Attached files
file | filename |
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EX-21 - TM Entertainment & Media, Inc. | v179137_ex21.htm |
EX-32 - TM Entertainment & Media, Inc. | v179137_ex32.htm |
EX-31.1 - TM Entertainment & Media, Inc. | v179137_ex31-1.htm |
EX-31.2 - TM Entertainment & Media, Inc. | v179137_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(mark
one)
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||
OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2009
OR
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
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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
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20-8951489
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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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
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NYSE
Amex
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(Title
of Class)
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(Name
of exchange on which registered)
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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
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Accelerated
Filer x
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Non-Accelerated
Filer o
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Smaller
Reporting Company x
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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
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2
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|||
ITEM
1
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Business
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2
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ITEM
1A.
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Risk
Factors
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31
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ITEM
1B.
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Unresolved
Staff Comments
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52
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ITEM
2
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Properties
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53
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ITEM
3
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Legal
Proceedings
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53
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ITEM
4
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(Removed
and Reserved).
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PART
II
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53
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ITEM
5
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Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer
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Purchases
of Equity Securities
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53
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ITEM
6
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Selected
Financial Data
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54
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ITEM
7
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Management’s
Discussion and Analysis of Financial Condition and Results
of
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Operations
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54
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ITEM
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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68
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ITEM
8
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Financial
Statements and Supplementary Data
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69
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ITEM
9
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Changes
in and Disagreements with Accountants on Accounting and
Financial
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|||
Disclosures
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69
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ITEM
9A.
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Controls
and Procedures
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70
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ITEM
9B.
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Other
Information.
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71
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PART
III
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72
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ITEM
10
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Directors,
Executive Officers and Corporate Governance
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72
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ITEM
11
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Executive
Compensation
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72
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ITEM
12
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Security
Ownership of Certain Beneficial Owners and Management and
Related
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Stockholder
Matters
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72
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ITEM
13
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Certain
Relationships and Related Transactions, and Director
Independence
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72
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ITEM
14
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Principal
Accountant Fees and Services
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72
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PART
IV
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73
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ITEM
15
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Exhibits,
Financial Statement Schedules
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73
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Index
to Consolidated Financial Statements
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||||
Consolidated
Financial Statements
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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:
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·
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“we,”
“us,” “CME,” “the Company” or “our Company” are references to China
MediaExpress Holdings, Inc. and its
subsidiaries;
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·
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“China”
and “PRC” are a reference to the People’s Republic of
China;
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·
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“RMB”
is a reference to Renminbi, the legal currency of
China;
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·
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“U.S.
dollar,” “$” and “US$” are a reference to the legal currency of the United
States;
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·
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“SEC”
is a reference to the United States Securities and Exchange
Commission;
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·
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“Securities
Act” is a reference to Securities Act of 1933, as amended;
and
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·
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“Exchange
Act” is a reference to the Securities Exchange Act of 1934, as
amended;
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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:
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 $10.0 million in three year, no interest promissory notes. Such
promissory notes were settled subsequent to December 31, 2009. In addition, the
former shareholders of HKMDF may earn up to an additional 15.0 million shares of
common stock subject to the achievement of the following net income targets for
2009, 2010 and 2011:
Year
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Net
Income (RMB)
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Net
Income (US$)(1)
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Shares
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|||
2009
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287.0
million
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$42.0
million
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1.0
million
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|||
2010
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570.0
million
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$83.5
million
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7.0
million
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2011(2)
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889.0
million
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$130.2
million
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7.0
million
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(1)
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Based
on current exchange rate of 6.83
RMB/US$.
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(2)
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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.
|
8
|
·
|
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.
|
9
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.
10
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.
|
11
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.
|
12
|
·
|
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 | % |
13
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:
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the
average age is 30 years old;
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the
average household income is over RMB5,800 per month and the average
individual income is over RMB3,300 per
month;
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the
primary purposes of travel include business, travel and leisure and
visiting families and friends;
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over
50% of the target audiences have received a diploma, college degree or
higher education;
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over
40% of the target audiences are professionals, managers, executives and
business owners; and
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over
40% of the target audiences are frequent travelers that take inter-city
express buses for more than once a
month.
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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.
14
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:
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the
average advertising rate for every thirty
seconds;
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the
number of minutes the advertisements will be displayed each month;
and
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the
aggregate advertising fees payable in that
year.
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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:
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the
municipality or province in which the advertisements will be
displayed;
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the
number of buses on which the advertisements will be displayed in any given
municipality or province;
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the
duration of advertising time in terms of
seconds;
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the
number of months in which the advertisements will be displayed;
and
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the
aggregate advertising fees payable.
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15
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.
16
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.
17
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.
18
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:
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Express
Phantom, a movie channel with foreign and domestic films, movie preview
and information on recent box office
hits;
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Express
Tunes, a music video channel with pop songs of artists from Hong Kong,
China and Taiwan, classical music and other types of
music;
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Express
Opera, a channel with classical Chinese opera and drama, talk shows,
dancing shows and circus shows;
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Express
Travel Companion, a travel channel with introduction of popular foreign
and domestic destinations and travel information;
and
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various
other entertainment programs provided by SouthEastern Satellite
Television, such as Super Star
Face.
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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.
19
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.
20
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.
21
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.
22
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.
23
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:
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·
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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
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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.
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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.
24
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:
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utilize
traffic safety facilities and traffic
signs;
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impede
the use of public facilities, traffic safety facilities and traffic
signs;
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obstruct
commercial and public activities or create an unpleasant sight in urban
areas;
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be
placed in restrictive areas near government offices, cultural landmarks or
historical or scenic sites; or
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be
placed in areas prohibited by the local governments from having
out-of-home advertisements.
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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”.
25
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.
26
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.
27
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.
28
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.
29
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:
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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
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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.
30
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.
31
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.
32
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.
33
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:
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the
amount of government involvement;
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the
level of development;
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·
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the
growth rate;
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the
control of foreign exchange; and
|
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·
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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.
34
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.
35
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:
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increased
sales and sales support activities;
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expanded
and improved administrative and operational
systems;
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enhanced
information technology systems;
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36
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·
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stringent
cost controls and sufficient working
capital;
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strengthening
of financial and management
controls;
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a
reliable supply of digital television displays and other equipment;
and
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hiring
and training of new personnel.
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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.
37
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.
38
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.
39
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.
40
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:
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a
general decline in economic
conditions;
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41
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a
decline in economic conditions in the particular geographical regions in
which CME conducts business;
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a
decision to shift advertising spending to other advertising media;
and
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a
decline in advertising spending in
general.
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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.
42
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:
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investors’
perception of, and demand for, securities of new out-of-home advertising
media companies;
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economic
conditions in the United States and other capital markets in which CME may
seek to raise funds;
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its
future financial condition, results of operations and cash
flows;
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PRC
government regulation of foreign investment in advertising services
companies and restrictions on out-of-home advertising media companies in
China;
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economic,
political and other conditions in China;
and
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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.
43
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.
44
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.
45
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:
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the
integration of new operations, services and
personnel;
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unforeseen
or hidden liabilities;
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the
diversion of resources and management attention from its existing business
and technology;
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its
potential inability to generate sufficient revenue to offset new
costs;
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the
expenses of acquisitions; or
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the
potential loss of or harm to relationships with its employees and clients
resulting from its integration of new
businesses.
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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.
46
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.
47
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:
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revoking
the business and operating licenses of such subsidiary and consolidated
entity;
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discontinuing
or restricting the conduct of any related-party transactions between such
subsidiary and consolidated entity;
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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;
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shutting
down CME’s advertising network; or
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requiring
CME or any subsidiary or consolidated entity to restructure the relevant
ownership structure or operations.
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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.
48
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.
49
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.
50
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.
51
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.
52
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.
|
53
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.
54
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.
55
Consolidation of CME’s 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.
56
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%.
57
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.
58
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.
59
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.
60
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.
61
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.
62
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.
63
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:
64
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. CME’s 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.
65
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.
66
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 ranging from five to
eight years and the concession fees provided in these agreements are subject to
an increase at a minimum of 10% and a maximum of 30% per
year.
Capital
commitments represent CME’s unperformed purchase obligations under all
agreements that it has entered into for the purchase of equipment and control
systems to expand its network.
There
were no material commitments for capital expenditures as of December 31, 2009
and 2008 respectively.
67
Operating
lease obligations represent CME’s payment obligations under the rental
agreements that it entered into for its office spaces.
CME’s
capital structure will be improved in 2010 as all of the outstanding pubic
warrants have been exercised or cancelled after the warrant redemption in
December 2009 and January 2010. As a result, new capital will be
coming from the warrant holders when they exercised their warrants. Also, CME
also concluded a $30 million private investment from Starr International
Company, Inc. (“Starr International”) transaction, involving newly issued shares
of CME Series A Convertible Preferred Stock and CME common stock purchase
warrants. CME does not expect that there will be any material changes
in the mix and the relative cost of our capital resources.
As of
December 31, 2009, CME did not have any off-balance sheet commitments or
arrangements. CME does not anticipate entering into any such commitments or
arrangements in the foreseeable future. CME has not entered into any financial
guarantees or other commitments to guarantee the payment obligations of any
third parties. In addition, CME has not entered into any derivative contracts
that are indexed to CME’s own shares and classified as shareholder’s equity, or
that are not reflected in CME’s consolidated financial statements. Furthermore,
CME does not have any retained or contingent interest in assets transferred to
an unconsolidated entity that serves as credit, liquidity or market risk support
to such entity. Moreover, CME does not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit
support to CME or engages in leasing, hedging or research and development
services with CME.
In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on CME’s results of operations. According to the PRC
National Bureau of Statistics, the change in Consumer Price Index in China was
4.8%, 5.9% and -0.7 in 2007, 2008 and 2009, respectively. See the section
entitled “RISK FACTORS — Risks Relating to Doing Business in
China — 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”.
ITEM
7A. Quantitative
and Qualitative Disclosures about Market Risk
Foreign
Exchange Risk
All of
CME’s revenue, and majority of costs and expenses are denominated in RMB.
Although the conversion of the RMB is highly regulated in China, the value of
the RMB against the value of the U.S. dollar or any other currency
nonetheless may fluctuate and be affected by, among other things, changes in
China’s political and economic conditions. Under current policy, the value of
the RMB is permitted to fluctuate within a narrow band against a basket of
certain foreign currencies. China is currently under significant international
pressures to liberalize this government currency policy, and if such
liberalization were to occur, the value of the RMB could appreciate or
depreciate against the U.S. dollar.
Because
all of CME’s earnings and cash assets are denominated in RMB, appreciation or
depreciation in the value of the RMB relative to the U.S. dollar would
affect CME’s financial results reported in U.S. dollar terms without giving
effect to any underlying change in CME’s business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any
dividend CME issues after this offering that will be exchanged into
U.S. dollars and earnings from, and the value of, any
U.S. dollar-denominated investments CME makes in the future. If
the RMB vs USD exchange rate increase/decrease by 1%, the net income will
increase/decrease by 1% correspondingly as most of the assets, liabilities,
revenue and expenses are dominated by RMB.
68
Very
limited hedging transactions are available in China to reduce CME’s exposure to
exchange rate fluctuations. To date, CME has not entered into any hedging
transactions in an effort to reduce CME’s exposure to foreign currency exchange
risk. While CME may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedging transactions may be limited and
CME may not be able to successfully hedge CME’s exposure at all. In addition,
CME’s currency exchange losses may be magnified by PRC exchange control
regulations that restrict CME’s ability to convert RMB into foreign
currency.
Interest
Rate Risk
CME has
not been, nor does it anticipate being, exposed to material risks due to changes
in interest rates. CME’s risk exposure to changes in interest rates relates
primarily to the interest income generated by cash deposited in interest-bearing
savings accounts. CME has not used, and does not expect to use in the future,
any derivative financial instruments to hedge its interest risk exposure.
However, CME’s future interest income may fall short of its expectation due to
changes in interest rates in the market.
Credit
Risk
The
Company is exposed to credit risk from its cash in bank and accounts receivable.
The credit risk on cash in bank and fixed deposits is limited because the
counterparties are recognized financial institutions. Accounts receivable are
subjected to credit evaluations. An allowance would be made, if necessary, for
estimated irrecoverable amounts by reference to past default experience, if any,
and by reference to the current economic environment.
Inflation
Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross margin and selling, general and
administrative expenses as a percentage of sales revenue if the selling prices
of our products do not increase with these increased costs.
Company’s
Operations are Substantially in Foreign Countries
Substantially
all of our operations are conducted in China and are subject to various
political, economic, and other risks and uncertainties inherent in conducting
business in China. Among other risks, the Company and its subsidiaries’
operations are subject to the risks of restrictions on transfer of funds; export
duties, quotas, and embargoes; domestic and international customs and tariffs;
changing taxation policies; foreign exchange restrictions; and political
conditions and governmental regulations. Additional information regarding such
risks can be found under the heading “Risk Factors” in this Form
10-K.
ITEM
8 Financial
Statements and Supplementary Data
Consolidated
Financial Statements
The
information required by Item 8 appears after the signature page to this report.
Please refer to F-1 to F-33 of this document.
ITEM
9 Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosures
In
connection with the closing of the Transaction, Eisner LLP (“Eisner”) was
replaced as TM’s independent registered public accounting firm. The reports of
Eisner on TM’s financial statements for the year ended December 31, 2008
and the period ended December 31, 2007 contained no adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except with respect to the TM’s ability to
continue as a going concern as described therein. During TM’s period
ended December 31, 2007, the year ended December 31, 2008 and through June
30, 2009, there were no disagreements with Eisner on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Eisner
would have caused it to make reference to the subject matter of such
disagreements in its report on TM’s financial statements for such
periods. Also, there were no reportable events described under Item
304(a)(1)(iv) of Regulation S-K for the period from May 1, 2007 through December
31, 2008 or through October 15, 2009. The replacement was not specifically
considered by the Board of Directors of TM.
69
On
October 15, 2009, AJ Robbins PC (“AJR”) was retained as the new independent
registered public accounting firm and approved by the audit committee. During
the period from January 1, 2007 through October 15, 2009, TM did not consult
with AJR regarding any of the matters or events set forth in Item 304(a)(2)(i)
and (ii) of Regulation S-K although CME did consult with AJR during that time
regarding such matters.
On
December 4, 2009, the Company dismissed AJR from its engagement with the
Company. The decision to change the accountants was recommended and
approved by the audit committee and the board of directors. There were no
disagreements between the Company and AJR on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
from the time of AJR’s engagement up to the date of dismissal which
disagreements that, if not resolved to AJR’s satisfaction, would have caused AJR
to make reference to the subject matter of the disagreement in connection with
its report issued in connection with the audit of the Company’s financial
statements. None of the reportable events described under Item
304(a)(1)(v)(A)-(D) of Regulation S-K occurred within the two fiscal years of
the Company ended December 31, 2007 and 2008 and subsequently up to the date of
dismissal. AJR did not perform an audit of the financial statements
of the Company for either of the past two year. As such, there have
been no such audit report of AJR on the financial statements of the Company for
either of the past two year which contain any adverse opinion or disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. AJR’s audit report on financial statements for
the fiscal years ended December 31, 2007 and 2008 of HKMDF, a significant
subsidiary of the Company, contained no adverse opinion or disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles.
On
December 4, 2009, the Company engaged Deloitte Touche Tohmatsu in Hong Kong
(“DTT”) to serve as its independent auditor, effective immediately upon the
dismissal of AJR. The decision to engage DTT as the Company’s
principal independent accountant was approved by the Audit Committee of the
Company on December 4, 2009. During the two fiscal years of the
Company ended December 31, 2007 and 2008, and through December 4, 2009, the
Company did not consult DTT regarding either: (i) the application of accounting
principles to a specified transaction (either completed or proposed), or the
type of audit opinion that might be rendered on the Company’s financial
statements; or (ii) any matter that was either the subject of a “disagreement”
or “reportable event” within the meaning set forth in Regulation S-K, Item 304
(a)(1)(iv) or (a)(1)(v).
ITEM
9A. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure
Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and regulations and that such information is
accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. Our Chief Executive Officer and Chief
Financial Officer evaluated, with the participation of other members of
management, the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rule 15d-15(e)), as of the end of the period covered by
this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective.
70
Although
the management of our Company, including the Chief Executive Officer and the
Chief Financial Officer, believes that our disclosure controls and internal
controls currently provide reasonable assurance that our desired control
objectives have been met, management does not expect that our disclosure
controls or internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Management’s
Report on Internal Control over Financial Reporting
On
October 15, 2009, we consummated the Share Exchange and acquired a business that
comprises all of the operations of the Company as of December 31,
2009. As a result of the acquisition, we were not required to conduct
an evaluation of the internal controls of this business in our management’s
report under Section 404 for the fiscal year ended December 31, 2009. Were we
required to conduct an evaluation, however, management’s report would have been
limited to addressing an evaluation of the internal controls of TM Entertainment
and Media, Inc. (“TMI”) prior to the acquisition of HKMDF in the business
combination. The internal controls of TMI existing prior to the acquisition
related to (i) our reporting as a blank check public company; and
(ii) the management of the trust fund, which was TMI’s only material asset
prior to the acquisition, which trust fund ceased to exist as of the closing of
the Share Exchange. We do not believe that these controls are relevant to our
financial reporting on December 31, 2009 and going forward and thus an
evaluation and assessment of the effectiveness of those controls would not be
useful, or meaningful to our shareholders. As a result, we have not included a
management’s report on internal control over financial reporting as of December
31, 2009.
Attestation Report of the
Registered Public Accounting Firm
For the
reasons set forth above, we have determined that we are not required to prepare
a management’s report on internal control over financial reporting as of
December 31, 2009. Accordingly, an attestation report from our registered
public accounting firm is not applicable.
Changes
in Internal Controls over Financial Reporting
In
connection with the Share Exchange on October 15, 2009, we adopted changes to
our internal control over financial reporting relating to the new business we
are operating. As result of the significance of the acquired business to our
operations, these changes are reasonably likely to have a material effect on the
Company’s internal control over financial reporting.
ITEM
9B. Other
Information.
There is
no information required to be disclosed in a report on Form 8-K during the
fourth quarter of the year covered by this Form 10-K but not
reported.
71
PART
III
ITEM
10 Directors,
Executive Officers and Corporate Governance
The
information required by this item relating to our directors and nominees,
regarding compliance with Section 16(a) of the Securities Act of 1934, and
regarding our Audit Committee is included under the captions “Directors and
Executive Officers of the Company” and “Section 16(a) Beneficial Ownership
Reporting Compliance,” and “—Role of the Audit Committee” in our Proxy Statement
related to the 2009 Annual Meeting of Shareholders and is incorporated herein by
reference.
Pursuant
to General Instruction G (3) of Form 10-K, the information required by this item
relating to our executive officers is included under the caption “Executive
Officers of the Company” in Part I of this report.
We have
adopted a code of ethics that applies to all of our executive officers,
directors and employees. The code of ethics codifies the business and ethical
principles that govern all aspects of our business. We have filed copies of our
code of ethics and our board committee charters as exhibits to the registration
statement in connection with our IPO. These documents can be accessed by
reviewing our public filings on the SEC’s web site at www.sec.gov. In addition,
a copy of the code of ethics will be provided without charge upon request to us
in writing at Room 2805, Central Plaza, Wanchai, Hong Kong or by telephone at
(852) 2827-6100. We intend to disclose any amendments to or waivers of certain
provisions of our code of ethics in a Current Report on
Form 8-K.
ITEM
11 Executive
Compensation
The
information appearing under the headings “Director Compensation” and “Executive
Compensation” in our Proxy Statement related to the 2009 Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM
12 Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information required by this item relating to security ownership of certain
beneficial owners and management is included under the caption “Security
Ownership of Management and Certain Beneficial Owners,” and the information
required by this item relating to securities authorized for issuance under
equity compensation plans is included under the caption “Executive Compensation
– Options and Stock Appreciation Rights,” in each case in our Proxy Statement
related to the 2009 Annual Meeting of Shareholders, and is incorporated herein
by reference.
ITEM
13 Certain
Relationships and Related Transactions, and Director
Independence
The
information required by this item relating to review, approval or ratification
of transactions with related persons is included under the caption “Certain
Relationships and Related Transactions,” and the information required by this
item relating to director independence is included under the caption “Board and
Committee Independence,” in each case in our Proxy Statement related to the 2009
Annual Meeting of Shareholders, and is incorporated herein by
reference.
ITEM
14 Principal
Accountant Fees and Services
The
information required by this item is included under the captions “Proposal No.
2: Ratification of Appointment of the Independent Public Accountants — Audit
Fees” and “—Pre-Approval Policies and Procedures” in our Proxy Statement related
to the 2009 Annual Meeting of Shareholders and is incorporated herein by
reference.
72
PART
IV
ITEM
15 Exhibits, Financial Statement Schedules
(a)
1. Financial Statements – China MediaExpress Holdings, Inc. and Subsidiaries and
Variable Interest Entity
The
following are contained in this 2009 Form 10-K Report:
·
|
Reports
of Independent Registered Public Accounting
Firms.
|
·
|
Consolidated
Statements of Operations for the years ended December 31, 2007,
2008, and 2009.
|
·
|
Consolidated
Balance Sheets at December 31, 2008 and
2009.
|
·
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007,
2008, and 2009.
|
·
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the
years ended December 31, 2007, 2008, and
2009.
|
·
|
Notes
to the Consolidated Financial
Statements.
|
The
Consolidated Financial Statements, the Notes to the Consolidated Financial
Statements and the Reports of Independent Registered Public Accounting Firms
listed above are filed as part of this Report and are set forth on pages F-1
through F-28 immediately following the signature pages of this
Report.
(a)
2. Financial Statement Schedules
Designation
|
Description
|
Schedule
I
|
Condensed
Financial Information of Registrant
|
Schedule
I is filed as part of this Report and is set forth on page F-29 immediately
following the Notes to the Consolidated Financial Statements referred to
above. The other schedules are omitted because they are not
applicable, the information required to be contained in them is disclosed
elsewhere in our Consolidated Financial Statements or the amounts involved are
not sufficient to require submission.
(a)
3. Exhibits
Exhibit
No.
|
Description | |
1.1
|
Form
of Underwriting Agreement.1
|
|
3.1
|
Form
of Amended and Restated Certificate of Incorporation. 3
|
|
3.2
|
By-laws.
3
|
|
3.3
|
Certificate
of Designation.7
|
|
4.1
|
Specimen
Unit Certificate. 3
|
|
4.2
|
Specimen
Common Stock Certificate. 3
|
|
4.3
|
Specimen
Warrant Certificate. 3
|
|
4.4
|
Form
of Warrant Agreement between Continental Stock Transfer & Trust
Company and the Registrant. 2
|
|
4.5
|
Form
of Unit Purchase Option to be granted to Representative. 2
|
|
4.6
|
Investor
Rights Agreement. 8
|
|
4.7
|
Registration
Rights Agreement. 8
|
|
4.8
|
Purchased
Warrant. 8
|
|
10.1
|
Form
of Letter Agreement among the Registrant, Pali Capital, Inc. and Theodore
S. Green. 4
|
|
10.2
|
Form
of Letter Agreement among the Registrant, Pali Capital, Inc. and Malcolm
Bird. 4
|
|
10.3
|
Form
of Letter Agreement among the Registrant, Pali Capital, Inc. and Jonathan
F. Miller. 4
|
|
10.4
|
Form
of Letter Agreement among the Registrant, Pali Capital, Inc. and John W.
Hyde. 2
|
|
10.5
|
Form
of Letter Agreement among the Registrant, Pali Capital, Inc., the Sara
Green 2007 GST Trust and Jeffrey Bolson, as Trustee. 2
|
|
10.6
|
Form
of Letter Agreement among the Registrant, Pali Capital, Inc., the Blair
Green 2007 GST Trust and Jeffrey Bolson, as Trustee. 2
|
|
10.7
|
Form
of Letter Agreement among the Registrant, Pali Capital, Inc. and the John
W. Hyde Living Trust. 2
|
|
10.8
|
Form
of Investment Management Trust Agreement between Continental Stock
Transfer & Trust Company and the Registrant. 4
|
|
10.9
|
Form
of Securities Escrow Agreement between the Registrant, Continental Stock
Transfer & Trust Company and the Initial Stockholders. 3
|
|
10.10
|
Form
of Administrative Service Agreement among Theodore S. Green, Malcolm Bird
and the Registrant. 3
|
|
10.11
|
Promissory
Note issued to Theodore S. Green. 3
|
|
10.12
|
Form
of Registration Rights Agreement among the Registrant and the
Stockholders. 3
|
|
10.13
|
Private
Placement Purchase Agreement between the Registrant and Theodore S. Green.
4
|
|
10.14
|
Private
Placement Purchase Agreement between the Registrant and Malcolm Bird.
4
|
|
10.15
|
Private
Placement Purchase Agreement between the Registrant and Jonathan F.
Miller.5
|
73
10.16
|
Private
Placement Purchase Agreement between the Registrant and the John W. Hyde
Living Trust.5
|
|
10.17
|
Form
of Agreement between Theodore S. Green and Malcolm Bird.5
|
|
10.18
|
Share
Exchange Agreement.6
|
|
10.19
|
First
Amendment to Share Exchange Agreement.7
|
|
10.20
|
Securities
Purchase Agreement. 8
|
|
14.1
|
Form
of Code of Ethics. 4
|
|
16.1
|
Letter
of AJ. Robins, P.C. dated December 8, 2009 (9)
|
|
16.2
|
Letter of Eisner LLP dated October 21, 2009 (10) | |
21
|
List
of subsidiaries.*
|
|
31.1
|
Certification
by Chief Executive Officer and Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
|
32.1
|
Certification
by Chief Executive Officers and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
99.1
|
Form
of Audit Committee Charter. 3
|
|
99.2
|
Form
of Nominating Committee Charter. 3
|
|
99.3
|
Form
of Compensation Committee Charter.3
|
*
|
Filed
herewith
|
(1)
|
Incorporated
by reference to the corresponding exhibit filed with Amendment No. 4 to
the Registration Statement on Form S-1 (File No. 333-143856) ) filed with
the SEC on October 12, 2007.
|
(2)
|
Incorporated
by reference to the corresponding exhibit filed with Amendment No. 2 to
the Registration Statement on Form S-1 (File No. 333-143856) ) filed with
the SEC on September 11, 2007.
|
(3)
|
Incorporated
by reference to the corresponding exhibit filed with the Registration
Statement on Form S-1 (File No. 333-143856) ) filed with the SEC on June
18, 2007.
|
(4)
|
Incorporated
by reference to the corresponding exhibit filed with Amendment No. 1 to
the Registration Statement on Form S-1 (File No. 333-143856)) filed with
the SEC on July 27, 2007.
|
(5)
|
Incorporated
by reference to the corresponding exhibit filed with Amendment No. 3 to
the Registration Statement on Form S-1 (File No. 333-143856)) filed with
the SEC on October 10, 2007.
|
(6)
|
Incorporated
by reference to Annex A-1 to the Registrant’s Final Proxy Statement, filed
with the SEC on October 5, 2009.
|
(7)
|
Incorporated
by reference to Annex A-2 to the Registrant’s Final Proxy Statement, filed
with the SEC on October 5, 2009.
|
(8)
|
Incorporated
by reference to the corresponding exhibit to Current Report on Form 8-K
filed with the SEC on January 19,
2010.
|
(9)
|
Incorporated
by reference to the corresponding exhibit to Current Report on Form 8-K
filed with the SEC on December 4, 2009.
|
(10)
|
Incorporated
by reference to Exhibit 16.1 to Current Report on Form 8-K/A filed
with the SEC on November 3,
2009.
|
74
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
March 31, 2010
|
By:
|
/s/
Zheng Cheng
|
|
By:
Zheng Cheng
|
|||
Title:
Chief Executive Officer
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following person on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated:
March 31, 2010
|
By:
|
/s/
Zheng Cheng
|
|
Name:
|
Zheng
Cheng
|
||
Title: |
Chief
Executive Officer and Chairman
|
||
Date: March
31, 2010
|
By:
|
/s/
Jacky Lam
|
|
Name: | Jacky Lam | ||
Title: |
Chief
Financial Officer
|
||
Dated: March
31, 2010
|
By:
|
/s/
George Zhou
|
|
Name:
|
George
Zhou
|
||
Title:
|
Director
|
Dated: March
31, 2010
|
By:
|
/s/
Marco Kung
|
|
Name:
|
Marco
Kung
|
||
Title:
|
Director
|
||
Dated: March
31, 2010
|
By:
|
/s/
Yingshou Huang
|
|
Name:
|
Yingshou
Huang
|
||
Title: |
Director
|
Dated: March
31, 2010
|
By:
|
/s/
Dorothy Dong
|
|
Name: |
Dorothy
Dong
|
||
Title: |
Director
|
||
75
CHINA MEDIAEXPRESS
HOLDINGS, INC.
|
||
CONSOLIDATED
FINANCIAL STATEMENTS FOR THE
|
||
YEARS
ENDED DECEMBER 31, 2007, 2008 AND 2009 AND
|
||
REPORTS
OF INDEPENDENT REGISTERED
|
||
PUBLIC
ACCOUNTING FIRMS
|
CHINA
MEDIAEXPRESS HOLDINGS, INC.
PAGE
|
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
F-1 -
F-4
|
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2009
|
F-5
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
|
|
DECEMBER
31, 2007, 2008 AND 2009
|
F-6
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND
|
|
COMPREHENSIVE
INCOME (LOSS) FOR THE YEARS ENDED
|
|
DECEMBER
31, 2007, 2008 AND 2009
|
F-7
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
|
|
DECEMBER
31, 2007, 2008 AND 2009
|
F-8
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
F-9
- F-28
|
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT - SCHEDULE I
|
F-29
- F-33
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and the Shareholders of China MediaExpress Holdings,
Inc.:
We have
audited the accompanying consolidated balance sheet of China MediaExpress
Holdings, Inc. (the "Company"), its subsidiaries and its variable interest
entity (the "Group") as of December 31, 2009 and the related consolidated
statements of operations, shareholders' equity and comprehensive income (loss),
and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the Index at Schedule I. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audit. The consolidated financial
statements of the Company for the years ended December 31, 2007 and 2008, before
the effects of the adjustments to retrospectively apply the changes in earnings
per share and capital as discussed in Notes 1(b), 2(p), 5 and 8 to the
consolidated financial statements, were audited by other auditors whose report
dated February 7, 2009, expressed an unqualified opinion on those
statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statements
presentation. We believe that our audit provide a reasonable basis
for our opinion.
In our
opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Group as of
December 31, 2009, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial
statements schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM - continued
To the
Board of Directors and the Shareholders of China MediaExpress Holdings, Inc.: -
continued
As
discussed in Notes 1(b), 2(p), 5 and 8 to the consolidated financial statements,
the Company completed a share exchange transaction (the "Share Exchange") with
Hong Kong Mandefu Holding Limited ("HKMDF") on October 15, 2009. The Share
Exchange 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 recapitalization. The accompanying consolidated financial
statements for periods prior to the consummation of the Share Exchange are those
of HKMDF and its subsidiary and variable interest entity, except the equity
section. Accordingly, the Group 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.
We have
also audited the adjustments to the 2007 and 2008 consolidated financial
statements to retrospectively revise the earnings per share calculation and
capital for the periods presented as discussed above. Our procedures included
(1) comparing the amounts shown in the capital section and the earnings per
share disclosure for 2007 and 2008 to the Company's underlying accounting
analysis, (2) comparing the previously reported shares outstanding and
consolidated statements of operations amounts per the Company's accounting
analysis to the previously issued consolidated financial statements, and (3)
recalculating the shares by multiplying the share exchange ratio to give effect
to the Share Exchange and testing the mathematical accuracy. In our opinion,
such retrospective adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2007 and 2008 consolidated financial statements of the Company other than with
respect to the retrospective adjustments and, accordingly, we do not express an
opinion on any other form of assurance on the 2007 and 2008 consolidated
financial statements taken as a whole.
DELOITTE
TOUCHE TOHMATSU
Certified
Public Accountants
Hong
Kong
March 30,
2010
F-2
AJ.
ROBBINS, PC
216
SIXTEENTH STREET
SUITE
600
DENVER,
COLORADO 80202
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Shareholders
of China MediaExpress Holdings, Inc.
We have
audited before the effect of retrospective changes to the earnings per share
calculation and the number of ordinary shares outstanding described in Notes
1(b), 2(p), 5 and 8, the accompanying consolidated balance sheet of China
MediaExpress Holdings, Inc. and its subsidiary and variable interest entity (the
“Company”) as of December 31, 2008, and the related consolidated statements of
operations, shareholders’ equity and comprehensive income, and cash flows for
each of the years ended December 31, 2008 and 2007 except as noted
below. Our audit did not include the financial statement schedules as
of and for the year ended December 31, 2008 and the period ended December 31,
2007 listed in the Index at Schedule I. The Company’s management is responsible
for these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
companies are not required to have, nor were we engaged to perform, an audit of
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the companies’ internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above before the effect of
retrospective changes to the earnings per share calculation and the number of
ordinary shares outstanding present fairly, in all material respects, the
financial position of China MediaExpress Holdings, Inc. as of December 31, 2008
and the results of its operations and its cash flows for the years ended
December 31, 2008 and 2007, in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Notes 1(b), 2(p), 5 and 8 to the consolidated financial statements,
the Company completed a share exchange transaction (the "Share Exchange") with
Hong Kong Mandefu Holding Limited ("HKMDF") 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 recapitalization. The accompanying consolidated financial
statements for periods prior to the consummation of the Share Exchange are those
of the HKMDF and its subsidiary and variable interest entity, except the equity
section. Accordingly, the Company revised its earnings per share
calculation.
F-3
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM- continued
To
the Board of Directors and
Shareholders of China MediaExpress
Holdings, Inc. - continued
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, they
retrospectively adjusted the accompanying 2007 and 2008 consolidated financial
statements for the change. We were not engaged to audit, review, or
apply any procedures to the retrospective changes to the earnings per share
calculation, the number of ordinary shares outstanding and the financial
statement schedules as of and for the year ended December 31, 2008 and the
period ended December 31, 2007 listed in the Index at Schedule I as discussed
above and accordingly, we do not express an opinion or any other form of
assurance about whether such retrospective changes are appropriate and have been
properly applied. These changes were audited by Deloitte Touche
Tohmatsu.
/s/ AJ. ROBBINS,
P.C.
AJ.
ROBBINS, P.C.
CERTIFIED
PUBLIC ACCOUNTANTS
Denver,
Colorado
February
7, 2009
F-4
CHINA
MEDIAEXPRESS HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
(Amounts in thousands of U.S.
dollars ("$'000"), except number of shares and per share
amounts)
Notes
|
December 31,
|
||||||||||
2008
|
2009
|
||||||||||
ASSETS
|
|||||||||||
Current
Assets:
|
|||||||||||
Cash
|
$ | 29,997 | $ | 57,151 | |||||||
Accounts
receivable
|
6,065 | 12,569 | |||||||||
Prepaid
expenses and other current assets
|
59 | 251 | |||||||||
Total
current assets
|
$ | 36,121 | $ | 69,971 | |||||||
Non-current
Assets:
|
|||||||||||
Property
and equipment, net
|
6
|
$ | 11,417 | $ | 11,065 | ||||||
Deferred
tax assets
|
4
|
1,578 | 1,943 | ||||||||
Total
non-current assets
|
$ | 12,995 | $ | 13,008 | |||||||
TOTAL
ASSETS
|
$ | 49,116 | $ | 82,979 | |||||||
|
|
||||||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||||||
Current
Liabilities:
|
|||||||||||
Accounts
payable
|
$ | 1,565 | $ | 2,179 | |||||||
Amounts
due to related parties
|
15
|
798 | 13,315 | ||||||||
Payables
for acquisitions of equipment
|
1,072 | 2,071 | |||||||||
Income
tax payable
|
3,072 | 5,765 | |||||||||
Accrued
expenses and other current liabilities
|
7
|
1,301 | 4,144 | ||||||||
Accrued
concession fees - current
|
- | 1,134 | |||||||||
Total
current liabilities
|
$ | 7,808 | $ | 28,608 | |||||||
Non-current
Liabilities:
|
|||||||||||
Accrued
severance payment
|
$ | 307 | $ | - | |||||||
Accrued
concession fees - non-current
|
6,005 | 6,639 | |||||||||
Total
non-current liabilities
|
$ | 6,312 | $ | 6,639 | |||||||
Total
liabilities
|
$ | 14,120 | $ | 35,247 | |||||||
Commitment
and contingency
|
13
|
||||||||||
Shareholders'
equity
|
|||||||||||
Common
shares ($0.001 par value:
|
|||||||||||
40,000,000
shares authorized; 20,915,000 and
|
|||||||||||
24,859,368
shares issued and outstanding as of
|
|||||||||||
December
31, 2008 and 2009, respectively)
|
8
|
$ | 21 | $ | 24 | ||||||
Additional
paid-in capital
|
(20 | ) | 1,960 | ||||||||
Subscription
receivable from shareholders
|
- | (3,350 | ) | ||||||||
Accumulated
other comprehensive income
|
1,384 | 1,346 | |||||||||
Statutory
reserve
|
4,314 | 8,834 | |||||||||
Retained
earnings
|
29,297 | 38,918 | |||||||||
Total
shareholders' equity
|
$ | 34,996 | $ | 47,732 | |||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 49,116 | $ | 82,979 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
CHINA
MEDIAEXPRESS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S.
dollars ("$'000"), except number of shares and per share
amounts)
Year ended December 31,
|
|||||||||||||||
Notes
|
2007
|
2008
|
2009
|
||||||||||||
Revenue,
net
|
$ | 25,837 | $ | 62,999 | $ | 95,934 | |||||||||
Cost
of revenue
|
(13,164 | ) | (25,065 | ) | (32,937 | ) | |||||||||
Gross
profit
|
12,673 | 37,934 | 62,997 | ||||||||||||
Selling
expenses
|
(923 | ) | (1,095 | ) | (3,508 | ) | |||||||||
Administrative
expenses
|
(734 | ) | (1,718 | ) | (2,846 | ) | |||||||||
Total
operating expenses
|
(1,657 | ) | (2,813 | ) | (6,354 | ) | |||||||||
Income
from operations
|
11,016 | 35,121 | 56,643 | ||||||||||||
Interest
income
|
24 | 100 | 113 | ||||||||||||
Income
before income tax expense
|
11,040 | 35,221 | 56,756 | ||||||||||||
Income
tax expense
|
4
|
(4,073 | ) | (8,854 | ) | (15,045 | ) | ||||||||
Net
income
|
$ | 6,967 | $ | 26,367 | $ | 41,711 | |||||||||
Earnings
per share:
|
5
|
||||||||||||||
Basic
|
$ | 0.33 | $ | 1.26 | $ | 1.93 | |||||||||
Diluted
|
$ | 0.33 | $ | 1.26 | $ | 1.81 | |||||||||
Weighted
average number of shares used in calculating:
|
|||||||||||||||
Basic
|
20,915,000 | 20,915,000 | 21,587,953 | ||||||||||||
Diluted
|
20,915,000 | 20,915,000 | 22,998,138 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
CHINA
MEDIAEXPRESS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands of U.S.
dollars ("$'000"), except number of shares)
Subscription
|
Accumulated
|
|||||||||||||||||||||||||||||||||||
Additional
|
receivable
|
other
|
||||||||||||||||||||||||||||||||||
Common
shares
|
paid-in
|
from
|
Comprehensive
|
Statutory
|
Retained
|
Comprehensive
|
||||||||||||||||||||||||||||||
Number
|
Amount
|
capital
|
shareholders
|
income
|
reserve
|
earnings
|
Total
|
income
|
||||||||||||||||||||||||||||
Balance
at January 1, 2007
|
20,915,000 | $ | 21 | $ | (20 | ) | $ | - | $ | 20 | $ | 351 | $ | 1,241 | $ | 1,613 | ||||||||||||||||||||
Foreign
currency translation
|
||||||||||||||||||||||||||||||||||||
adjustments
|
- | - | - | 352 | - | - | 352 | $ | 352 | |||||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | - | 6,967 | 6,967 | 6,967 | |||||||||||||||||||||||||||
Comprehensive
income
|
- | - | - | - | - | - | - | - | $ | 7,319 | ||||||||||||||||||||||||||
Appropriations
|
- | - | - | - | - | 1,084 | (1,084 | ) | - | |||||||||||||||||||||||||||
Deemed
dividends arising from
|
||||||||||||||||||||||||||||||||||||
purchase
of patent from the
|
||||||||||||||||||||||||||||||||||||
controlling
shareholder
|
- | - | - | - | - | - | (1,315 | ) | (1,315 | ) | ||||||||||||||||||||||||||
Balance
at December 31, 2007
|
20,915,000 | $ | 21 | $ | (20 | ) | $ | - | $ | 372 | $ | 1,435 | $ | 5,809 | $ | 7,617 | ||||||||||||||||||||
Foreign
currency translation
|
||||||||||||||||||||||||||||||||||||
adjustments
|
- | - | - | - | 1,012 | - | - | 1,012 | $ | 1,012 | ||||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | - | 26,367 | 26,367 | 26,367 | |||||||||||||||||||||||||||
Comprehensive
income
|
- | - | - | - | - | - | - | - | $ | 27,379 | ||||||||||||||||||||||||||
Appropriations
|
- | - | - | - | - | 2,879 | (2,879 | ) | - | |||||||||||||||||||||||||||
Balance
at December 31, 2008
|
20,915,000 | $ | 21 | $ | (20 | ) | $ | - | $ | 1,384 | $ | 4,314 | $ | 29,297 | $ | 34,996 | ||||||||||||||||||||
Foreign
currency translation
|
||||||||||||||||||||||||||||||||||||
adjustments
|
- | - | - | - | (38 | ) | - | - | (38 | ) | $ | (38 | ) | |||||||||||||||||||||||
Net
income
|
- | - | - | - | - | - | 41,711 | 41,711 | 41,711 | |||||||||||||||||||||||||||
Comprehensive
income
|
- | - | - | - | - | - | - | - | $ | 41,673 | ||||||||||||||||||||||||||
Appropriations
|
- | - | - | - | - | 4,520 | (4,520 | ) | - | |||||||||||||||||||||||||||
Recapitalization
in connection with
|
||||||||||||||||||||||||||||||||||||
Share
Exchange (Note 1(b))
|
3,002,413 | 3 | (420 | ) | - | - | - | - | (417 | ) | ||||||||||||||||||||||||||
Redemption
of warrants
|
- | - | (950 | ) | - | - | - | - | (950 | ) | ||||||||||||||||||||||||||
Distribution
to shareholders
|
||||||||||||||||||||||||||||||||||||
by
way of issuance of promissory
|
||||||||||||||||||||||||||||||||||||
notes
in connection with the
|
||||||||||||||||||||||||||||||||||||
Share
Exchange (Note 1(b))
|
- | - | - | - | - | - | (10,000 | ) | (10,000 | ) | ||||||||||||||||||||||||||
Exercises
of options
|
332,625 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Exercises
of warrants
|
609,330 | - | 3,350 | (3,350 | ) | - | - | - | ||||||||||||||||||||||||||||
Dividends
paid (Note 10)
|
- | - | - | - | - | - | (17,570 | ) | (17,570 | ) | ||||||||||||||||||||||||||
Balance
at December 31, 2009
|
24,859,368 | $ | 24 | $ | 1,960 | $ | (3,350 | ) | $ | 1,346 | $ | 8,834 | $ | 38,918 | $ | 47,732 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
CHINA
MEDIAEXPRESS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S.
dollars ("$'000"), except number of shares and per share
amounts)
For the year ended December
31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 6,967 | $ | 26,367 | $ | 41,711 | ||||||
Adjustments
to reconcile net income to net cash provided by
|
||||||||||||
operating
activities:
|
||||||||||||
Depreciation
of property and equipment
|
1,621 | 2,875 | 3,226 | |||||||||
Deferred
tax
|
(766 | ) | (812 | ) | (367 | ) | ||||||
Professional
fees incurred in relation to the Share Exchange
|
- | - | 418 | |||||||||
Loss
on disposal of property and equipment
|
32 | - | - | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
(2,530 | ) | (3,349 | ) | (6,522 | ) | ||||||
Prepaid
expenses and other current assets
|
(10 | ) | (46 | ) | 40 | |||||||
Accounts
payable
|
682 | 796 | 202 | |||||||||
Amounts
due to related parties
|
2,451 | (2,397 | ) | 741 | ||||||||
Income
tax payable
|
1,513 | 1,218 | 2,702 | |||||||||
Accrued
expenses and other current liabilities
|
(918 | ) | (505 | ) | 2,615 | |||||||
Accrued
concession fees
|
3,063 | 2,942 | 1,785 | |||||||||
Accrued
severance payment
|
- | 307 | (307 | ) | ||||||||
Net
cash provided by operating activities
|
$ | 12,105 | $ | 27,396 | $ | 46,244 | ||||||
Cash
flows used in investing activity:
|
||||||||||||
Acquisitions
of property and equipment, net of related payables
|
$ | (6,594 | ) | $ | (4,216 | ) | $ | (1,884 | ) | |||
Cash
flows from financing activities:
|
||||||||||||
Dividend
paid to a shareholder
|
$ | - | $ | - | $ | (17,570 | ) | |||||
Redemption
of warrants
|
- | - | (470 | ) | ||||||||
Net
proceed from Share Exchange
|
- | - | 878 | |||||||||
Deemed
dividends paid
|
(1,315 | ) | - | - | ||||||||
Net
cash used in financing activities
|
$ | (1,315 | ) | $ | - | $ | (17,162 | ) | ||||
Effect
of foreign currency translation adjustments on cash
|
$ | 683 | $ | 453 | $ | (44 | ) | |||||
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 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Income
taxes paid
|
$ | 3,381 | $ | 8,526 | $ | 12,710 | ||||||
Interest
paid
|
$ | - | $ | - | $ | - | ||||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
Acquisitions
of property and equipment included in accrued
|
||||||||||||
liabilities
|
$ | (969 | ) | $ | (669 | ) | $ | (2,071 | ) | |||
Issuance
of promissory notes in connection with the Share
|
||||||||||||
Exchange
(Note 1(b))
|
$ | - | $ | - | $ | 10,000 | ||||||
Redemption
of warrants paid by a director on behalf of
|
||||||||||||
the
Company
|
$ | - | $ | - | $ | 480 | ||||||
Professional
fees related to the Share Exchange paid by a director
|
||||||||||||
on
behalf of the Company
|
$ | - | $ | - | $ | 1,296 | ||||||
Deferred
expenses not yet settled
|
$ | - | $ | - | $ | 232 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-8
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
1.
|
PRINCIPAL
ACTIVITIES, ORGANIZATION AND BASIS OF
PRESENTATION
|
|
(a)
|
Principal
activities
|
China
MediaExpress Holdings Inc., (the "Company", formerly TM Entertainment and Media,
Inc.) was incorporated in Delawave, United States ("U.S.") on May 1, 2007 as a
shell company for the purpose of effecting a merger, capital stock exchange,
asset acquisition or other similar business combinations with an operating
business in the entertainment, media, digital and communication
industry. Through a share exchange transaction (Note 1(b)), the
Company acquired Hong Kong Mandefu Holding Limited ("HKMDF"), its subsidiary and
variable interest entity ("VIE"). The Company and its subsidiaries
and VIE (collectively as the "Group") are principally engaged in the operation
of mobile television advertising networks on passenger buses travelling on
highways in the People's Republic of China (the "PRC"). The Company does not
conduct any substantive operations of its own, but conducts it primary business
operations through Fujian Fenzhong Media Co., Ltd. ("Fujian Fenzhong"), a VIE of
a wholly owned subsidiary, Fujian Across Express Information Technology Co, Ltd.
("Across Express").
Prior to
the consummation of the share exchange transaction as described in Note 1(b)
below, HKMDF, a company incorporated in Hong Kong, acted as an investment
holding company through which it held the entire interest of the subsidiary and
VIE that are operating the whole mobile television advertising network on
passenger buses.
|
(b)
|
Reorganization
and reverse merger
|
HKMDF and
the Company entered into a Share Exchange Agreement on May 1, 2009, as amended
on September 30, 2009 (the "Share Exchange") under which the Company acquired
all of the issued and outstanding shares of HKMDF in exchange for:
|
i)
|
The
issuance of 20,915,000 newly issued common shares of the Company to the
shareholders of HKMDF (the
"Sellers");
|
|
ii)
|
The
payment of $10,000 to the Sellers in three years. These promissory notes
are non-interest bearing;
|
|
iii)
|
The
issuance of up to 15,000,000 common shares of the Company ("Earn-out
Shares") to the Sellers if certain performance targets as calculated based
on the terms as stipulated in the Share Exchange Agreement are met in
fiscal 2009, 2010 and 2011; and
|
|
iv)
|
The
payment of up to $20,900 of cash proceeds from the exercise of the
Company's publicly held warrants to the Sellers to the extent a
sufficient number of these warrants are
exercised.
|
The Share
Exchange was approved at the Company's special meeting of Shareholders on
October 15, 2009. The Share Exchange is being accounted for as a reverse merger
and recapitalization of the Company, whereby HKMDF is the continuing entity for
financial reporting purposes, and is deemed to be the accounting acquirer of the
Company. The Share Exchange is being accounted for as a reverse
merger because (i) after the Share Exchange, the Sellers of HKMDF hold the
substantial majority of the outstanding common shares of the Company, and have
the ability to initially appoint the majority of the members of the board of
directors of the Company, and (ii) the Company had no prior operations and was
formed for the purpose of effecting a business combination, such as the business
combination with HKMDF. Accordingly, the accompanying consolidated financial
statements for periods prior to the consummation of the Share Exchange are those
of HKMDF and its subsidiary and VIE, except the equity
section. Capital 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 share recapitalization. The
promissory notes of $10,000 as part of the Share Exchange was accounted for as a
distribution to shareholders and the payable was fully repaid in February
2010.
Prior to
the Share Exchange, the Company was a shell company with minimal assets and
liabilities.
F-9
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
1.
|
PRINCIPAL ACTIVITIES,
ORGANIZATION AND BASIS OF PRESENTATION -
continued
|
|
(c)
|
Contractual
arrangements between Across Express and Fujian
Fenzhong
|
PRC
regulations currently limit foreign ownership of companies that are engaged in
the media content and advertising business. To comply with these
regulations, the Group conducts its activities through its consolidated VIE
subsidiary, Fujian Fenzhong, a company established in Fujian, the PRC on May 31,
2002. On November 2, 2003 and December 1, 2003, Across Express,
Fujian Fenzhong and the shareholders of Fujian Fenzhong entered into framework
agreements under which the shareholders of Fujian Fenzhong granted Across
Express all their voting rights as shareholders of Fujian Fennzhong, and Fujian
Fenzhong agreed to distribute all its economic benefits to Across
Express. On April 17, 2009, HKMDF, through its wholly owned
subsidiary, Across Express, loaned RMB20 million (equivalent to $2,928) to two
directors of the Group, for the sole purpose of funding Fujian
Fenzhong. Each of the directors acquired 50% equity interest of
Fujian Fenzhong with the proceeds of the loan. On April 17, 2009,
Across Express entered into an Exclusive Business Cooperation Agreement
("Service Agreement") with Fujian Fenzhong pursuant to which Across Express
provides technology support, consulting services and other commercial services
related to the business operations of Fujian Fenzhong in exchange for service
fees from Fujian Fenzhong. As a collateral security for the prompt
and complete performance of the obligations of Fujian Fenzhong under the Service
Agreement and the loan made to the shareholders of Fujian Fenzhong, the
respective shareholders of Fujian Fenzhong have entered into an equity pledge
agreements (the "Equity Pledge Agreements") with Across Express on April 17,
2009. Pursuant to the Equity Pledge Agreements, the shareholders of
Fujian Fenzhong agreed to pledge all their equity interests in Fujian Fenzhong
to Across Express. In addition, on April 17, 2009, the respective
shareholders of Fujian Fenzhong signed an exclusive option agreements (the
"Exclusive Option agreements") with Across Express, under which Across 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 the
shareholders of Fujian Fenzhong, to the extent permitted by PRC law and foreign
investment policies. The purchase consideration for the entire equity
interest shall equal the actual capital contributions paid in the registered
capital of Fujian Fenzhong by the shareholders.
Based on
these contractual arrangements, the Company believes that Fujian Fenzhong should
be considered as a VIE under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 810, Consolidation, because the
equity investors in Fujian Fenzhong do not have the characteristics of a
controlling financial interest and the Company through Across Express is the
primary beneficiary of Fujian Fenzhong. Accordingly, the Company
believes that Fujian Fenzhong should be consolidated under ASC 810.
The
contractual agreements described above provided for effective control of Fujian
Fenzhong to be transferred to the HKMDF on April 17, 2009. The
shareholders of Fujian Fenzhong and the HKMDF were the same with same percentage
equity interest at the time of transfer. There was no change in
control or ownership interests as a result of this transaction. Since
the transaction was accounted for as a reorganization under common control, the
consolidated financial statements present the operation of Fujian Fenzhong since
inception on an as-if-pooled basis. Prior to the transaction, the
HKMDF and Across Express were shell companies with minimal assets and
liabilities.
F-10
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
1.
|
PRINCIPAL ACTIVITIES,
ORGANIZATION AND BASIS OF PRESENTATION -
continued
|
The
Group's consolidated assets do not include any collateral for Fujian Fenzhong's
obligations. The carrying amount of the total assets of Fujian
Fenzhong as of December 31, 2008 and 2009 were $45,293 and $83,087,
respectively, and the carrying amount of the total liabilities of Fujian
Fenzhong as of December 31, 2008 and 2009 were $48,952 and $87,867,
respectively. There was no pledge or collateral of its
assets. Furthermore, creditors of Fujian Fenzhong have no recourse to
the general credit of Across Express, which is the primary beneficiary of Fujian
Fenzhong.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Basis
of presentation
|
The
consolidated financial statements of the Company have been prepared in
accordance with the accounting principles generally accepted in the U.S. ("U.S.
GAAP").
|
(b)
|
Principles
of consolidation
|
The consolidated financial statements
include the financial statements of the Company, its subsidiaries and its VIE
for which the Company is the primary beneficiary. All transactions
and balances among the Company, its subsidiaries and VIE have been eliminated
upon consolidation.
|
(c)
|
Use
of estimates
|
The
preparation of financial statements in conformity with U.S. GAAP requires the
Group's management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates,
including those related to useful lives and residual values of long-lived
assets, the recoverability of the carrying values of long-lived assets,
increment rate of concession fees and valuation allowance for deferred tax
assets. Changes in facts and circumstances may result in revised
estimates.
|
(d)
|
Foreign
currency transactions
|
The
functional and reporting currency of the Company is in the United States dollar
("US$", "$"). The functional currency of HKDMF and other subsidiary
and VIE are Renmibi ("RMB"). Monetary assets and liabilities
denominated in currencies other than functional currencies are translated into
functional currencies at the rates of exchange ruling at the balance sheet
date. Transactions in currencies other than functional currencies
during the year are converted into functional currencies at the applicable rates
of exchange prevailing at the date of the transactions. Transaction gains and
losses are recognized in the consolidated statements of operations.
The
financial records of the Company's subsidiaries and VIE are maintained in
RMB. All assets and liabilities are translated at the rates of
exchange quoted by the People's Bank of China at the date of statements of
financial position, except for equity accounts which are translated at the
historical exchange rates, and all income and expense items are translated at
the average rates of exchange over the year. All exchange differences
arising from the translation of subsidiaries' and VIE's financial statements are
reported as cumulative translation adjustments and are recorded as a component
of accumulated other comprehensive income in the consolidated statements of
shareholders' equity and comprehensive income.
F-11
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -
continued
|
|
(e)
|
Cash
|
Cash
consists of cash at bank and on hand.
|
(f)
|
Allowance
for doubtful accounts
|
The Group
determines the allowance for doubtful accounts when facts and circumstances
indicate that the full amount of the receivable is unlikely to be
collected. If the financial condition of the Group's customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Based on the Group's
evaluation, as of December 31, 2008 and 2009, no allowance for doubtful accounts
is recorded.
|
(g)
|
Property
and equipment, net
|
Property
and equipment are carried at cost less accumulated depreciation.
Depreciation
is calculated using the straight-line method over the following estimated useful
lives of respective assets, after taking into account the residual
values:
Buildings
|
20
years
|
Electronic
and office equipment
|
5
years
|
Motor
vehicles
|
10
years
|
Display
network equipment
|
5
years
|
|
(h)
|
Impairment
of long-lived tangible assets
|
Long-lived
assets, are evaluated for impairment when events or changes in circumstances
indicate that the carrying amounts of these assets may not be
recoverable. The Group reviews its long-lived tangible assets for
potential impairment based on a review of projected undiscounted future cash
flows associated with these assets. When the review of projected
undiscounted cash flows indicates the existence of a potential impairment, the
measurement of impairment losses for assets that the Group expects to hold and
use is based on the estimated fair value of the assets.
(i)
|
Financial
instruments
|
The
carrying amounts of cash, accounts receivable, accounts payable, payables for
acquisition of equipment, and amounts due to related parties approximate to
their fair values due to the short-term nature of these
instruments.
F-12
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -
continued
|
|
(j)
|
Revenue
recognition
|
The
Group's revenues are derived from selling advertising time slots on the Group's
mobile television network placed in contracted buses in the PRC.
The Group
typically signs standard contracts with its customers, who require the Group to
broadcast the advertisements on the Group's network in specified areas (or
specified provinces) and on specified passenger buses for a period of time
generally ranging from 3 to 12 months. The service price, agreed at
the contract date, is final and not subject to any adjustment. The Group
recognizes advertising revenues ratably over the contractual period for which
the advertisements are broadcasted, and collection of such fee is probable.
Generally, the Group's customers pay the monthly service amount ratably
over the contracts one month after the services are provided. The Group
assesses customer's creditworthiness before accepting service contracts;
historically the Group has not experienced any credit losses related to
sales.
The Group
entered 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.
The
Company's PRC subsidiary and VIE are subject to business tax at a rate of 5% and
other taxes ranging from 0.09% to 3% on total revenues after deduction of
certain costs of revenue as permitted by the PRC tax laws. The Group records
revenue net of these taxes. Such business tax and other taxes for the years
ended December 31, 2007, 2008 and 2009 were approximately $2,443, $5,958 and
$8,887, respectively.
|
(k)
|
Cost
of revenue
|
Cost of
revenue consists primarily of concession fees charged by the operators of
passenger buses, depreciation of media display equipment and other operating
costs.
The Group
enters into long-term exclusive agreements with the operators of various
inter-city express passenger buses in the PRC generally ranging from 5 to 8
years. Such equipment and systems on the inter-city express passenger
buses serve as the Group's advertising platform. The Group pays a
pre-determined network concession fee each year, which is based upon the number
of buses operated, subject to an increase by 10% to 30% per year, to the
passenger bus operators for the exclusive rights to install the Group's
advertising network equipment on their buses.
The Group
accounts for the concession fees on a straight-line basis over the terms of the
agreements with the passenger bus operators. As the concession fees
increase by 10% to 30% per year and the agreements are long term (5 to
8 years), the Group calculates the minimum concession fees due over the
term of the agreement and amortizes that amount using the straight-line basis
over the term of the agreement. Since the incremental of concession
fee cannot be estimated based on current circumstances, the minimum 10% is used
in its calculation for concession fee in each year. If the actual
increase in concession fee is higher than that 10% increased, excess over these
amounts should be recognized immediately. Differences between actual
concession fee payments and concession expenses charged to the consolidated
statements of operations are recorded as accrued concession fees on the
accompanying consolidated balance sheets. The portion that is expected to
reverse within one year is classified as current liability, while the portion
that will be reversed over one year is classified as non-current
liability.
F-13
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -
continued
|
|
(l)
|
Advertising
Expenses
|
Advertising
costs are expensed when incurred and are included in selling expenses in the
consolidated statements of operations. For the years ended
December 31, 2007, 2008 and 2009, advertising expenses were approximately
$1, $5 and $518, respectively.
|
(m)
|
Operating
leases
|
Leases
where substantially all the rewards and risks of ownership of assets remain with
the leasing company are accounted for as operating leases. Payments
made under operating leases are charged to the consolidated statement of
operations on a straight-line basis over the lease periods.
(n)
|
Pension
and other retirement benefits
|
The
full-time employees of the Company's subsidiary and VIE that are established in
the PRC are entitled to staff welfare benefits, including medical care, welfare
subsidies, unemployment insurance and pension benefits. These
subsidiary and VIE are required to accrue these benefits based on percentages
stated in the relevant regulations and to make contributions to the
state-sponsored pension and medical plans out of medical and pension
benefits. The total amounts charged to the consolidated statements of
operations for such employee benefits amounted to approximately $363, $384 and
$440 for the years ended December 31, 2007, 2008 and 2009,
respectively. The PRC government is responsible for the medical
benefits and ultimate pension liability to these employees.
The Group
has no other significant obligation to make payments in respect of retirement
benefits of the employees.
|
(o)
|
Income
taxes
|
Deferred
income tax are recognized for the differences between the carrying amounts of
assets and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to be applied to assessable income in
the years in which those temporary differences are expected to be reversed or
realized. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in consolidated statements of operations in
the period that includes the enactment date. The Group records a
valuation allowance against the amount of deferred tax assets that it determines
is not more likely than not of being realized. Current income tax is provided
for in accordance with the laws and regulations applicable to the
Group.
The
Company recognizes the effect of income tax positions only if those positions
are more likely than not of being sustained. Recognized income tax
positions are measured at the largest amount that is greater than 50% likely of
being realized. Changes in recognition or measurement are reflected
in the period in which the change in judgment occurs. The Company
records interest related to unrecognized tax benefits and penalties, if any, in
income tax expense.
F-14
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -
continued
|
|
(p)
|
Earnings
per share
|
Basic
earnings per share are computed by dividing net income of the Group by the
weighted average number of ordinary shares outstanding during the
year.
Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common shares were exercised or converted
into common shares.
For the
purpose of calculating earnings per share for the periods prior to the Share
Exchange presented, the number of ordinary shares outstanding is determined on
the basis of HKMDF's historical number of ordinary shares outstanding multiplied
by the share exchange ratio established in the Share Exchange.
|
(q)
|
Segment
reporting
|
The Group
uses the management approach in determining reportable operating
segments. The management approach considers the internal organization
and reporting used by the Group's chief operating decision maker for making
operating decisions, allocating resources and assessing performance as the
source for determining the Group's reportable segments.
|
(r)
|
Concentration
of risks
|
Concentration of credit
risk
Financial
instruments that potentially subject the Group to significant concentration of
credit risk primarily consist of cash and accounts receivable. As of
December 31, 2008 and 2009, substantially all of the Group's cash were managed
by a few financial institutions with high credit-ratings and
quality. Accounts receivable are typically unsecured and are derived
from revenues earned from customers in the PRC. The risk with respect
to accounts receivable is mitigated by credit evaluations performed on its
customers and its ongoing monitoring process of outstanding balances. The Group
has not experienced a loss in such accounts.
Concentration of vendors and
customers
The Group
currently conducts a substantial portion of advertising services with a limited
number of vendors. For the years ended December 31, 2007, 2008 and
2009, vendors which individually accounted for greater than 10% of total
concession fee included in cost of revenue represent 7.6%, 14.7% and 14.8%,
respectively, of total concession fee included in cost of revenue. As
of December 31, 2008 and 2009, vendors accounted for 10% or more of accounts
payable represent 12.5% and 13.4%, respectively, of accounts
payable.
For the
year ended December 31, 2007, customers which individually accounted for greater
than 10% of total revenue represent 22.4% of total revenue. For the years ended
December 31, 2008 and 2009, there were no customers which individually represent
greater than 10% of total revenue. As of December 31, 2008, there was no
customer accounted for 10% or more of accounts receivable. As of December 31,
2009, customer accounted for 10% or more of accounts receivable represents 11.3%
of accounts receivable.
F-15
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -
continued
|
|
(r)
|
Concentration
of risks - continued
|
Current vulnerability due to
certain other concentrations
The
Group's operations may be adversely affected by significant political, economic
and social uncertainties in the PRC. Although the PRC government has
been pursuing economic reform policies for more than 20 years, no assurance can
be given that the PRC government will continue to pursue such policies or that
such policies may not be significantly altered, especially in the event of a
change in leadership, social or political disruption or unforeseen circumstances
affecting the PRC's political, economic and social conditions. There
is also no guarantee that the PRC government's pursuit of economic reforms will
be consistent or effective.
Substantially
all of the Group's businesses are transacted in RMB, which is not freely
convertible into foreign currencies. On January 1, 1994, the PRC government
abolished the dual rate system and introduced a single rate of exchange as
quoted daily by the People's Bank of China. However, the unification of the
exchange rates does not imply the convertibility of RMB into US$ or other
foreign currencies. All foreign exchange transactions continue to
take place either through the People's Bank of China or other banks authorized
to buy and sell foreign currencies at the exchange rates quoted by the People's
Bank of China. Approval of foreign currency payments by the People's
Bank of China or other institutions requires submitting a payment application
form together with supplier invoices, shipping documents and signed
contracts.
|
(s)
|
Comprehensive
Income (loss)
|
Comprehensive
income (loss) includes net income and foreign currency translation
adjustments. Comprehensive income is defined as the change in equity
during a period from transactions and other events and circumstances except for
transactions resulting from investments by shareholders and distributions to
shareholders and is reported in the consolidated statements of shareholders'
equity and comprehensive income.
3.
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In
December 2009, the FASB issued Accounting Standards 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 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.
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.
F-16
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
4.
|
INCOME
TAXES
|
United
States of America
The
Company was incorporated in the U.S. and is subject to U.S. federal income
taxes. The Company did not derive any significant amount of income
subject to such taxes after completion of the Share Exchange and accordingly, no
relevant tax provision is made in the consolidated statements of
operations.
Hong
Kong
The
provision for current income taxes of the subsidiary operating in Hong Kong has
been calculated by applying the current rate of taxation of 16.5% for the years
ended December 31, 2009 and 2008 and 17.5% for the year ended December 31, 2007
to the estimated taxable income earned in or derived from Hong Kong during the
period, if applicable. This subsidiary did not derive any significant
amount of income subject to tax during the years ended December 31, 2007, 2008
and 2009.
People's
Republic of China
On March
16, 2007, the National People's Congress of the PRC enacted the PRC Enterprise
Income Tax Law (the "New Tax Law"), under which foreign invested enterprise and
domestic company would be subject to enterprise income tax at a uniform rate of
25%. The new tax rate has become effective on January 1, 2008. The subsidiary
and VIE of the Company established in the PRC are subject to tax rate of 25% for
the years ended December 31, 2008 and 2009.
Prior to
the implementation of the New Tax Law, the Company's subsidiary and VIE
established in the PRC were subject to a tax rate of 33%.
In
July 2006, the FASB issued certain provisions in FASB ASC 740, Income Tax, ("ASC 740")
(formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109), subsequent changed to
FASB ASC 740 Income
Taxes which clarifies the accounting and disclosure for uncertainty in
tax positions, as defined in that statement. These provisions
prescribe a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on de-recognition
of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, accounting for income taxes in interim periods
and income tax disclosures.
The Group
has adopted these provisions on January 1, 2007. Based on its
analysis and documentation, the Group has made its assessment of the level of
tax authority for each tax position (including the potential application of
interest and penalties) based on the technical merits, and has measured the
unrecognized tax benefits associated with the tax positions. Based on
this evaluation, the Group has concluded that there are no significant uncertain
tax positions requiring recognition in consolidated financial
statements. The Group does not anticipate any significant increases
or decreases to its liability for unrecognized tax benefits within the next 12
months. As of December 31, 2009, there are no interest and penalties
related to uncertain tax positions.
F-17
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
4.
|
INCOME
TAXES - continued
|
Aggregate
undistributed earnings of the Company's subsidiary and VIE in the PRC that are
available for distribution to the Company of approximately $51.1 million at
December 31, 2009 are considered to be indefinitely reinvested under FASB ASC
740, and accordingly, no provision has been made for the PRC dividend
withholding taxes that would be payable upon the distribution of such amount to
the Company. In an announcement formally made on February 22, 2008,
the PRC authorities clarified that the distributions made out of undistributed
earnings that arose prior to January 1, 2008 would not give rise to withholding
tax.
Under
U.S. GAAP, a deferred tax liability should be recorded for taxable temporary
differences attributable to the excess of financial reporting amounts over tax
basis amounts, including those differences attributable to a more than 50%
interest in a domestic subsidiary. However, recognition is not
required in situations where the tax law provides a means by which the reported
amount of that investment can be recovered tax-free and the enterprise expects
that it will ultimately use that means. The Company has not recorded
any such deferred tax liability attributable to the undistributed earnings of
its financial interest in VIE because it believes such excess earnings can be
distributed in a manner that would not be subject to tax.
According
to the PRC Tax Administration and Collection Law, the statute of limitations is
generally three years if the underpayment of taxes is due to computational
errors made by the taxpayer. The statute of limitations will be
extended to five years under special circumstances, which are not clearly
defined, but an underpayment of tax liability exceeding RMB100,000
(approximately $14) is specifically listed as a special
circumstance. In the case of a transfer pricing related adjustment,
the statute of limitations is 10 years. There is no statute of
limitations in the case of tax evasion.
Composition
of income tax expense
The
current and deferred components of the income tax expense appearing in the
consolidated statements of operations are as follows:
Year ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Income
tax expense
|
$ | 4,807 | $ | 9,599 | $ | 15,412 | ||||||
Deferred
tax credits
|
(734 | ) | (745 | ) | (367 | ) | ||||||
$ | 4,073 | $ | 8,854 | $ | 15,045 |
Included
in the deferred tax credit was an amount of deferred tax expense of $152, Nil
and Nil for the years ended December 31, 2007, 2008 and 2009, respectively,
arising from the change in tax rate.
F-18
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
4.
|
INCOME
TAXES - continued
|
Reconciliation
of the differences between statutory tax rate and effective tax
rate
Reconciliation
between income tax expense and that amount computed by applying the PRC
statutory income tax rate of 33% for the year ended December 31, 2007 and 25%
for each of the years ended December 31, 2008 and 2009 to net income before
income tax expense is as follows:
For the year ended December
31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Net
income before income tax expense
|
$ | 11,040 | $ | 35,221 | $ | 56,756 | ||||||
Computed
income tax expense
|
$ | 3,643 | $ | 8,805 | $ | 14,189 | ||||||
Effect
of non-deductible expenses
|
278 | 49 | 288 | |||||||||
Effect
of non-taxable income
|
- | - | (71 | ) | ||||||||
Changes
in valuation allowances
|
- | - | 335 | |||||||||
Effect
of different tax rate applicable to the
|
||||||||||||
group
companies operating in other jurisdictions
|
- | - | (44 | ) | ||||||||
Effect
of change in tax rate
|
152 | - | - | |||||||||
Withholding
income tax on dividend
|
- | - | 348 | |||||||||
Income
tax expense
|
$ | 4,073 | $ | 8,854 | $ | 15,045 |
Composition
of deferred tax assets
The
principal components of the Group's deferred tax assets are as
follows:
December 31,
|
||||||||
2008
|
2009
|
|||||||
Non-current
deferred tax assets:
|
||||||||
Accrued
concession fee
|
$ | 1,501 | $ | 1,943 | ||||
Pre-operating
expenses
|
- | 826 | ||||||
Accrued
expenses
|
- | 102 | ||||||
Accrued
severance payment
|
77 | - | ||||||
Expenses
paid for the Share Exchange
|
- | 1,233 | ||||||
Net
operating losses
|
- | 697 | ||||||
$ | 1,578 | $ | 4,801 | |||||
Less:
valuation allowance
|
- | (2,858 | ) | |||||
Total
|
$ | 1,578 | $ | 1,943 |
F-19
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
4.
|
INCOME
TAXES - continued
|
Composition of deferred tax
assets - continued
Movement of valuation
allowance
2007
|
2008
|
2009
|
||||||||||
At
the beginning of the year
|
$ | - | $ | - | $ | - | ||||||
Current
year addition
|
- | - | 335 | |||||||||
Arising
from acquisition of the Company by HKMDF
|
- | - | 2,523 | |||||||||
At
the end of the year
|
$ | - | $ | - | $ | 2,858 |
A
valuation allowance has been provided on the deferred tax assets because the
Group believes that it is not more likely than not that the assets will be
utilized. As of December 31, 2009, a valuation allowance was provided
for the deferred tax assets relating to the future benefit of net operating
losses carryforward as the management determined that the utilization of those
net operating losses carryforward is not more likely than not. If
events occur in the future that allow the Group to realize more of its deferred
tax assets than the presently recorded amount, an adjustment to the valuation
allowance will be made when those events occur. As of December 31,
2007 and 2008, the Group had no net operating losses carryforward. As of
December 31, 2009, the Group had net operating losses carryforward of
approximately $605, $40, $142 and $1,423, that will expire in the year ending
December 31, 2014, 2027, 2028 and 2029, respectively.
Under the
New Tax Law, enterprises are classified as either resident or
non-resident. A resident enterprise refers to one that is
incorporated under the PRC law or under the law of a jurisdiction outside the
PRC with its "de facto management organization" located within the
PRC. Non-residential enterprise refers to one that is incorporated
under the law of a jurisdiction outside the PRC with its "de facto management
organization" located also outside the PRC, but which has either set up
institutions or establishments in the PRC or has income originating from the PRC
without setting up any institution or establishments in the
PRC. Under the New Enterprise Income Tax ("EIT") Implementation
Regulation, "de facto management organization" is defined as the organization of
an enterprise through which substantial and comprehensive management and control
over the business, operations, personnel, accounting and properties of the
enterprise are exercised. Under the New Tax Law and the New EIT
Implementation Regulation, a resident enterprise's global net income will be
subject to a 25% EIT rate. Uncertainties exist with respect to how
the new EIT Law applies to the Group's overall operations, and more
specifically, with regard to tax residency status. Additional
guidance is expected to be released by the Chinese government in the near future
that may clarify how to apply this standard to taxpayers. Despite the
present uncertainties resulting from the limited PRC tax guidance on the issue,
the Company does not believe that its legal entities organized outside the PRC
should be treated as residents for New Tax Law purposes. Even if one
or more of its legal entities organized outside the PRC were characterized as
PRC tax residents, none of them had profit; therefore, no significant impact
would be expected on the net current tax payable balance and the net deferred
tax balance.
The
Company and its subsidiaries file separate income tax returns.
F-20
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
5.
|
EARNINGS
PER SHARE
|
Earnings
per share for the periods prior to the Share Exchange have been restated to
effect the Share Exchange. For the purpose of calculating earnings
per share for the periods presented, the number of ordinary shares outstanding
is determined on the basis of HKMDF's historical number of ordinary shares
outstanding multiplied by the share exchange ratio established in the share
exchange agreement.
The
calculations of basic earnings per share are computed as follows:
For the year ended December
31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Numerator:
|
||||||||||||
Net
income used for basic and diluted earning
|
||||||||||||
per
share
|
$ | 6,967 | $ | 26,367 | $ | 41,711 | ||||||
Denominator:
|
||||||||||||
Denominator
for basic earnings per share
|
||||||||||||
-
Weighted-average ordinary shares outstanding
|
||||||||||||
during
the year
|
20,915,000 | 20,915,000 | 21,587,953 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
-
Pali Options
|
- | - | 7,082 | |||||||||
-
Warrants
|
- | - | 1,194,884 | |||||||||
-
Earn-out Shares for fiscal year 2009
|
- | - | 208,219 | |||||||||
Denominator
used for diluted earnings
|
||||||||||||
per
share
|
20,915,000 | 20,915,000 | 22,998,138 | |||||||||
Basic
earnings per share
|
$ | 0.33 | $ | 1.26 | $ | 1.93 | ||||||
Diluted
earnings per share
|
$ | 0.33 | $ | 1.26 | $ | 1.81 |
The
Company has no dilutive potential common shares that are outstanding for years
ended December 31, 2007 and 2008.
The
impact of Earn-out Shares for fiscal year 2009 as described in Note 1(b) was
included in the calculation of the diluted earnings per share as the Company
achieved the performance target for fiscal year 2009 as stipulated in the Share
Exchange Agreement.
6.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment consist of the following:
December
31,
|
||||||||
2008
|
2009
|
|||||||
Buildings
|
$ | 229 | $ | 228 | ||||
Electronic
and office equipment
|
94 | 105 | ||||||
Motor
vehicles
|
190 | 190 | ||||||
Display
network equipment
|
16,402 | 19,259 | ||||||
Sub-total
|
$ | 16,915 | $ | 19,782 | ||||
Less:
accumulated depreciation
|
(5,498 | ) | (8,717 | ) | ||||
Total
|
$ | 11,417 | $ | 11,065 |
Depreciation
expense was $1,621, $2,875 and $3,226 for the years ended December 31, 2007,
2008 and 2009, respectively.
F-21
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
7.
|
ACCRUED
EXPENSES AND OTHER CURRENT
LIABILITIES
|
December 31,
|
||||||||
2008
|
2009
|
|||||||
Business
tax payables
|
$ | 848 | $ | 1,694 | ||||
Salary
and welfare payables
|
101 | 847 | ||||||
Other
tax payables
|
281 | 605 | ||||||
Advertisements
production cost payable
|
- | 293 | ||||||
Other
payables
|
71 | 705 | ||||||
Total
|
$ | 1,301 | $ | 4,144 |
8.
|
CAPITAL
STRUCTURE
|
Common
Shares
Just
prior to the Share Exchange, the Company had 3,002,413 common shares
outstanding. As part of the Share Exchange, 20,915,000 common shares of the
Company were issued in exchange for ordinary shares of HKMDF. As a
result, upon completion of the Share Exchange, the Company had 23,917,413 common
shares outstanding.
Subsequent
to the Share Exchange, 332,625 common shares were issued a result of exercises
of Pali Options (see Note 11 below) and 609,330 common shares were issued as a
result of the exercises of Public Warrants (see Note 12 below).
The
authorized capital of HKMDF is HK$10,000 (equivalent to $1) divided into 10,000
ordinary shares of par value HK$1 each. As of January 1, 2007, HKMDF had 10,000
ordinary shares issued and outstanding. The share capital of HKMDF as
of January 1, 2007 as shown in the consolidated financial statements has been
restated retroactively to reflect the share exchange ratio as at the date of the
Share Exchange in a manner similar to a share recapitalization, resulting in a
total of 20,915,000 shares outstanding as of January 1, 2007.
As a
result of the above transactions, the Company had 24,859,368 shares outstanding
as of December 31, 2009.
Preference
Shares
The
Company is authorized to issue 1,000,000 preferred shares of par value of $0.001
each, with such designations, voting and other rights and preference as may be
determined from time to time by the board of directors of the Company. As of
December 31, 2008 and 2009, there were no preference shares
outstanding.
F-22
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
9.
|
RETAINED
EARNINGS, RESERVES AND RESTRICTED NET
ASSETS
|
The
Company's retained earnings are not restricted as to the payment of dividends
except to the extent dictated by prudent business practices. There
are no material restrictions, including foreign exchange controls, on the
ability of its non-PRC subsidiary to transfer surplus funds to the Company in
the form of cash dividends, loans, advances or purchase. With respect
to the Company's PRC subsidiary and VIE, there are restrictions on the payment
of dividends and the removal of dividends from the PRC. After the
implementation of the New Tax Law (refer to Note 4 for further details of the
New Tax Law), payment of dividends by PRC subsidiary and VIE to foreign
investors on profits earned subsequent to January 1, 2008 will also be
subject to withholding tax. In addition, pursuant to the relevant PRC
regulations, a certain portion of the profits made by these subsidiary and VIE
must be set aside for future capital investment and are not distributable, and
the registered capital of the Company's PRC subsidiary and VIE are also
restricted. These reserves and registered capital of the PRC
subsidiary and VIE amounted to $8,023 and $63,002 as of December 31, 2008 and
2009, respectively. However, the Company believes that such
restrictions will not have a material effect on the Group's liquidity or cash
flows.
The
Group's subsidiary and VIE established in the PRC are required on an annual
basis to make appropriations of retained earnings set at certain percentage of
profit after-tax reported in their statutory financial statements prepared in
accordance with the relevant accounting principles and financial regulations
applicable to companies established in the PRC (the "PRC statutory financial
statements"), and regulations to statutory reserve fund and statutory welfare
fund (collectively "Statutory Reserves"). The statutory reserve fund
can be used to increase the registered capital and eliminate future losses of
the Companies; it cannot be distributed to shareholders except in the event of a
solvent liquidation of the Companies. The statutory welfare fund can
only be used for the collective benefits and facilities of the
employees.
The
statutory welfare fund contribution percentage is subject to the discretion of
the subsidiary's and VIE's board of directors. Across Express, as a
wholly foreign owned enterprises established in the PRC and Fujian Fenzhong, a
domestic enterprise, are required to make appropriation of retained earnings
equal to at least 10% of the PRC General Accepted Accounting Principal after-tax
profit to the statutory reserve fund. Once the level of these funds
reaches 50% of the registered capital of the Across Express, further
appropriations are discretionary.
During
the year ended December 31, 2007, 2008 and 2009, the Group made total
appropriations to these Statutory Reserves of approximately $1,084, $2,879, and
$4,520, respectively. The balance of Statutory Reserve was $4,314 and
$8,834 as at December 31, 2008 and 2009, respectively.
Taking
into account the registered capital and Statutory Reserves, the amount of
restricted net assets of the Company's subsidiary and VIE were $8,023 and
$63,002 as of December 31, 2008 and 2009, respectively.
10.
|
DIVIDENDS
|
On
February 5, 2009, the board of directors of HKMDF approved and paid a dividend
of $17,570 (equivalent to RMB120 million) or $1,757 per share (before the effect
of Share Exchange) payable to Cheng Zheng, the sole shareholder of HKMDF at the
date of dividend declaration.
F-23
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
11.
|
OPTION
ARRANGEMENT
|
The
Company completed its initial public offering ("IPO") on October 17, 2007 (the
"IPO Date"). On that date, the Company sold to Pali Capital, Inc.
("Pali"), as representatives of the underwriters, for $100, an option to
purchase up to a total of 700,000 units at $10.00 per unit (the "Pali
Options"). The units issuable upon the exercise of this option are
identical to those sold in the IPO. That is, upon exercises, the Pali
Options can be converted into one common shares and one warrant. The
warrant, with exercise price of $5.5 per warrant, will entitle the holder to one
common share. The Pali Options are exercisable at $10.00 per unit,
converting into one common share and one warrant. The Pali Options
may be exercised on a cashless basis at the discretion of holder, converting
into common shares and warrants based on a predetermined conversion
formula. The Pali Options are exercisable commencing on the later of
the consummation of a business combination and one year from the date of the
effectiveness of the IPO and expire five years from the date of the
effectiveness of the IPO.
The Pali
Options were accounted for as underwriting expenses and were recorded in
equity.
During
the year ended December 31, 2009, 697,822 Pali Options were exercised and
converted into 332,625 common shares and 332,625 warrants of the Company based
on a predetermined conversion formula.
12.
|
WARRANTS
|
Public Warrants
On IPO
Date, the Company sold 10,255,000 units in the IPO at a price of $8.00 per unit.
Each unit consists of one share of the Company's common share and one
redeemable common stock purchase warrant ("Public Warrant(s)"). Each
Public Warrant will entitle the holder to purchase from the Company one share of
common share at an exercise price of $5.50 commencing on the later of the
completion of a business combination and one year from IPO Date and expires four
years from IPO Date. The Company may redeem the Public Warrants, at a
price of $0.01 per Public Warrant upon 30 days' notice while the
Public Warrants are exercisable, only in the event that the last sale price of
the common share is at least $11.50 per share for any 20 trading days within a
30 trading day period ending on the third day prior to the date on which notice
of redemption is given. In accordance with the Public Warrant agreement
relating to the Public Warrants sold and issued in the IPO, the Company is
required to use its best efforts to maintain the effectiveness of the
registration statement covering the Public Warrants. The Company will
not be obligated to deliver securities, and there are no contractual penalties
for failure to deliver securities, if a registration statement is not effective
at the time of exercise. Additionally, in the event that a
registration is not effective at the time of exercise, the holder of such Public
Warrant will not be entitled to exercise such Public Warrant and in no event
(whether in the case of a registration statement not being effective or
otherwise) will the Company be required to net cash settle the Public Warrant.
Consequently, the Public Warrants may expire unexercised, unredeemed and
worthless. The Public Warrants were not exercised or redeemed during the
years ended December 31, 2007 and 2008. During the year ended December 31,
2009:
|
i)
|
1,900,000
Public Warrants were redeemed by the Company at a re-negotiated redemption
price of $0.5 per warrant
|
|
ii)
|
609,330
Public Warrants were exercised and converted into common shares of the
Company
|
|
iii)
|
332,625
Public Warrants were granted as a result of the exercises of Pali
Options
|
The
proceeds of approximately $3,350 from the exercises of 609,330 Public Warrants
had not been received from the shareholders as of December 31, 2009, and is
recorded as subscription receivable from shareholders in the consolidated
statements of shareholders' equity.
F-24
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
12.
|
WARRANTS -
continued
|
Insider
Warrants
The
Company's initial officers and initial directors purchased a total of 2,100,000
warrants ("Insider Warrants") at $1.00 per warrant (for an aggregate purchase
price of $2,100,000) concurrently with the consummation of the IPO pursuant to a
private placement agreement with the Company. The Insider Warrants are
identical to the Public Warrants except that the Insider Warrants may not be
called for redemption and the Insider Warrants are exercisable on cashless
basis, at the holder's option, so long as such securities are held by such
purchaser or his affiliates.
Furthermore,
the purchasers have agreed that the Insider Warrants will not be sold or
transferred by them, except for estate planning purposes, until after the
Company has completed a business combination. The sale of the Insider
Warrants to management did not result in the recognition of any stock-based
compensation expense because they were sold above fair market
value. The holder of Insider Warrants will not have any right to any
liquidation distributions with respect to shares underlying Insider Warrants if
the Company fails to consummate a business combination, in which event Insider
Warrants will expire worthless.
During
the years ended December 31, 2007, 2008 and 2009, none of the Insider Warrants
were exercised or forfeited.
|
13.
|
COMMITMENTS
AND CONTINGENCY
|
|
(a)
|
Lease
commitments
|
The Group
has entered into certain leasing arrangements relating to office premises that
are classified as operating leases.
Future
minimum lease payments for non-cancellable operating leases as of December 31,
2009 are as follows:
Year ending December
31,
|
||||
2010
|
$ | 61 | ||
2011
|
3 | |||
$ | 64 |
Total
rental expenses were approximately $25, $116 and $207 during the years ended
December 31, 2007, 2008 and 2009, respectively, and were charged to the
consolidated statements of operations.
F-25
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
13.
|
COMMITMENTS
AND CONTINGENCY - continued
|
|
(b)
|
Concession
fees
|
The Group
has entered into concession right agreements with passenger bus
operators. The contract terms of such concession rights range from
five years to eight years.
Future
minimum concession fee payments under non-cancelable concession right agreements
as of December 31, 2009 are as follows:
Year ending December
31,
|
||||
2010
|
$ | 28,760 | ||
2011
|
31,636 | |||
2012
|
20,183 | |||
2013
|
11,034 | |||
2014
|
6,255 | |||
$ | 97,868 |
Total
concession fee expenses were approximately $10,688, $19,955 and $24,823 during
the years ended December 31, 2007, 2008 and 2009, respectively, and were charged
to the consolidated statements of operations.
There
were no capital commitments as at December 31, 2009
|
14.
|
SEGMENT
REPORTING
|
The Group
is engaged in the selling of advertising time slots on its advertising network
of television screens placed in passenger buses traveling on the highways
throughout the PRC. The Group's chief operating decision maker has been
identified as the Chief Executive Officer, who reviews the consolidated results
when making decisions about allocating resources and assessing performance of
the Group.
Geographic
information
The Group
operates in the PRC and all of the Group's identifiable assets are located in
the PRC.
Although
the Group operates in multiple cities in PRC which include Fujian, Beijing
Shanghai, Guangzhou, Tianjin, Chengdu and other cities, the chief operating
decision maker evaluates the Group's performance as a single reportable segment
and thus the Group believes it operates in one segment as it provides services
to customers irrespective of their locations.
Major
customers
In 2008
and 2009, there were no single customers that contributed for 10% or more of the
Group's revenue.
In 2007,
the Group had contracted with the following customers that accounted for 10% or
more of the Group's revenue:
2007
|
||||
Company
A
|
$ | 2,954 | ||
Company
B
|
$ | 2,841 | ||
$ | 5,795 |
F-26
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
15.
|
RELATED
PARTY TRANSACTIONS
|
Other
than the Share Exchange as described in Note 1(b) and dividends paid as
described in Note 10, the Group has the following transactions and balances with
its related parties.
|
(i)
|
Related
parties transactions
|
For the years ended December
31,
|
||||||||||||||||||
Relationship
|
||||||||||||||||||
with
the
|
Transaction
|
|||||||||||||||||
Name of related parties
|
Company
|
nature
|
2007
|
2008
|
2009
|
|||||||||||||
(Note
1)
|
(Note
2)
|
|||||||||||||||||
Cheng
Zheng
|
|
a
|
i
|
$ | 14 | - | - | |||||||||||
Cheng
Zheng
|
|
a
|
ii
|
$ | 1,315 | - | - | |||||||||||
Cheng
Zheng and its family members
|
a
|
iii
|
$ | 3,298 | - | - |
|
Note
1:
|
a)
|
A
director of HKMDF, director and a shareholder of the Company since the
Share Exchange.
|
|
Note
2:
|
i)
|
The
Group purchased a vehicle from Cheng Zheng for total consideration of
$14.
|
|
ii)
|
The
Group purchased a patent from Cheng Zheng for total
consideration of $1,315. As such transaction was considered under common
control, the excess of the consideration paid by the Group over the net
carrying value of the assets was reflected as deemed dividends distributed
to Cheng Zheng.
|
|
iii)
|
Being
loans advance by Cheng Zheng's Family. The loans were
non-interest bearing and were fully settled in
2007.
|
(ii)
|
Related
parties balances
|
As at December 31,
|
||||||||
2008
|
2009
|
|||||||
Amounts
due to:
|
||||||||
Cheng
Zheng (Note a)
|
$ | 798 | $ | 6,515 | ||||
Thousand
Space Holdings Limited (Note b)
|
- | 6,800 | ||||||
$ | 798 | $ | 13,315 |
Note:
(a)
The amount as of December 31, 2009 comprised of a promissory note of $3,200,
which is repayable in 3 years, and other payables of $3,315 which is repayable
on demand. Both balances are unsecured and non-interest bearing. Subsequent to
December 31, 2009, the promissory note of $3,200 was fully
repaid. The amount as of December 31, 2008 was unsecured,
non-interest bearing and repayable on demand.
(b)
Thousand Space Holdings Limited was one of the shareholders of HKMDF prior to
the Share Exchange, and is a shareholder of the Company after the Share
Exchange. The amount as of December 31, 2009 represented a promissory
note of $6,800, which is unsecured, non-interest bearing and repayable in 3
years. Subsequent to December 31, 2009, the promissory note was fully
repaid.
F-27
CHINA
MEDIAEXPRESS HOLDINGS, INC.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of U.S. dollars ("$'000"), except number of shares and per share
amounts)
16.
|
SUBSEQUENT
EVENTS
|
On
January 12, 2010, the Company entered into a securities purchase agreement with
Starr Investments Cayman II, Inc. ("Starr"). Under this agreement,
Starr, subject to various terms and conditions, purchased from the Company
1,000,000 shares of Series A Convertible Preferred Stock with par value US$0.001
(the "Purchased Shares"), and warrants (the "Purchased Warrants") to purchase
1,545,455 shares of the common shares of the Company, for an aggregate purchase
price of US$30,000,000. Concurrently, certain shareholders of the Company
transferred 150,000 shares of Common Stock to Starr for no additional cash
consideration. The number of potential common shares outstanding and
the diluted earnings per share would change if the issuance of the Purchased
Shares and Purchased Warrants occurred before the year ended December 31,
2009.
In
January 2010, a total of 8,050,577 Public Warrants of the Company were
exercised. The remaining 27,718 public warrants were redeemed by the
Company. As there were sufficient number of Public Warrants
exercised, the Sellers received $20,900 cash proceeds pursuant to the terms of
the Share Exchange (see Note 1(b)(iv)) subsequent to December 31,
2009.
17.
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
2009
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
Revenue,
net
|
$ | 18,769 | $ | 19,092 | $ | 26,122 | $ | 31,951 | ||||||||
Gross
profit
|
11,636 | 11,863 | 17,492 | 22,006 | ||||||||||||
Income
from operations
|
10,535 | 11,085 | 15,533 | 19,490 | ||||||||||||
Net
income
|
$ | 7,455 | $ | 8,281 | $ | 11,664 | $ | 14,311 | ||||||||
Earnings
per share
|
||||||||||||||||
Basic
|
$ | 0.36 | $ | 0.40 | $ | 0.56 | $ | 0.61 | ||||||||
Diluted
|
$ | 0.36 | $ | 0.40 | $ | 0.56 | $ | 0.49 | ||||||||
2008
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
Revenue,
net
|
$ | 15,094 | $ | 15,356 | $ | 15,783 | $ | 16,766 | ||||||||
Gross
profit
|
9,253 | 9,297 | 9,324 | 10,060 | ||||||||||||
Income
from operations
|
8,546 | 8,566 | 8,487 | 9,522 | ||||||||||||
Net
income
|
$ | 6,435 | $ | 6,400 | $ | 6,363 | $ | 7,169 | ||||||||
Earnings
per share
|
||||||||||||||||
Basic
|
$ | 0.31 | $ | 0.31 | $ | 0.30 | $ | 0.34 | ||||||||
Diluted
|
$ | 0.31 | $ | 0.31 | $ | 0.30 | $ | 0.34 |
F-28
CHINA
MEDIAEXPRESS HOLDINGS, INC.
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT-SCHEDULE I
CONDENSED
BALANCE SHEETS
(Amounts in thousands of U.S.
dollars ("$'000"), except number of shares and per share
amounts)
December 31,
|
||||||||
2008
|
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$ | 160 | $ | 18 | ||||
Cash
held in trust available for taxes
|
15 | - | ||||||
Prepaid
expenses and other current assets
|
91 | 232 | ||||||
Total
current assets
|
$ | 266 | $ | 250 | ||||
Non-current
Assets:
|
||||||||
Investment
in a subsidiary and VIE
|
$ | - | $ | 58,666 | ||||
Cash
held in trust – restricted
|
81,119 | - | ||||||
TOTAL
ASSETS
|
$ | 81,385 | $ | 58,916 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accrued
expenses and other current liabilities
|
$ | 414 | $ | 624 | ||||
Amount
due to a subsidiary
|
- | 560 | ||||||
Amounts
due to related parties
|
- | 10,000 | ||||||
Total
current liabilities
|
$ | 414 | $ | 11,184 | ||||
Non-current
Liability:
|
||||||||
Deferred
underwriting fee
|
$ | 3,282 | $ | - | ||||
TOTAL
LIABILITIES
|
$ | 3,696 | $ | 11,184 | ||||
Shareholders'
equity
|
||||||||
Common
shares ($0.001 par value: 40,000,000 shares authorized;
|
||||||||
12,505,000
and 24,859,368 shares issued and outstanding as of
|
||||||||
December
31, 2008 and 2009)
|
$ | 13 | $ | 24 | ||||
Additional
paid-in capital
|
53,575 | 42,225 | ||||||
Common
shares, subject to possible conversion
|
24,286 | - | ||||||
Interest
income attributable to common shares,
|
||||||||
subject
to possible conversion
|
42 | - | ||||||
Subscription
receivable from shareholders
|
- | (3,350 | ) | |||||
Accumulated
other comprehensive income
|
- | (8 | ) | |||||
Statutory
reserve
|
- | 4,520 | ||||||
(Deficits)
retained earnings
|
(227 | ) | 4,321 | |||||
Total
shareholders' equity
|
$ | 77,689 | $ | 47,732 | ||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 81,385 | $ | 58,916 |
F-29
CHINA MEDIAEXPRESS HOLDINGS, INC.
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT - SCHEDULE I
CONDENSED
STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S.
dollars ("$'000"), except number of shares and per share
amounts)
For
the period
|
||||||||||||
from
May 1,
|
||||||||||||
2007
(date of
|
For
the year
|
For
the year
|
||||||||||
incorporation)
to
|
ended
|
ended
|
||||||||||
December
31,
|
December
31,
|
December
31,
|
||||||||||
2007
|
2008
|
2009
|
||||||||||
Administrative
expenses
|
$ | (296 | ) | $ | (1,994 | ) | $ | (5,191 | ) | |||
Equity
in earning of subsidiaries and VIE
|
- | - | 14,102 | |||||||||
(Loss)
income from operations
|
$ | (296 | ) | $ | (1,994 | ) | $ | 8,911 | ||||
Interest
income
|
488 | 1,619 | 157 | |||||||||
Interest
expense
|
(2 | ) | - | - | ||||||||
Net
income (loss)
|
$ | 190 | $ | (375 | ) | $ | 9,068 |
F-30
CHINA
MEDIAEXPRESS HOLDINGS, INC.
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT - SCHEDULE I
CONDENSED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands of U.S.
dollars ("$'000"), except number of shares and per share
amounts)
Interest income
|
||||||||||||||||||||||||||||||||||||||||||||
attributable to
|
||||||||||||||||||||||||||||||||||||||||||||
Common shares
|
common shares,
|
Subscription
|
Accumulated
|
|||||||||||||||||||||||||||||||||||||||||
Additional
|
subject
to
|
subject
to
|
receivable
|
other
|
Retained
|
|||||||||||||||||||||||||||||||||||||||
Common
shares
|
paid-in
|
possible
|
possible
|
from
|
Comprehensive
|
Statutory
|
earnings
|
Comprehensive
|
||||||||||||||||||||||||||||||||||||
Number
|
Amount
|
capital
|
conversion
|
conversion
|
shareholders
|
loss
|
reserve
|
(deficits)
|
Total
|
income
|
||||||||||||||||||||||||||||||||||
Issuance
of common shares
|
||||||||||||||||||||||||||||||||||||||||||||
at
incorporation
|
2,250,000 | $ | 2 | $ | 23 | $ |
-
|
$ |
-
|
$ | - | $ | - | $ | - | $ | - | $ | 25 | |||||||||||||||||||||||||
Issuance
of Insider Warrants
|
- | - | 2,100 |
-
|
-
|
- | - | - | - | 2,100 | ||||||||||||||||||||||||||||||||||
Issuance
of common shares pursuant
|
||||||||||||||||||||||||||||||||||||||||||||
to
IPO
|
10,255,000 | 11 | 75,738 |
-
|
-
|
- | - | - | - | 75,749 | ||||||||||||||||||||||||||||||||||
Issuance
of Pali Options
|
- | - | - |
-
|
-
|
- | - | - | - | - | ||||||||||||||||||||||||||||||||||
Restricted
IPO proceed
|
- | - | (24,286 | ) |
24,286
|
-
|
- | - | - | - | - | |||||||||||||||||||||||||||||||||
Net
income and comprehensive
|
||||||||||||||||||||||||||||||||||||||||||||
income
|
- | - | - |
-
|
-
|
- | - | - | 190 | 190 | $ | 190 | ||||||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
12,505,000 | $ | 13 | $ | 53,575 | $ |
24,286
|
$ |
-
|
$ | - | $ | - | $ | - | $ | 190 | $ | 78,064 | |||||||||||||||||||||||||
Accretion
of trust fund relating to
|
||||||||||||||||||||||||||||||||||||||||||||
common
stock subject to possible
|
||||||||||||||||||||||||||||||||||||||||||||
conversion
|
- | - | - |
-
|
42
|
- | - | - | (42 | ) | - | |||||||||||||||||||||||||||||||||
Net
loss and comprehensive loss
|
- | - | - |
-
|
-
|
- | - | - | (375 | ) | (375 | ) | $ | (375 | ) | |||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
12,505,000 | $ | 13 | $ | 53,575 | $ |
24,286
|
$ |
42
|
$ | - | $ | - | $ | - | $ | (227 | ) | $ | 77,689 | ||||||||||||||||||||||||
Foreign
currency translation
|
||||||||||||||||||||||||||||||||||||||||||||
adjustments
|
- | - | - |
-
|
-
|
- | (8 | ) | - | - | (8 | ) | $ | (8 | ) | |||||||||||||||||||||||||||||
Net
income
|
- | - | - |
-
|
-
|
- | - | - | 9,068 | 9,068 | 9,068 | |||||||||||||||||||||||||||||||||
Comprehensive
income
|
- | - | - |
-
|
-
|
- | - | - | - | - | $ | 9,060 | ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||
Appropriations
|
- | - | - |
-
|
-
|
- | - | 4,520 | (4,520 | ) | - | |||||||||||||||||||||||||||||||||
Waiver
of deferred underwriting fee
|
- | - | 3,282 |
-
|
-
|
- | - | - | - | 3,282 | ||||||||||||||||||||||||||||||||||
Redemption
of shares from
|
|
|||||||||||||||||||||||||||||||||||||||||||
IPO
shareholders
|
(9,602,587 | ) | (10 | ) | (51,625 | ) |
(24,286
|
) |
(42
|
) | - | - | - | - | (75,963 | ) | ||||||||||||||||||||||||||||
Recapitalization
in connection with
|
|
|||||||||||||||||||||||||||||||||||||||||||
Share
Exchange
|
20,915,000 | 21 | 34,593 |
-
|
-
|
- | - | - | - | 34,614 | ||||||||||||||||||||||||||||||||||
Issuance
of common shares for
|
||||||||||||||||||||||||||||||||||||||||||||
finder's fee
|
100,000 | - | - |
-
|
-
|
- | - | - | - | - | ||||||||||||||||||||||||||||||||||
Redemption
of warrants
|
- | - | (950 | ) |
-
|
-
|
- | - | - | - | (950 | ) | ||||||||||||||||||||||||||||||||
Exercises
of options
|
332,625 | - | - |
-
|
-
|
- | - | - | - | - | ||||||||||||||||||||||||||||||||||
Exercises
of warrants
|
609,330 | - | 3,350 |
-
|
-
|
(3,350 | ) | - | - | - | - | |||||||||||||||||||||||||||||||||
Balance
at December 31, 2009
|
24,859,368 | $ | 24 | $ | 42,225 | $ |
-
|
$ |
-
|
$ | (3,350 | ) | $ | (8 | ) | $ | 4,520 | $ | 4,321 | $ | 47,732 |
F-31
CHINA
MEDIAEXPRESS HOLDINGS, INC.
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT - SCHEDULE I
CONDENSED
STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S.
dollars ("$'000"), except number of shares and per share
amounts)
For
the period
|
||||||||||||
from
May 1,
|
||||||||||||
2007
(date of
|
For
the year
|
For
the year
|
||||||||||
incorporation)
to
|
ended
|
ended
|
||||||||||
December
31,
|
December
31,
|
December
31,
|
||||||||||
2007
|
2008
|
2009
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income (loss)
|
$ | 190 | $ | (375 | ) | $ | 9,068 | |||||
Adjustments
to reconcile net income (loss) to net cash from
|
||||||||||||
by
operating activities:
|
||||||||||||
Equity
in earning of a subsidiary and VIE
|
- | - | (14,102 | ) | ||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Prepaid
expenses and other current assets
|
(200 | ) | 110 | (141 | ) | |||||||
Accrued
expenses and other current liabilities
|
271 | 115 | 210 | |||||||||
Amount
due to a subsidiary
|
- | - | 80 | |||||||||
Net
cash provided by (used in) operating activities
|
$ | 261 | $ | (150 | ) | $ | (4,885 | ) | ||||
Cash
flows (used in) provided by investing activities:
|
||||||||||||
(Increase)
decrease in cash held in trust - restricted
|
$ | (80,979 | ) | $ | (140 | ) | $ | 81,119 | ||||
Cash
flows from financing activities:
|
||||||||||||
Redemption
of shares from IPO shareholders
|
$ | - | $ | - | $ | (75,921 | ) | |||||
Redemption
of warrants
|
- | - | (470 | ) | ||||||||
Payment
of deferred offering costs
|
(2,982 | ) | - | - | ||||||||
Repayment
of note payable
|
(100 | ) | - | - | ||||||||
Proceeds
from IPO
|
82,040 | - | - | |||||||||
Proceeds
from issuance of Insider Warrants
|
2,100 | - | - | |||||||||
Receipts
from note payable
|
100 | - | - | |||||||||
Proceeds
from issuance of shares at incorporation
|
25 | - | - | |||||||||
Net
cash provided by (used in) financing activities
|
$ | 81,183 | $ | - | $ | (76,391 | ) | |||||
Net
increase (decrease) in cash
|
$ | 465 | $ | (290 | ) | $ | (157 | ) | ||||
Cash
at the beginning of the period/ year
|
- | 465 | 175 | |||||||||
Cash
at the end of the period/ year
|
$ | 465 | $ | 175 | $ | 18 | ||||||
Supplemental
schedule of non-cash investing and
|
||||||||||||
financing
activities:
|
||||||||||||
Issuance
of promissory notes in connection with
|
||||||||||||
the
Share Exchange
|
$ | - | $ | - | $ | 10,000 | ||||||
Redemption
of warrants paid by a subsidiary on
|
||||||||||||
behalf
of the Company
|
$ | - | $ | - | $ | 480 |
F-32
CHINA
MEDIAEXPRESS HOLDINGS, INC.
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT - SCHEDULE I
(Amounts in thousands of U.S.
dollars ("$'000"))
Schedule
I has been provided pursuant to the requirement of Rule 12-04(a) and 4-08(e)(3)
of Regulation S-X, which require condensed financial information as to financial
position, changes in financial position and results of operations of a parent
company as of the same dates and for the same periods for which audited
consolidated financial statements have been presented when the restricted net
assets of the consolidated subsidiaries together exceed 25 percent of
consolidated net assets as of end of the most recently completed fiscal
year. As of December 31, 2009, $63,002 of the restricted capital and
reserves are not available for distribution, and as such, the condensed
financial information of the Registrant has been presented for the period from
May 1, 2007 (date of incorporation) to December 31, 2007 and for the years ended
December 31, 2008 and 2009. As of December 31, 2008, the Registrant
did not have any subsidiary or variable interest entity.
During
the year ended December 31, 2009, no dividend was declared by any subsidiary of
the Registrant.
Basis
of preparation
The
condensed financial information of the Registrant has been prepared using the
same accounting policies as set out in the Company's consolidated financial
statements except that (1) the Registrant used the equity method to account for
investments in its subsidiaries and variable interest entity; and (2) the
Registrant did not account for the Share Exchange as the reverse merger and
recapitalization although the Registrant is the accounting
acquiree. Accordingly, the condensed financial information for the
periods prior to the consummation of the Share Exchange is those of the
Registrant.
F-33