted by the State Intellectual Property Office to Zheng Cheng, its chairman and chief executive officer for a term of ten years beginning from July 16, 2005. Zheng Cheng and Fujian Fenzhong executed a Patent Transfer Contract on January 2, 2007, by which Zheng Cheng transferred the patent to Fujian Fenzhong, such patent transfer has been registered with State Intellectual Property Office of the PRC.  The State Intellectual Property Office of the PRC issued a Notice on July 3, 2009 to announce that Fujian Fenzhong became the owner of the patent. Moreover, on August 1, 2008, Zheng Cheng and Fujian Fenzhong entered into a patent licensing agreement with Hangzhou Yusong pursuant to which Hangzhou Yusong obtains a license to manufacture CME’s equipment and control systems based on CME’s patented technology. Such payment to Zheng Cheng has been recognized as deemed dividend paid to Zheng Cheng.
 
No third parties, including other advertising network operators, are permitted to use the technology protected by CME’s patent to engage in their businesses.
 
Trademark
 
Zheng Cheng, CME’s chairman and chief executive officer, submitted an application to register the graphic and characters incorporated in its logo in Category 35 with the Trademark Bureau in his own name on July 11, 2005. The Trademark Bureau accepted his application on September 27, 2005 but partly rejected the application in December 2008. On December 29, 2008, Zheng Cheng filed an application for review of the rejection, which is still pending the examination of the Trademark Bureau. Zheng Cheng transferred his application rights under such trademark application to Fujian Across Express Information Technology Co., Ltd. (the “Fujian Express”) which was approved by the Trademark Bureau on May 20, 2009.
 
The trademarks “Fenzhong TV” and “Mandefu”, each owned by Zheng Cheng, have been registered with the Trademark Bureau. On June 30, 2009, Zheng Cheng signed a trademark transfer agreement with Fujian Express and transferred his rights to these trademarks to Fujian Express. Such transfer is subject to, and will become effective upon, approval of the Trademark Bureau.
 
Fenzhong also filed, in its own name, applications for seven trademarks it uses or intends to use in CME’s business in Categories 35 and 38 on July 14, 2008. The Trademark Bureau accepted these applications but has not issued the trademark registration certificates to date.
 
Domain name
 
CME has also registered seven domain names, and for its website at www.ccme.tv with Computer Network Information Center under the Chinese Academy of Sciences and www.gstv.ccwith the Internet Corporation for Assigned Names and Numbers.

CME will make available on our website, the Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) as soon as reasonably practicable after electronically filed such material with, or furnish it to, the SEC.
 
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Competition
 
CME’s competes directly with existing smaller advertising network operators who place their network on inter-city buses that travel primarily between villages or on highways in China, including Riri Express, Northern Express and Longyum Media (Company has translated directly from Chinese) which are believed to have less than 1,000 buses. In addition, CME competes with other alternative advertising media, such as the Internet, street furniture and frame, as well as traditional advertising media, such as television, newspapers, magazines and radio for overall advertising spending by its clients. CME also competes for overall advertising spending by its clients with new out-of-home advertising network operators including Focus Media, a multi-platform digital media company with its primary platform in office buildings or other building structure; VisionChina Media, Towona and Bus Online, digital television advertising network operators with their primary platforms on public mass transportation systems; and AirMedia, a digital television advertising network operator with its primary platform on airplanes and airports.
 
In the future, CME may also face competition from new entrants into the out-of-home advertising network sector. In addition, since December 2005, the establishment of wholly foreign owned advertising companies has been permitted and a large number of wholly foreign owned advertising companies have been established since then. CME believes China’s ongoing deregulation of its advertising market will expose it to greater competition with existing or new advertising companies in China, including PRC subsidiaries of larger or better established multi-national companies that may have more experience in the advertising industry and significantly greater financial resources.
 
As of December 31, 2009, CME has entered into long-term framework agreements with 45 inter-city express bus operators in China. Moreover, in October 2007, CME became the sole strategic alliance partner designated by Transport Television and Audio-Video Center, or TTAVC, being the institution under the China Communication News Press, or CCNP, which is an organization under the Ministry of Transport of the People’s Republic of China. CME believes that its status as the sole strategic partner, patented automated control systems and well established management practices impose relatively high entry barriers that limit competition and the threat of new entrants. For risks relating to CME’s maintenance of its status as the sole designated strategic alliance partner by the TTAVC, see the section entitled “RISK FACTORS — Risks Relating to CME — If CME fails to compete successfully with existing and new competitors, its business and results of operations may be adversely affected”.
 
Employees
 
As of December 31, 2009, CME had a total of 161 employees consisting of 7 senior management members overseeing its business operations and development, 63 employees in business operation, 40 employees in equipment installation and maintenance, 16 employees in program production, 9 employees in finance, 12 employees in administration, 4 employees in human resources, 7 employees in client service and 3 employees in procurement.
 
CME plans to hire additional employees in all functions as it grows its business. CME maintains harmonious relationships with its employees and has never experienced business interruption resulting from a strike or any other forms of labor dispute since its inception.
 
The remuneration package of CME’s employees includes salary and bonus. In accordance with applicable PRC regulations, CME participates in a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a personal injury insurance plan and a housing reserve fund. For the years ended December 31, 2007, 2008 and 2009, CME’s total contribution for such employee benefits required by applicable PRC regulations amounted to $363,000, $348,000 and $440,000, respectively.
 
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Facilities
 
CME’s principal executive offices are located at Room 2805, Central Plaza, Wanchai, Hong Kong. CME also has an office in its headquarters comprising approximately 2,000 square meters at 22/F, Wuyi Center, 33 East Street, Fuzhou, Fujian Province, People’s Republic of China.
 
Insurance
 
Except for mandatory vehicle insurance, CME does not maintain any property insurance policies covering equipment and facilities for losses due to earthquake, flood or any other natural disasters. Consistent with customary industry practice in China, CME does not maintain business interruption insurance or key employee insurance for its executive officers. Uninsured damage to any of its equipment or buildings or a significant product liability claim could have a material adverse effect on CME’s results of operations. See the section entitled “RISK FACTORS — Risks Relating to CME”.
 
Legal and Administrative Proceedings
 
CME is currently not a party to any legal or administrative proceedings and is not aware of any material pending or threatened legal or administrative proceedings against it. CME may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of its business.
 
Regulation/Contractual Arrangements
 
Since December 10, 2005, foreign investors have been permitted to own directly a 100% interest in PRC advertising companies if the foreign investor has at least three years of direct operation outside China. CME is a foreign legal person under PRC laws and has not directly operated any advertising business outside China. Since CME has not been involved in the direct operation of an advertising business outside China, Fujian Express, CME’s wholly foreign owned enterprise in China, is currently ineligible to apply for the requisite advertising services licenses in China.
 
CME’s advertising business is operated through its contractual arrangements with Fujian Fenzhong. Fujian Express, Fujian Fenzhong and its shareholders entered into a series of agreements on April 17, 2009, including an exclusive business cooperation agreement, loan agreements, powers of attorney, exclusive option agreements and equity interest pledge agreements. These contractual arrangements enable CME to exercise effective control over Fujian Fenzhong and receive substantially all of the economic benefits of Fujian Fenzhong in consideration for CME’s services provided by Fujian Express in China. CME intends to continue its business operations in China upon the expiration of these contractual arrangements by renewing them or entering into new contractual arrangements if the then current PRC law does not allow it to directly operate advertising businesses in China. CME believes that, under these contractual arrangements, CME has sufficient control over Fujian Fenzhong and its shareholders to renew or enter into new contractual arrangements prior to the expiration of the current arrangements on terms that would enable CME to continue to operate its business in China after the expiration of the current arrangements.
 
Agreements that Transfer Economic Benefit to CME
 
Exclusive Business Cooperation Agreement.  Pursuant to the exclusive business cooperation agreement entered into on April 17, 2009 between Fujian Express and Fujian Fenzhong, Fujian Express provides technology support, consulting services and other commercial services related to the business operations of Fujian Fenzhong. As consideration for such services, Fujian Fenzhong has agreed to pay service fees. The term of this agreement is ten years from the date thereof, and it can be automatically renewed for an additional ten years upon expiration, provided that no objection is made by Fujian Express within 20 days prior to each tenth anniversary.
 
Agreements that Provide CME Effective Control over Fujian Fenzhong
 
Framework Agreements.  On November 2, 2003 and December 1, 2003, Fujian Express, Fujian Fenzhong, Zheng Cheng and Chunlan Bian, entered into two agreements, respectively, under which Zheng Cheng and Chunlan Bian granted Fujian Express all their voting rights as shareholders of Fujian Fenzhong, and Fujian Fenzhong agreed to distribute all its economic benefits to Fujian Express. These agreements do not have a term or any indemnification provisions, and do not expressly provide the parties with the right to terminate such agreements.
 
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Loan Agreements.  Fujian Express entered into two loan agreements with Zheng Cheng and Chunlan Bian respectively on April 17, 2009 that allow CME to capitalize its PRC significant subsidiaries, which facilitate the establishment of CME’s current corporate structure. Fujian Express made an interest-free loan of RMB20.0 million in total to the shareholders of Fujian Fenzhong. The term of each loan is ten (10) years from the date of the receipt of the funds, and will be automatically renewed for an additional ten (10) years, provided that no objection is made by the lender within twenty (20) days prior to each tenth year anniversary. Upon the occurrence of any of the following events of default, the entire loan is due and payable immediately: (i) 30 days elapse after borrower receives written notice from lender requesting repayment of the loan; (ii) borrower’s death, lack or limitation of civil capacity; (iii) borrower ceases (for any reason) to be an employee of Fujian Fenzhong or any of its affiliated entities, or ceases to be a shareholder of Fujian Fenzhong; (iv) borrower engages in criminal act or is involved in criminal activities; (v) any third party files a claim against borrower that exceeds RMB1,000,000; or (vi) the lender determines to exercise the exclusive option under the Exclusive Option Agreement described below. Fujian Express has the sole right to determine the shareholders’ method of repayment of the loan as follows, (1) transfer the equity interest in whole to Fujian Express or Fujian Express’s designated persons (legal or natural persons) pursuant to the Exclusive Option Agreements as discussed below; and (2) in case of liquidation, the shareholders shall repay the loan with all the remaining assets of Fujian Fenzhong distributed after liquidation to Fujian Express or its designees.
 
Powers of Attorney.  Zheng Cheng and Chunlan Bian each signed a power of attorney on April 17, 2009, pursuant to which Zheng Cheng and Chunlan Bian have respectively and irrevocably granted Fujian Express the right to exercise all their rights as shareholders of Fujian Fenzhong as provided under its articles of association and the PRC laws and regulations. The powers of attorney shall be irrevocable and continuously valid from the date thereof, as long as Zheng Cheng or Chunlan Bian, or both, is a shareholder of Fujian Fenzhong.
 
Exclusive Option Agreements.  Fujian Express, Zheng Cheng, and Chunlan Bian respectively entered into an exclusive option agreement on April 17, 2009, pursuant to which Fujian Express has an exclusive option to purchase, or to designate any qualified person to purchase, part or all of the equity interests in Fujian Fenzhong owned by Zheng Cheng and Chunlan Bian, to the extent permitted by PRC law and foreign investment policies, and to require Zheng Cheng and Chunlan Bian to complete relevant approval and registration procedures. The purchase price for the entire equity interest shall equal the actual capital contributions paid in the registered capital of Fujian Fenzhong by the shareholders. If appraisal is required by the PRC laws and regulations when Fujian Express exercises its exclusive purchase option, the parties shall negotiate in good faith and make necessary adjustment to the purchase price based on the appraisal result to be in compliance with the laws and regulations then applicable in China. The exclusive option agreements remain in effect for a term of 10 years, and may be automatically renewed for an additional 10 years upon expiration, provided that no objection is made by Fujian Express within 20 days prior to each tenth anniversary.
 
Equity Interest Pledge Agreements.  Pursuant to the equity interest pledge agreements entered into on April 17, 2009, Zheng Cheng and Chunlan Bian have respectively pledged their equity interest in Fujian Fenzhong to Fujian Express to secure the obligations of Zheng Cheng, Chunlan Bian, and Fujian Fenzhong under the loan agreements and the exclusive business cooperation agreement (including all ancillary agreements, if any). In addition, shareholders of Fujian Fenzhong agree not to transfer, sell, pledge, dispose of or create any encumbrance on any equity interests in Fujian Fenzhong that would affect the pledgee’s interests. The equity interest pledge agreements will expire upon the full payment of the consulting and service fees under the exclusive business cooperation agreement and upon termination of Fujian Fenzhong’s obligations under the exclusive business cooperation agreement, or upon fulfillment of all the obligations due under the loan agreements by the shareholders of Fujian Fenzhong (the later of the fulfillment of the obligations). The equity interest pledge was registered with the Fuzhou State Administration for Industry and Commerce (“SAIC”) effective June 15, 2009.
 
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Exclusive Business Cooperation Agreement.  Fujian Express and Fujian Fenzhong entered into an exclusive business cooperation agreement on April 17, 2009, pursuant to which Fujian Express provides technology support, consulting services and other commercial services related to the business operations of Fujian Fenzhong. The term of this agreement is ten years from the date thereof, and it can be automatically renewed for an additional ten years upon expiration, provided that no objection is made by Fujian Express within 20 days prior to each tenth year anniversary. During the term of this agreement, unless Fujian Express commits willful misconduct or a fraudulent act against Fujian Fenzhong, Fujian Fenzhong may not terminate the agreement prior to its expiration date. Nevertheless, Fujian Express has the right to terminate the agreement upon giving 30 days’ prior written notice to Fujian Fenzhong at any time.
 
In the opinion of CME’s PRC legal counsel:
 
 
·
the ownership structure of Fujian Fenzhong does not result in a breach or violation of or constitute a default of any explicit requirements under the applicable PRC laws; and
 
 
·
each of the contracts under CME’s contractual arrangements among Fujian Express, Fujian Fenzhong and its shareholders are valid and binding on all parties to these arrangements, and do not violate explicit requirements of current PRC laws.
 
CME’s PRC legal counsel has further advised that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Therefore, the PRC regulatory authorities may take a view that is contrary to the above opinion of CME’s PRC legal counsel in the future. We have been further advised by CME’s PRC counsel that if the PRC government determines that the agreements that establish the structure for operating CME PRC advertising network businesses do not comply with applicable restrictions on foreign investment in the advertising industry, CME could be subject to severe penalties, including an order from the government to cease CME’s business operation. See the section entitled “RISK FACTORS — Risks Relating to CME’s Corporate Structure”.
 
Regulations on the Advertising Industry in China
 
Foreign Investments in Advertising
 
Under the Administrative Provision on Foreign Investment in the Advertising Industry, jointly promulgated by the SAIC and Ministry of Commerce (“MOFCOM”) on March 2, 2004, or the 2004 Provision, foreign investors can invest in PRC advertising companies either through wholly owned enterprises or joint ventures with Chinese parties. Since December 10, 2005, foreign investors have been allowed to own up to 100% equity interest in PRC advertising companies. However, the foreign investors must have at least three years of direct operations outside China in the advertising industry as their core business. This requirement is reduced to two years if foreign investment in the advertising company is in the form of a joint venture. Such requirement is also provided similarly in the newly promulgated regulation that is to replace the 2004 provision from October 1, 2008 on, except that according to the new regulation, the establishment of wholly foreign-owned advertising companies shall be approved by the SAIC or its authorized provincial counterparts and provincial MOFCOM instead of the SAIC and MOFCOM only. Foreign-invested advertising companies can engage in advertising design, production, publishing and agency, provided that certain conditions are met and necessary approvals are obtained.
 
CME has not engaged in direct operations outside China in the advertising industry as its core business. Therefore, its subsidiary in China, Fujian Express, is ineligible to apply for the required licenses for providing advertising services in China. Its advertising business is operated by its significant subsidiary in China, namely Fujian Fenzhong. Fujian Fenzhong is currently owned by Zheng Cheng and Chunlan Bian. Fujian Fenzhong holds the requisite licenses to provide advertising services in China. Fujian Fenzhong directly operates its advertising network, enters into long-term framework agreements with inter-city express bus operators, and sells advertising time to its clients. CME has been, and is expected to continue to be, dependent on Fujian Fenzhong to operate its advertising business. CME does not have any equity interest in Fujian Fenzhong, but its subsidiary, Fujian Express, receives its economic benefits through contractual arrangements.
 
CME has been advised by its PRC counsel, that each of the contracts under the structure of its business operations in China through contractual arrangements with Fujian Fenzhong and its shareholders complies, and immediately after the completion of the Transaction, will comply with all applicable PRC laws and regulations and does not violate, breach, contravene or otherwise conflict with any explicit requirements of applicable PRC laws, rules or regulations. However, there exist substantial uncertainties regarding the application, interpretation and enforcement of current and future PRC laws and regulations and its potential effect on its corporate structure and contractual arrangements. The interpretation of these laws and regulations are subject to the discretion of competent PRC authorities. There can be no assurance that the PRC regulatory authorities will not take a view different from the opinions of its PRC counsel and determine that its corporate structure and contractual arrangements violate PRC laws, rules and regulations. In the event that the PRC regulatory authorities determine in their discretion that its corporate structure and contractual arrangements violate applicable PRC laws, rules and regulations, including restrictions on foreign investment in the advertising industry in the future, CME may be subject to severe penalties, including an order to cease its business operations.
 
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Business License for Advertising Companies
 
On October 27, 1994, the Tenth Session of the Standing Committee of the Eighth National People’s Congress adopted the Advertising Law which became effective on February 1, 1995. According to the currently effective Advertising Law and its various implementing rules, companies engaging in advertising activities must obtain from the SAIC or its local branches a business license which specifically includes within its scope the operation of an advertising business. Companies conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation. CME has obtained such a business license from the local branches of the SAIC as required by existing PRC regulations. CME does not expect to encounter any difficulties in maintaining it business license. However, if CME seriously violates the relevant advertising laws and regulations, the SAIC or its local branches may revoke its business license.
 
Out-of-Home Advertising
 
The Advertising Law in China stipulates that the exhibition and display of out-of-home advertisements must comply with certain requirements. It provides that the exhibition and display of out-of-home advertisements must not:
 
 
·
utilize traffic safety facilities and traffic signs;
 
 
·
impede the use of public facilities, traffic safety facilities and traffic signs;
 
 
·
obstruct commercial and public activities or create an unpleasant sight in urban areas;
 
 
·
be placed in restrictive areas near government offices, cultural landmarks or historical or scenic sites; or
 
 
·
be placed in areas prohibited by the local governments from having out-of-home advertisements.
 
In addition to the Advertising Law, the SAIC promulgated the Out-of-Home Advertising Registration Administrative Regulations on December 8, 1995, as amended on December 3, 1998 and May 22, 2006, which also governs the out-of-home advertising industry in China. Under these regulations, out-of-home advertisements in China must be registered with the local SAIC before dissemination. The advertising distributors are required to submit a registration application form and other supporting documents for registration. After review and examination, if an application complies with the requirements, the local SAIC will issue an Out-of-home Advertising Registration Certificate for such advertisement. The content, quantity, format, specifications, periods, distributors’ name, and locations of dissemination of the out-of-home advertisement must be submitted for registration with the local SAIC. A change of registration with local SAICs must be effected in the event of a change in the distributor, the location of dissemination, the periods, the content, the format, or the specifications of the advertisements. It is unclear whether the SAIC, or any of its local branches in the municipalities and provinces covered by CME’s network, will deem CME’s business as out-of-home advertising business, and thus require CME to obtain the Out-of-Home Advertising Registration Certificate. See the section entitled “RISK FACTORS — Risks Relating to CME — If the PRC government determines that CME was obligated to register as an out-of-home advertising network operator, it may be subject to administrative sanctions, including discontinuation of its business for failure to complete such registration”.
 
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In addition, on December 6, 2007, the State Administration of Radio Film and Television of the PRC (the “SARFT”) promulgated the December 2007 Notice pursuant to which the broadcasting of audio and visual programs, including news, drama series, sports, technology, entertainment and other programs, through radio and television networks, the Internet and other information systems affixed to vehicles and buildings and in airports, bus and railway stations, shopping malls, banks, hospitals and other out-of-home public media is subject to approval by the SARFT. The December 2007 Notice requires the local branches of SARFT to investigate and record any organization or company engaging in the activities described in the December 2007 Notice without any permissions, send written notices to such organizations or companies demanding their compliance with the December 2007 Notice, and report the results of such investigations to SARFT by January 15, 2008. CME has not received any notice from the SARFT or any of its local branch demanding its compliance with the December 2007 Notice. For risks relating to the December 2007 Notice, see the section entitled “RISK FACTORS — Risks Relating to CME — CME may be required to obtain an approval from the PRC State Administration of Radio, Film and Television, or SARFT, under the Notice on Strengthening the Administration of Audio and Visual Media on Vehicles, Buildings and Other Public Arena, or December 2007 Notice, or be required to remove entertainment programs from its advertising network”.
 
Advertising Content
 
PRC advertising laws, rules and regulations set forth certain content requirements for advertisements in China including, among other things, prohibitions on false or misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited. There are also specific restrictions and requirements regarding advertisements that relate to matters such as patented products or processes, pharmaceutical products, medical procedures, alcohol, tobacco, and cosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, together with any other advertisements which are subject to censorship by administrative authorities according to relevant laws or regulations, must be submitted to relevant authorities for content approval prior to dissemination.
 
Advertisers, advertising operators, including advertising agencies, and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of the advertisements they prepare or distribute is true and in full compliance with applicable law. In providing advertising services, advertising operators and advertising distributors must review the supporting documents provided by advertisers for advertisements and verify that the content of the advertisements complies with applicable PRC laws, rules and regulations. Prior to distributing advertisements that are subject to government censorship and approval, advertising distributors are obligated to verify that such censorship has been performed and approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke violators’ licenses or permits for their advertising business operations. Furthermore, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties in the course of their advertising business.
 
CME does not believe that advertisements containing content subject to restriction or censorship comprise a material portion of the advertisements displayed on its network. However, there can be no assurance that each advertisement displayed on CME’s network complies with relevant PRC advertising laws and regulations. See the section entitled “RISK FACTORS — Risks Relating to CME — Failure to comply with PRC laws and regulations relating to advertisement content restrictions governing the advertising industry in China may result in severe penalties and civil liabilities”.
 
Regulation on Intellectual Property
 
Regulation on Trademark
 
The Trademark Law of the PRC was adopted at the 24th meeting of the Standing Committee of the Fifth National People’s Congress on August 23, 1982 and amended on February 22, 1993 and October 27, 2001. The Trademark Law sets out the guidelines on administration of trademarks and protection of the exclusive rights of trademark owners. In order to enjoy an exclusive right to use a trademark, one must register the trademark with the Trademark Bureau of the SAIC and obtain a registration certificate.
 
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Zheng Cheng, CME’s chairman and chief executive officer, submitted an application to register the graphic and characters incorporated in its logo in category 35 with the Trademark Bureau in his own name on July 11, 2005. The Trademark Bureau accepted his application on September 27, 2005 but partly rejected the application in December 2008. On December 29, 2008, Zheng Cheng filed an application for review of the rejection, which is still pending the examination of the Trademark Bureau. Zheng Cheng transferred his rights under such trademark application to Fujian Express which was approved by the Trademark Bureau on May 20, 2009.
 
Another two of Zheng Cheng’s trademarks “Fenzhong TV” and “Mandefu” have been registered with the Trademark Bureau, and licensed to Fujian Express and Fujian Fenzhong pursuant to the trademark license agreements between Zheng Cheng, Fujian Express and Fujian Fenzhong dated August 1, 2008.
 
Fujian Fenzhong also filed, in its own name, applications for seven trademarks it uses or intends to use during the business operation in Categories 35 and 38 on July 14, 2008. The Trademark Bureau accepted these applications but has not issued the trademark registration certificates to date.
 
Regulation on Patent
 
The Patent Law of the PRC was adopted at the 4th Meeting of the Standing Committee of the Sixth National People’s Congress on March 12, 1984 and subsequently amended in 1992 and 2000. The Patent Law extends protection to three kinds of patent: invention patent, utility patent and design patent. According to the Implementing Regulations of the Patent Law, promulgated by the State Council of the PRC on December 28, 2002 and effective on February 1, 2003, an invention patent refers to a new technical solution relating to a product, a process or improvement. When compared to existing technology, an invention patent has prominent substantive features and represents notable progress. A utility patent refers to any new technical solution relating to the shape, the structure, or their combination, of a product. Utility patents are granted for products only, not processes. A design patent (or industrial design) refers to any new design of the shape, pattern or color of a product or their combinations, that create an aesthetic feeling and are suitable for industrial application. Inventors or designers must register with the State Intellectual Property Office to obtain patent protection. The term of protection is twenty years for invention patents and ten years for utility patents and design patents. Unauthorized use of patent constitutes an infringement and the patent holders are entitled to claims of damages, including royalties, to the extent reasonable, and lost profits.
 
CME’s automated control systems obtained utility patent protection from the State Intellectual Property Office on August 9, 2006 for a term of ten years beginning from July 16, 2005. CME’s patented automated control systems are designed to automatically initiate its entertainment programs and advertisements through the opening and closing of the electric doors on the buses.
 
Regulation on Copyright
 
The Copyright Law of the PRC was adopted at the 15th Meeting of the Standing Committee of the Seventh National People’s Congress on September 7, 1990 and amended on October 27, 2001. Unlike patent and trademark protection, copyrighted works do not require registration for protection in China. However, copyright owners may wish to voluntarily register with China’s National Copyright Administration to establish evidence of ownership in the event enforcement actions become necessary. Consent from the copyright owners and payment of royalties are required for the use of copyrighted works. Copyrights of movies or other audio or video works usually expire fifty years after their first publication.
 
CME is the sole strategic alliance partner designated by TTAVC to establish a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China. Unless the copyright protection for the content CME displays on its platform has expired and belongs to the public domain where payment of royalties is no longer required, CME pays royalties or other forms of consideration to relevant copyright holders to obtain the right to display the content on its advertising platform. CME expects to continue to receive additional copyrighted contents from its third-party content suppliers in the future.
 
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Regulations on Foreign Currency Exchange
 
Foreign Currency Exchange
 
Pursuant to the Foreign Currency Administration Rules promulgated on August 5, 2008 and various regulations issued by State Administration of Foreign Exchange (“SAFE”) and other relevant PRC government authorities, RMB is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from SAFE or its local branch for conversion of RMB into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Payments for transactions that take place within the PRC must be made in RMB. Domestic companies or individuals can repatriate foreign currency payments received from abroad or deposit these payments abroad subject to applicable regulations that expressly require repatriation within certain period. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks. Foreign currencies received under current account items can be either retained or sold to financial institutions engaged in the foreign exchange settlement or sales business without prior approval from SAFE by complying with relevant regulations. Foreign exchange income under capital account can be retained or sold to financial institutions engaged in foreign exchange settlement and sales business, with prior approval from SAFE unless otherwise provided.
 
The business operations of CME, which are subject to the foreign currency exchange regulations, have all been in accordance with these regulations. CME will take steps to ensure that its future operations are in compliance with these regulations.
 
Foreign Exchange Registration of Offshore Investment by PRC Residents
 
Pursuant to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, or Circular No. 75, issued on October 21, 2005 and effective on November 1, 2005, (i) a PRC resident, including a PRC resident natural person or a PRC company, shall register with the local branch of SAFE before it establishes or controls an overseas special purpose vehicle (“SPV”) for the purpose of overseas equity financing (including convertible debt financing); (ii) when a PRC resident contributes the assets of or its equity interests in a domestic enterprise to an SPV, or engages in overseas financing after contributing assets or equity interests to an SPV, such PRC resident shall register his or her interest in the SPV and the change thereof with the local SAFE branch; and (iii) when the SPV undergoes a material event outside China, such as a change in share capital, or merger or acquisition, the PRC resident shall, within 30 days of the occurrence of such event, register such change with the local branch of SAFE. PRC residents who are shareholders of SPVs established before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. Such deadline has been further extended by the Circular 106.
 
Under Circular No. 75, failure to comply with the registration procedures set forth above may result in penalties, including restrictions on a PRC subsidiary’s foreign exchange activities in capital accounts and its ability to distribute dividends to the SPV. On May 29, 2007, SAFE issued Circular 106 as the implementing rules of Circular 75, which provides more detailed provisions and requirements for the registration procedures.
 
CME’s affiliates subject to the SAFE registration requirements have informed CME of their registrations with SAFE, and to CME’s knowledge, its shareholders and/or beneficial owners subject to the SAFE registration requirements have registered with SAFE. The failure of these shareholders and/or beneficial owners to timely amend their SAFE registrations pursuant to the Circular No. 75 or the failure of future shareholders and/or beneficial owners of CME who are PRC residents to comply with the registration procedures set forth in the Circular No. 75 may subject such shareholders, beneficial owners and/or CME’s PRC operating companies to fines and legal sanctions. Any such failure may also limit CME’s ability to contribute additional capital into its PRC operating companies, limit CME’s PRC operating companies’ ability to distribute dividends to CME or otherwise adversely affect CME’s business.
 
On December 25, 2006, the People’s Bank of China promulgated the “Measures for the Administration of Individual Foreign Exchange,” and on January 5, 2007, SAFE promulgated the implementation rules on those measures. These regulations became effective on February 1, 2007. Pursuant to these regulations, PRC citizens who are granted shares or share options by an overseas listed company according to its employee share option or share option plan are required, through a qualified PRC agent which may be the PRC subsidiary of such overseas listed company, to register with the SAFE and complete certain other procedures related to the share option or share option plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas listed company must be remitted into a foreign currency account of such PRC citizen or be exchanged into RMB. In addition, Circular 106 requires a PRC resident to make the SPV filing together with the employee stock option filing. Moreover, the PRC resident is required to make an amendment to the previous filings when he or she exercises his or her employee stock options.
 
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Dividend Distribution
 
The principal laws, rules and regulations governing dividends paid by PRC operating subsidiaries include the Company Law of the PRC (1993), as amended in 2005, the Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and the Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended in 2001. Under these laws and regulations, PRC subsidiaries, including wholly owned foreign enterprises, or WFOEs, and domestic companies in China, may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, CME’s PRC significant subsidiaries, including WFOEs and domestic companies, are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their statutory capital reserve fund until the cumulative amount of such reserve reaches 50% of their respective registered capital. These reserves are not distributable as cash dividends.
 
After the Transaction, we may each be considered to be “resident enterprise” under the Enterprises Income Tax “EIT” Law and could be subject to the uniform 25% enterprise income tax rate for its global income. See section entitled “Tax” below (if they are considered “non-resident enterprise” under the EIT Law, they may be subject to the enterprise income tax rate of 10% on their income sourced from China). As a result, the amount available for distribution to our stockholders would be reduced.
 
Tax
 
On March 16, 2007, the Fifth Session of the Tenth National People’s Congress of PRC passed the Enterprise Income Tax Law of the People’s Republic of China, or EIT Law, which became effective on January 1, 2008. On November 28, 2007, the State Council at the 197th Executive Meeting passed the Regulation on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China (the “Implementation Rules”), which became effective on January 1, 2008. The EIT Law adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises) and revoked the existing tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. Under the EIT Law, enterprises are classified as either “resident enterprises” or “non-resident enterprises.” Pursuant to the EIT Law and the Implementation Rules, enterprises established under PRC laws, or enterprises established outside China whose “de facto management bodies” are located in China, are considered “resident enterprises” and subject to the uniform 25% enterprise income tax rate for their global income. According to the Implementation Rules, “de facto management body” refers to a managing body that in practice exercises overall management and control over the production and business, personnel, accounting and assets of an enterprise. CME’s management is currently based in China and is expected to remain in China in the future. In addition, although the EIT Law provides that “dividends, bonuses and other equity investment proceeds between qualified resident enterprises” is exempted income, and the Implementation Rules refer to “dividends, bonuses and other equity investment proceeds between qualified resident enterprises” as the investment proceeds obtained by a resident enterprise from its direct investment in another resident enterprise, however, it is unclear whether CME’s circumstance is eligible for exemption.
 
Furthermore, the EIT Law and Implementation Rules provide that the “non-resident enterprises” are subject to the enterprise income tax rate of 10% on their income sourced from China, if such “non-resident enterprises” (i) do not have establishments or premises of business in China or (ii) have establishments or premises of business in China, but the relevant income does not have actual connection with their establishments or premises of business in China. Such income tax may be exempted or reduced by the State Council of the PRC or pursuant to a tax treaty between China and the jurisdictions in which the non-resident enterprise reside. Under the Double Tax Avoidance Arrangement between Hong Kong and Mainland China and the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties issued on February 20, 2009 by the State Administration of Taxation, if the Hong Kong resident enterprise owns more than 25% of the equity interest in a company in China for at least 12 months before receiving dividends from the company in China, the 10% withholding tax on the dividends the Hong Kong resident enterprise received from such company in China is reduced to 5%. If CME is considered as a Hong Kong resident enterprise under the Double Tax Avoidance Arrangement and is considered as a “non-resident enterprise” under the EIT Law, the dividends paid to CME by Fujian Express may be subject to the reduced income tax rate of 5% under the Double Tax Avoidance Arrangement. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment.

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Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
 
On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission (“CSRC”), MOFCOM, State Asset Supervision and Administration Commission, State Administration of Taxation, SAIC and SAFE, jointly promulgated a rule entitled Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A rule, which became effective on September 8, 2006, to regulate foreign investment in PRC domestic enterprises. The M&A rule provides that the MOC must be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise and any of the following situations exist: (i) the transaction involves an important industry in China; (ii) the transaction may affect national “economic security”; or (iii) the PRC domestic enterprise has a well-known trademark or historical Chinese trade name in China. The M&A rule also contains a provision purporting, among other things, to require offshore SPVs formed for the purpose of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or PRC individuals, to obtain the approval of the CSRC prior to listing and trading their securities on overseas stock exchanges. On September 21, 2006, the CSRC published guidelines with respect to this provision of the M&A rule.
 
To date, the application of this new M&A rule is unclear. CME’s PRC counsel, Han Kun Law Offices, has advised CME that:
 
 
·
the CSRC approval required under the M&A rule applies to SPVs that, for purposes of achieving overseas listing, acquire the equity interests in PRC companies through share exchanges; and
 
 
·
based on their understanding of the current PRC laws, rules and regulations and the M&A rule, unless there are new PRC laws and regulations or clear requirements from the CSRC in any form that require the prior approval of the CSRC for the listing and trading of any overseas SPV’s securities on an overseas stock exchange, the M&A rule does not require that CME obtain prior CSRC approval for the listing and trading of CME on the NYSE Amex because CME completed its reorganization whereby Fujian Express was established as a wholly foreign owned enterprise and the restructuring between Fujian Express and Fujian Fenzhong was carried out prior to September 8, 2006, the effective date of the M&A rule.
 
However, the interpretation and application of the M&A rule remain unclear, and the PRC government authorities have the sole discretion to determine whether the Transaction is subject to the approval of the CSRC. If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval is required for the Transaction, CME cannot predict how long it would take to obtain the approval. In addition, CME may need to apply for a remedial approval from the CSRC and may be subject to certain administrative or other sanctions from these regulatory agencies.
 
Further, new rules and regulations or relevant interpretations may be issued from time to time that may require CME to obtain retroactive approval from the CSRC in connection with a business combination. If this were to occur, CME’s failure to obtain or delay in obtaining the CSRC approval for the business combination would subject CME to sanctions imposed by the CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties on CME’s operations in China, restrictions or limitations on CME’s ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect CME’s business, results of operations and financial condition.
 
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If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval is required for a business combination, CME may need to apply for a remedial approval from the CSRC and may be subject to certain administrative punishments or other sanctions from these regulatory agencies. New rules and regulations or relevant interpretations may require that CME retroactively obtain approval from the CSRC in connection with the business combination. If this were to occur, CME’s failure to obtain or delay in obtaining the CSRC approval for the Transaction would subject CME to sanctions imposed by the CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties on CME’s operations in China, restrictions or limitations on CME’s ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect CME’s business, results of operations and financial condition.
 
The new regulations may also establish additional procedures and requirements expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. These rules may also require the approval from the MOC where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Complying with the requirements of the new regulations to complete such transactions could be time-consuming, and any required approval processes, including MOC approval, may delay or inhibit CME’s ability to complete such transactions, which could affect CME’s ability to expand its business.
 
ITEM 1A. Risk Factors
 
An investment in our Common Stock is speculative and involves a high degree of risk and uncertainty. You should carefully consider the risks described below, together with the other information contained in this prospectus, including the consolidated financial statements and notes thereto, before deciding to invest in our Common Stock. If any of the following risks occur, our business, financial condition and results of operations and the value of our Common Stock could be materially and adversely affected.
 
Risks Relating to Doing Business in China
 
General
 
The economies of individual foreign countries may differ significantly from the U.S. economy in such respects as growth of gross national product, rate of inflation, currency depreciation, capital reinvestment, resource self sufficiency and balance of payments position. With respect to some foreign countries there is the possibility of nationalization, expropriation or confiscatory taxation, political changes, governmental regulation, economic or social instability, or diplomatic developments (including war) which could adversely affect investments in those countries.
 
Laws and regulations of foreign countries may impose restrictions that would not exist in the United States. Some foreign countries have laws and regulations that currently limit or preclude direct foreign investment. Even where permitted, direct investments may require significant government approvals and may require financing and structuring alternatives that differ significantly from those customarily used in the United States. In addition, in certain countries such laws and regulations have been subject to frequent and unforeseen change, potentially exposing an investment to restrictions, taxes, and other obligations that were not anticipated at the time the initial investment was made.
 
Investments in international companies may be subject to significant currency exchange risks. Any fluctuations in foreign currency exchange rates between the U.S. Dollar and the respective foreign currencies may significantly affect the value of international companies and the returns ultimately achieved. We may enter into financial arrangements designed to hedge such currency exchange risks. Such hedging arrangements are themselves subject to various risks different from those of the related investment. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance than if the hedging arrangement had not been entered into. Moreover, there can be no assurance that instruments suitable for hedging currency will be available, or that such instruments will be attractively priced, at the time we wish to use them.

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Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect CME’s business.
 
CME conducts substantially all of its business operations in China. Accordingly, CME’s business, results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal conditions in China or in countries in the same geographic region. China’s economy differs from the economies of developed countries in many respects, including with respect to government regulation and control of foreign exchange, the level of development and growth rate, and the allocation of resources.
 
While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and economic sectors. The PRC government has implemented certain measures to encourage economic development and guide the allocation of resources. While some of these measures benefit the PRC economy generally, they may also negatively affect CME. For example, CME’s business, financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations applicable to CME.
 
The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing market-oriented reforms, the reduction of state ownership of productive assets and improved corporate governance, the PRC government still owns a substantial portion of productive assets in China and continues to play a significant role in regulating industrial development. In addition, the PRC government exercises significant control over China’s economic growth by controlling the allocation of resources and payment of foreign currency-denominated obligations, setting monetary policy and giving preferential treatment to particular industries or companies.
 
Since late 2003, the PRC government has implemented a number of measures, such as raising bank reserves against deposit rates and placing additional limitations on the ability of commercial banks to make loans and raise interest rates, in an attempt to slow down specific segments of China’s economy that the government believed to be overheating. In 2008, however, in response to the world economic crisis, the PRC government cut internal rates and announced a stimulus plan in an attempt to help sustain growth. These actions, as well as future actions and policies of the PRC government, could materially affect CME’s liquidity and access to capital, as well as its ability to operate its business.
 
Uncertainties with respect to the PRC legal system could adversely affect CME.
 
CME conducts its business primarily through operations in China. CME’s operations in China are governed by PRC laws and regulations. CME’s operating companies are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is principally based on statutes. Prior court decisions may be cited for reference but typically have limited precedential value.
 
Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions (and the nonbinding nature of such decisions), the interpretation and enforcement of these laws and regulations raise uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have retroactive effect. As a result, CME may not be aware of its violation of these policies and rules until after a violation occurs. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
 
CME may have difficulty establishing adequate management, legal and financial controls in the PRC.
 
Most PRC companies historically have been less focused on establishing Western style management and financial reporting concepts and practices, as well as modern banking, computer and other internal control systems, than companies in the U.S. and certain other Western countries. CME believes that, with the current finance team led by the CFO, it will be able to maintain sufficient internal control systems to comply with Section 404 of the Sarbanes-Oxley Act. However, CME may have difficulty in hiring and retaining a sufficient number of qualified internal control employees to work in the PRC. As a result of these factors, CME may experience difficulty in establishing management, legal and financial controls, collecting financial data, preparing financial statements, books of account and corporate records, and instituting business practices that meet Western standards. CME’s inability to maintain sufficient internal controls to meet the requirements of Section 404 of the Sarbanes-Oxley Act could impair our ability to timely meet our ongoing Exchange Act reporting obligations, may result in the failure to identify and assess the risks of their business and internal control system which may cause misstatements in its financial reporting and may result in a qualified opinion on its audit of internal control.

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PRC regulation of loans to and direct investment by offshore holding companies in PRC entities may delay or prevent CME from making loans or additional capital contributions to its PRC operating companies, which could materially and adversely affect its liquidity and ability to fund and expand its business.
 
As an offshore holding company of its PRC operating companies, CME may make loans or additional capital contributions to its PRC operating companies. Any loans to CME’s PRC operating companies are subject to PRC regulations. For example, loans by CME to its operating companies in China, which are foreign-invested enterprises, to finance their activities may not exceed statutory limits and must be registered with the PRC State Administration of Foreign Exchange, or SAFE.
 
CME may also decide to finance its operating companies, in which it has equity ownership, by making capital contributions to such entities. The PRC Ministry of Commerce (or its local counterpart) must approve these capital contributions. CME cannot assure you that it will be able to obtain these government approvals on a timely basis, if at all, with respect to any such capital contributions. If CME fails to receive such approvals, its ability to use the proceeds of such transactions and to capitalize its PRC operations may be negatively affected, which could adversely affect CME’s liquidity and ability to fund and expand its business.
 
Governmental control of foreign exchange markets in the PRC may affect the value of an investment in certain securities of CME.
 
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. CME receives substantially all of its revenue in RMB. CME’s income is primarily derived from dividend payments from its PRC operating companies. Shortages in the availability of foreign currency may restrict the ability of CME’s PRC operating companies to remit sufficient foreign currency to pay dividends or make other payments, or otherwise satisfy their foreign currency denominated obligations.
 
Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses, such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict future access to foreign currencies for current account transactions. If the Chinese foreign exchange control system prevents CME from obtaining sufficient foreign currency to satisfy its currency demands, CME may not be able to pay dividends in foreign currencies to shareholders.
 
Fluctuation in the value of the RMB may have a material adverse effect on the value of an investment in certain securities of CME.
 
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB has been permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. This change in policy has resulted in an approximately 17% appreciation of the RMB against the U.S. dollar between July 21, 2005 and June 30, 2009. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.
 
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Substantially all of CME’s revenue and costs are denominated in the RMB, and a significant portion of CME’s financial assets is also denominated in the RMB. Further, CME relies principally on dividends and other distributions paid to it by its operating companies and affiliated entities in China. Any significant revaluation of the RMB could materially and adversely affect CME’s cash flows, revenue, earnings and financial position, and the value of, and any dividends payable with respect to, the shares of the Company in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.
 
Any health epidemics and other outbreaks, or war, acts of terrorism or other man-made or natural disasters could severely disrupt CME’s business operations.
 
CME’s business could be materially and adversely affected by the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, swine influenza (H1N1) or another epidemic. In 2006 and 2007, there were reports of occurrences of avian influenza in various parts of China, including a few confirmed human cases and deaths. In 2009, there were reported cases of swine influenza (H1N1) in certain parts of China. Any prolonged recurrence of avian influenza, SARS, swine influenza (H1N1) or other adverse public health developments in China could require the temporary closure of CME’s offices or otherwise severely disrupt CME’s business operations and adversely affect its results of operations.
 
CME’s operations are also vulnerable to interruption and damage from natural and other types of disasters, including snowstorms, earthquakes, fire, floods, environmental accidents, power loss, communications failures and similar events. In January and February 2008, large portions of Southern and Central China were hit with a series of snowstorms, which caused extensive damage and transportation disruption. On May 12, 2008, a severe earthquake measuring approximately 8.0 on the Richter scale occurred in Sichuan province of China, resulting in numerous casualties and severe property damage. The Panzhihua earthquake struck southern Sichuan province on August 30, 2008 resulting in deaths and damage to property and infrastructure. If any disaster were to occur in the future, CME’s ability to operate its business could be seriously impaired.
 
Adverse changes in the political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for CME’s services and have a material adverse effect on its business.
 
Substantially all of CME’s assets are located in China and substantially all of its revenue are derived from its operations in China. Accordingly, economic, political and legal developments of China will substantially affect its business, financial condition, results of operations and prospects. The Chinese economy differs from the economies of most developed countries in many respects, including:
 
 
·
the amount of government involvement;
 
 
·
the level of development;
 
 
·
the growth rate;
 
 
·
the control of foreign exchange; and
 
 
·
the allocation of resources.
 
While the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may also have a negative effect on CME. CME cannot predict the future direction of political or economic reforms or the effects such measures may have on CME’s business, financial position or results of operations. Any adverse change in the political or economic conditions in China, including any decrease in the government expenditure on highway transportation infrastructure construction, could have a material adverse effect on CME’s business, lead to reduction in demand for its services and materially adversely affect its business.
 
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The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially adversely affect CME’s business. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since late 2003, the PRC government implemented a number of measures, such as raising bank reserves against deposit rates to place additional limitations on the ability of commercial banks to make loans and raise interest rates, in order to control the growth rate of specific segments of China’s economy which it believed to be overheating. China has experienced a period of relatively high inflation since August 2007 and the PRC government has introduced and implemented a number of measures in an effort to control inflation. The PRC government may continue these and other measures to control inflation and manage economic growth. These measures may cause decreased economic activity in the PRC, including a slow-down or decline in advertising spending, which in turn could adversely affect its financial condition and results of operations. These measures, as well as future actions and policies of the PRC government, could also materially affect CME’s liquidity and access to capital and CME’s ability to operate its business. Substantially all of CME’s assets are located in China and substantially all of its revenue are derived from its operations in China. Accordingly, CME’s business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
 
Uncertainties with respect to the PRC legal system could limit the legal protections available to CME or result in substantial costs and the diversion of resources and management attention.
 
The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform. Enforcement of these laws, regulations and rules involve uncertainties, which may limit the legal protections available to CME. For example, CME may have to resort to administrative and court proceedings to enforce the legal protection that it enjoys either by law or contract. However, since PRC administrative authorities and courts have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult than in more developed legal systems to evaluate the outcome of administrative and court proceedings and the level of legal protection CME enjoys. These uncertainties may impede CME’s ability to enforce the contracts it has entered into with its business partners, clients and suppliers. In addition, such uncertainties, including the inability to enforce its contracts, could materially adversely affect its business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, CME cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of national laws by local regulations. These uncertainties could limit the legal protections available to other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and the diversion of resources and management attention.
 
CME may experience difficulties effecting service of process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws, against CME or its management as approved by this Proxy Statement.
 
CME conducts substantially all of its operations in China and substantially all of its assets are located in China. In addition, all of its senior executive officers reside within China and Hong Kong. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon CME or its senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of legal judgments.
 
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Restrictions on currency exchange may limit our ability to receive and use our revenue and may affect the value of your investment.
 
According to the existing PRC foreign exchange regulations, RMB is freely convertible only to the extent of current account items, such as trade-related receipts and payments and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from or registration with the SAFE or its local branch for conversion of RMB into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.
 
Under the current corporate structure of CME, income is primarily derived from dividend payments, a substantial part of which is derived from the legally distributable profits of subsidiary and consolidated entity. All revenue and expenses are denominated in RMB. CME’s PRC subsidiary must remit sufficient foreign currency to pay dividends or make other payments to it. Although the payments of current account items, including profit distributions, can be made in foreign currencies without prior approval by complying with certain procedural requirements, PRC government may restrict access to foreign currencies for current account transactions in the future, which would limit its ability to pay dividends in foreign currencies to its shareholders.
 
If CME needs to convert RMB into foreign currency and remit it out of China to pay capital expenses, such as the repayment of loans denominated in foreign currencies, CME must obtain approval from SAFE or its local branch. These limitations could affect its ability to obtain foreign exchange through debt or equity financing, and could affect its business and financial condition.
 
Risks Relating to CME
 
CME may fail to execute its expansion strategies and manage its growth effectively, which could materially adversely affect its financial condition and results of operations.
 
CME has experienced significant growth since it commenced its advertising services business in November 2003. To meet the demand of advertisers for broader network coverage, CME must continue to expand the coverage of its network by increasing the number of inter-city express buses within its network and expanding into new provinces and regions not currently included in its network. CME intends to increase the number of inter-city express buses within its network and to enter into new provinces and regions in the future. CME also plans to increase the number of airport shuttle buses and tour buses included in its network. In addition, CME plans to expand its network to other transportation vehicles, such as shuttle buses servicing the commute between supermarkets and residential communities in China and expand its business into other media platforms such as stationary adverting media at bus terminals. However, there can be no assurance that it will be able to execute its expansion strategies.
 
CME’s continued success is dependent on its ability to execute its expansion strategies and manage its growth effectively and efficiently in the future. The marketing strategies of advertisers and advertising agencies may differ from region to region to cater to the taste of the target audiences in a particular region. As a result, CME’s clients’ specifications may become more complex and difficult to satisfy and CME may be required to devote more time, effort and resources to satisfy client preferences, which could substantially increase its costs. In addition, as CME continues its expansion efforts, it will incur substantial costs and expend substantial resources. CME may not be able to manage its current or future operations effectively or compete effectively in the new markets it enters. If it is not able to manage its growth successfully, CME’s business and prospects will be materially adversely affected.
 
The continued growth of CME’s business has resulted in, and will continue to result in, substantial demand on its management, operational and other resources. In particular, the management of its growth will require, among other things:
 
 
·
increased sales and sales support activities;
 
 
·
expanded and improved administrative and operational systems;
 
 
·
enhanced information technology systems;
 
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·
stringent cost controls and sufficient working capital;
 
 
·
strengthening of financial and management controls;
 
 
·
a reliable supply of digital television displays and other equipment; and
 
 
·
hiring and training of new personnel.
 
CME’s limited operating history may not serve as an adequate basis to judge its future prospects and results of operations.
 
CME commenced its operations in the advertising industry in November 2003. Its limited operating history may not provide an adequate basis for you to evaluate its business, financial performance and prospects. Since the market in which CME operates is rapidly evolving, it has only limited insight into the emerging trends that may affect its business. In addition, it is difficult to evaluate the viability of its business and address the risks frequently encountered by early stage companies using new forms of advertising media. If CME is unsuccessful in addressing any risk or uncertainty associated with its network, its business, financial condition and results of operations may be materially adversely affected.
 
If CME’s clients or the passengers do not accept, or lose interest in, in-vehicle digital television advertising, its business will deteriorate.
 
The market for in-vehicle television advertising networks in China is relatively new and its potential is uncertain. CME’s success depends on the public acceptance of this method of delivering advertising content. If the target audiences are not receptive to its advertising network, CME’s clients may not continue to utilize this medium as a component of their advertising strategies. The attractiveness of CME’s advertising network to the target audiences is primarily affected by the appeal of its entertainment programs. As a result, CME’s ability to continue to obtain a sufficient range of programs attractive to the target audiences and to switch or rotate the programs more frequently on its advertising network is critical to maintain the appeal of its advertising network. Currently, CME manually updates the entertainment programs on a fifteen-day interval and advertisements on a thirty-day interval. CME expects to upgrade its existing equipment and control systems to automatically update its entertainment programs upon arrival of the express buses carrying its network at the bus terminals. CME believes this upgrade will allow for more frequent updating of the content to increase the attractiveness of its advertising network and enable it to reduce the costs of manual updating. However, there can be no assurance that CME will be successful in these efforts. If CME fails in these efforts, its network may lose its appeal and it may not be able to draw the attention of the bus passengers. In addition, the attention of the target audiences may be districted by the increasing popularity and use of personal handheld entertainment devices, such as portable media players and handheld video game devices. If CME fails to maintain or increase the attractiveness of its network, its business, financial condition and results of operations may be materially adversely affected.
 
Although CME has adopted various methods to enhance the effectiveness of its advertising network, passengers may find some elements of in-vehicle digital television advertising disruptive or intrusive. For example, passengers are not able to turn off entertainment programs and advertisement content during transit because the switches of CME’s equipment and systems are connected to the electric doors of the buses, which cannot be opened while the buses are traveling on expressways. In addition, CME’s systems are programmed to play the entertainment programs and advertisements at or above a fixed minimum volume. Because passengers are effectively confined to their seat during their journey, they may react negatively to having to see and hear CME’s content. While there have been no significant complaints received to date, if a substantial number of passengers complain about CME’s services, bus operators may become less willing or unwilling to carry CME’s network on their buses and advertising agencies and advertisers may become less willing or unwilling to use CME’s network to deliver their advertisements. As a result, its business, financial condition and results of operations would be materially adversely affected.

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CME may not be able to renew its existing long-term framework agreements with inter-city express bus operators or enter into new long-term framework agreements with additional inter-city express bus operators
 
CME has entered into long-term framework agreements (including the supplementary agreements, if any) with 45 inter-city express bus operators in China to install its equipment and control systems and display entertainment programs and advertisements for a term ranging from five to eight years. These agreements will begin to expire December 31, 2011. As a result, CME’s future growth is dependent upon its ability to continue to enter into long-term framework agreements with existing and new inter-city express bus operators. If it is unable to renew its existing long-term framework agreements upon expiration, it may lose advertising network coverage over municipalities and provinces highly desirable for its clients and consequently, it may lose its competitive advantage in the industry. Moreover, in order to replace the network coverage represented by the loss of such long-term arrangements, CME may have to enter into short-term contracts with other inter-city express bus operators on less favorable terms, which could adversely affect the attractiveness of its advertising network for its clients and increase its costs. Further, if it is unable to enter into long-term framework agreements with additional inter-city express bus operators on commercially reasonable terms, CME may not be able to expand its network as planned which would reduce its ability to grow its revenue and maximize average advertising fees.
 
CME has not experienced any difficulties or disputes with respect to the performance of its long-term agreements with inter-city express bus operators. However, if any inter-city express bus operator ceases to engage CME to exclusively provide entertainment programs and advertisements on its buses, chooses not to renew its long-term framework agreement with CME upon expiration or terminates its long-term framework agreement with CME before it expires or otherwise fails to perform its obligations to CME, there can be no assurance that CME will be able to seek adequate recourse and its business, financial condition and results of operations could be materially adversely affected.
 
CME does not have direct contractual relationships with third-party owners of certain inter-city express buses carrying its network and its purchase of digital television displays originally installed on these buses may be subject to claims by third parties.
 
Less than 10% of the inter-city express buses carrying CME’s network are not owned by the inter-city express bus operators participating in its network with which it has entered into long-term framework agreements. Instead, these inter-city express buses are owned by third parties and commissioned by the inter-city express bus operators participating in its network to provide transportation services. CME is not a party to the contracts between these third-party bus owners and the inter-city express bus operators participating in its network. CME does not have direct contractual relationships with third-party owners of certain inter-city express buses carrying its network. Therefore, it does not have control over such third-party bus owners. Although the inner-city express bus operators are responsible for maintaining the number of buses provided by the third-party owners, in the event that any third-party bus operator fails to provide transportation services or unilaterally terminates its contracts with the inter-city express bus operators participating in its network for any reason, CME would not be able to fulfill its obligations to display advertisements for its clients on those buses. If this occurs, CME’s business, financial condition and results of operations could be materially adversely affected.
 
In addition, CME has purchased digital television displays originally installed on the buses owned by third-parties from some of the bus operators participating in its network. However, the bus operators that sold the digital television displays to CME may not have ownership over such displays. CME has been advised by its PRC counsel, that it has legally acquired ownership over such digital television displays in accordance with PRC law because it has acquired such displays in good faith as a bona fide third-party purchaser (that is, it was not aware of the fact that the bus operators did not have ownership over the digital television displays at the time of the purchase), it paid reasonable considerations for such displays, and it has received delivery of such displays. In addition, CME entered into supplementary agreements with such bus operators in the summer of 2008, whereby the bus operators guaranteed their full title to the displays they transferred to CME, and if any third party asserts ownership to the displays which causes any loss to CME, the bus operators shall be responsible for the settlement of such dispute and compensate CME in full for the amount of the loss suffered by CME. All digital television displays purchase agreements entered into after August 2008 contain similar guarantees by bus operators. Nonetheless, there can be no assurance that the original owners of the digital television displays will not assert claims against the bus operators and include CME as a defendant in the claims. If any plaintiff prevails, CME may be jointly and severally liable with the bus operators for monetary compensation of residual value of the digital television displays or for an injunction to return the digital television displays to the original owner, and there can be no assurance that the bus operators will compensate CME in full the amount of the loss suffered by CME as provided in the supplementary agreements. Either case will cause CME to incur cash outlays to pay for monetary compensation or to fund the replacement of digital television displays.

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A business disruption of any bus operator participating in CME’s network or a downturn in the inter-city express bus transportation industry in general could adversely affect its business.
 
CME’s business depends heavily on the continued operation of the inter-city express bus transportation services. Prior to January 1, 2006, CME relied on no more than ten bus operators to carry its network. For the year ended December 31, 2007, although the number of bus operators participating in its network increased to more than 30, CME relied heavily on the top ten bus operators to carry its network. For the years ended December 31, 2007 2008 and 2009,  the amount of concession fees paid to the top ten bus operators participating in its network accounted for 62.3% , 61.0% and 53.8%respectively of total concession fees paid to all bus operators participating in its network. Currently, more than one-fifth of inter-city express buses carrying its network are operated by three bus operators participating in its network. If any major bus operator participating in CME’s network experiences a business disruption, insolvency or bankruptcy, it might suspend or stop its transportation services partially or completely. If this occurs, the number of inter-city express buses carrying CME’s network could decrease significantly, which could materially adversely affect the scope of its market share.
 
Furthermore, inter-city bus travel in China is largely driven by economic growth. Therefore, inter-city express bus transportation services are susceptible to downturns in the economy. In the event of an economic downturn, the number of passengers, including business, leisure and other travelers, may decrease, which would result in a smaller target audience and in turn impact the effectiveness of its advertising network for advertisers and advertising agencies. Moreover, further increases in crude oil prices could result in increases in bus fares payable by the passengers, particularly if government subsidies are insufficient to cover resulting increases in fuel costs incurred by bus operators, which may adversely affect the demand for travel on inter-city express buses. Further, the introduction and the expanded reach of high speed railway networks as the government continues to increase expenditure on high speed railway construction in China are likely to impose competition for inter-city express bus operators in the future. If an increased number of inter-city travelers choose to travel on high speed railways, or alternative transportation options, such as automobiles or airplanes, instead of on inter-city express buses in the future, the size of the target audience reachable by its advertising network may not grow or may even decrease and the attractiveness of its advertising network for advertisers may suffer.
 
If CME is unable to continue to obtain a wide range of free entertainment programs from its content suppliers or from other content suppliers on substantially the same terms in the future, its business could be materially adversely affected.
 
On September 1, 2006, CME entered into a cooperation agreement with Fujian SouthEastern Television Channel for a term of nine years starting from September 1, 2006 to August 31, 2015. In addition, on August 25, 2008, CME entered into a cooperation agreement with Hunan Satellite Television for a term of two years starting from September 1, 2008 to August 31, 2010. As a result, CME obtains a wide range of free entertainment programs from Fujian SouthEastern Television Channel and Hunan Satellite Television each month. However, there can be no assurance that CME will be able to continue to obtain free content from these content suppliers or at all. CME is obligated to perform certain obligations under these agreements. For example, CME is obligated to display the logo of Fujian SouthEastern Television Channel while showing its content on its network. In the event of a breach of such obligations, Fujian SouthEastern Television Channel could terminate its agreement with CME. The payment of penalty charges in the event of an early termination may not be sufficient to compensate CME for the loss of its ability to obtain free entertainment content each month. Moreover, if CME fails to renew its agreements with its content suppliers on substantially the same terms upon expiration, CME may have to pay for content provided by third-party suppliers which would increase CME’s costs and adversely affect its profitability. If CME is unable to locate alternative content suppliers to provide comparable content on commercially reasonable terms in the event of an early termination or upon expiration, the attractiveness of its advertising network could be reduced and its business could be materially adversely affected.
 
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CME relies on third-party advertising agencies to source advertisers. CME’s failure to retain key third-party agencies or attract additional agencies on favorable terms could materially adversely affect its revenue growth.
 
CME currently generates a majority of its revenue by selling advertising time slots to advertising agencies that purchase advertising time slots from it and in turn resell such time directly to advertisers. Consequently, the success of its business is significantly reliant on such third-party advertising agencies to source advertisers. CME typically enters into advertising contracts with its advertising agency clients with terms ranging from several months to one year. If it fails to renew these advertising contracts for any reason with any of its key advertising agency clients, its revenue may be materially adversely affected.
 
CME has also entered into long-term framework agreements with some of its advertising agency clients for three year terms that commenced January 1, 2008 to December 31, 2010. These long-term framework agreements specify the permissible range of annual increase in the average selling prices, which is between a minimum of 20% and a maximum of 50%. However, CME has entered into such long-term framework agreements with a small portion of its clients. If it is unable to increase its average selling prices with a sufficient number of its clients each year, it may not be able to grow its revenue or maximize its average advertising fees as planned. In addition, the advertising industry is highly competitive and fragmented. If it is unable to closely monitor the changing trends in the advertising agency industry or fail to retain any of its key third-party advertising agency clients, its business, financial condition and results of operations could be materially adversely affected.
 
CME derives a substantial portion of its revenue from a limited number of advertising clients.
 
CME derives a majority of its revenue from a limited number of advertising clients. For the year ended December 31, 2009, revenue generated from its top ten clients and the single largest client accounted for 45.0% and 6.9%, respectively, of its total revenue. CME generated all its revenue in the year ended December 31, 2005 directly from advertisers. It started generating revenue from advertising agency clients who purchase advertising time slots from it and resell such time to their end clients in the year ended December 31, 2006 and the top two clients in that year were advertising agency clients. For the years ended December 31, 2007, and 2008, all of the top ten clients were advertising agency clients while for the year ended December 31, 2009, nine out of the top ten clients were advertising agency clients. . The change of mix of advertising agency clients in relation to direct advertising clients in its client base significantly increased its reliance on advertising agency clients for the generation of its revenue. The loss of sales from any of its clients, in particular, its advertising agency clients, could have a material adverse effect on its business. Moreover, CME typically enters into one-year contracts with its advertising agency clients. CME’s revenue may decline if it is unable to renew the one-year contracts with its advertising agency clients.
 
CME relies on one equipment supplier, Hangzhou Yusong Electronic Technology Co., Ltd., or Hangzhou Yusong, to deliver its digital television displays and related equipment and automated control systems.
 
CME purchases its digital television displays and related equipment and control systems exclusively from Hangzhou Yusong, an independent third party. Because it relies exclusively on Hangzhou Yusong for the supply of its equipment and control systems, any interruption or delay in Hangzhou Yusong’s production could materially adversely affect CME’s ability to install its equipment and control systems on additional inter-city express buses to expand its network as planned, and CME may not be able to find an alternative equipment supplier in a timely or cost-effective manner, if at all. In addition, although Hangzhou Yusong has been its equipment supplier since 2003, CME does not have any exclusive contractual arrangements with Hangzhou Yusong. As a result, Hangzhou Yusong may produce equipment and control systems for CME’s competitors in the future, and may refuse to renew its agreement with CME or may enter into agreements with it on less favorable terms, which may substantially increase CME’s costs and materially adversely affect CME’s operations.
 
Moreover, on August 1, 2008, Zheng Cheng, Fujian Fenzhong and Hangzhou Yusong entered into a patent licensing agreement pursuant to which Hangzhou Yusong obtained a license to manufacture its equipment and control systems based on CME’s patented technology. According to the patent licensing agreement, Hangzhou Yusong is subject to confidentiality obligations to keep the production procedures or other information necessary for the production of CME’s patented automated control systems in strict confidence. However, there can be no assurance that Hangzhou Yusong will abide by its confidentiality obligations. In the event that Hangzhou Yusong breaches its confidentiality obligations and discloses production procedures or other information necessary for the production of CME’s patented automated control systems to any third party, including CME’s competitors, CME’s business may be materially adversely affected. In addition, although CME obtained patent protection for its automated control systems, in the event of any third-party infringement of its patent, the costs and other resources necessary to prosecute any claim may be large and could have a material adverse effect on CME’s business.
 
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Further, certain key components of CME’s equipment and control systems, such as hard disk drives and integrated circuit chips are imported from overseas. Although the importation of such equipment and systems is the responsibility of Hangzhou Yusong, any delay resulting from custom inspections or otherwise of these imported key components could in turn result in the delay of Hangzhou Yusong’s production and supply of CME’s equipment and control systems to it, which could adversely affect its business.
 
CME may reach saturation in terms of advertising time slots available for sale and, conversely, it may experience difficulties in selling advertising time slots, either of which could adversely affect its revenue and profitability over time.
 
CME sells the advertising time slots on its network placed on inter-city express buses. CME sells its advertising time slots by the number of minutes or seconds in a particular municipality or province for a period of a few months to one year. Although inter-city express buses carrying its network frequently travel across municipalities and provinces in China, CME sells its advertising time slots based on the municipality or province from which the buses depart. Therefore, CME’s advertising time slots available for sale are limited by the municipalities and provinces included in its network. CME’s existing network comprises all four municipalities, namely, Beijing, Shanghai, Tianjin and Chongqing, and seven economically prosperous provinces, namely, Guangdong, Jiangsu, Fujian, Sichuan, Hubei, Anhui and Hebei. CME expects to enter into new provinces and regions in the future. If CME is unable to enter into new provinces according to its plans, it would not be able to increase the number of advertising time slots available for sale on its network. In addition, advertisers usually target audiences located in economically prosperous regions to promote their products and services. In provinces and municipalities where demand for advertising time slots by advertisers is particularity strong, such as Shanghai, Beijing, Jiangsu and Guangdong, CME may run out of advertising time slots for sale to its clients. On the other hand, it may not be able to sell all advertising time slots on inter-city express buses traveling in economically less prosperous provinces or regions as it continues to expand its geographic coverage in the future, which could adversely affect its ability to generate higher levels of revenue and profitability over time.
 
A downturn in the businesses of advertisers, advertising agencies or the advertising industry in general, could materially adversely affect CME’s business.
 
CME generates all of its revenue from advertisers who purchase advertising time slots directly from it or through advertising agencies. If there is a downturn in the business of the advertisers, they may decrease their overall advertising spending on new out-of-home advertising networks, including CME. Moreover, the businesses of some advertisers may be subject to seasonal or unpredictable fluctuations, making it difficult for them to determine the amount of advertising spending to be used on CME’s advertising network, if at all. In the event of a downturn in the businesses of the advertisers, the advertisers may decrease or cease purchases of advertising time slots from CME. Similarly, CME’s business from advertising agencies could be materially adversely affected if the advertisers who purchase advertising time slots through the advertising agencies decrease their advertising spending. All of CME’s historical revenue has been generated from advertising services. CME does not currently have any plans to diversify revenue sources beyond the provision of selling advertising time slots. As a result, if there were any business disruption or a downturn in the advertising industry in general for any reason, CME may be unable to diversify its revenue sources and its ability to generate revenue and its results of operations could be materially adversely affected.
 
CME operates in the advertising industry, which is particularly sensitive to changes in economic conditions and advertising trends.
 
CME operates in the advertising industry where demand for advertising time and the resulting advertising spending are particularly sensitive to changes in general economic conditions with advertising spending typically decreasing during periods of economic downturn. The amount of advertising spending on CME’s network may decrease for a number of reasons, including:
 
 
·
a general decline in economic conditions;
 
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·
a decline in economic conditions in the particular geographical regions in which CME conducts business;
 
 
·
a decision to shift advertising spending to other advertising media; and
 
 
·
a decline in advertising spending in general.
 
A decrease in demand for advertising media in general, and for CME’s advertising services in particular, would materially adversely affect its business, financial condition and results of operations.
 
If CME fails to attract advertising clients to its network, it will be unable to maintain or increase its advertising prices, which would negatively affect its ability to grow revenue.
 
The actual prices CME can charge its advertising clients who purchase advertising time slots on its network, either directly or through advertising agencies, depend on the coverage and quality of its networks and the demand by advertisers for advertising time. CME’s advertising clients choose to advertise on its advertising network in part based on the extent of its coverage and the desirability of the cities where it operates. If CME fails to maintain or expand its geographic coverage, or solidify its brand name and reputation as a quality provider of advertising services, advertisers may be unwilling to purchase time on its network or pay the advertising fees it requires to remain profitable. A decrease in demand for its services could cause it to lower the prices it charges for advertising time on its network and could negatively affect its ability to increase its prices in the future, either of which would materially adversely affect its business, financial condition, prospects and results of operations.
 
If CME fails to compete successfully with existing and new competitors, its business and results of operations may be adversely affected.
 
CME competes directly with existing smaller advertising network operators who place their network on inter-city buses that travel primarily between villages or on highways in China. In addition, CME competes with other alternative advertising media, such as the Internet, street furniture and frame, as well as traditional advertising media, such as television, newspapers, magazines and radio for overall advertising spending by its clients. CME also competes for overall advertising spending by its clients with new out-of-home advertising network operators including Focus Media, a multi-platform digital media company with its primary platform in office buildings or other building structure; VisionChina Media, Towona and Bus Online, digital television advertising network operators with their primary platforms on public mass transportation systems inside cities; and AirMedia, a digital television advertising network operator with its primary platform on airplanes and airports.
 
In the future, CME may also face competition from new entrants into the out-of-home advertising network sector. In addition, since December 2005, the establishment of wholly foreign-owned advertising companies has been permitted and a large number of wholly foreign-owned advertising companies have been established since then. CME believes China’s ongoing deregulation of its advertising market will expose it to greater competition with existing or new advertising companies in China, including PRC subsidiaries of larger or better established multi-national companies that may have more experience in the advertising industry and significantly greater financial resources.
 
If CME loses its status as the sole strategic alliance partner designated by TTAVC, it may be unable to maintain or expand its advertising network.
 
In October 2007, CME entered into a five-year cooperation agreement with Transport Television and Audio-Video Center, or TTAVC, an entity affiliated with the Ministry of Transport of the People’s Republic of China to be the sole strategic alliance partner in the establishment of a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China. The cooperation agreement also gave CME exclusive rights to display advertisements on the system. In November 2007, TTAVC issued a notice to municipalities, provinces and transportation enterprises in China regarding facilitating the implementation of the system contemplated under the cooperation agreement. Its ability to maintain its status as the sole strategic alliance partner designated by TTAVC is important to its future growth. If CME is unable to maintain such status because TTAVC refuses to renew the agreement upon expiration or for any other reason, CME may be unable to expand its network as planned. Moreover, CME would lose its exclusive rights and other advertising network operators may establish in-vehicle television systems on buses traveling on highways in China to compete with it. If this occurs, it may lose its market share to these competitors. Further, CME’s clients may decide to place their advertisements on such competing networks or otherwise decrease their advertising spending on its network, which would materially adversely affect its financial condition and results of operations.

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If CME Does Not Meet Performance Targets Specified in its Financing Documents, it Could be Required to Pay Significant Cash Penalties and/or a Change of Control May Take Place
 
Pursuant to the terms of an investor rights agreement, the Company is required to pay certain performance adjustment amounts to Starr in the event the Company’s audited consolidated net profits (“ANCP”) for 2009, 2010 or 2011 are less than US$42,000,000, US$55,000,000 and US$70,000,000, respectively (each, a “Profits Target”). The Performance Adjustment Amount payable in any of 2009, 2010 or 2011 will be a fraction of US$343,462,957 proportionate to the amount by which the Company’s ANCP in such year falls short of the then applicable Profits Target. The Performance Adjustment Amounts will be payable in cash or stock, but only to the extent such stock, together with the shares of Common Stock acquired or acquirable as a result of Starr’s ownership of the Purchased Shares, the Purchased Warrants and the Transferred Shares, will not exceed 19.9% of the total number of shares of Common Stock issued and outstanding as of the date of the Purchase Agreement.
 
In addition, as long as Starr owns at least 3% of the issued and outstanding shares of CME’s common stock, on a fully diluted, as-if-converted basis, it will also have the right (the “Put Right”) to require the founding stockholders of HKMDF to purchase all the securities held by it if any of the following occurs: (1) the Company’s ACNP for 2012 is less than its ACNP for 2011; (2) the Company fails to achieve 50% of any Profits Target for any of 2009, 2010 or 2011; or (3) the Company or certain of such founding stockholder materially breaches certain provisions of the investment documents.
 
In the event such founding stockholders do not comply with their obligation to purchase Starr’s shares under the foregoing provisions, Starr will have the right to require the founding stockholders to sell up to all of the Company’s capital stock directly or indirectly held by them to a third party pursuant to a managed sale process.  In the event such sales take place or of any of the foregoing penalties are imposed, there could be a material adverse effect on our business, results of operation and financial condition.
 
If CME is unable to adapt to changing trends and technologies in the advertising industry, it will not be able to compete effectively.
 
Trends and technologies in the advertising industry are continuously evolving. The ability to quickly identify new advertising trends and to develop new technology to meet the demand of advertisers and target audiences is essential to the continued success in the advertising industry. To enable more frequent updating of the content displayed on its network, CME plans to upgrade its existing equipment and control systems to automatically update its programs upon arrival of the buses at bus terminals. However, there can be no assurance that it will be able to successfully upgrade its existing equipment as planned. If it is unsuccessful in these efforts, CME may incur substantial research and development costs without the ability to recoup such expenses with future revenue derived from such efforts and it may not be able to grow its business as planned.
 
In addition, if advertisers find other advertising networks to be more attractive, it may be required to expand into new advertising networks to adapt to new trends in the advertising industry, which may require substantial capital expenditure to develop or acquire new technologies. It may not have sufficient financial or technological resources necessary to fund or otherwise implement needed technological innovations. If CME fails to respond to the changing advertising trends, it may be unable to increase or maintain its market share and revenue, which may materially adversely affect its business prospects.
 
CME may be unable to obtain sufficient funds for future development on commercially reasonable terms, which could materially adversely affect its liquidity and financial condition.
 
CME may need additional capital for future developments. If current sources are insufficient to satisfy cash requirements, it may seek to sell additional equity or debt securities or obtain a credit facility. This could result in additional dilution to shareholders and increased debt service obligations. The incurrence of indebtedness could also result in operating and financing covenants that could restrict operations and liquidity.
 
In addition, its ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
 
 
·
investors’ perception of, and demand for, securities of new out-of-home advertising media companies;
 
 
·
economic conditions in the United States and other capital markets in which CME may seek to raise funds;
 
 
·
its future financial condition, results of operations and cash flows;
 
 
·
PRC government regulation of foreign investment in advertising services companies and restrictions on out-of-home advertising media companies in China;
 
 
·
economic, political and other conditions in China; and
 
There can be no assurance that financing will be available in amounts or on terms acceptable to CME in a timely manner, if at all. Any failure to raise additional funds on favorable terms could have a material adverse effect on its liquidity and financial condition.
 
The loss of key employees, including any member of senior management, or a failure to recruit qualified personnel as needed could weaken CME’s strategic, technological and operational expertise, and lower the quality of its services.
 
CME’s future success depends upon the continued services of its senior executives and other key employees. In particular, it relies on the expertise and experience of its chief executive officer, Zheng Cheng and its chief financial officer, Jacky Lam Wai Kei. It relies on their industry expertise, their experience in its business operations, and their working relationships with CME’s employees, its clients, the inter-city express bus operators, and relevant government authorities. Its success also depends on its ability to attract and retain qualified personnel for strategic planning, programming and enhanced services. The competition for qualified personnel in new out-of-home advertising industry may increase in the future, making it difficult for it to attract and retain qualified personnel. CME’s operations could suffer with the loss of any member of the senior management team or any key employee. If one or more of its senior executives were unable or unwilling to continue in their present positions, CME might be unable to find suitable replacements for them. In addition, although CME has entered into non-competition agreements with its senior executives and key employees, there can be no assurance that they will abide by their non-competition obligations. If any of them work for its competitors in the future, it may suffer from losses of clients, content suppliers, equipment suppliers, key professionals and staff members, which could materially adversely affect its operations and revenue.

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CME may be subject to the risk of labor disputes.
 
CME is subject to laws and regulations in relation to labor protection in China, including representation of employees by a labor union. Currently, the employees of Fujian Fenzhong are represented by a labor union. The labor union typically represents the majority of employees and assists with collective bargaining of compensation and benefits and other legal matters with the employers on behalf of employees, monitors compliance with labor laws and internal labor procedures and mediates labor disputes in the case of conflicts and lawsuits against the employer. The labor union can also enter into a collective bargaining agreement with the employer in writing and all employment contracts separately entered into with each employee can be no less favorable than the terms contained in such collective bargaining agreement. In addition, employers are required to make contributions to the union fund at a rate of 2% of salaries paid to the employees. For the year ended December 31, 2006, CME’s contribution to the union fund amounted to $12,000, which increased by 93.0% to $23,000 for the year ended December 31, 2007, which further increased by 5% to $27,000 for the year ended December 31, 2008. Such contributions are subject to increase as it recruits new employees or increase the salaries of its existing employees. Moreover, it has not experienced strikes or labor protests in the past; however, there is no assurance that such events will not occur in the future if it is unable to maintain a satisfactory relationship with its employees or the labor union. If this occurs, it could experience a disruption to its operations which would materially adversely affect its financial condition and results of operations.
 
CME may be subject to intellectual property infringement claims, which may force it to incur substantial legal expenses and could potentially result in judgments against it, which may materially disrupt its business.
 
CME cannot be certain that its advertising content, entertainment content or other aspects of its business do not or will not infringe upon patents, copyrights or other intellectual property rights held by third parties. Although it is not aware of any such claims, it may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of its business. If it is found to have violated the intellectual property rights of others, it may be enjoined from using such intellectual property, and it may incur licensing fees or be forced to develop alternatives. Successful infringement or licensing claims against it may also result in substantial monetary liabilities, which may materially adversely affect its business.
 
CME’s failure to protect its intellectual property rights could have a negative impact on its business.
 
CME believes its brand, trade name, patented automated control systems and other intellectual property rights are critical to its success. The success of its business depends in part upon its continuing ability to use its brand, trade names, trademarks and patented automated control systems to increase brand awareness and to further develop its brand and expand its advertising network. In particular, CME’s patented automated control system is a key component of its competitive advantage and its growth strategy. The unauthorized use of its patented automated control systems or other infringements on its intellectual property rights could diminish the value of its brand and its market acceptance, competitive advantages or goodwill.
 
CME does not have any business liability, disruption, property or litigation insurance in China.
 
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. CME has determined that the cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for it to have such insurance. As a result, except for the mandatory vehicle insurance, CME does not have any business liability, disruption, litigation or other property insurance coverage for its operations in China. Any business disruption, loss of properties or litigation it experiences might result in substantial costs incurred and diversion of resources which may materially adversely affect its business, financial condition and results of operations.

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Failure to comply with PRC laws and regulations relating to advertisement content restrictions governing the advertising industry in China may result in severe penalties and civil liabilities.
 
Advertisers, advertising operators, and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of the advertisements they prepare or distribute is fair, accurate and in full compliance with applicable laws, rules and regulations. In providing advertising services, advertising agencies and advertising distributors must review the supporting documents provided by advertisers and verify that the content of the advertisements complies with applicable PRC laws, rules and regulations. Prior to distributing advertisements that are subject to government censorship and approval, such as advertisements for patented products or processes, pharmaceutical products, medical procedures, alcohol, tobacco, and cosmetics, advertising distributors are obligated to verify that such governmental review has been performed and approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish corrections of the advertisement containing restricted or prohibited content. In circumstances involving serious violations, the State Administration of Industry and Commerce, or SAIC, or its local branches may revoke violators’ licenses or permits for their advertising business operations.
 
CME is an advertising operator that places advertisements provided by its clients on inter-city express buses. As a result, it is obligated under PRC laws and regulations to ensure that the content of the advertisements displayed on its advertising network is in full compliance with applicable laws and regulations. CME endeavors to take all required measures, including independent verification of whether the advertisers have performed requisite reviews and obtained necessary approvals prior to distribution of relevant advertisements. However, if it fails to comply with applicable laws and regulations for any reason, CME may face severe penalties.
 
Moreover, civil claims may be filed against CME for fraud, defamation, subversion, negligence, copyright or trademark infringements or other violations due to the nature and content of the information displayed on its network. If viewers find the content displayed on its advertising network to be offensive, bus companies that display its content on their buses and bus terminals may seek to hold CME responsible for any claims by their passengers or they may terminate their relationships with CME.
 
If the PRC government determines that CME was obligated to register as an out-of-home advertising network operator, it may be subject to administrative sanctions, including discontinuation of its business for failure to complete such registration.
 
The SAIC promulgated the Out-of-Home Advertising Registration Administrative Regulations, or the Out-of-Home Advertising Regulations, on December 8, 1995 as amended on December 3, 1998 and May 22, 2006. Under the Out-of-Home Advertising Regulations, out-of-home advertisements in China must be registered with the local branch of the SAIC before dissemination. The advertising distributors are required to submit a registration application form and other supporting documents for registration. After review and examination, if an application complies with applicable requirements, the local branch of the SAIC will issue an Out-of-Home Advertising Registration Certificate for such advertisement. A change of registration with local SAICs must be made in the event of a change in the distributor, the location of dissemination, the periods, the content, the format, or the specifications of the advertisements.
 
According to the Out-of-Home Advertising Regulations, advertisements posted or placed on public transportation vehicles, such as inter-city express buses, are considered out-of-home advertisements and must be registered as advertising distributors. However, it is unclear whether the advertisements displayed on CME’s network would be considered out-of-home advertisements. Further, although the PRC Advertising Law defines an “advertising distributor” as a legal person or other economic entity that distributes advertisements for advertisers or an advertising operator entrusted by advertisers, the Out-of-Home Advertising Regulations do not define “advertising distributor.” Therefore, CME is unable to determine whether it is considered as an advertising distributor for purposes of the Out-of-Home Advertising Regulations and therefore is obligated to obtain the registration certificate.
 
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To ensure that CME’s business complies with the Out-of-Home Advertising Regulations, CME made inquiries with the local SAICs in the cities in which it has operations regarding whether it is required to obtain Out-of-Home Advertising Registration Certificates or to proceed with other procedures, such as filing, in these cities. With the exception of the local SAIC in Jiangsu province and Xiamen city of Fujian province, all the local SAICs with whom CME consulted do not expressly require CME to register with them. The officials at different levels within the local SAIC in Jiangsu and Xiamen city expressed different views on whether the advertisements shown on CME’s digital television displays should be regarded as out-of-home advertisements. CME recently again inquired with the local SAIC of Xiamen whether it is required to be registered and was verbally told that the advertisements displayed on CME’s digital television displays do not need to be registered with Xiamen SAIC and that CME does not need to obtain the Out-of-Home Advertising Registration Certificate according to Out-of-Home Advertising Regulations, but is only required to file the content of advertisement with the Xiamen SAIC. However, the filing procedures are unclear and it is also unclear whether penalties will be imposed if CME fails to make such filings. In addition, CME tried to re-apply for Out-of-Home Advertising Registration with the local SAICs in Jiangsu, but the officials rejected such applications saying that CME does not need to register under current applicable regulations. In light of such circumstances, there can be no assurance that CME will be able to complete the registration procedure in compliance with the new out-of-home advertisement provisions in Jiangsu, or at all. If CME is required to complete the registration procedure with the local SAIC in Jiangsu but fails to do so, the relevant authorities in Jiangsu may require CME to forfeit its advertising income sourced in Jiangsu or subject it to fines. CME may also be required to discontinue its operations in Jiangsu, which would result in a breach of contracts with its clients and its business, financial condition and results of operations would be materially adversely affected.
 
Future acquisitions may have an adverse effect on CME’s ability to manage its business.
 
CME may acquire businesses, technologies, services or products which are complementary to its core advertising network business. Future acquisitions may expose it to potential risks, including risks associated with:
 
 
·
the integration of new operations, services and personnel;
 
 
·
unforeseen or hidden liabilities;
 
 
·
the diversion of resources and management attention from its existing business and technology;
 
 
·
its potential inability to generate sufficient revenue to offset new costs;
 
 
·
the expenses of acquisitions; or
 
 
·
the potential loss of or harm to relationships with its employees and clients resulting from its integration of new businesses.
 
Any of the potential risks listed above could have a material and adverse effect on its ability to manage its business, its revenue and net income.
 
See also Risk Factor
 
“CME may be unable to obtain sufficient funds for future development on commercially reasonable terms, which could materially adversely affect its liquidity and financial condition”.
 
CME may be required to obtain an approval from the PRC State Administration of Radio, Film and Television, or SARFT, under the Notice on Strengthening the Administration of Audio and Visual Media on Vehicles, Buildings and Other Public Arena, or December 2007 Notice.
 
On December 6, 2007, SARFT promulgated the December 2007 Notice pursuant to which the broadcasting of audio and visual programs, including news, drama series, sports, technology, entertainment and other programs, through radio and television networks, the Internet and other information systems affixed to vehicles and buildings and in airports, bus and railway stations, shopping malls, banks, hospitals and other out-of-home public media is subject to approval by the SARFT. The December 2007 Notice requires the local branches of SARFT to investigate and record any organization or company engaging in the activities described in the December 2007 Notice without any permissions, send written notices to such organizations or companies demanding their compliance with the December 2007 Notice, and report the results of such investigations to SARFT by January 15, 2008. To date, CME has not received any notice from the SARFT, or any of its local branches in the municipalities and provinces included in its network, demanding its compliance with the December 2007 Notice. CME made inquiries with SARFT regarding whether it is required to obtain an approval and the procedures of obtaining such an approval. Due to the lack to clear implementing rules and regulations for the December 2007 Notice, CME is unable to obtain a written confirmation from SARFT as to whether it is required to obtain an approval under the December 2007 Notice and the procedures thereof. To ensure that its business complies with the December 2007 Notice, CME submitted an application for approval with the local SARFT in Fujian in July 2008 but has not obtained any approval to date. In the event that the SARFT, or any of its local branches in the municipalities and provinces included in CME’s network, requires it to obtain an approval, there is no assurance that it will be able to obtain such approval. If it is unable to obtain such approval, it may be required to discontinue its operations, which will decrease the attractiveness of its advertising network may cause its clients to reduce or cease the purchase of advertising time slots from it, and could materially adversely affect its business, financial condition and results of operations.

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CME faces risks relating to health epidemics and natural disasters, which could materially adversely affect its financial condition and results of operations.
 
The effect of a health epidemic or outbreak could materially adversely affect CME’s business. Any prolonged recurrence of avian flu, severe acute respiratory syndrome, or SARS, or another epidemic or outbreak in China may result in restrictions on long-distance travel, including highway transportation on inter-city express buses, and have a material adverse effect on demand for transportation on inter-city express buses in China. In addition, the government authorities may require the closure of CME’s offices or other businesses to temporarily cease their operations, including transportation services provided by inter-city express bus operators critical to CME’s continued operations. For example, during SARS outbreak in 2003 and 2004, many businesses closed their offices and many businesses were temporarily forced to cease operations under the order of the government authorities. From 2005 to present, there have also been reports on the occurrence of avian flu in various parts of China, including a few confirmed human cases and deaths. The recurrence of any health epidemic in China could result in similar government measures to contain dissemination of diseases, which would have a material adverse effect on the Chinese economy in general and result in an impact on CME’s business if the inter-city express buses were required to temporarily cease operations. Further, a significant disruption to long-distance bus services resulting from major construction or renovation projects, terrorist attacks, natural disasters, weather conditions or other factors beyond CME’s control could render its advertising media inoperative or materially limit the effectiveness of CME’s advertising network. If any of these occurs, CME would not be able to display advertisements for its clients, which would result in a breach of contracts with its clients and have a material adverse effect on its business.
 
Risks Relating to CME’s Corporate Structure
 
If the PRC government determines that the agreements that establish the structure of CME’s business operations in China do not comply with applicable PRC laws and regulations, CME could be subject to severe penalties, including an order to cease its business operations.
 
The PRC government requires any foreign entities that invest in the advertising services industry to have at least two years of direct operations in the advertising industry outside China. CME has not directly operated any advertising business outside China and therefore, CME currently does not qualify under PRC regulations to directly provide advertising services. CME is a Delaware corporation and a foreign legal person under Chinese laws. Therefore, as a subsidiary, Fujian Express is currently ineligible to apply for the required licenses to provide advertising services in China. CME’s advertising business is currently provided through its contractual arrangements with Fujian Fenzhong, its consolidated entity in China. Fujian Fenzhong is currently owned by Zheng Cheng and Chunlan Bian. Fujian Fenzhong holds the requisite licenses to provide advertising services in China. Fujian Fenzhong directly operates its advertising network and sells advertising time slots to its clients. CME has been and expects to continue to be dependent on Fujian Fenzhong to operate its advertising business. CME does not have any equity interest in Fujian Fenzhong but receives the economic benefits of it through various contractual arrangements.
 
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CME has been advised by its PRC counsel that each of the contracts under the structure of its business operations in China through contractual arrangements with Fujian Fenzhong and its shareholders complies with all applicable PRC laws and regulations and does not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations. However, there exist substantial uncertainties regarding the application, interpretation and enforcement of relevant current and future PRC laws and regulations and their potential effect on its corporate structure and contractual arrangements. The interpretation of these laws and regulations are subject to the discretion of competent PRC authorities. There can be no assurance that the PRC regulatory authorities will not take a view different from the opinions of CME’s PRC counsel and determine that its corporate structure and contractual arrangements violate PRC laws, rules and regulations. In the event that the PRC regulatory authorities determine in their discretion that its corporate structure and contractual arrangements violate applicable PRC laws, rules and regulations, including restrictions on foreign investment in the advertising industry in the future, CME may be subject to severe penalties, including an order to cease its business operations.
 
If CME or any of its current or future subsidiaries are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, PRC regulatory authorities would have broad discretion in dealing with such violations, including:
 
 
·
revoking the business and operating licenses of such subsidiary and consolidated entity;
 
 
·
discontinuing or restricting the conduct of any related-party transactions between such subsidiary and consolidated entity;
 
 
·
imposing fines, confiscating the income of Fujian Fenzhong or CME’s income, or imposing other requirements with which CME or any subsidiary or consolidated entity may not be able to comply;
 
 
·
shutting down CME’s advertising network; or
 
 
·
requiring CME or any subsidiary or consolidated entity to restructure the relevant ownership structure or operations.
 
The imposition of any of these penalties would result in a material adverse effect on CME’s ability to conduct its business.
 
CME relies on contractual arrangements with Fujian Fenzhong, its consolidated entity in China, and its shareholders, which may not be as effective in providing CME with operational control or enabling CME to derive economic benefits as through ownership of controlling equity interest.
 
CME has in the past relied, and will continue in the future to rely, on contractual arrangements with Fujian Fenzhong, its consolidated entity in China, and its shareholders to operate its advertising business. These contractual arrangements may not be as effective as ownership of controlling equity interest would be in providing CME with control over, or enabling CME to derive economic benefits from operations of, Fujian Fenzhong. If CME had direct ownership of Fujian Fenzhong, it would be able to exercise its rights as a shareholder to (i) effect changes in the board of directors of Fujian Fenzhong, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level, and (ii) derive economic benefits from operations of Fujian Fenzhong by causing Fujian Fenzhong to declare and pay dividends. However, under the current contractual arrangements, as a legal matter, if Fujian Fenzhong and any of its shareholder fails to perform its, his or her respective obligations under these contractual arrangements, CME may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which it cannot assure you will be effective. For example, if shareholders of Fujian Fenzhong were to refuse to transfer their equity interests in Fujian Fenzhong to CME or its designated persons when it exercises the purchase option pursuant to these contractual arrangements, CME may have to take legal actions to compel them to fulfill their contractual obligations.
 
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CME expects to continue to depend upon its contractual arrangements among Fujian Express, Fujian Fenzhong and its shareholders to operate its advertising business in China due to the PRC regulatory restrictions on foreign investments in its industry. If (i) the applicable PRC authorities invalidate these contractual arrangements for violation of PRC laws, rules and regulations, (ii) Fujian Fenzhong or its shareholders terminate these contractual arrangements or (iii) Fujian Fenzhong or its shareholders fail to perform their obligations under these contractual arrangements, CME would not be able to continue its business operations in China or to derive economic benefits from the operations of Fujian Fenzhong. Further, if Fujian Express (on behalf of CME) fails to renew these contractual arrangements upon their expiration, CME would not be able to continue its business operations unless the then current PRC law allows CME or its direct subsidiary to directly operate advertising businesses in China. In addition, if Fujian Fenzhong or all or part of its assets become subject to liens or rights of third-party creditors, CME may be unable to continue some or all of its business activities, which could severely disrupt its business and cause grave damaging effects on its financial condition and results of operations. If Fujian Fenzhong undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering CME’s ability to operate its business or derive economic benefits from Fujian Fenzhong, which could materially adversely affect its business and its ability to generate revenue.
 
All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC. Therefore, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC may not be as well developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit CME’s ability to enforce these contractual arrangements. In the event CME is unable to enforce these contractual arrangements, it may not be able to exercise effective control over its operating entities, and its ability to conduct its business or derive economic benefits from operations of Fujian Fenzhong may be negatively affected.
 
In addition, the equity interest in Fujian Fenzhong is pledged to secure the obligations of Fujian Fenzhong and the loans of Fujian Fenzhong’s shareholders according to the contractual arrangements. Pursuant to the PRC Property Law effective on October 1, 2007, the pledge of equity interest is created only after being registered with the competent local SAIC. Fujian Express and Fujian Fenzhong’s shareholders have received the Notice on Pledge of Equity Interest Registration issued by the Fuzhou Administration of Industry and Commerce dated June 15, 2009, announcing the respective equity interest pledged by Zheng Cheng and Chunlan Bian became effective as of such date.
 
The beneficial owners of Fujian Fenzhong may have potential conflicts of interest with CME.
 
The beneficial owners of Fujian Fenzhong are also the founders of CME and own a substantial portion of its common shares. Conflicts of interests between their dual roles as beneficial owners of both Fujian Fenzhong and CME may arise. There can be no assurance that when conflicts of interest arise, any or all of these individuals will act in the best interests of CME or that any conflict of interest will be resolved in its favor. In addition, these individuals may breach or cause Fujian Fenzhong to breach or refuse to renew the existing contractual arrangements that allow CME to effectively control Fujian Fenzhong and receive economic benefits from it. If CME cannot resolve any conflicts of interest or disputes between CME and the beneficial owners of Fujian Fenzhong, CME would have to rely on legal proceedings, the outcome of which is uncertain and which could be disruptive to CME’s business.
 
Fujian Express’ contractual arrangements with Fujian Fenzhong may be subject to scrutiny by the PRC tax authorities and may result in a finding that it owes additional taxes or is ineligible for tax exemption, or both, which could substantially increase its taxes owed and thereby reduce its net income.
 
Under applicable PRC laws, rules and regulations, arrangements and transactions among related parties may be subject to audits or challenges by the PRC tax authorities. Neither CME nor its PRC counsel are able to determine whether any of these transactions will be regarded by the PRC tax authorities as arm’s length transactions because, based on its knowledge, the PRC tax authorities have not issued a ruling or interpretation in respect of the type of transaction structure similar to that of CME. The relevant tax authorities may determine that CME’s contractual relationships with Fujian Fenzhong were not entered into on an arm’s length basis. If any of the transactions between Fujian Express and Fujian Fenzhong, including the contractual relationships with Fujian Fenzhong, are determined not to have been entered into on an arm’s length basis, or are found to result in an impermissible reduction in taxes under PRC law, the PRC tax authorities may adjust the profits and losses of Fujian Fenzhong and assess more taxes on it. In addition, the PRC tax authorities may impose late payment surcharges and other penalties to Fujian Fenzhong for underpaid taxes. CME’s net income may be materially adversely affected if Fujian Fenzhong’s tax liabilities increase or if it is found to be subject to late payment surcharges or other penalties.
 
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CME relies principally on dividends and other distributions on equity paid by its wholly-owned operating subsidiary to fund any cash and financing requirements it may have, and any limitation on the ability of its operating subsidiary to pay dividends to it could have a material adverse effect on its ability to conduct its business.
 
CME is a holding company, and it relies principally on dividends and other distributions on equity paid by Fujian Express, its PRC operating subsidiary, for its cash requirements, including the funds necessary to service any debt it may incur. If Fujian Express incurs debt on its own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to it. In addition, the PRC tax authorities may require CME to adjust its taxable income under the contractual arrangements Fujian Express currently has in place with Fujian Fenzhong in a manner that would materially adversely affect Fujian Express’s ability to pay dividends and other distributions to CME. Furthermore, relevant PRC laws, rules and regulations permit payments of dividends by Fujian Express only out of its retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC laws, rules and regulations, the statutory general reserve fund requires annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends until the cumulative fund reaches 50% of the registered capital. As a result of these PRC laws, rules and regulations, Fujian Express is restricted in its ability to transfer a portion of its net assets to CME whether in the form of dividends, loans or advances. As of December 31, 2008, its contribution to the reserve funds pursuant to PRC laws and regulations totaled $4,314,000. Any limitation on the ability of its subsidiary or consolidated entity to pay dividends to it could materially adversely limit its ability to grow, make investments or acquisitions that could be beneficial to its businesses, pay dividends or otherwise fund and conduct its business.
 
If any of CME’s PRC significant subsidiaries or consolidated entity becomes the subject of a bankruptcy or liquidation proceeding, CME may lose the ability to use and enjoy those assets, which could reduce the size of its advertising network and materially adversely affect its business, ability to generate revenue and the market price of its products.
 
To comply with PRC laws, rules and regulations relating to foreign ownership restrictions in the advertising industry, CME currently conducts its operations in China through contractual arrangements among Fujian Express, Fujian Fenzhong and its shareholders. As part of these arrangements, Fujian Fenzhong holds substantially all the assets that are important to the operation of the business. If Fujian Fenzhong becomes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, its may be unable to continue some or all of its business activities, which could materially adversely affect CME’s business, financial condition and results of operations. If Fujian Fenzhong undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of its assets, thereby hindering CME’s ability to operate its business, which could materially adversely affect its business, its ability to generate revenue.
 
Under the EIT Law, CME each may be classified as a “resident enterprise” of the PRC. Such classification could result in unfavorable tax consequences to us, CME and our non-PRC shareholders.
 
On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes, although the dividends paid to one resident enterprise from another may qualify as “tax-exempt income”. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. The EIT Law and its implementing rules are relatively new and ambiguous in terms of some definitions, requirements and detailed procedures; therefore, it is unclear how the PRC tax authorities will determine tax residency based on the facts of each case.
 
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If the PRC tax authorities determine that we and/or CME is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we and/or CME may be subject to enterprise income tax at a rate of 25% on our and/or CME’s worldwide taxable income, as the case may be, as well as PRC enterprise income tax reporting obligations. Second, although the EIT Law provides that “dividends, bonuses and other equity investment proceeds between qualified resident enterprises” is exempted income, and the implementing rules of the EIT Law refer to “dividends, bonuses and other equity investment proceeds between qualified resident enterprises” as the investment proceeds obtained by a resident enterprise from its direct investment in another resident enterprise, however, it is unclear whether the dividends CME receives indirectly from Fujian Express constitute “dividend between qualified resident enterprises” and therefore qualify for tax exemption, thus the dividends CME received may be subject to PRC withholding tax at a rate of 10%. Finally, the new “resident enterprise” classification could result in a situation in which a 10% PRC tax is imposed on dividends we pay to our non-PRC security holders and gains derived by our non-PRC security holders from transferring our securities, if such income is considered PRC-sourced income by the relevant PRC authorities. If any such PRC taxes apply, a non-PRC security holder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or foreign tax credit against such security holder’s domestic income tax liability (subject to applicable conditions and limitations). CME stockholders should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available foreign credits.
 
Furthermore, the EIT Law and Implementation Rules provide that the “non-resident enterprises” are subject to the enterprise income tax rate of 10% on their income sourced from China, if such “non-resident enterprises” (i) do not have establishments or premises of business in China or (ii) have establishments or premises of business in China, but the relevant income does not have actual connection with their establishments or premises of business in China. Such income tax may be exempted or reduced by the State Council of the PRC or pursuant to a tax treaty between China and the jurisdictions in which the non-resident enterprise reside. Under the Double Tax Avoidance Arrangement between Hong Kong and Mainland China and the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties issued on February 20, 2009 by the State Administration of Taxation, if the Hong Kong resident enterprise owns more than 25% of the equity interest in a company in China incessantly within 12 months immediately prior to obtaining dividend from such company, the 10% withholding tax on the dividends the Hong Kong resident enterprise received from such company in China is reduced to 5%. If CME is considered as a Hong Kong resident enterprise under the Double Tax Avoidance Arrangement and is considered as a “non-resident enterprise” under the EIT Law, the dividends paid to CME by Fujian Express may be subject to the reduced income tax rate of 5% under the Double Tax Avoidance Arrangement. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment; and based on the Notice on the Comprehension and Recognition of Beneficial Owner in Tax Treaties issued on October 27, 2009 by the State Administration of Taxation, funnel companies, which are established for the purpose of evading or reducing tax, transferring or accumulating profits, shall not be recognized as beneficial owner and thus are not entitled to the abovementioned reduced income tax rate of 5% under the Double Tax Avoidance Arrangement.
 
PRC regulations relating to mergers and acquisitions of domestic enterprises by foreign investors may increase the administrative burden we face and create regulatory uncertainties.
 
On August 8, 2006, six PRC regulatory agencies, including the CSRC, MOC, the State Owned Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, or SAT, SAIC, and SAFE, jointly promulgated a rule entitled Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A rule, which was amended and took effect on June 22, 2009, to regulate foreign investment in PRC domestic enterprises. The M&A rule provides that the MOC must be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise and any of the following situations exist: (i) the transaction involves an important industry in China; (ii) the transaction may affect national “economic security”; or (iii) the PRC domestic enterprise has a well-known trademark or historical Chinese trade name in China. The M&A rule also contains a provision purporting, among other things, to require offshore special purpose vehicles, or SPVs, formed for the purpose of overseas listing of equity interests in PRC companies and entities directly or indirectly controlled by PRC companies or PRC individuals, to obtain the approval of the CSRC prior to the listing and trading of their securities on overseas stock exchanges. On September 21, 2006, the CSRC published guidelines to this provision of the M&A rule.
 
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To date, the application of the M&A rule is unclear. CME’s PRC counsel has advised CME that:
 
 
·
the CSRC approval required under the M&A rule applies to SPVs that, for purposes of achieving overseas listing, acquire the equity interests in PRC companies through share exchanges; and
 
 
·
based on their understanding of the current PRC laws, rules and regulations and the M&A rule, unless there are new PRC laws and regulations or clear requirements from the CSRC in any form that require the prior approval of the CSRC for the listing and trading of any overseas SPVs securities on an overseas stock exchange, the M&A rule does not require that CME obtains prior CSRC approval for the listing and trading on the NYSE Amex because CME completed its reorganization whereby Fujian Express was established as a wholly foreign owned enterprise and the restructuring between Fujian Express and Fujian Fenzhong was carried out prior to September 8, 2006, the effective date of the M&A rule.
 
However, the interpretation and application of the M&A rule remain unclear, and the PRC government authorities have the sole discretion to determine whether the business combination is subject to the approval of the CSRC. If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval is required for the business combination, CME cannot predict how long it would take to obtain the approval. In addition, CME may need to apply for a remedial approval from the CSRC and may be subject to certain administrative or other sanctions from these regulatory agencies.
 
Further, new rules and regulations or relevant interpretations may be issued from time to time that may require CME to obtain retroactive approval from the CSRC in connection with the business combination. If this were to occur, CME’s failure to obtain or delay in obtaining the CSRC approval for the business combination would subject CME to sanctions imposed by the CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties on CME’s operations in China, restrictions or limitations on CME’s ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect CME’s business, results of operations and financial condition.
 
If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval is required for the business combination, CME may need to apply for a remedial approval from the CSRC and may be subject to certain administrative punishments or other sanctions from these regulatory agencies. New rules and regulations or relevant interpretations may require that CME retroactively obtain approval from the CSRC in connection with the business combination. If this were to occur, CME’s failure to obtain or delay in obtaining the CSRC approval for the Transaction would subject CME to sanctions imposed by the CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties on CME’s operations in China, restrictions or limitations on CME’s ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect CME’s business, results of operations and financial condition.
 
CME cannot predict when the CSRC may promulgate additional rules or other guidance, if at all. Any delay in the issuance of such implementing rules or guidance may create additional uncertainties with respect to this Transaction. Moreover, implementing rules or guidance, to the extent issued, may fail to resolve current ambiguities under the M&A rules. Uncertainties and/or negative publicity regarding the M&A rules could have a material adverse effect on CME’s trading price.
 
The new regulations also established additional procedures and requirements expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. These rules may also require the approval from the MOC where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Complying with the requirements of the new regulations to complete such transactions could be time-consuming, and any required approval processes, including MOC approval, may delay or inhibit CME’s ability to complete such transactions, which could affect CME’s ability to expand its business.
 
ITEM 1B. Unresolved Staff Comments
 
None.
 
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ITEM 2 Properties
 
Our principal executive offices are located at its headquarters comprising approximately 2,000 square meters at 22/F, Wuyi Center, 33 East Street, Fuzhou, Fujian Province, People’s Republic of China.
 
ITEM 3 Legal Proceedings
 
We are not a party to any material legal proceedings nor are we aware of any circumstance that may reasonably lead a third party to initiate legal proceedings against us.
 
ITEM 4 Removed and Reserved
 
PART II
 
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our equity securities trade on the NYSE Amex. Prior to January 29, 2010, each of our units consisted of one share of common stock and one warrant and traded on the NYSE Amex under the symbol “TMI.U.”  On November 14, 2007, the common stock and warrants included in the units began to trade separately. Those units not separated continued to trade on the NYSE Amex under the symbol “TMI.U,” and each of the common stock and warrants traded on the NYSE Amex under the symbols “TMI” and TMI.WS.”  Commencing December 14, 2009, our units, common stock and warrants traded on the NYSE Amex under the symbols “CCME.U.” “CCME” “CCME.WS,” respectively.
 
We announced the redemption of our public warrants in December 2009.  On January 29, 2010, we completed the warrant redemption and as a result of the redemption, our publicly traded warrants (“CCME.WS”) and units (“CCME.U”) ceased trading on the NYSE Amex.
 
The following table sets forth, for each quarter of the fiscal years ended December 31, 2008 and 2009 and for a portion of the first quarter of the fiscal year ended December 31, 2010, the high and low sales price of our Common Stock, units, and warrants as reported on the NYSE Amex. Prior to October 17, 2007, there was no established trading market for our securities.
 
   
CCME/U (1)
Units
   
CCME
Common Stock
   
CCME/WS
Warrants
 
   
High
   
Low
   
High
   
Low
   
High
   
Low
 
Year Ended December 31, 2010:
                                   
First Quarter (through March 15, 2010)
  $ 20.49     $ 17.00     $ 14.82     $ 9.26     $ 8.15     $ 3.80  
                                                 
Year Ended December 31, 2009:
                                               
First Quarter
  $ 7.55     $ 7.36     $ 7.63     $ 7.32     $ 0.07     $ 0.03  
Second Quarter
    7.78       7.60       7.80       7.63       0.20       0.04  
Third Quarter
    8.00       7.80       7.91       7.73       0.29       0.10  
Fourth Quarter
    19.88       7.60       13.16       7.50       5.49       0.35  
                                                 
Year Ended December 31, 2008:
                                               
First Quarter
  $ 7.89     $ 7.47     $ 7.33     $ 7.10     $ 0.68     $ 0.38  
Second Quarter
    7.80       7.41       7.40       7.13       0.50       0.35  
Third Quarter
    7.75       7.00       7.52       7.20       0.51       0.20  
Fourth Quarter
    7.45       6.81       7.31       6.87       0.29       0.01  
 

(1)
Our units began trading on October 17, 2007. The common stock and warrants did not begin separate trading until November 14, 2007.
 
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Holders of Common Equity
 
As of March 9, 2010, there was 1 holder of record of our units, 4 holders of record of our warrants and 16 holders of record of our Common Stock. Such numbers do not include beneficial owners holding shares, warrants or units through nominee names.
 
Dividends
 
We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends prior to the completion of a Share Exchange. The payment of cash dividends in the future will be dependent upon our revenue and earnings, if any, capital requirements and general financial condition subsequent to completion of the Share Exchange. The payment of any dividends subsequent to the Share Exchange will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
As of December 31, 2009, we did not have any active equity compensation plans.
 
Equity Repurchases
 
Period
 
(a)
Total Number of
Shares (or Units) Purchased
 
(b)
Average Price Paid per Share (or Unit)
   
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
   
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
 
November 2009
 
1,900,000 warrants to purchase common stock
  $ 0.50       ---       ---  
 
ITEM 6 Selected Financial Data
 
As a smaller reporting company, we are not required to provide this information.
 
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
CME, through contractual arrangements with Fujian Fenzhong, an entity majority owned by CME’s majority shareholder, operates the largest television advertising network on inter-city express buses in China.  CME’s operations in general and similar connotations, refer to Fujian Fenzhong, an entity which is controlled by CME through contractual agreements and which operates the advertising network. While CME has no direct equity ownership in Fujian Fenzhong, through the contractual agreements CME receives the economic benefits of Fujian Fenzhong’s operations.  CME generates revenue by selling advertising on its network of television displays installed on inter-city express buses in China.
 
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CME’s extensive and growing network covers inter-city express bus services originating in China’s most prosperous regions. As of December 31, 2009, CME’s network covered inter-city express bus services originating in fourteen regions, including the five municipalities of Beijing, Shanghai, Tianjin, Guangzhou and Chongqing and nine economically prosperous provinces, namely Guangdong, Jiangsu, Fujian, Sichuan, Anhui, Hubei, Hebei, Shandong and Shanzi. These fourteen regions in aggregate generated over half of China’s gross domestic product, or GDP. CME’s network is capable of reaching a substantial and growing audience. Many of the cities connected in CME’s network are major transportation hubs, which serve as points of transfer for large numbers of leisure, business and other travelers in China to other modes of transportation. CME’s network also includes airport buses connecting major cities to airports and tour buses traveling on routes that connect major cities with popular tourist destinations in China. As of December 31, 2009, CME’s network covered six of the seven transportation hubs designated by the Ministry of Transport, and CME expects to further increase this percentage as it continues to expand the geographic coverage of its network. In addition to major transportation hubs, the network also covers small to medium-sized cities in China, some of which rely on highway transportation as the primary transportation option for connection outside these cities.
 
CME has entered into long-term framework agreements with 45 bus operator partners for terms ranging from five to eight years. Pursuant to these agreements, CME pays the bus operators concession fees for the right to install its displays and automated control systems inside their buses and display entertainment content and advertisements. CME’s entertainment content is provided by third parties and advertisements provided by its clients. CME obtains a wide range of free entertainment content from Fujian SouthEastern Television Channel and Hunan Satellite Television each month and purchases a limited amount of copyrighted programs from time to time.
 
In October 2007, CME entered into a five-year cooperation agreement with an entity affiliated with the Ministry of Transport of the People’s Republic of China to be the sole strategic alliance partner in the establishment of a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China. The cooperation agreement also gave CME exclusive rights to display advertisements on the system. In November 2007, this entity issued a notice regarding the facilitation of implementation of the system contemplated under the cooperation agreement to municipalities, provinces and transportation enterprises in China. CME believes its status as the sole strategic alliance partner designated by an entity affiliated with the Ministry of Transport and the exclusive rights to display advertisements on the system has facilitated its historical expansion and is expected to continue to provide them with a competitive advantage in the future.
 
CME believes its network is a highly effective advertising medium. The network is capable of reaching audiences on inter-city express buses while they remain in a comfortable and enclosed environment with minimal distraction. The majority of the inter-city express buses within the network are equipped with leather seats and air-conditioning, providing a comfortable environment which makes the audiences more receptive to the content displayed on CME’s network. Inter-city travel in China typically takes a number of hours. Audiences are therefore exposed to the content displayed on its advertising platform for a significantly longer period of time than on shorter-distance travel. In addition, CME’s patented automated control systems ensure that the programs and advertisements are displayed continuously throughout the journey.
 
CME has grown significantly since it commenced its advertising services business in November 2003. During the year ended December 31, 2009, more than 450 advertisers had purchased advertising time on CME’s network either through advertising agents or directly from CME. Some of these clients have purchased advertising time from CME for more than three years, including Hitachi, China Telecom, Toyota, Siemens and China Pacific Life Insurance. CME has attracted several well-known international and national brands to its advertising network, including Coca Cola, Pepsi, Wahaha, KFC, Siemens, Hitachi, Haier, China Telecom, China Mobile, Nokia, China Post, Procter & Gamble, Bank of China, China Constructing Bank and China Pacific Life Insurance. For the years ended December 31, 2007, 2008 and 2009, CME generated total revenue of $25.8 million, $63.0 million, $95.9 million respectively. During the same years, CME had net income of $7.0 million and $26.4 million and $41.7 million respectively.
 
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Consolidation of CMEs Significant Subsidiaries
 
CME commenced operations in the advertising industry through Fujian Fenzhong in November 2003. Fujian Fenzhong was formerly known as Fuzhou Mandefu Food Co., Ltd., a limited liability company established in China on May 31, 2002 and subsequently changed its names to Fuzhou Fenzhong Media Co., Ltd. and Fujian Fenzhong Media Co., Ltd. on November 17, 2003 and January 21, 2008, respectively.
 
Fujian Express was incorporated in China on June 23, 2003 and is 100% owned by HKMDF. Fujian Express was formerly known as Fuzhou Shoushan Waterfall Group EM Polder Co., Ltd. and changed to its current name on June 3, 2008.
 
On February 16, 2007, Zheng Cheng, CME’s founder, chairman of the board of directors and chief executive officer, transferred a 40.5% equity interest in HKMDF to Thousand Space Holdings Limited, which is 100% beneficially owned by Ou Wen Lin. As a result, Zheng Cheng and Chunlan Bian, a director and the mother of Zheng Cheng, in the aggregate own the remaining 59.5% interest in HKMDF. Fujian Fenzhong holds the licenses and permits necessary to operate CME’s businesses and provide CME’s advertising services in China.
 
Due to PRC regulatory restrictions on foreign investments in the advertising industry in China, CME operates its advertising business in China through Fujian Fenzhong. CME’s relationships with Fujian Fenzhong and its shareholders are governed by a series of contractual arrangements that allow CME to effectively control and derive economic benefits from Fujian Fenzhong. As a result, CME treats Fujian Fenzhong as its significant subsidiary for accounting purposes and has consolidated its historical financial results in CME’s financial statements in accordance with U.S. GAAP. In addition, in accordance with U.S. GAAP, CME’s consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the period presented and all transactions between CME and CME’s significant subsidiaries have been eliminated upon consolidation.

Reverse merger

CME completed a share exchange transaction (the "Share Exchange") with HKMDF, which originally owned by Zheng Cheng, Thousand Space Holdings Limited and Bright Elite Management Limited, on October 15, 2009. The Share Exchange represents a reverse acquisition involving a public shell company and has been accounted for financial reporting purposes as the issuance of securities by HKMDF in exchange for the assets and liabilities of the Company, accompanied by a recapitalized. The accompanying consolidated financial statement and the financial information for periods prior to the consummation of the Share Exchange are those of HKMDF and its subsidiary and VIE, except the equity section. Accordingly, CME revised its earnings per share calculation and for the purpose of calculating earnings per share for the periods presented, the number of ordinary shares outstanding is based on the weighted average number of ordinary shares of HKMDF that would have been outstanding during the periods presented assuming the Share Exchange occurred on January 1, 2007 and, retrospectively adjusted the accompanying 2007 and 2008 consolidated financial statements for the change.
 
Critical Accounting Policies
 
CME prepares its consolidated financial statements in accordance with U.S. GAAP, which requires CME to make judgments, estimates and assumptions that affect the reported amounts of its assets and liabilities, the disclosure of its contingent assets and liabilities at the end of each reporting period and the reported amounts of revenue and expenses during each reporting period. CME continually evaluates these estimates and assumptions based on the most recently available information, CME’s own historical experiences and other factors that CME believes to be relevant under the circumstances. Since CME’s financial reporting process inherently relies on the use of estimates and assumptions, CME’s actual results could differ from its expectations. Certain accounting policies require higher degrees of judgment, some of which are inherently subjective and involve higher degrees of estimates and assumptions, than others in their application, due to, among other reasons, limited information available at the time CME’s financial statement is prepared. To the extent that the estimates used materially differ from actual results, adjustments or restatements to the statement of operations and corresponding balance sheet accounts could be necessary. CME considers the policies discussed below to be critical to an understanding of its consolidated financial statements because they involve higher degrees of reliance on CME’s management’s judgment.
 
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When reading CME’s financial statements, you should consider CME’s critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. CME believes the following accounting policies involve the most significant judgment and estimates used in the preparation of its financial statements. CME has not made any material changes in the methodology used in these accounting policies since it commenced operations in the advertising industry in November 2003.
 
Revenue Recognition
 
CME derives revenue from selling advertising time slots on its network. The advertisements display repetitively in our pre-designed pattern during each of the journey in our inter-city buses.  The recognition of the revenue is very critical to the financial statements because of its magnitude and the judgement made on how to determine whether the advertisements were displayed. CME recognizes revenue ratably over the contract performance period during which the advertisements are displayed and the collection of the fees is probable. In accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 104, CME considers the following factors in its revenue recognition:
 
 
·
Whether persuasive evidence of an arrangement exists.  CME typically enter into short term contracts with its advertising agency clients and its direct advertising clients that require CME to display their advertisements in exchange for a certain amount of advertising fees specified in the contracts.

 
·
Whether the services have been rendered.  CME receives payments from its clients on a monthly basis based on the advertisements displayed on its network in the preceding month.

 
·
Whether the fees are fixed or determinable.  The advertising fees specified in the contract are final and not subject to any subsequent amendment.

 
·
Whether collectability is reasonably assured.  CME mitigates its collection risk by evaluating the creditworthiness of its clients and monitoring outstanding balances payable by CME’s clients. Therefore, CME did not have significant bad debts during the periods presented in its consolidated financial statements included elsewhere in this proxy statement.
 
CME enters into barter agreements whereby it broadcasts television companies' logo in return for the right to broadcast television program provided by television companies. Such transactions are accounted for as nonmonetary exchange and the Group does not recognize such revenue and expense of the exchange as the fair value of the advertising surrendered in the barter transaction is not determinable.   No direct costs are attributable to such revenue.
 
Depreciation of Property and Equipment
 
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which are 20 years for buildings, ten years for motor vehicles and five years for electronic and office equipment and media display equipment, and after taking into account their residual values.  Changes in estimation of useful lives and residual value may have impact on the amount of depreciation charge to be charged to the consolidated statements of operations.
 
Accrual of Concession Fees
 
CME has entered into long-term framework agreements with more than 40 inter-city express bus operators in China. Such contracts provide for CME’s concession rights to install its equipment and control systems inside their inter-city express buses at CME’s own cost and CME pays the bus operators participating in its network a pre-determined concession fee. CME has entered into framework agreements with all the bus operators participating in CME’s network for terms ranging from five to eight years. CME enters into contracts with these bus operators each year to update the number of buses carrying its network and the concession fees per bus for that year. The framework agreements specify the permissible range of annual increase in concession fees per bus, which is in all cases between a minimum of 10% and a maximum of 30%.
 
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CME pays concession fees to the bus operators participating in its network on a monthly basis. However, the total concession fees payable under each long-term contract are charged to the consolidated statements of operations as concession expenses on a straight-line basis over the course of the contract period, based on the assumption that the concession fees increase by 10% per year. The differences between concession fee payments and concession fee expenses charged to the consolidated statements of operations are accrued as liability or recorded as reversal to the corresponding previously accrued liability.  Changes in the estimation of annual increase will affect the amount of concession expenses to be charged to the consolidated statements of operations.
 
Impairment of Long-Lived Assets
 
CME evaluates its long-lived assets or asset group with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of a group of long-lived assets may not be fully recoverable, such as a significant adverse change in market conditions that will impact the future use of the assets. When these events occur, CME evaluates the impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, CME recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value that is generally based on the expected discounted cash flows using a risk-free rate. CME did not have any impairment of long-lived assets during the periods presented in CME’s consolidated financial statements.
 
Income taxes
 
CME accounts for the expected future tax consequences by recognition of deferred income taxes arising from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements by applying the statutory tax rates applicable under the EIT Law. CME records a valuation allowance to reduce deferred tax assets to the value CME believes is more likely than not to be realized. In the event CME was to determine that it would be able to realize its deferred tax assets in the future in excess of their recorded amount, an adjustment to CME’s valuation allowance would increase its income in the period such determination was made. Likewise, if CME determines that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to its valuation allowance would be charged to its income in the period such determination is made. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. CME remeasured its deferred tax assets as a result of the reduction in tax rate from 33% to 25% under the EIT Law and recognized an increase in income tax expenses of $0.2 million for the year ended December 31, 2007.
 
Recent accounting pronouncements

In December 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities ("ASU 2009-17") which amends the FASB Accounting Standard Codification ("ASC") for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), issued by the FASB in June 2009. The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach primarily focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb the losses of the entity or (2) the right to receive the benefits from the entity. ASU 2009-17 also requires additional disclosure about a reporting entity's involvement in VIE, as well as any significant changes in risk exposure due to that involvement. ASU 2009-17 is effective for annual and interim periods beginning after November 15, 2009. Early application is not permitted. The adoption of ASU 2009-07 is not expected to have a material impact on the Group's financial position, results of operations and cash flows.
 
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In June 2009, the FASB issued Statement of Financial Accounting Standard ("SFAS") 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162 ("SFAS 162") (collectively "SFAS 168"). SFAS 168 states that the FASB Accounting Standards Codification will become the source of authoritative U. S. GAAP recognized by the FASB. Once effective, the Codification's content will carry the same level of authority, effectively superseding SFAS 162. The U.S. GAAP hierarchy will be modified to include only two levels of U.S. GAAP: authoritative and nonauthoritative. The adoption did not have a material impact on the Group's financial position, results of operations and cash flows.

Principal Components of Statement of Operations
 
Net Revenue
 
CME records its sales, net of business tax and related surcharges (“net revenue”). CME generates advertising service revenue from the sales of advertising time slots on its digital television advertising network placed on inter-city express buses. Fujian Fenzhong is subject to business tax and other surcharges on the revenue arising from the provision of advertising services in China. Other surcharges consist of culture and education construction fees and embankment protection fees for services provided in the PRC. The rates of business tax, culture and education construction fees and embankment protection fees are 5%, 3% and 0.09% of revenue, respectively. For the years ended December 31, 2007, 2008 and 2009, the amount of business tax and other surcharges were $2.4 million, $6.0 million and $8.9 million, respectively. In addition, CME offers its clients volume discounts from its list price. CME records its advertising service revenue net of any discounts it offers to its clients.
 
CME’s geographic coverage included Shanghai, Jiangsu, Beijing, Tianjin, Guangdong, Sichuan and Hebei in the year ended December 31, 2007 and include Chongquing and Hubei in the year ended December 31, 2008.  CME further expanded its net work in Anhui, Shandong and Shanxi in the year ended December 31, 2009.  CME believes it will be able to continue to increase its revenue through the geographic expansion of its network coverage.
 
CME sets its list prices by reference to a combination of factors, including local economic conditions, the advertising fees charged by other advertising media, including local satellite television operators, and the number of inter-city express buses carrying its network. Generally, the list prices in Shanghai and Jiangsu are higher than those in Beijing, Tianjin, Guangdong and Fujian, which, in turn, are higher than those in Sichuan, Hebei, Anhui, Shandong and Shanxi. The actual selling prices are lower than the list prices because CME usually offers its clients volume discounts at a certain discount rate based on negotiations with CME’s clients. CME believe that the advertising rate will be increased in PRC for at least 10% per year based on the historical market trend and the industrial norm.
 
CME generates revenue from two types of clients: advertising agencies which purchase advertising time slots from CME and resell such time slots to advertisers and advertising clients which directly purchase advertising time slots from CME. In the year ended December 31, 2007 and 2008, all of the top ten clients were advertising agency clients and in the year ended December 31, 2009, nine out of the top ten clients were advertising agency clients. During the years ended December 31, 2009 and 2008, revenue generated from advertising agency clients accounted for 78.6% and 97.7%, respectively, of CME’s total revenue whereas revenue generated from direct clients accounted for the remaining 21.4% and 2.3% of CME’s total revenue, respectively. Because the amount of purchases by advertising agency clients is significantly larger than that by direct advertising clients, advertising agency clients usually enjoy greater discounts than direct advertising clients. As advertising agency clients in CME’s client mix in relation to direct clients continue to decrease in the future, CME believes its gross profit margins could be increased. On the other hand, CME incurs more operating expenses for sales to direct advertising clients than to sales advertising agency clients due to more sales people needed to handle the different direct advertising clients.  However, the selling expenses should not completely offset with the increase in the margin as the salaries for the sales people is not high.  As a result, CME believes its net profit margins could increase in the future if CME is able to continue to increase the portion of the direct advertising clients continues to grow.
 
Cost of Sales
 
CME’s cost of sales consists of concession fees charged by inter-city express bus operators, depreciation of CME’s equipment and control systems, business tax and surcharges, salary, production cost for embedded advertisement and other operating costs. The following table sets forth CME’s cost of sales, divided into its major components, by amount and percentage of net revenue for the years indicated:
   
Year Ended of December 31,
 
   
2007
   
2008
   
2009
 
   
Dollars
   
% of 
Revenue
   
Dollars
   
% of 
Revenue
   
Dollars
   
% of 
Revenue
 
 
(In thousands, except percentage of net sales)
 
Revenue
  $ 25,837           $ 62,999           $ 95,934        
                                           
Cost of Revenue:
                                         
Concession fees
  $ 10,668       41.3 %   $ 19,955       31.7 %   $ 24,823       25.9 %
Depreciation
    1,591       6.2 %     2,835       4.5 %     3,183       3.3 %
Business tax
    737       2.9 %     2,063       3.3 %     3,209       3.3 %
Salary
    156       0.6 %     203       0.3 %     251       0.0 %
Production cost for embedded advertisement
    -       0.0 %     -       0.0 %     1,468       1.5 %
Other operating costs
    12       0.0 %     9       0.0 %     3       0.0 %
                                                 
Total
  $ 13,164       51.0 %   $ 25,065       39.8 %   $ 32,937       34.3 %
 
Concession fees.  Concession fees charged by inter-city express bus operators amounted to 41.3%, 31.7% and 25.9% as a percentage of CME’s net revenue for the years ended December 31, 2007, 2008 and 2009, respectively. Such concession fees represented the largest component of CME’s cost of sales, accounting for 81.0%, 79.6% and 75.4% for the years ended December 31, 2007, 2008 and 2009, respectively. CME expects concession fees to remain the largest component of its cost of sales in the future.
 
The primary factors affecting CME’s concession costs include its geographic coverage, the number of inter-city express buses carrying its network and the unit concession fees charged by inter-city express bus operators participating in CME’s network. CME’s existing network consists of all five municipalities and nine provinces and CME expects to enter into seven new provinces, namely Zhejiang, Hunan, Inner Mongolia, Yunnan, Jiangxi, Shannxi and Guangxi by the end of 2010 and three new provinces namely Heilongjiang, Jilin and Liaoning by the end of 2011. Moreover, the framework agreements CME enters into with all the inter-city express bus operators participating in its network specify the permissible range of annual increase in the concession fees per bus, which is in all cases between a minimum of 10% and a maximum of 30%. CME charges concession fees payable under such long-term agreements as concession expenses to the consolidated statements of operations on a straight-line basis over the course of the contract period, based on the assumption that the concession fees increase by 10% per year. As CME continues to expand the geographic coverage of its network and the number of inter-city express buses carrying its network, CME expects to incur a substantially increased amount of concession fees in the future.
 
Depreciation.  Depreciation for CME’s equipment and control systems, which primarily include digital television displays and hard disk drives, amounted to 6.2%, 4.5% and 3.3% as a percentage of CME’s net revenue for the years ended December 31, 2007, 2008 and 2009, respectively. CME procures digital television displays and related equipment and control systems from Hangzhou Yusong. CME also purchases digital television displays originally installed on the inter-city express buses from some of the bus operators participating in CME’s network to serve as CME’s advertising platform. CME capitalizes the acquisition cost of its digital television displays and hard disk drives and recognize depreciation on a straight-line basis over the course of their useful lives, which CME estimates to be five years.
 
The primary factors affecting CME’s depreciation include the number of digital television displays and hard disk drives installed in its network, the unit cost of each of its digital television displays and hard disk drives, and the remaining useful life of its digital television displays and hard disk drives. CME expects its depreciation to increase in the future as a result of expansion of its network by adding more digital television displays and hard disk drives.
 
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Business tax.  CME’s business tax amounted to 2.9%, 3.3% and 3.3% as a percentage of its net revenue for the years ended December 31, 2007, 2008 and 2009, respectively. Business tax included in CME’s cost of sales relates to business tax arising from consulting services provided by Fujian Express to Fujian Fenzhong.
 
Salary.  CME’s salary costs in CME’s cost of sales amounted to 0.6%, 0.3% and 0.0% as a percentage of its net revenue for the years ended December 31, 2007, 2008 and 2009, respectively. Salary costs in CME’s cost of sales relate to salaries paid to the personnel in its production department in charge of combining the entertainment programs provided by its content suppliers and advertisements provided by CME’s clients, as well as the personnel in the engineering department in charge of periodically updating the entertainment programs and advertisements at the bus terminals.
 
Production cost for embedded advertisement.  Production costs increase to $1.5 million for the year ended December 31, 2009 from nil for the year ended December 31, 2008 as CME started to hire external parties to producing the embedded advertisements in the second half of year 2009.
 
Other operating costs.  For the years ended December 31, 2007, 2008 and 2009, other operating costs represented less than 0.5% of net revenue in each period. Other operating costs consist of welfare costs, programming fees and repair and maintenance costs. Programming fees relate to the acquisition costs of copyrighted foreign and domestic films from third parties. Repair and maintenance costs arise from the repair and maintenance of CME’s equipment and control systems.
 
Operating Expenses
 
CME’s operating expenses consist of selling expenses and general and administrative expenses. The following table sets forth CME’s operating expenses, divided into their major categories by amount and as a percentage of net revenue for the years indicated:
 
   
Year Ended of December 31,
 
   
2007
         
2008
         
2009
       
   
Dollars
   
% of 
Revenue
   
Dollars
   
% of 
Revenue
   
Dollars
   
% of 
Revenue
 
(In thousands, except percentage of net sales)
                                   
Revenue
  $ 25,837       100.0 %   $ 62,999       100.0   $ 95,934       100.0 %
                                                 
Gross profit
    12,673       49.0 %     37,934       60.2 %     62,997       65.7
Selling expenses
    923       3.6 %     1,095       1.7 %     3,508       3.7 %
Administrative expenses
    734       2.8 %     1,718       2.7 %     2,846       3.0 %
Total operating expense
    1,657       6.4 %     2,813       4.5 %     6,354       6.7 %
 
Selling expenses.  CME’s selling expenses primarily consist of salaries and commissions for CME’s sales staff, marketing and promotional expenses and other costs related to supporting CME’s sales force. Selling expenses amounted to 3.6% and 1.7% and 3.7% as a percentage of CME’s net revenue for the years ended December 31, 2007, 2008 and 2009, respectively. The increases in selling expenses were attributable to increases in headcounts as well as increases in salaries and commission.
 
Although CME’s selling expenses increased significantly from the year ended December 31, 2007 compared to the year ended December 31, 2009, selling expenses as a percentage of net revenue have accounted for less than 4% because CME’s net revenue increased at a greater rate than selling expenses increased. CME expects selling expenses to increase in the future as CME’s operations continue to grow. However, CME expects selling expenses as a percentage of net revenue to continue to be stable as CME adopted a new commission policy in 2009 to compensation for the sales people. Commission to the sales people will be based on 3% of the revenue received.
 
General and administrative expenses.  CME’s general and administrative expenses primarily consist of salaries, social insurance and housing fund for management, accounting and administrative personnel, depreciation of office equipment, statutory union fees, office rentals, professional fees and other office expenses. General and administrative expenses amounted to 2.8%, 2.7% and 3.0% as a percentage of CME’s net revenue for the years ended December 31, 2007, 2008 and 2009, respectively. The increases in general and administrative expenses were attributable to increases in headcounts, salaries, legal cost and professional fees for the Share Exchange and compliance cost for a listed company.
 
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Although the amount of general and administrative expenses increased during the same period, general and administrative expenses as a percentage of net revenue remained stable because CME’s net revenue increased at a greater rate than general and administrative expenses increased. CME expects that its general and administrative expenses will increase in the future as it hires additional personnel and incurs additional costs in connection with the expansion of its business and with being a publicly traded company. However, CME expects general and administrative expenses as a percentage of net revenue to decrease as its net revenue increase at a greater rate than general and administrative expenses.
 
Income Tax Expenses
 
Fujian Fenzhong and Fujian Express are subject to enterprise income taxes. Under the Enterprise Income Tax Law of the People’s Republic of China, or EIT Law, passed by the Fifth Plenary Session of the Tenth National People’s Congress on March 16, 2006, the rate of enterprise income tax was reduced from 33% to 25% with effect from January 1, 2008. In this connection, CME measured CME’s deferred tax assets as a result of the reduction in tax rate and recognized an increase in income tax expenses of $0.2 million for the year ended December 31, 2007.
 
Deferred tax assets reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for assessment of income tax purposes. CME’s deferred tax assets relate to the accrued concession fees payable under the long-term framework agreements with the inter-city express bus operators participating in CME’s network. CME determines the carrying amount of such concession fees subject to an increase at a minimum of 10% and a maximum of 30% per year over a five- to eight-year period using the accrual method on a straight line basis for financial reporting purposes. To date, all CME’s long-term framework agreements with the inter-city express bus operators were entered into beginning in the year ended December 31, 2007. As a result, CME recognized deferred tax credits arising from accrued concession fees in the amount of $0.8 million for the year ended December 31, 2007, $0.5 million for the year ended December 31, 2008 and $0.7 million for the year ended December 31, 2009. CME also records the deferred tax in relation to the accrued severance payments for employees. For the year ended December 31, 2008, $0.3 million was recognized as the deferred tax credit arising from the accrued severance payments while CME did not recognize the deferred tax credit in relation to the accrued severance payments for the year ended December 31, 2007, and recognized a deferred tax charge of $0.3 million for the year ended 2009.
 
The EIT Law provides that enterprises established outside China whose “de facto management bodies” are located in China are considered “resident enterprises,” and will generally be subject to the uniform 25% enterprise income tax rate as to their global income, including income CME receives from its subsidiary and consolidated affiliates. According to the implementation rules, “de facto management body” refers to a managing body that exercises, in substance, overall management control over the production and Business, personnel, accounting and assets of an enterprise. Substantially all of CME’s management is currently based in China, and may remain in China in the future. In addition, although the EIT Law provides that dividend income between “qualified resident enterprises” is exempted income, and the implementing rules refer to “qualified resident enterprises” as “direct equity interest,” it is still unclear whether the dividends CME receives from its subsidiaries in China constitute dividend income between “qualified resident enterprises” and therefore qualify for tax exemption. If CME is required to pay income tax for any dividends it receives from its subsidiary, the amount of dividends CME can pay to its shareholders.
 
Furthermore, the implementation rules of the EIT Law provide that an income tax rate of 10% will normally be applicable to dividends declared to non-PRC resident investors after January 1, 2008 for income sourced in China. Such income tax may be exempted or reduced by the State Council of the PRC or pursuant to a tax treaty between China and the jurisdictions in which CME’s non-PRC shareholders reside. The 10% withholding tax is reduced to 5% pursuant to the Double Tax Avoidance Agreement between Hong Kong and Mainland China if the beneficial owner in Hong Kong owns more than 25% of the registered capital in a company in China. Following the Transaction, TM will be a Delaware holding company with a subsidiary in Hong Kong which in turn owns a 100% equity interest in Fujian Express. Further, CME derives substantially all of CME’s income from dividends it receives from CME’s significant subsidiaries in China. If CME declares dividends from such income, it is unclear whether the income will be deemed to be sourced in China under the EIT Law and enjoy a reduced income tax rate of 5% under the Double Tax Avoidance Agreement Between Hong Kong and Mainland China. If CME is required under the EIT Law to withhold income tax on dividends payable to CME’s non-PRC resident shareholders and ADS holders, your investment in CME may be materially adversely affected.
 
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Results of Operations
 
The following table sets forth a summary of CME’s consolidated statement of operations for the years indicated. CME’s historical results presented below are not necessarily indicative of the results that may be expected for any other future period.
 
   
Year Ended of December 31,
   
Consolidated
 
2007
     
2008
     
2009
   
Statement of
     
% of
         
% of
         
% of
   
Operations Data:
 
Dollars
 
Revenue
     
Dollars
 
Revenue
     
Dollars
 
Revenue
   
Revenue
 
$
25,837
 
100.0
 
%
 
$
62,999
 
100.0
 
%
 
$
95,934
 
100.0
 
%
Cost of revenue
   
(13,164
)
(51.0
)
%
   
(25,065
)
(39.8
)
%
   
(32,937
)
(34.3
)
%
                                           
Gross profit
   
12,673
 
49.0
 
%
   
37,934
 
60.2
 
%
   
62,997
 
65.7
 
%
Operating expenses
                                         
Selling expenses
   
(923
)
(3.6
)
%
   
(1,095
)
(1.7
)
%
   
(3,508
)
(3.7
)
%
Administrative expenses
   
(734
)
(2.8
)
%
   
(1,718
)
(2.7
)
%
   
(2,846
)
(3.0
)
%
                                           
Total operating expenses
   
(1,657
)
(6.4
)
%
   
(2,813
)
(4.5
)
%
   
(6,354
)
(6.7
)
%
                                           
Income from operations
   
11,016
 
42.6
 
%
   
35,121
 
55.7
 
%
   
56,643
 
59.0
 
%
Interest income
   
24
 
0.1
 
%
   
100
 
0.2
 
%
   
113
 
0.2
 
%
                                           
Income before income tax expense
   
11,040
 
42.7
 
%
   
35,221
 
55.9
 
%
   
56,756
 
59.2
 
%
Income tax expense
   
(4,073
)
(15.8
)
%
   
(8,854
)
(14.1
)
%
   
(15,045
)
(15.7
)
%
                                           
Net income
 
$
6,967
 
26.9
 
%
 
$
26,367
 
41.8
 
%
 
$
41,711
 
43.5
 
%
 
Year ended December 31, 2009 Compared to Year ended December 31, 2008
 
Revenue.  CME’s revenue increased to $95.9 million for the year ended December 31, 2009 from $63.0 million for the year ended December 31, 2008. The increase was primarily attributable to the increase in average rates per second, increase in portion of direct sales to the advertisers, expansion of the geographic coverage and the number of buses of CME’s network, revenue from the embedded advertisements which were displayed during the broadcasting of the content for the year ended December 31, 2009.  During the year ended December 31, 2009, CME expanded its geographic coverage to include three economically prosperous provinces, Anhui, Shandong and Shanxi.  In connection with such expansion, the number of inter-city express buses carrying CME’s network increased significantly from 15,260 as of December 31, 2008 to 20,161 as of December 31, 2009. In addition, increased revenue was attributable to the growth in selling directly to the advertisers during the year ended December 31, 2009.  The direct sales to the advertisers contributed larger margin to CME. The direct sales accounted for 21.4% for the year ended December 31, 2009 while it was 2.3% for the year ended December 31, 2008.  The embedded advertisements launched in August 2009 generates $12.9 million revenue for the year ended December 31, 2009 while there was no revenue from the embedded advertisements for the year ended December 31, 2008.
 
Cost of revenue.  CME’s cost of sales increased to $32.9 million for the year ended December 31, 2009 from $25.1 million for the year ended December 31, 2008 due to the following reasons:
 
Concession fees.  Concession fees charged by inter-city express bus operators increased to $24.8 million for the year ended December 31, 2009 from $20.0 million for the year ended December 31, 2008. The increase was attributable to the increase in the concession fees payable to the bus operators participating in CME’s network for the year ended December 31, 2009 as well as an increase in the number of inter-city express buses carrying CME’s network.
 
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Depreciation.  Depreciation for CME’s digital television displays and hard disk drives increased to $3.2 million for the year ended December 31, 2009 from $2.8 million for the year ended December 31, 2008. The increase was attributable to installation of new equipment and control systems in connection with the increase in the number of inter-city express buses in the CME’s networks
 
Business tax.  Business tax increased to $3.2 million for the year ended December 31, 2009 from $2.1 million for the year ended December 31, 2008. The increase was primarily attributable to business taxes arising from consulting services Fujian Express provided to Fujian Fenzhong in the year ended December 31, 2009.
 
Salary.  Salaries increased to $251,000 for the year ended December 31, 2009, from $203,000 for the year ended December 31, 2008. The increase was due to the increase in number of staff in the production and maintenance departments and the increase in salaries for the year ended December 31, 2009.
 
Production cost for embedded advertisement.  Production costs increase to $1.5 million for the year ended December 31, 2009 from nil for the year ended December 31, 2008 as CME started to produce the embedded advertisements.
 
Gross profit.  As a result of the foregoing, CME’s gross profit increased to $63.0 million for the year ended December 31, 2009 from $37.9 million for the year ended December 31, 2008. CME’s gross profit margin for the year ended December 31, 2009 increased to 65.7% from 60.2% for the year ended December 31, 2008.
 
 Operating expenses.  CME’s operating expenses increased to $6.4 million for the year ended December 31, 2009 from $2.8 million for the year ended December 31, 2008 due to the following reasons:
 
Selling expenses.  Selling expenses were $3.5 million and $1.1 million for the year ended December 31, 2009 and 2008, respectively.  The majority of selling expenses consisted of the salary and staff welfare of the sales force and promotion expenses. There were no significant differences in the size of the sales force for the year ended December 31, 2009 and 2008. The significant increase in selling expenses is mainly a result of the addition of commission expense since the third  quarter.  Starting July 1, 2009, CME began paying commissions to the sales people, which is calculated based upon a percentage of the monthly advertising revenue.  The payment of commission provided incentive to the sales people to get more business from both direct and indirect sales.  Salaries, commission and welfare expenses increased to $2.7 million for the year ended December 31, 2009, from $0.8 million for the year ended December 31, 2008.  Promotion expenses increased to $518,000 for the year ended December 31, 2009, from $5,000 for the year ended December 31, 2008 as CME promoted its corporation image to other media platform.
 
General and administrative expenses.  General and administrative expenses increased by 65.7% to $2.8 million for the year ended December 31, 2009 from $1.7 million for the year ended December 31, 2008. The increase was primarily attributable to increased salaries, rental expenses on various offices in the PRC, professional fees for being a listed company, housing fund and welfare paid to additional management and administrative personnel to meet the demand arising from CME’s enlarged scale of operations.
 
Income from operation.  As a result of the foregoing, CME’s income from operation increased by 61.3% to $56.6 million for the year ended December 31, 2009 from $35.1 million for the year ended December 31, 2008.
 
Interest income.  CME’s interest income increased by 13.0% to $113,000 for the year ended December 31, 2009 from $100,000 for the year ended December 31, 2008, primarily because of the increase in bank deposit balance.
 
Income tax expenses.  CME’s income tax expenses increased by 69.9% to $15.0 million for the year ended December 31, 2009 from $8.9 million for the year ended December 31, 2008. The increase was primarily attributable to the increase in income before income tax expense. 
 
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Net income.  As a result of the foregoing, CME’s net income increased by 58.2% to $41.7 million for the year ended December 31, 2009 from $26.4 million for the year ended December 31, 2008. CME’s net profit margin increased to 43.5% for the year ended December 31, 2009 from 41.9% for the year ended December 31, 2008, primarily attributable to an increase in gross profit in the year ended December 31, 2009.
 
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
Revenue.  CME’s revenue increased to $63.0 million for the year ended December 31, 2008 from $25.8 million for the year ended December 31, 2007. The increase was primarily attributable to the significantly increased total amount of advertising time that CME sold resulting from the expansion of the geographic coverage of CME’s network and an increase in the number of inter-city express buses carrying its network. For the year ended December 31, 2008, CME expanded its geographic coverage to include one municipality, Chongqing and one economically prosperous province, Hubei. Partly as a result of such geographic expansion, CME’s sales of advertising time slots increased significantly from a total of 1,680 minutes in the year ended December 31, 2007 to a total of 2,240 minutes in the year ended December 31, 2008. In connection with such expansion, the number of inter-city express buses carrying CME’s network increased significantly from 10,053 as of December 31, 2007 to 15,260 as of December 31, 2008. In addition, increased sales of advertising time was attributable to the growth of CME’s advertising agency client base for the year ended December 31, 2008.
 
Cost of revenue.  CME’s cost of revenue increased to $25.1 million for the year ended December 31, 2008 from $13.2 million for the year ended December 31, 2007 due to the following reasons:
 
Concession fees.  Concession fees charged by inter-city express bus operators increased to $20.0 million for the year ended December 31, 2008 from $10.7 million for the year ended December 31, 2007. The substantial increase was attributable to the concession fees payable to the group of bus operators participating in CME’s network through the execution of long-term framework agreements for the year ended December 31, 2008 as well as an increase in the number of inter-city express buses carrying CME’s network to 15,260 as of December 31, 2008 from 10,053 as of December 31, 2007.
 
Depreciation.  Depreciation for CME’s digital television displays and hard disk drives increased to $2.8 million for the year ended December 31, 2008 from $1.6 million for the year ended December 31, 2007. The increase was attributable to installation of new equipment and control systems in connection with the increase in the number of inter-city express buses in the CME’s networks.
 
Business tax.  Business tax increased to $2.1 million for the year ended December 31, 2008 from $0.7 million for the year ended December 31, 2007. The increase was primarily attributable to business taxes arising from consulting services Fujian Express provided to Fujian Fenzhong in the year ended December 31, 2008.
 
Salary.  Salaries increased to the amount of $203,000 for the year ended December 31, 2008 from the amount of $156,000 for year ended December 31, 2007. The increase was primarily attributable to the increase in number of staff in production and maintenance department in 2008.
 
Other operating costs.  Other operating costs decreased slightly to approximately $9,000 for the year ended December 31, 2008 from approximately $13,000 for the year ended December 31, 2007. The decrease was primarily attributable to the decrease in production costs in 2008.
 
Gross profit.  As a result of the foregoing, CME’s gross profit increased to $37.9 million for the year ended December 31, 2008 from $12.7 million for the year ended December 31, 2007. CME’s gross profit margin increased to 60.2% for the year ended December 31, 2008 from 49.0% for the year ended December 31, 2007 because the rate of increase in CME’s revenue exceeded the rate of increase in cost of sales for the year ended December 31, 2008 compared to the year ended December 31, 2007.
 
Operating expenses.  CME’s operating expenses increased to $2.8 million for the year ended December 31, 2008 from $1.7 million for the year ended December 31, 2007 due to the following reasons:

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Selling expenses.  Selling expenses increased to $1.1 million for the year ended December 31, 2008 from $0.9 million for the year ended December 31, 2007. The increase was attributable to new marketing and promotional expenses resulting from the geographic expansion of CME’s network coverage and the growth of CME’s client base for the year ended December 31, 2008, offset by a decrease in salaries paid to CME’s sale force.
 
General and administrative expenses.  General and administrative expenses increased by 134.1% to $1.7 million for the year ended December 31, 2008 from $0.7 million for the year ended December 31, 2007. The increase was primarily attributable to the increase in salaries, rental expenses on various offices in the PRC, professional fees, other staff costs and welfare paid to additional management and administrative personnel to meet the demand arising from CME’s enlarged scale of operations.
 
Income from operation.  As a result of the foregoing, CME’s income from operation increased by 218.8% to $35.1 million for the year ended December 31, 2008 from $11.0 million for the year ended December 31, 2007.
 
Interest income.  CME’s interest income increased by 316.7% to $100,000 for the year ended December 31, 2008 from $24,000 for the year ended December 31, 2007, primarily as a result of higher cash and cash equivalent balances provided by CME’s operating activities.
 
Income tax expenses.  CMEs income tax expenses increased by 117.4% to $8.9 million for the year ended December 31, 2008 from $4.1 million for the year ended December 31, 2007. The increase was primarily attributable to the increase in income before income taxes.
 
Net income.  As a result of the foregoing, CME’s net income increased by 278.5% to $26.4 million for the year ended December 31, 2008 from $7.0 million for the year ended December 31, 2007. CME’s net profit margin increased to 41.8% for the year ended December 31, 2008 from 26.9% for the year ended December 31, 2007.
 
Liquidity and capital resources.
 
   
Year Ended of December 31,
 
   
2007
   
2008
   
2009
 
   
(In thousands)
 
Selected Consolidated Cash Flow Data:
                       
Net cash provided by operating activities
 
$
12,105
   
$
27,396
   
$
46,244
 
Net cash used in investing activities
   
(6,594
)
   
(4,216
)
   
(1,884
)
Net cash used in financing activities
   
(1,315
)
   
     
(17,162)
 
Net increase in cash
   
4,879
     
23,633
     
27,154
 
Cash at the beginning of the year
   
1,485
     
6,364
     
29,997
 
Cash at the end of the year
   
6,364
     
29,997
     
57,151
 
 
As of December 31, 2009, CME had cash of $57.2 million. CME’s cash primarily consists of cash on hand and cash deposited in banks and interest-bearing savings accounts. CME’s liquidity requirements primarily include cash required to install its equipment and control systems on the inter-city express buses carrying its network, concession fees payable to the inter-city express bus operators participating in its network and its working capital needs.

For the years ended December 31, 2009, 2008 and 2007, CME has financed its liquidity needs primarily through cash flows from operating activities.
 
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As of December 31, 2009 and December 31, 2008, CME’s accounts receivable, one of the principal components of CME’s current assets, were $12.6 million and $6.1 million, respectively. CME’s accounts receivable relate to advertising fees payable by its clients. CME expects its accounts receivable to increase as it continues to grow its business. CME intends to maintain its current policies for collections of accounts receivable, which provide a 30-60-day credit period following the month in which the advertisements are displayed. CME mitigates its collection risk by evaluating the creditworthiness of its clients and monitoring outstanding balances payable by its clients. In addition, as of December 31, 2009 and December 31, 2008, CME’s accounts payable, one of the principal components of its current liabilities, were $2.2 million and $1.6 million, respectively. CME’s accounts payable relate to concession fees payable to the inter-city express bus operators participating in CME’s networks. CME expects its accounts payable to increase as the number of inter-city express buses carrying its network increases. CME settles such concession fees on a monthly basis based on the actual number of buses carrying its network in the preceding month. Moreover, as of December 31, 2009 and December 31, 2008, CME’s accrued liabilities for the purchase of property and equipment were $2.1 million and $1.1 million, respectively. Such liabilities relate to CME’s purchase of equipment and control systems.  Tax payables, which were $5.8 million and $3.1 million as of December 31, 2009 and December 31, 2008, respectively, represented the Enterprises Income Tax payable to the PRC tax bureau for the profits earned from CME’s PRC subsidiaries. CME believes the cash it generates from its customers, will be sufficient to fund its expansions and payment obligations to the inter-city express bus operators and CME’s equipment supplier.  In addition, CME’s amounts due to related parties were $13.3 million and $0.8 million as of December 31, 2009 and December 31, 2008, respectively.  The significant increase for the balance as at December 31, 2009 was because there were promissory notes of $10 million due to the founder shareholders of CME which stated in the Stock Exchange Agreement and the Amendment.  The amounts were settled subsequent to December 31, 2009.
 
CME believes that its existing cash resources, the anticipated cash flows from operating activities, financing from the warrants holders who exercised their outstanding public warrants as a result of the warrants redemption and the financing from the issuance of preferred shares and warrants to Starr International will be sufficient to meet both its short-term and long-term liquidity needs, including capital expenditure requirements to achieve its expansion plans and the potential increase in costs as a result of becoming a public reporting company.
 
Any issuance of equity securities could cause dilution for our shareholders. Any incurrence of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating and financial covenants.

Net cash  generated from operating activities
 
For the year ended December 31, 2009, cash generated from operating activities was $46.2 million, consisting primarily of net income of $41.7 million, $3.2 million of non-cash depreciation charges and non-cash deferred tax benefits of $0.4 million, cash inflow from changes in operating assets and liabilities of $1.3 million.   For the year ended December 31, 2008, cash generated from operating activities was $27.4 million, consisting primarily of net income of $26.4 million and $2.9 million of non-cash depreciation charges, offset by cash outflow from changes in operating assets and liabilities of $1.0 million, $0.8 million of non-cash deferred tax benefits. For the year ended December 31, 2007, cash generated from operating activities was $12.1 million, consisting primarily of net income of $7.0 million, cash inflow from changes in operating assets and liabilities of $4.3 million and $1.6 million of non-cash depreciation charges, offset by $0.8 million of non-cash deferred tax benefits.  The net cash generated from operating activities continue to increase from year to year as a result of the increases in revenue and the stable in working capitals.  CME maintains a low account receivable and account payable turnover day since 2007.
 
Net cash used in investing activities
 
For the years ended December 31, 2007, 2008 and 2009 cash used in investing activities was $6.6 million, $4.2 million and $1.9 million respectively, reflecting the procurement of equipment and control systems and the acquisition of digital television displays.
 
Net cash generated from financing activities
 
For the year ended December 31, 2009, cash used in financing activities was $17.2 million, consisting primarily of the payment of dividends to shareholders of HKMDF of $17.6 million prior to the Share Exchange, payment to redeem the warrants of $0.5 million, offset by $0.9 million proceeds from the Stock Exchange.
 
For the years ended December 31, 2007, cash used in financing activities was $1.3 million, reflecting the payment of dividends to shareholders of HKMDF.
 
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Capital Expenditures
 
For the years ended December 31, 2007, 2008 and 2009, CME had capital expenditures of $6.6 million, $4.2 million and $1.9 million, respectively. CME’s capital expenditures were made primarily to procure equipment and control systems from Hangzhou Yusong and acquire digital television displays originally installed on inter-city express buses from some bus operators participating in CME’s network. CME’s capital expenditures were primarily funded by net cash generated from CME’s operating activities.
 
Based on current estimates, CME expects its capital expenditures in the future to primarily consist of:
 
 
·
approximately $1,000 on equipment and a control system for each bus added to its network as it expands its geographic coverage and increases the number of inter-city express buses within its network; and

approximately $500 to replace any malfunctioning existing equipment and control system; and
 
 
·
approximately $150,000 per bus station and less than $100 per bus to upgrade CME’s technological capability to change programs and advertisements from a manual system to local wireless network technology;  CME will study the market demand and decide the timing to implement the wireless platform.
 
In addition, as opportunities arise, CME may make acquisitions of other businesses that complement its operations or enter into strategic relationships. CME expects to fund its future capital expenditures by cash generated from operating activities and the cash financed from the redemption of warrants and the Starr International investment. CME may, however, require additional cash due to changing business conditions or other future developments, including investments, acquisitions or strategic relationships that CME may decide to pursue. If CME’s cash requirements exceed the amounts of cash on hand, CME may seek to issue debt or equity securities or obtain short-term or long-term bank financing.
 
Dividends
 
For the year ended December 31, 2009, HKMDF approved a cash dividend payment of $17.6 million to the founder shareholders. The payment of cash dividends in the future will be dependent upon our revenue and earnings, if any, capital requirements and general financial condition subsequent to completion of the Share Exchange.  It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and to look for any good opportunities in the PRC media market and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
 
 
The following table sets forth CME’s contractual obligations as of December 31, 2009:
 
             
Payment Due by Period
 
     
Total
     
2010
     
2011
     
2012
     
2013
     
2014
 
     
(In thousands)
 
Concession fee obligations
 
$
97,868
   
$
28,760
   
$
31,636
   
$
20,183
   
$
11,034
   
$
6,255
 
Capital commitments
   
     
     
     
     
     
 
Lease obligations
   
64
     
61
     
3
     
---
     
---
     
-
 
 
Concession fee obligations represent the future minimum concession fees that CME is obliged to pay under the long-term framework agreements (assuming a 10% increase per year) that CME has entered into with inter-city express bus operators participating in its network. These agreements have terms ra