UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
20-F








oREGISTRATION STATEMENT PURSUANT TO
SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF
1934


OR


xANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For
the fiscal year ended: December 31, 2009


OR


o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


OR


 ̈ SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




Date
of event requiring this shell company report


For
the transition period from                 to


Commission
file number: 001-34132





CHINA
MASS MEDIA CORP.


(Exact
name of Registrant as specified in its charter)





Not
      Applicable
              
              Cayman
      Islands(Translation
      of Registrant’s name into English)
              
              (Jurisdiction
      of Incorporation or
Organization)




6th
Floor, Tower B, Corporate Square, 35 Finance Street


Xicheng
District, Beijing 100033


People’s
Republic of China


(Address
of Principal Executive Offices)





Mr.
Eric Wang Lam Cheung, Chief Financial Officer


Tel:
(8610) 8809-1099


Email:
ericwlcheung@chinammia.com


Fax:
(8610) 8809-1088


6th
Floor, Tower B, Corporate Square, 35 Finance Street


Xicheng
District, Beijing 100033


People’s
Republic of China


(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)





Securities
registered or to be registered pursuant to Section 12(b) of the
Act:





Title
      of each class
            
            Exchange
      on which registeredOrdinary
      shares, par value US$0.001 per share
              American
      depositary shares, each representing 30
              ordinary
      shares
            
            New
      York Stock Exchange*
              New
      York Stock Exchange







*
              Not
      for trading but only in connection with the listing on New York Stock
      Exchange of the American depositary
shares.


Securities
registered or to be registered pursuant to Section 12(g) of theAct:
None


Securities
for which there is a reporting obligation pursuant to Section 15(d) of
theAct: None


Number
of outstanding shares of each of the issuer’s classes of capital or common stock
as of


December
31, 2009:


716,375,000
Ordinary Shares, par value US$0.001 per share












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


If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or (15)(d) of
the Securities Exchange Act of 1934.    Yes  o No  x


Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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  o No  x


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 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. (Check
one):


Large
Accelerated Filer o  Accelerated
Filer oNon-Accelerated


Filer
x


Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:


U.S.
      GAAP  x
              International
      Financial Reporting
                Standards
      as issued by the International
                Accounting
      Standards Board  o
              Other
       o


If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to follow.   Item
17  o Item 18  o




If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  o


(APPLICABILITY
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS)


Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 13, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.


Yes
      o No o







Table
of Contents




Part
I





PageINTRODUCTION
                            
                            4FORWARD-LOOKING
      STATEMENTS
                            
                            5ITEM
      1.
                            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
                            
                            5ITEM
      2.
                            OFFER
      STATISTICS AND EXPECTED TIMETABLE
                            
                            5ITEM
      3.
                            KEY
      INFORMATION
                            
                            5ITEM
      4.
                            INFORMATION
      ON THE COMPANY
                            
                            31ITEM
      4A
                            UNRESOLVED
      STAFF COMMENTS
                            
                            47ITEM
      5.
                            OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
                            
                            47ITEM
      6.
                            DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
                            
                            66ITEM
      7.
                            MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                            
                            76ITEM
      8.
                            FINANCIAL
      INFORMATION
                            
                            79ITEM
      9.
                            THE
      OFFER AND LISTING
                            
                            81ITEM
      10.
                            ADDITIONAL
      INFORMATION
                            
                            82ITEM
      11.
                            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                            
                            96ITEM
      12.
                            DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                            
                            97ITEM
      13.
                            DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
                            
                            99ITEM
      14.
                            MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                            
                            99ITEM
      15.
                            CONTROLS
      AND PROCEDURES
                            
                            99ITEM
      16A.
                            AUDIT
      COMMITTEE FINANCIAL
                            
                            100ITEM
      16B.
                            CODE
      OF ETHICS
                            
                            101ITEM
      16C.
                            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                            
                            101ITEM
      16D.
                            EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                            
                            101ITEM
      16E.
                            PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATEDPURCHASERS
                            
                            102ITEM
      16F.
                            CHANGE
      IN REGISTRANT’S CERTIFYING ACCOUNTANT
                            
                            102ITEM
      16G.
                            CORPORATE
      GOVERNANCE
                            
                            102ITEM
      17.
                            FINANCIAL
      STATEMENTS
                            
                            102ITEM
      18.
                            FINANCIAL
      STATEMENTS
                            
                            102ITEM
      19.
                            EXHIBITS
                            
                            103




3




INTRODUCTION





Unless
otherwise indicated, references in this annual report to:





•
              “ADRs”
      are to the American depositary receipts that evidence our
      ADSs;





•
              “ADSs”
      are to our American depositary shares, each of which represents 30
      ordinary shares;





•
              “China”
      or the “PRC” are to the People’s Republic of China, excluding, for the
      purpose of this annual report on Form 20-F only, Taiwan and the special
      administrative regions of Hong Kong and
Macau;





•
              “RMB”
      and “Renminbi” are to the legal currency of
  China;





•
              “series
      A preferred shares” are to our convertible series A preferred shares, par
      value US$0.001 per share;





•
            “shares”
      or “ordinary shares” are to our ordinary shares, par value US$0.001 per
      share; and


•
            “US$,”
      “$” and “U.S. dollars” are to the legal currency of the United
      States.




Unless
the context indicates otherwise, “we,” “us,” “our company” and “our” refer to
China Mass Media Corp., or CMM, Universal International Advertising Limited, or
UIAL, Mass Media and Universal International Advertising Co., Ltd., or
Universal, and, up to December 31, 2007, Mass Media International Advertising
Co., Ltd., or Mass Media.





Unless
otherwise indicated, all share and per share information in this annual report
gives effect to the 1,000-for-one
share split of our ordinary shares and series A preferred shares effected in the
form of a grant of bonus shares on July 17, 2008, but does not give effect to
the stock dividend that was approved by our board of directors in May 2010 and
by shareholders in July 2010, under which our shareholders are entitled to
receive one additional ordinary share for every ten ordinary shares they
hold.





This
annual report on Form 20-F includes our audited combined statements of
operations data for the years ended December 31, 2007, 2008 and 2009, and
combined balance sheet data as of December 31, 2008 and 2009.




We
completed the initial public offering of 7,212,500 ADSs, each representing 30
ordinary shares on August 7,
2008. On August 4, 2008, we listed our ADSs on NYSE Arca under the symbol “CMM.”
 On August 25, 2009 we transferred the listing of our ADSs from NYSE Arca to the
New York Stock Exchange, or the NYSE.





FORWARD-LOOKING
STATEMENTS





This
annual report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, with respect to our business, operating
results and financial condition as well as our current expectations,
assumptions, estimates and projections about our industry. All statements other
than statements of historical fact in this annual report are forward-looking
statements. These statements relate to events that involve known and unknown
risks, uncertainties and other factors, including those listed under “Risk
Factors,” which may cause our actual results, performance or achievements to be
materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements.





In some
cases, these forward-looking statements can be identified by words or phrases
such as “aim,” “anticipate,” “believe,” “continue,” “estimate,” “expect,”
“intend,” “is/are likely to,” “may,” “plan,” “potential,” “will” or other
similar expressions. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. These forward-looking
statements include, among other things, statements relating to:




4




•
            our
      goals and strategies;





•
            our
      expectations regarding demand for our
services;





•
            our
      future business development, financial condition and results of
      operations;





•
            expected
      changes in our revenues, expenses, profits, earnings and other estimated
      financial information;





•
              our
      plan to obtain additional advertising time slots from China Central
      Television, or CCTV, and regional television
  networks;





•
            expected
      changes in CCTV’s advertising policies or
  practices;





•
            competition
      in the PRC advertising market;





•
              the
      expected growth in the urban population, consumer spending, average income
      levels and advertising spending
levels;





•
            PRC
      governmental policies and regulations relating to the advertising
      market;





•
            the
      current global financial crisis and economic downturn;
  and





•
            those
      other risks identified in “Item 3. Key Information—D. Risk
      Factors.”




The
forward-looking statements made in this annual report relate only to events or
information as of the date on which the statements are made in this annual
report. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise, after the date on which the statements are made or to
reflect the occurrence of unanticipated events. You should read this annual
report and the documents that we reference in this annual report and have filed
as exhibits to the annual report completely and with the understanding that our
actual future results may be materially different from what we
expect.





PART
I




ITEM
      1.
            IDENTITY OF
      DIRECTORS, SENIOR MANAGEMENT AND
ADVISORS





Not
applicable.




ITEM
      2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE





Not
applicable.




5


ITEM
      3.
              KEY
      INFORMATION
 
 A.
              Selected
      Financial Data


The
following selected combined statements of operations data for the three years
ended December 31, 2007,
2008 and 2009 and selected combined balance sheets data as of December 31, 2008
and 2009 have been derived from our audited combined financial statements
included elsewhere in this annual report. The following selected combined
statements of operations data for the years ended December 31, 2005 and 2006 and
selected combined balance sheets data as of December 31, 2005, 2006 and 2007
have been derived from our audited combined financial statements not included in
this annual report. These combined financial data have been audited by
PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent
registered public accounting firm.





The selected combined financial data
should be read in conjunction with, and are qualified in their entirety by
reference to, our audited combined financial statements and related notes and
“Item 5. Operating and Financial Review and Prospects” included elsewhere in
this annual report. Our combined financial statements are prepared and presented
in accordance with U.S. GAAP. Our historical results do not necessarily indicate
our results expected for any future periods.





The basic and diluted earnings per
share data for all periods presented below have been adjusted for the
one-for-ten stock dividend declared by our board of directors in May 2010 and
approved by our shareholders in July 2010.




6




Year
      Ended December 31,2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2009(RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (US$)(In thousands, except for per share data)Selected
      Combined Statement of Operation DataRevenues:Advertising
      agency services
                      
                      
                      215,448
                      
                      
                      
                      245,200
                      
                      
                      
                      202,637
                      
                      
                      
                      334,053
                      
                      
                      
                      397,279
                      
                      
                      
                      58,202Special
      events services
                      
                      
                      15,228
                      
                      
                      
                      -
                      
                      
                      
                      15,991
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Production
      and sponsorship services
                      
                      
                      2,336
                      
                      
                      
                      10,487
                      
                      
                      
                      60,018
                      
                      
                      
                      34,935
                      
                      
                      
                      30,305
                      
                      
                      
                      4,439Total
      revenues
                      
                      
                      233,012
                      
                      
                      
                      255,687
                      
                      
                      
                      278,646
                      
                      
                      
                      368,988
                      
                      
                      
                      427,584
                      
                      
                      
                      62,641Less:
      business tax
                      
                      
                      (19,163
                      )
                      
                      
                      (20,472
                      )
                      
                      
                      (23,110
                      )
                      
                      
                      (16,006
                      )
                      
                      
                      (16,022
                      )
                      
                      
                      (2,347
                      )Total
      net revenues
                      
                      
                      213,849
                      
                      
                      
                      235,215
                      
                      
                      
                      255,536
                      
                      
                      
                      352,982
                      
                      
                      
                      411,562
                      
                      
                      
                      60,294Operating
      costs and expenses:Cost
      of revenues
                      
                      
                      (29,311
                      )
                      
                      
                      (26,734
                      )
                      
                      
                      (30,148
                      )
                      
                      
                      (40,200
                      )
                      
                      
                      (40,239
                      )
                      
                      
                      (5,895
                      )Cost
      of revenues – media fees to a related party
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (163,200
                      )
                      
                      
                      (230,000
                      )
                      
                      
                      (33,695
                      )Sales
      and marketing expenses
                      
                      
                      (10,069
                      )
                      
                      
                      (7,038
                      )
                      
                      
                      (5,600
                      )
                      
                      
                      (8,204
                      )
                      
                      
                      (17,362
                      )
                      
                      
                      (2,544
                      )General
      and administrative expenses
                      
                      
                      (8,494
                      )
                      
                      
                      (5,631
                      )
                      
                      
                      (8,505
                      )
                      
                      
                      (24,487
                      )
                      
                      
                      (33,194
                      )
                      
                      
                      (4,863
                      )Total
      operating costs and expenses
                      
                      
                      (47,874
                      )
                      
                      
                      (39,403
                      )
                      
                      
                      (44,253
                      )
                      
                      
                      (236,091
                      )
                      
                      
                      (320,795
                      )
                      
                      
                      (46,997
                      )Operating
      income
                      
                      
                      165,975
                      
                      
                      
                      195,812
                      
                      
                      
                      211,283
                      
                      
                      
                      116,891
                      
                      
                      
                      90,767
                      
                      
                      
                      13,297Interest
      and investment income
                      
                      
                      1,331
                      
                      
                      
                      3,434
                      
                      
                      
                      10,774
                      
                      
                      
                      15,103
                      
                      
                      
                      9,494
                      
                      
                      
                      1,391Other
      income (expenses), net
                      
                      
                      (151
                      )
                      
                      
                      (1,560
                      )
                      
                      
                      (3,128
                      )
                      
                      
                      (1,441
                      )
                      
                      
                      533
                      
                      
                      
                      78Income
      before tax
                      
                      
                      167,155
                      
                      
                      
                      197,686
                      
                      
                      
                      218,929
                      
                      
                      
                      130,553
                      
                      
                      
                      100,794
                      
                      
                      
                      14,766Income
      tax expense
                      
                      
                      (24,738
                      )
                      
                      
                      (28,271
                      )
                      
                      
                      (10,619
                      )
                      
                      
                      (20,139
                      )
                      
                      
                      (14,328
                      )
                      
                      
                      (2,099
                      )Net
      income
                      
                      
                      142,417
                      
                      
                      
                      169,415
                      
                      
                      
                      208,310
                      
                      
                      
                      110,414
                      
                      
                      
                      86,466
                      
                      
                      
                      12,667Net
      income allocated to participating preferred shares
                      
                      
                      (24,951
                      )
                      
                      
                      (29,682
                      )
                      
                      
                      (36,496
                      )
                      
                      
                      (9,752
                      )
                      
                      
                      -
                      
                      
                      
                      -Net
      income available to ordinary shareholders
                      
                      
                      117,466
                      
                      
                      
                      139,733
                      
                      
                      
                      171,814
                      
                      
                      
                      100,662
                      
                      
                      
                      86,466
                      
                      
                      
                      12,667Earnings
      per ordinary share, basic and diluted
                      
                      
                      0.26
                      
                      
                      
                      0.31
                      
                      
                      
                      0.38
                      
                      
                      
                      0.17
                      
                      
                      
                      0.11
                      
                      
                      
                      0.02Earnings
      per ADS, basic
                      
                      
                      7.77
                      
                      
                      
                      9.24
                      
                      
                      
                      11.36
                      
                      
                      
                      5.12
                      
                      
                      
                      3.29
                      
                      
                      
                      0.48Earnings
      per ADS, diluted
                      
                      
                      7.77
                      
                      
                      
                      9.24
                      
                      
                      
                      11.36
                      
                      
                      
                      5.12
                      
                      
                      
                      3.28
                      
                      
                      
                      0.48Dividends
      declared per share
                      
                      
                      0.22
                      
                      
                      
                      0.32
                      
                      
                      
                      0.40
                      
                      
                      
                      0.19
                      
                      
                      
                      -
                      
                      
                      
                      -Shares
      used in calculating earnings per ordinary share, basic
                      
                      
                      453,640
                      
                      
                      
                      453,640
                      
                      
                      
                      453,640
                      
                      
                      
                      589,764
                      
                      
                      
                      788,013
                      
                      
                      
                      788,013Shares
      used in calculating earnings per ordinary share, diluted
                      
                      
                      453,640
                      
                      
                      
                      453,640
                      
                      
                      
                      453,640
                      
                      
                      
                      589,764
                      
                      
                      
                      789,861
                      
                      
                      
                      789,861Shares
      used in calculating earnings per ADS, basic
                      
                      
                      15,121
                      
                      
                      
                      15,121
                      
                      
                      
                      15,121
                      
                      
                      
                      19,659
                      
                      
                      
                      26,267
                      
                      
                      
                      26,267Shares
      used in calculating earnings per ADS, diluted
                      
                      
                      15,121
                      
                      
                      
                      15,121
                      
                      
                      
                      15,121
                      
                      
                      
                      19,659
                      
                      
                      
                      26,329
                      
                      
                      
                      26,329




7




As of December 31,2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2009(RMB)
                  
                  
                  (RMB)
                  
                  
                  (RMB)
                  
                  
                  (RMB)
                  
                  
                  (RMB)
                  
                  
                  (US$)(In thousands)Selected Combined Balance
      Sheet DataCash
      and cash equivalents
                  
                  
                  374,044
                  
                  
                  
                  510,915
                  
                  
                  
                  138,262
                  
                  
                  
                  566,889
                  
                  
                  
                  508,778
                  
                  
                  
                  74,536Total
      current assets
                  
                  
                  393,981
                  
                  
                  
                  547,443
                  
                  
                  
                  385,450
                  
                  
                  
                  1,150,558
                  
                  
                  
                  657,652
                  
                  
                  
                  96,347Total
      non-current assets
                  
                  
                  22,744
                  
                  
                  
                  26,546
                  
                  
                  
                  18,092
                  
                  
                  
                  57,261
                  
                  
                  
                  55,464
                  
                  
                  
                  8,125Total
      assets
                  
                  
                  416,725
                  
                  
                  
                  573,989
                  
                  
                  
                  403,542
                  
                  
                  
                  1,207,819
                  
                  
                  
                  713,116
                  
                  
                  
                  104,472Total
      current liabilities
                  
                  
                  326,584
                  
                  
                  
                  436,685
                  
                  
                  
                  274,827
                  
                  
                  
                  819,777
                  
                  
                  
                  236,468
                  
                  
                  
                  34,643Total
      liabilities
                  
                  
                  326,584
                  
                  
                  
                  436,685
                  
                  
                  
                  274,827
                  
                  
                  
                  819,777
                  
                  
                  
                  236,468
                  
                  
                  
                  34,643Total
      shareholder’s equity
                  
                  
                  90,141
                  
                  
                  
                  137,304
                  
                  
                  
                  128,715
                  
                  
                  
                  388,042
                  
                  
                  
                  476,648
                  
                  
                  
                  69,829Total
      liabilities and shareholder’s equity
                  
                  
                  416,725
                  
                  
                  
                  573,989
                  
                  
                  
                  403,542
                  
                  
                  
                  1,207,819
                  
                  
                  
                  713,116
                  
                  
                  
                  104,472




Exchange
Rate Information





We
publish our financial statements in Renminbi. This annual report contains
translations of Renminbi amounts into U.S. dollars at specified rates solely for
the convenience of the reader. Unless otherwise noted, all translations from
Renminbi to U.S. dollars were made at the noon buying rate in the City of New
York for cable transfers in Renminbi per U.S. dollar as certified for customs
purposes by the Federal Reserve Bank of New York as of December 31, 2009, which
was RMB6.8259 to US$1.00. No representation is made that the Renminbi
amounts referred to in this annual report could have been or could be converted
into U.S. dollars at any particular rate or at all. The PRC government imposes
control over its foreign currency reserves in part through direct regulation of
the conversion of Renminbi into foreign exchange and through restrictions on
foreign trade. On August 20, 2010, the exchange rate as published by the Federal
Reserve Board was RMB 6.7900 to US$1.00.





The
following table sets forth information regarding the noon buying rate in
Renminbi per U.S. dollar for the periods indicated.




Renminbi per U.S. Dollar Noon Buying Rate(1)Period End
                  
                  
                  Average (2)
                  
                  
                  Low
                  
                  
                  High2005
                  
                  
                  8.0702
                  
                  
                  
                  8.1826
                  
                  
                  
                  8.0702
                  
                  
                  
                  8.27652006
                  
                  
                  7.8041
                  
                  
                  
                  7.9579
                  
                  
                  
                  7.8041
                  
                  
                  
                  8.07022007
                  
                  
                  7.2946
                  
                  
                  
                  7.5806
                  
                  
                  
                  7.2946
                  
                  
                  
                  7.81272008
                  
                  
                  6.8225
                  
                  
                  
                  6.9193
                  
                  
                  
                  6.7800
                  
                  
                  
                  7.29462009
                  
                  
                  6.8259
                  
                  
                  
                  6.8295
                  
                  
                  
                  6.8176
                  
                  
                  
                  6.8470December
                  
                  
                  6.8259
                  
                  
                  
                  6.8275
                  
                  
                  
                  6.8244
                  
                  
                  
                  6.82992010January
                  
                  
                  6.8268
                  
                  
                  
                  6.8269
                  
                  
                  
                  6.8258
                  
                  
                  
                  6.8295February
                  
                  
                  6.8258
                  
                  
                  
                  6.8285
                  
                  
                  
                  6.8258
                  
                  
                  
                  6.8330March
                  
                  
                  6.8258
                  
                  
                  
                  6.8262
                  
                  
                  
                  6.8254
                  
                  
                  
                  6.8270April
                  
                  
                  6.8247
                  
                  
                  
                  6.8256
                  
                  
                  
                  6.8229
                  
                  
                  
                  6.8275May
                  
                  
                  6.8305
                  
                  
                  
                  6.8275
                  
                  
                  
                  6.8245
                  
                  
                  
                  6.8310June
                  
                  
                  6.7815
                  
                  
                  
                  6.8184
                  
                  
                  
                  6.7815
                  
                  
                  
                  6.8323July
                  
                  
                  6.7735
                  
                  
                  
                  6.7762
                  
                  
                  
                  6.7709
                  
                  
                  
                  6.7807August
      (through August 20)
                  
                  
                  6.7900
                  
                  
                  
                  6.7812
                  
                  
                  
                  6.7670
                  
                  
                  
                  6.8038









(1)
              For
      periods prior to January 1, 2009, the exchange rates reflect the noon
      buying rates as reported by the Federal Reserve Bank of New York. For
      periods after January 1, 2009, the exchange rates reflect the exchange
      rates as set forth in the H.10 statistical release of the Federal Reserve
      Board.


(2)
              Annual
      averages are calculated by using the average of the exchange rates at the
      end of each month during the period. Monthly averages are calculated by
      using the average of the daily rates during the relevant
      period.




8




B.
            Capitalization
      and Indebtedness





Not
Applicable.





C.
            Reasons
      for the Offer and Use of Proceeds





Not
Applicable.





D.
            Risk
      Factors





Risks
Related to Our Business and Industry





Our
business substantially depends on CCTV. We rely on our access to advertising
time slots on CCTV to broadcast our clients’ advertisements. Any unfavorable
change in CCTV’s advertising model, any changes that adversely affect CCTV’s
market position or any limitation on our access to desired television
advertising time slots could harm the effectiveness and attractiveness of our
services.




CCTVisthemaintelevisionnetworkfrom which we currentlyobtainadvertisingtime.We place our advertising
clients’ advertisements on CCTV, the largest television network in China, which
offers 21 public channels in China and around the world. According to China
Radio & TV Yearbook, CCTV had the largest market share in China in terms of
total television advertising revenues. We believe CCTV is generally perceived as
the most influential and reputable television medium by the public in China, due
to its central government sponsorship, extensive network coverage and long
broadcasting history in China. As such, advertisers often regard CCTV as the
television advertising platform on which they can gain the maximum exposure and
recognition for their products or services in China. We believe our access to a
substantial number of advertising time slots on five channels of CCTV,
particularly during certain popular television programs, enhances our service
offerings. CCTV uses third-party agencies, such as our company, to sell a
significant portion of its advertising time slots to advertisers, while selling
the remaining portion of its advertising time slots directly by itself or
through auctions. Since 2009, CCTV has begun to sell more of its advertising
time slots by itself or through auctions under a new initiative. For example,
CCTV ceased to grant us the advertising right to the 2010 Chinese New Year Gala
program, and sold the advertising time slots for that program by itself, which
have had a material adverse effect on our results of operations. If CCTV
continues to apply or expand the application of such initiative, we may lose the
advertising time slots for other programs on CCTV that we currently have. As a
result, we may lose our advertising clients and our business, financial
condition and results of operations could be materially and adversely affected.
In addition, certain of CCTV’s senior management members changed in May 2009,
which could result in other changes of CCTV’s program mix and operational
model.





An unfavorablechange in CCTV’smarketpositioncouldmateriallyand adverselyaffectus.CCTV is owned by China’s
central government, and its dominant position in China’s television advertising
market is derived primarily from its status as one of the central government’s
key channels for communication with the public. As a result, CCTV enjoys certain
favorable governmental support that is not available to other television
networks. For example, the central government mandates that CCTV’s Channel 1, on
which we have a substantial number of advertising time slots, be broadcast by
all regional television networks in China, which makes this channel particularly
attractive to advertisers who want to achieve nationwide exposure. Nevertheless,
CCTV faces increasing competition from regional television networks that strive
to offer more attractive television programs to compete with CCTV for television
audiences. If CCTV fails to compete successfully against these other networks,
it may lose its market share. Any changes that could potentially erode CCTV’s
dominant market position, such as relaxation of media control by the government
or inadequate response to competition from other networks by CCTV, could in turn
reduce the attractiveness of our advertising offerings.





9




CCTVhas considerablebargainingpower overus.Consistent with industry
practice in China, the pricing and payment terms of our advertising contracts
with CCTV are typically negotiated annually, including the contracts that have
terms of more than one year. As CCTV is owned by the government, our negotiating
power with CCTV is limited. In general, CCTV would be less likely to enter into
new contracts with us if we failed to bring in sufficient advertising revenues
for the advertising time slots contracted to us in a previous year. From time to
time we enter into contracts with CCTV and commit ourselves to a minimum amount
of advertising revenues with respect to certain advertising time slots provided
to us. Under all such contracts, we are required to pay the agreed-upon minimum
amounts to CCTV even if we do not successfully procure advertisers for the time
slots. If we fail to procure sufficient advertising clients for the secured time
slots or receive total amounts lower than what we have committed ourselves to
deliver, we will be required to cover the difference ourselves, as a result of
which our financial condition and results of operations could be adversely
affected. In addition, CCTV adopted a new payment term in 2010 for advertising
time slots we obtained through auctions, under which we are required to pay 30%
of the annual media fee in advance as deposit with the remaining fee being
payable in 12 monthly payments throughout the year. Such payment term will have
a significant impact on our cash flow. Moreover, as our existing contracts
expire, we may be unable to renew or extend the terms of contracts for desired
advertising time slots on desirable CCTV channels or at favorable price levels,
if at all. Any significant decreases in our CCTV advertising time slot resources
as a result of our failure to renew or extend our existing contracts with CCTV
could materially and adversely affect the effectiveness and attractiveness of
our advertising offerings.





CCTV may change or discontinue our
services or not renew our service contract upon its expiration. CCTV may
change or discontinue our services or not renew our service contract upon its
expiration. For example, we used to provide special events services to assist
CCTV in the sales and marketing of advertising time slots for major sporting
events broadcast on its Channels 1 and 2 and the service term was renewed
annually in prior years. In 2009, however, CCTV did not renew our service
contract for 2010.





We
rely on access to advertising time slots during a limited number of television
programs to place our clients’ advertisements and the desirability of the
advertising time slots we obtain depends on the popularity of the relevant
television programs and other factors that are difficult to
predict.





We rely
significantly on our rights to advertising time slots during a limited number of
television programs, including Television Guides and the programs under our
Daytime Advertising Package, all of which are broadcast on CCTV. We also
obtained advertising rights to a number of additional programs on CCTV Channels
E and F, which became available to us in 2008. In addition, we successfully bid
for the advertising rights to the Periodic China News Package on CCTV Channel 4
in 2010 through auctions. Although we occasionally procure advertising time
slots during other programs on CCTV, we substantially rely on the regular daily
television programs we have obtained from CCTV to place advertisements for
clients and generate revenues. We do not have control over the availability or
scheduling of these programs. If any of such programs are rescheduled to times
that are unattractive to our clients or if any of such programs are shortened or
canceled by CCTV and we cannot obtain alternative media resources, we would face
difficulty in marketing our services and our revenues may decline. For example,
the advertising time for World Update, a program on CCTV Channel 4 for which we
have obtained advertising rights, was reduced from three minutes to two minutes
in 2008 when the length of the program was shortened, and eventually the program
was cancelled in May 2008. This type of change to the advertising time slots
currently available to us may cause a decrease in our revenues from advertising
agency services in future periods.





In
addition, the value of television advertising time slots depends primarily on
the popularity, ratings and demographics of the viewership of the program to
which such advertising time slots are attached. Therefore, the perceived
effectiveness and desirability of our services to a certain extent depends on
the acceptance by the public of the television programs to which our advertising
time slots are attached, which is difficult to predict. The
success of a television program also depends on the quality and acceptance of
other competing programs, the availability of alternate forms of entertainment,
the general trend of leisure time activities and other tangible and intangible
factors, many of which are difficult to predict. Poor ratings of a television
program in targeted demographics can lead to a reduction in the advertising
spending for any advertising time slots related to that program. If any of the
television programs to which our advertising time slots are attached becomes
unpopular, our service offerings may become less attractive to our clients and
our financial condition and results of operations could be materially and
adversely impacted as a result.





10




Our
ability to adjust our advertisement costs is limited and any substantial
increase in the prices charged by CCTV
for the advertising time slots available to us may reduce our revenues and
profitability.




In
negotiating with our advertising clients, we price the advertising time slots
for most daily television programs based on a number of factors, including
market demand for such advertising time slots, target audience, the ratings and
quality of the relevant television programs and prices charged by our
competitors. We also refer to the
rate cards published by CCTV for its advertising time slots. We typically
negotiate the pricing terms with CCTV with respect to the advertising time slots
of such daily television programs available to us on an annual basis. In such
contracts, we and CCTV agree on the prices that we will pay to CCTV for these
time slots, which are generally lower than the published rate card prices. We
typically retain the difference between the prices we charge to our advertising
clients and the prices we pay to CCTV as our commission. CCTV usually increases
the prices charged to us and the prices on its published rate cards every year.
We are typically able to pass on such price increases to our advertising
clients. However, in the future we may not always be able to do so. Due to its
dominant market position, CCTV enjoys much greater bargaining power over price
increases than we do and our ability to control such advertisement costs is
limited. If CCTV substantially raises the prices charged to us for the
advertising time slots available to us and we are unable to pass on such costs
to our advertising clients, our revenues would decrease and our profitability
may decline. For example, CCTV increased the media fees for Channel 4 programs
by approximately 40.9% in 2009, which has negatively affected our operating
income from these programs. As a further example, we obtained in an auction the
advertising rights to the Periodic China News Package on CCTV Channel 4 in 2010
and if we cannot pass on the cost of the bid media fee to our customers, we will
sustain a loss on that program.





We
receive a substantial portion of our revenues from a limited number of large
clients, and the loss of these clients, or the loss of significant advertisers
by our agency clients, could materially and adversely impact our business,
financial condition and results of operations.




A
relatively small number of clients are responsible for a substantial percentage
of our revenues. In the years ended December 31, 2007, individual clients
accounting for more than 10% of our revenues in the aggregate were responsible
for 32.3% of our total revenues. None of our clients accounted for more than 10%
of our total revenues in 2008 and 2009 because we recorded the advertising
revenues from CCTV Channel 4 programs on a gross basis, which increased our
revenue basis.Most of
our large clients are third-party advertising agencies who obtained advertising
time slots from us for their advertising clients and may in turn rely on a
limited number of large advertisers for their businesses. The performance of
such third-party advertising agencies has a direct impact on our operating
results. Advertisers who access our advertising time slots through other
advertising agencies may reduce advertising and marketing spending or cancel
projects at any time for any reason. Any of our advertising clients may not
continue to utilize our services to the same extent, or at all, in the future. A
significant reduction in advertising and marketing spending by, or the loss of
one or more of, our advertising clients, if not replaced by new clients or an
increase in business from existing clients, could make it difficult for us to
fill the time slot vacancies and our revenues and profits could decline
significantly as a result. The third-party advertising agencies may also
introduce their advertising clients to other advertising service providers who
have obtained other advertising time slots from CCTV or other television
networks. As a result, any loss of our significant clients, or the loss of
significant advertisers by our agency clients, could have a material and adverse
effect on our financial condition and results of operations. In addition, if any
client with whom we have a substantial amount of business experiences financial
difficulty, we could be unable to collect accounts receivable on a timely basis,
if at all. This may result in an increase in our bad debt expenses and adversely
affect our results of operations.





11




We
face significant competition, and if we do not compete successfully against
existing and new competitors, we may lose our market share and our profitability
may be materially harmed.




The
advertising industry is highly competitive and fragmented in China. As an
increasing number of companies enter the industry, competition continues to
intensify. Our direct competitors are other national or regional advertising or
marketing services providers that offer television airtime to advertisers,
primarily including SinoMedia Holding Limited, Walk-on Advertising Co., Ltd. and
Charm Communication Corp. We compete with other television advertising agencies
for the limited time slots available on CCTV or other television networks on the
basis of sales and marketing capabilities, operating track record and service
quality. In particular, some of our advertising clients are other advertising
agencies who could become our competitors seeking the same limited media
resources. If CCTV continues or expands the practice to sell its advertising
time slots through auctions, we may face increased competition in obtaining
desired advertising time slots from CCTV. We also compete with other television
advertising agencies for advertisers’ spending on the basis of desirability of
time slots offered, television network coverage, service quality, reputation,
pricing and relationships with television networks.





We face
competition from new entrants in the television advertising sector. Wholly
foreign-owned advertising companies have been allowed to operate in China since
December 2005, which exposes us to increased competition from international
advertising companies that have greater financial and other resources than us.
Fixed costs in the advertising industry are generally low, and it is customary
that advertising service contracts with advertising clients, such as ours, are
entered into on a short-term and non-exclusive basis. It is possible that our
competitors, including new market entrants, could acquire a significant number
of clients and establish a significant presence in our markets.





Some of
our existing and potential competitors may have competitive advantages, such as
closer cooperative relationships with CCTV, longer operating histories, larger
market shares, access to larger client bases or media resources, or greater
financial, sales and marketing, distribution, technical or other resources, than
we do. Increased competition will provide potential clients with a wider choice
of advertising and marketing service providers, which could lead to lower prices
and decreased revenues and profits for us. We may not be able to successfully
compete against new or existing competitors and failure to do so may cause our
market share and our revenues to decline significantly.





In
addition, television networks, upon which we depend for our business, also
compete with other forms of advertising media, such as radio, newspapers,
magazines, the Internet, indoor or outdoor flat panel displays, billboards and
public transport advertising, for overall advertising spending. In particular,
we believe that the Internet is becoming increasingly popular as an alternative
advertising medium among advertisers. In addition, technology in television,
video, data services and other media used in the entertainment industry is
changing rapidly, and advances in technology have led to alternative methods of
content delivery and storage. Certain changes in the behavior of television
viewers driven by these methods of delivery and storage could have a negative
effect on the television advertising revenues. For example, devices that enable
users to view television programs on a time-delayed basis or allow them to
fast-forward or skip advertisements may cause changes in consumer behavior that
could adversely affect the advertising revenues of television networks and our
results of operations.





We
derive substantially all of our revenues from the provision of advertising
services, a business that is particularly sensitive to changes in economic
conditions and other general trends.





We derive
substantially all of our revenues from a single business, the provision of
advertising services. Demand for our services and the resulting advertising
spending by our clients are highly sensitive to changes in general economic
conditions and other general trends, including changes in lifestyle patterns and
consumers’ tastes and preferences. Recessionary economic cycles may adversely
affect the businesses of our advertising clients, which can have the effect of
reducing the volume of advertising time slots and other services advertisers
purchase from us. For example, in the second half of 2008 and the first half of
2009, the global recession had negatively affected the business of many of our
clients or potential clients in China, which significantly reduced the demand
for our services in those periods. Additionally, advertisers could also decide
to spend more of their advertising budget on non-television advertising media
because of perceived changes in consumers’ lifestyles or their tastes and
preferences. A general decrease in total advertising spending, or a decrease in
the demand for our advertising services in particular, would materially and
adversely affect our ability to generate revenues and have a significant
negative effect on our financial condition and results of
operations.





12




Advertising
clients periodically review and change their advertising or marketing models and
strategies, and if we fail to adapt quickly to such changes, we may be unable to
attract advertisers and increase the demand for our services, and therefore be
unable to maintain or increase our revenues and profits.





Advertising
service contracts with clients are generally entered into on a short-term and
non-exclusive basis. Clients may move their accounts to another agency on
relatively short notice. For example, in 2007, one advertiser reduced its
advertising spending for time slots during the Television Guides program, which
resulted in a substantial decrease in our revenues. In many cases, we represent
a client for only a portion of its advertising or marketing needs or only in
specific advertisements or marketing campaigns, thus enabling the client to
continually compare the effectiveness of our services against that of other
agencies. A client’s decision to place its advertisements through us is affected
by a number of factors, including the desirability of time slots we offer, the
extent of television network coverage we provide, our service packages and
pricing structure and the client’s perception of the effectiveness and quality
of our services. If we fail to retain our existing clients or increase
advertisers’ awareness and utilization of our services, or to formulate
attractive service packages and pricing structures
to attract new clients, demand for our services will not grow and may even
decrease. Advertisers might be unwilling to seek time slots from us or to pay
the levels of advertising fees we require to generate profits, which could
materially and adversely affect our ability to increase our revenues and our
profitability.





We
depend on the services of key personnel, including Mr. Shengcheng Wang, who is
our chairman and chief executive officer, and our business and growth prospects
may be severely disrupted if we lose their services.





Mr.
Shengcheng Wang, our chairman and chief executive officer, has led our company
since our establishment. Our business and operations depend to a significant
extent on his business vision, industry expertise, experience with our business
operations and management skills, as well as his relationships with CCTV, many
of our key clients and our employees. We do not maintain key-man life insurance
for Mr. Shengcheng Wang. If he becomes unable or unwilling to continue in his
present position, we may not be able to replace him in a timely manner or at
all, which would have a material adverse effect on our business and growth
prospect. We also rely on the performance of a number of other key employees.
Although we believe that we have established a reputation in the industry that
attracts talented personnel, we are still vulnerable to adverse consequences
from the loss of key employees due to competition among providers of advertising
services for talented personnel.





The
current global financial crisis and economic downturn may continue to have a
material and adverse effect on our businesses, results of operations and
financial condition.




The
current global financial crisis and economic downturn have adversely affected
economies and businesses around the world, including in China. Due to the global
economical downturn, a decrease in exportation and domestic consumer demand and
a slowdown in domestic property investments, the economic situation in China was
severe during the second half of 2008 and the first half of 2009. Principally
due to this change in the macro- economic conditions, advertisers had downsized
or cancelled their advertising campaigns and as a result the demand for our
advertising services had been declining in the second half of 2008 and the first
half of 2009, which had a material adverse effect upon our business and
profitability. The demand for our services increased in the second half of 2009
as China’s economy started to recover from the global financial crisis. However,
if the global financial crisis continues or deteriorates or if the economy of
China does not fully recover as expected or begin to fluctuate, the demand for
our services may drop and as a result, our businesses, results of operations and
financial condition could continue to be materially and adversely
affected.





13




A
significant percentage of our outstanding ordinary shares is beneficially owned
by Mr. Shengcheng Wang, our chairman and chief executive officer, and, as a
result, he has substantial influence over our company and his interests may not
be aligned with the interests of our other shareholders.





As of
August 20, 2010, Mr. Shengcheng Wang, our chairman and chief executive officer,
beneficially owns 69.80%of our
outstanding ordinary shares. Accordingly, he has significant influence in
determining the outcome of any corporate transaction or other matters submitted
to the shareholders for approval, including mergers, consolidations and the sale
of all or substantially all of our assets, election of directors and other
significant corporate actions. Mr. Wang also has the power to prevent or cause a
change in control. In addition, without the consent of Mr. Wang, we could be
prevented from entering into transactions that could be beneficial to us. Mr.
Wang may cause us to take actions that are opposed by other shareholders as his
interests may differ from those of other shareholders, including those who hold
our ADSs.





Moreover,
certain of Mr. Wang’s family members, including his parents, have owned or
controlled a number of companies that conduct businesses similar to ours and
enter into transactions with us from time to time. For example, Mr. Wang’s
immediate family members indirectly own a 50% interest in Guang Er Gao Zhi FTP,
with whom we entered into a framework agreement to procure advertising rights to
several CCTV programs in 2008 and 2009. See “Related Party
Transactions—Transactions with Guang Er Gao Zhi FTP.” All of such companies are
managed separately by management teams different from that of our company.
Although Mr. Wang and his parents and spouse have agreed not to engage in any
business that directly or indirectly competes with us, such undertakings may not
be as effective as we expect, and any breach of such undertakings by Mr. Wang or
his immediate family members may result in conflicts of interests and harm the
interests of our other shareholders.




If
we fail to maintain an effective and adequate sales and marketing team, our
sales and revenues could materially decrease.




We depend
on our sales personnel to increase advertisers’ awareness, acceptance and
utilization of our services, which are crucial to our revenues, business and
growth. We recruited a number of senior sales executives and doubled the size of
our sales force in 2009. As of December 31, 2009, we had 72employees
directly engaged in sales. Consistent with the industry norm, we typically
experience a high turnover rate among our sales personnel, and we cannot assure
you that our current sales personnel will remain effective or loyal to us. We
face intense competition for experienced sales personnel both from our direct
competitors and other advertising and media companies. Furthermore, we will need
to continue expanding our sales force if our business continues to grow. We may
not be able to hire, retain, integrate or motivate an adequate number of
qualified new sales personnel as we grow our business, which could disrupt our
business and cause our revenues to materially decrease.





We
may not be able to successfully solicit sponsors for the public service
announcements we produce and therefore may not receive sponsorship fees to cover
our production costs. In addition, we enter into fixed-price contracts with
respect to our content production services, and our failure to accurately
estimate the resources required for the execution of these contracts could
negatively affect our results of operations.




We are
committed to produce public service announcements for the daily “Guang Er Gao
Zhi” program broadcast on CCTV. We typically solicit sponsors for such
announcements we produce and the sponsor’s name will be shown at the end of an
announcement. We charge fees for this service based on the value of such
sponsorship to the sponsors. If we are unable to procure sponsors for the public
service announcements we produce, we will not be able to cover the costs we
incur in producing such announcements. For example, the sponsorship for the
public service announcements dropped significantly in 2009 due to the global
financial crisis, which negatively affected our revenue and profitability. In
addition, all of our content production services are provided on a fixed-price
basis. Such contracts require us to undertake projections and planning related
to resource utilization and costs, and we bear the risk of cost overruns in
connection with our production projects. If we cannot secure a price increase
from our clients and try to complete our production within a restricted budget,
we may not be able to deliver the content at the quality expected from us. Any
failure to accurately estimate the resources required for a project or any other
factors that may impact our costs to complete the project, or any failure to
complete our production at the committed performance level, could adversely
affect our profitability and results of operations.





14




Our
strategy to acquire complementary businesses and assets involves significant
risks and uncertainty that may prevent us from achieving our objectives and harm
our financial conditions and results of operations.




Our
business strategy includes selective acquisitions of businesses and assets that
are complementary to our current advertising business. The implementation of
this strategy involves significant risks and uncertainties, including our
ability to:




•
            identify
      and acquire suitable businesses or assets on commercially reasonable terms
      or at all;





•
            raise
      sufficient capital to fund the
acquisitions;





•
            integrate
      acquired services, products or operations into our organization
      effectively;





•
            retain
      and motivate key personnel and retain the clients of acquired entities;
      and





•
            derive
      the intended financial benefits from our
  acquisitions.





Our
management may be required to devote significant time and attention to
acquisitions and to integrating newly acquired companies into our existing
operations. There are other risks associated with acquisitions,
including:




•
              unforeseen
      or hidden liabilities, including exposure to lawsuits, associated with
      newly acquired businesses or
assets;




•
            short-term
      deterioration in our operating results due to new acquisitions of
      unprofitable companies;




•
            failure
      to generate sufficient revenues to offset the costs and expenses of
      acquisitions;




•
              potential
      impairment losses or amortization expenses relating to intangible assets
      arising from any of such acquisitions, which may materially reduce our net
      income;




•
              potential
      conflicts with our existing employees and advertising clients as a result
      of our integration of newly acquired companies;
  and




•
              our
      inexperience in carrying out acquisitions, as we have not previously
      engaged in any such
transactions.




Any of
these risks could materially increase our costs and expenses associated with any
such acquisitions, which in turn could harm our financial condition and results
of operations, and we may be unable to recover our investment in the acquired
business or assets.




If
our clients forfeit the use of advertising time they have won in CCTV’s annual
open bidding process, we may lose the deposit we placed with CCTV.




During
CCTV’s annual open bidding process, we bid on behalf of our clients for
advertising time. As a condition for attending the CCTV bidding process, both
our clients and we are required to place a deposit with CCTV. The amount of our
deposit depends on the number of clients that we represent in the process.
According to CCTV’s bidding policy, such deposit will be returned to us when our
clients complete the placement of advertisements on a minimum percentage of the
advertising time won by them in the bidding process. The minimum percentage is
specified by CCTV. We have the right to sell the advertising time on which our
clients cannot or decide not to place advertisements, unless our clients do not
use the minimum percentage of such advertising time as required by CCTV, in
which case CCTV has the right to retain the deposit placed by our clients and
us, and demand further compensation from our clients and us if CCTV incurs
additional actual loss. Therefore, we may lose our deposit to CCTV if our
clients fail to place advertisements on the time slots that we have obtained for
our clients through the bidding process. If this happens, our financial
condition and results of operations may be materially and adversely affected. In
addition, any such occurrence may negatively affect our relationship with CCTV
and materially and adversely affect our business prospects. At December 31,
2009, our aggregate bidding deposits held by CCTV was RMB 3.8 million.





15




We
may encounter difficulties in expanding into regional television networks, which
may materially and adversely affect our business, financial condition and
results of operations.




We
currently obtain all of our advertising time slots from CCTV. One element of our
strategy is to expand our presence on regional television networks. Our
implementation of this strategy will be subject to many risks, including, but
not limited to, the following:




•
            we
      have no track record in obtaining advertisement resources from regional
      television networks;




•
              our
      experience and expertise gained from our cooperation with CCTV may not be
      successfully applied to the regional television
  networks;




•
            we
      do not have a long-standing history with these regional television
      networks as we do with CCTV;




•
              we
      will face intense competition from advertising companies that are already
      well-established in those
markets;




•
              we
      may not be able to accurately assess and adjust to the consumer tastes,
      preferences and demands in the relevant regional markets;
    and




•
            we
      may not be able to generate enough revenue to offset our
      costs.




These and
other risks may make our expansion into regional television networks
unsuccessful. In addition, implementing this strategy may require us to devote
significant resources to promoting advertising time slots we obtain from
regional television networks, which may divert our management’s attention from
our existing business. If we are not successful in expanding into regional
television networks, our business, financial condition and results of operations
may be materially and adversely affected.





We
may need additional capital to fund the growth of our business, which may not be
available on terms acceptable to us or at all, and which, if available, could
dilute your interest in our company.





Capital
requirements are difficult to plan in our rapidly changing industry. We expect
that our current cash and cash equivalents, cash flow from operations and the
proceeds from our initial public offering will be sufficient to meet our
anticipated cash needs, for both working capital and capital expenditures, for
the foreseeable future. If, however, there are unforeseen changes in general
business conditions or unexpected developments in our business or expansion, we
may require additional cash resources. For example, we may seek to sell
additional equity or debt securities or obtain a credit facility. The sale of
convertible debt securities or additional equity securities could result in
additional dilution to our shareholders. Furthermore, if we incur more debt, we
will be liable for increased debt service costs and might have to agree to
operating and financing covenants that would restrict our operations and
liquidity.





Our
ability to obtain additional capital on commercially acceptable terms is subject
to significant risks and uncertainties, including:





•
            investors’
      perception of, and demand for, our
securities;





•
            prevailing
      conditions of the capital markets in which we seek to raise
      funds;





•
            our
      future results of operations, financial condition and cash
      flows;





16




•
            PRC
      governmental regulation of foreign investment in advertising companies in
      China;





•
            PRC
      governmental policies relating to foreign exchange;
  and





•
            economic,
      political and other conditions in
China.




Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure to raise additional funds when needed could limit our ability to expand
or develop our operations to respond to market demand or competitive
challenges.





If
we are unable to adapt to changing technological developments in the media and
advertising industries, our competitiveness, business and results of operations
may be materially and adversely affected.





Technology
used in advertisement content production is evolving rapidly and we need to keep
pace with changes in technology and service features to meet the needs of
advertisers and to remain competitive. For example, cutting edge filming
equipment and editing tools, including advanced computer applications, are
increasingly utilized in the content production process to achieve high quality
and eye-catching visual effects. However, we may not have the financial or other
resources necessary to finance and implement future technological developments
or to replace obsolete technology. If we fail to identify, develop and
incorporate new features or technologies in our services and operations in a
timely and cost-effective manner, we may lose our competitiveness and demand for
our services may decrease, which would have a material and adverse effect on our
revenues and profitability. To keep pace with new technological developments, we
may be required to expend significant amounts of funds to develop or acquire new
technologies, which could significantly increase our costs and operating
expenses and materially strain our capital resources.





Our
quarterly operating results are difficult to predict and may fluctuate
significantly from period to period in the future.





Our
quarterly results of operations are difficult to predict and may fluctuate
significantly from period to period based on the seasonality of advertising
spending. Factors that are likely to cause our operating results to fluctuate,
such as a deterioration of economic conditions in China, are discussed elsewhere
in this annual report. If our revenues for a particular quarter are lower than
we expect, we may be unable to reduce our operating expenses for that quarter by
a corresponding amount, which would harm our operating results for that quarter.
In addition, we derive a portion of our revenues from our sales and marketing
services to CCTV in connection with major sporting events, the occurrence of
which vary from period to period. The amount of our fees for such services, and
the timing of confirmation for such fees, are determined by CCTV at its sole
discretion and are difficult to predict. As a result of the foregoing, our
quarterly results of operations may fluctuate significantly from period to
period and you should not rely on period-to-period comparisons of our historical
results of operations as an indication of our future performance.





We
may become subject to government actions due to our advertising content, which
may have a material adverse effect on our financial condition and results of
operations.





PRC
advertising laws and regulations require advertisers, advertising distributors
and advertising service providers, such as our company, to ensure that the
content of the advertisements prepared or distributed are fair, accurate and in
full compliance with applicable laws. Violation of these laws or regulations may
result in penalties against us, including fines, confiscation of advertising
fees, orders to cease disseminating the advertisements and orders to publish
public announcements to correct the misleading information. In circumstances
involving serious violations, the PRC government may revoke our license to
operate advertising business. In addition, such non-compliance can constitute a
violation of criminal law and criminal proceedings could be brought against us
as a result.





17




Under the
relevant PRC regulations, we are required to independently review and verify the
content of our clients’ advertisements for compliance and to confirm that any
required government review has been performed and that all necessary approvals
have been obtained. In addition, for advertising content related to certain
types of products, such as tobacco, alcohol, cosmetics, pharmaceuticals and
medical instruments, we are required to confirm that the advertisers have
obtained requisite government approvals relating to their operations, including
the advertisers’ operating qualifications and proofs of quality inspection.
Under our contracts with advertising clients, our advertisers are responsible
for obtaining any PRC government approvals or licenses required for their
advertisements and providing us with proof of such approvals or licenses prior
to our placing their advertisements. While we review advertising content for
compliance with relevant PRC laws and regulations, some advertisement that we
place may still not be in compliance with the relevant PRC laws and regulations
or the supporting documentation and government approvals provided to us by our
advertising clients may not be true and
complete. Our failure to conduct such review may subject us to governmental
inspections or actions.





Governmental
proceedings may harm our reputation and may divert significant amounts of our
management’s time and other resources. It may be difficult and expensive to
defend against such proceedings. We cannot assure you that we would successfully
defend such claims, and if we fail to do so we would have to bear the costs of
all such actions as well as any fines imposed on us. In addition, some of our
existing contracts with our advertising clients do not provide us with any
indemnity from our clients for claims relating to advertising content. As a
result of the foregoing, any governmental proceedings brought against us could
have a material adverse effect on our business, financial condition and results
of operations.





We
may be exposed to liabilities from allegations that certain of our clients’
advertisements may be false or misleading or that our clients’ products may be
defective.





We may
become, or may be joined as, a defendant in litigations or administrative
proceedings brought against our clients by third parties, our clients’
competitors, regulatory authorities or consumers. These actions could involve
claims alleging, among other things, that:


•
            advertisements
      made with respect to our advertising clients’ products or services are
      false, deceptive, misleading, libelous, injurious to the public welfare or
      otherwise offensive;





•
            our
      advertising clients’ products are defective or injurious and may be
      harmful to others; or





•
            marketing,
      communications or advertising materials created for our advertising
      clients infringe on the intellectual proprietary rights of third
      parties.




The
damages, costs, expenses or attorney’s fees arising from any of these claims
could have an adverse effect on our business and results of operations to the
extent that we are not adequately insured against such risks or indemnified by
our clients. In any case, our reputation may be negatively affected by such
allegations.





We
are using the brand name “Guang Er Gao Zhi” in Chinese characters in our company
logo and, through Mass Media, we have registered that brand name and logo with
the State Trademark Bureau in certain categories of goods and services. The
legal remedy available to us against unauthorized uses in other categories of
goods and services, and/or prior uses, by other companies of “Guang Er Gao Zhi”
and our logo is limited.





We
believe market recognition of the “Guang Er Gao Zhi (广而告之)” brand has
contributed significantly to the success of our business. “Guang Er Gao Zhi”
means “to spread the message far and wide,” and is also the name of a one-minute
daily public service announcement program on CCTV that we produce. Through Mass
Media, we has registered with the State Trademark Bureau in the PRC the
trademark relating to our brand name and our logo in the category of book
publishing, movie production, radio and television program production and in the
category of advertisement by posters, outdoor advertisement, mail advertisement,
radio advertisement, television advertisement and advertisement agency
services.





18




Under PRC
law, the protection of our registered trademark is limited to the categories of
goods and services as to which such trademark is registered. Consequently, the
legal remedy available to us against unauthorized uses of our trademark in other
categories of goods and services by other companies is limited. In addition, we
are aware of several companies in China that are unrelated to us and have been
using the Chinese characters of “Guang Er Gao Zhi” as part of their company
names for a period of time. We may not be able to prevent the use of the phrase
in the corporate names of these other companies, unless our trademark is legally
recognized as a “well-known trademark.” The public may be confused and may
mistakenly associate the products, services or activities of those companies
with us, which may result in harm to the reputation of our company.




We
may be subject to intellectual property infringement claims, which may be
expensive to defend and may disrupt our business and operations.





We place
advertisements provided by our advertising clients on television and also
produce television advertisements based on the information provided to us by our
advertising clients. In doing so, we may employ information, software programs,
technology or equipment supplied by other parties, to which such parties may not
have intellectual property rights. Some of our existing contracts with our
advertising clients do not provide us with indemnity from our clients for any
intellectual property infringement claims relating to the advertisements
provided by our clients. We cannot be certain that our operations or any aspects
of our business do not or will not infringe upon patents, copyrights or other
intellectual property rights held by third parties. Although we are not aware of
any such claims, we may become subject to legal proceedings and claims from time
to time relating to the intellectual property rights of others. If we are found
to have violated the intellectual property rights of others, we may be subject
to liability for our infringement activities or may be prohibited from using
such intellectual property, and we may incur licensing fees or be forced to
develop alternatives of our own. In addition, we may incur significant expenses,
and may be forced to divert management’s time and other resources from our
business and operations to defend against these third-party infringement claims,
regardless of their merits. Successful infringement or licensing claims made
against us may result in significant monetary liabilities and may materially
disrupt our business and operations by restricting or prohibiting our use of the
intellectual property in question.





If
we fail to protect our intellectual property rights, it could harm our business
and competitive position.





We
operate in an industry that places a premium on creative abilities and artistic
talents. Many of our work products resulting from our creative activities are
the subject of intellectual property rights, on which our business relies to
stay competitive in the marketplace. We rely on a combination of copyright,
trade secrets, confidentiality procedures and contractual provisions to protect
our intellectual property rights. Nevertheless, these afford only limited
protection and policing unauthorized use of proprietary information can be
difficult and expensive. In addition, intellectual property rights historically
have not been enforced in the PRC to the same extent as in the United States. We
may not be able to detect unauthorized use of, or take appropriate steps to
enforce, our intellectual property rights and this could have a material adverse
effect on our business, operating results and financial condition.





The
discontinuation of any of the preferential tax treatments or the financial
incentives currently available to us in the PRC and a newly enacted PRC tax law
could adversely affect our overall results of operations.





The PRC
government has provided various tax incentives to our subsidiary in China. These
incentives include income tax exemption and reduced enterprise income tax rates.
For example, under the PRC enterprise income tax law effective prior to January
1, 2008, our PRC subsidiary, Universal, as a foreign-invested enterprise
established in the Shenzhen Special Economic Zone, was entitled to a
preferential income tax rate of 15% on the income generated by its offices in
Shenzhen and an income tax rate of 30% on the income generated by its offices
outside of Shenzhen, as compared to the statutory income tax rate of 33%. In
addition, Universal was fully exempted from PRC income tax commencing from its
first profit-making year, followed by a 50% reduction in PRC income tax for the
next two years. As a result, Universal was exempted from PRC income tax for the
year ended December 31, 2007 and was entitled to a 50% income tax reduction for
each of the years ending December 31, 2008 and 2009.





19




On March
16, 2007, the PRC National People’s Congress enacted the Enterprise Income Tax
Law, and on December 6, 2007, the PRC State Council issued the Implementation
Regulations of the Enterprise Income Tax Law, both of which became effective on
January 1, 2008. The Enterprise Income Tax Law and its Implementation
Regulations, or the new EIT law, imposes a uniform tax rate of 25% on all PRC
enterprises, including foreign-invested enterprises, and eliminates or modifies
most of the tax exemptions, reductions and preferential treatments available
under the previous tax laws and regulations. Under the new EIT law, enterprises
that were established before March 16, 2007 and already enjoy preferential tax
treatments (i) in the case of preferential tax rates, continue to enjoy the tax
rates which are being gradually increased to the new tax rates within five years
from January 1, 2008 or (ii) in the case of preferential tax exemption or
reduction for a specified term, continue to enjoy the preferential tax holiday
until the expiration of such term. In accordance with a directive issued by the
State Council in December 2007, the 15% preferential income tax we enjoyed prior
to 2008 was be increased to 18% in 2008 and 20% in 2009, and will be increased
to 22% in 2010, 24% in 2011 and 25% in 2012. As a result of the discontinuation
of the preferential tax treatment and the new EIT law, our effective tax rate
could substantially increase from 4.9% in 2007 up to as much as 25% in the near
future, which could have a significant adverse effect on our net income. For
2008 and 2009, our effective tax rate increased to 14.8% and 12.6%,
respectively, mainly due to the expiration on January 1, 2008 of the income tax
exemption that Universal had enjoyed in 2007 and the imposition of withholding
tax on dividends payable by our PRC subsidiary in 2008 and 2009.





Any
increase in the enterprise income tax rate applicable to us or discontinuation
or reduction of any of the preferential tax treatments or financial incentives
currently enjoyed by our subsidiary in the PRC could adversely affect our
business, operating results and financial condition.





The
dividends we receive from our PRC subsidiary and our global income may be
subject to PRC tax under the new EIT law, which would have a material adverse
effect on our results of operations; our foreign ADS holders may be subject to a
PRC withholding tax upon the dividends payable by us and upon gains realized on
the sale of our ADSs, if we are classified as a PRC “resident
enterprise.”





Under the
new EIT law, dividends, interests, rent, royalties and gains on transfers of
property payable by a foreign-invested enterprise in the PRC to its foreign
investor who is a non-resident enterprise are subject to a 10% withholding tax,
unless such non-resident enterprise’s jurisdiction of incorporation has a tax
treaty with the PRC that provides for a reduced rate of withholding tax. The
British Virgin Islands, where UIAL, our PRC subsidiary’s direct holding company,
is incorporated, does not have such a tax treaty with the PRC. If UIAL is
considered a non-resident enterprise, this new 10% withholding tax imposed on
our dividend income received from our PRC subsidiary would reduce our net income
and have an adverse effect on our operating results. We have accrued this
withholding tax in an amount of RMB 5,398,047 and RMB 2,274,872 for the years
ended December 31, 2008 and 2009, respectively, based on 30% of net income
attributable to UIAL that we do not expect to reinvest in our
business.





Under the
new EIT law, an enterprise established outside the PRC with its “de facto
management body” within the PRC is considered a resident enterprise and will be
subject to the enterprise income tax at the rate of 25% on its worldwide income.
The “de facto management body” is defined as the organizational body that
effectively exercises overall management and control over production and
business operations, personnel, finance and accounting, and properties of the
enterprise. It remains unclear how the PRC tax authorities will interpret such a
broad definition. Substantially all of our management members are based in the
PRC. If the PRC tax authorities subsequently determine that we should be
classified as a resident enterprise, then our worldwide income will be subject
to income tax at a uniform rate of 25%, which may have a material adverse effect
on our financial condition and results of operations. Notwithstanding the
foregoing provision, the new EIT law also provides that, if a resident
enterprise directly invests in another resident enterprise, the dividends
received by the investing resident enterprise from the invested enterprise are
exempted from income tax, subject to certain conditions. Therefore, if CMM and
UIAL are classified as resident enterprises, the dividends received from our PRC
subsidiary may be exempted from income tax. However, it remains unclear how the
PRC tax authorities will interpret the PRC tax resident treatment of an offshore
company, like us, having indirect ownership interests in PRC enterprises through
intermediary holding vehicles.





20




Moreover,
under the new EIT law, foreign ADS holders may be subject to a 10% withholding
tax upon dividends payable by us and gains realized on the sale or other
disposition of ADSs or ordinary shares, if such income is sourced from within
the PRC. Although CMM is incorporated in the Cayman Islands, it remains unclear
whether the dividends payable by us or the gains our foreign ADS holders may
realize will be regarded as income from sources within the PRC if we are
classified as a PRC resident enterprise. Any such tax will reduce the returns on
your investment in our ADSs.




Our
insurance coverage is limited and we may incur substantial costs as a result of
a severe business liability or disruption or other unexpected events, which
could have a material adverse effect on our financial condition and results of
operations.





Insurance
companies in China offer limited business insurance products and generally do
not, to our knowledge, offer business liability insurance. Business disruption
insurance is available to a limited extent in China, but we have determined that
the risks of disruption, the cost of such insurance and the difficulties
associated with acquiring such insurance make it impractical for us to have such
insurance. We do not maintain insurance coverage for any kinds of business
liabilities or disruptions and would have to bear the costs and expenses
associated with any such events out of our own resources.




Any
failure to achieve and maintain effective internal controls could have a
material adverse effect on our business, results of operations and the market
price of our ADSs.





The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, adopted rules requiring every public company to include a
management report on such company’s internal controls over financial reporting
in its annual report, which contains management’s assessment of the
effectiveness of the company’s internal controls over financial reporting. In
addition, an independent registered public accounting firm must attest to and
report on the effectiveness of the company’s internal controls over financial
reporting.





Our management and independent registered public accounting firm have not
identified any material weaknesses or significant deficiencies in our internal
control over financial reporting for the year ended December 31, 2009. However,
we cannot assure you that in the future our management or our independent
registered public accounting firm will not identify material weaknesses or
significant deficiencies during the Section 404 of the Sarbanes-Oxley Act audit
process or for other reasons. In addition, because of the inherent limitations
of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. As a
result, if we fail to maintain effective internal controls over financial
reporting or should we be unable to prevent or detect material misstatements due
to error or fraud on a timely basis, investors could lose confidence in the
reliability of our financial statements, which in turn could harm our business,
results of operations and negatively impact the market price of our ADSs, and
harm our reputation. Furthermore, we have incurred and expected to continue to
incur considerable costs and to use significant management time and other
resources in an effort to comply with Section 404 and other requirements of the
Sarbanes-Oxley Act.




21




We
have granted employee stock options under our equity incentive plan and may
continue to grant stock options and other share-based compensation in the
future. Our net income could be adversely affected as a result.





We
adopted an equity incentive plan in July 2008 that permits the grant of
incentive stock options, non-statutory stock options, restricted stock, stock
appreciation rights, restricted stock units, performance units, performance
shares, and other share-based awards to employees, directors and consultants of
our company. In July 2010, we also conditionally adopted a 2010 share option
scheme, which will become effective if and when our ordinary shares are listed
on the Stock Exchange of Hong Kong Limited, or SEHK. Once our 2010 share option
scheme becomes effective, no further option will be granted under our 2008
equity incentive plan. We have granted to our employees options under the 2008
equity inventive plan and as of August 20, 2010, options to purchase 17,655,093
ordinary shares are outstanding. As a result of these option grants and
potential future grants under the 2009 equity incentive plan or the 2010 share
option scheme, we have incurred share-based compensation expenses and expect to
incur such expenses in future periods. The amount of these expenses will be
based on the fair value of the share-based awards. We have adopted ASC 718 and
ASC 505-50 for the accounting treatment of our equity incentive plan. As a
result, we will have to account for compensation costs for all stock options,
including stock options granted to our directors and employees, using a
fair-value based method and recognize expenses in our consolidated statement of
income in accordance with the relevant rules under U.S. GAAP, which may have a
material adverse effect on our net income. Moreover, the additional expenses
associated with share-based compensation may reduce the attractiveness of such
incentive plan to us. Employee stock options or other share- based compensation
we may grant in the future may have a material adverse effect on our
profitability.





We
may be a passive foreign investment company, or PFIC, which could result in
adverse U.S. federal income tax consequences to U.S. holders of our ADSs or
ordinary shares.





Depending
upon the value of our ordinary shares and ADSs and the nature of our assets and
income over time, we could be classified as a passive foreign investment
company, or PFIC, by the U.S. Internal Revenue Service, or IRS, for U.S. federal
income tax purposes. Based on the composition of our income and valuation of our
assets, we believe we were a PFIC during the taxable year ended December 31,
2009. In addition, there can be no assurance that we will not be a PFIC for the
taxable year ending December 31, 2010, as PFIC status is tested after the close
of each year and depends on our assets and income in such year.




We will
be classified as a PFIC in any taxable year if either: (1) the average quarterly
percentage value of our gross assets during the taxable year that produce
passive income or are held for the production of passive income is at least 50%
of the value of our total gross assets or (2) 75% or more of our gross income
for the taxable year is passive income. The value of our assets for a taxable
year is determined based on the sum of our average market capitalization, which
is our share price multiplied by the total number of our outstanding shares, and
our average liabilities over that taxable year. Accordingly, we would be a PFIC
for the taxable year ending December 31, 2010 if the average quarterly value of
our assets for the taxable year is not more than twice the average quarterly
value of our cash, cash equivalents and other assets that produce passive income
or are held for the production of passive income.





If we are
classified as a PFIC in any taxable year in which you hold our ADSs or ordinary
shares and you are a U.S. Holder (as defined under “Item 10. Additional
Information Taxation—U.S. Federal Income Taxation”),
you generally will become subject to increased U.S. federal income tax
liabilities and special U.S. federal income tax reporting requirements. For more
information on the U.S. federal income tax consequences to you that would result
from our classification as a PFIC, see “Item 10. Additional Information
Taxation—U.S. Federal Income Taxation—Passive Foreign Investment
Company.”





Risks
Related to Doing Business in China





Changes
in China’s economic, political or social conditions or government policies could
have a material adverse effect on our business and operations.





Substantially
all of our assets are located in and all of our revenues are sourced from the
PRC. Accordingly, our business, financial condition, results of operations and
prospects may be influenced to a significant degree by political, economic and
social conditions in the PRC generally and by continued economic growth in the
PRC as a
whole.




22





The PRC
economy differs from the economies of most developed countries in many respects,
including the level of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. Although the PRC
government has implemented measures since the late 1970s emphasizing the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of improved corporate
governance in business enterprises, a substantial portion of productive assets
in the PRC is still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. The PRC government also exercises significant
control over the PRC’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.





While the
PRC economy has experienced significant growth over the past decades, 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 benefit the overall
PRC economy, but may also have a negative effect on us. For example, our
operating results and financial condition may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us. The PRC government has implemented certain measures,
including interest rate increases, to control the pace of economic growth. These
measures may cause decreased economic activity in the
PRC, which could in turn reduce the demand for our services and adversely affect
our operating results and financial condition.





The PRC
government also regulates television broadcasts, including the amount of
broadcast time that may be set aside for advertisements. Changes in these
regulations, and particularly any reduction in the amount of broadcast time that
may be set aside for advertisements, could have a material adverse impact on our
business and operations.




Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit
the legal protections available to you and us.





The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which legal decisions have limited value as
precedents. In the late 1970s, the PRC government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. The overall effect of legislation over the past three decades has
significantly increased the protections afforded to various forms of foreign or
private-sector investment in the PRC. Our PRC operating subsidiary, Universal,
is a foreign-invested enterprise and is subject to laws and regulations
applicable to foreign investment in the PRC as well as laws and regulations
applicable to foreign-invested enterprises. Universal is a privately owned
company and is subject to various PRC laws and regulations that are generally
applicable to companies in the PRC. These laws and regulations are still
evolving, and their interpretation and enforcement involve uncertainties. For
example, we may have to resort to administrative and court proceedings to
enforce the legal protections that we enjoy either by law or contract. However,
since PRC administrative and court authorities have significant discretion in
interpreting and implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court proceedings and
the level of legal protection we enjoy in the PRC legal system than in more
developed legal systems. These uncertainties may also impede our ability to
enforce the contracts we have entered into. As a result, these uncertainties
could materially and adversely affect our business and
operations.





23





The
approval of the China Securities Regulatory Commission, or the CSRC, may be
required in connection with our initial public offering that was completed in
August 2008; the failure to obtain this approval, if required, could have a
material adverse effect on our business, operating results and reputation as
well as the trading price of our ADSs.





On August
8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, or
MOFCOM, the State-owned Assets Supervision and Administration Commission of the
State Council, the State Administration for Taxation, the State Administration
for Industry and Commerce, or the SAIC, the CSRC and the State Administration of
Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules,
which became effective on September 8, 2006. The M&A Rules, among other
things, include provisions that purport to require that an offshore special
purpose vehicle formed for the purpose of an overseas listing of securities in a
PRC company obtain the approval of the CSRC prior to the listing and trading of
such special purpose vehicle’s securities on an overseas stock exchange. On
September 21, 2006, the CSRC published on its official website procedures
regarding its approval of overseas listings by special purpose vehicles. The
CSRC approval procedures require the filing of an application and supporting
documents with the CSRC.





We
completed our initial public offering in August 2008. The application of the
M&A Rules with respect to our initial public offering remained unclear. Our
PRC counsel had advised us that, because we were owned by non-PRC residents, our
company was not viewed as a special purpose vehicle that was subject to the
M&A Rules, thus we were not required to apply to the CSRC for approval.
However, if a CSRC approval was required or is retroactively required under new
PRC rules or regulations but not obtained, we may face regulatory actions or
other sanctions from the CSRC or other PRC regulatory agencies. Any
uncertainties or negative publicity regarding this CSRC approval requirement
could have an adverse effect on the trading price of our ADSs.





The
M&A Rules set forth complex procedures for acquisitions conducted by foreign
investors, which could make it more difficult to pursue growth through
acquisitions.





The
M&A Rules, among other things, set forth complex procedures and requirements
that could make merger and acquisition activities by foreign investors more
time-consuming and complex, including requirements in some instances that the
Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise. Part of
our growth strategy includes acquiring complementary businesses or assets.
Complying with the requirements of the M&A Rules to complete such
transactions could be time-consuming, and any required approval processes,
including obtaining approval from the Ministry of Commerce, may delay or inhibit
the completion of such transactions, which could affect our ability to expand
our business or maintain our market share. In addition, in the future, if any of
our acquisitions were subject to the M&A Rules and were found not to be in
compliance with the requirements of the M&A Rules, relevant PRC regulatory
agencies may impose fines and penalties on our operations in the PRC, limit our
operating privileges in the PRC, or take other actions that could have a
material adverse effect on our business, financial condition, results of
operations, reputation and prospects.





PRC
regulations relating to offshore investment activities by PRC residents may
increase the administrative burden we face and may subject our PRC resident
beneficial owners or employees to personal liabilities, limit our subsidiary’s
ability to increase its registered capital or distribute profits to us, limit
our ability to inject capital into our PRC subsidiary, or may otherwise expose
us to liability under PRC law.





SAFE has
promulgated regulations that require PRC residents and PRC corporate entities to
register with local branches of SAFE in connection with their direct or indirect
offshore investment activities. These regulations may apply to our shareholders
who are PRC residents and may apply to any offshore acquisitions that we make in
the future.





24





SAFE
regulations require PRC residents who make, or have previously made, direct or
indirect investments in offshore companies to register those investments. In
addition, any PRC resident who is a direct or indirect shareholder of an
offshore company is required to update his registration with the relevant SAFE
branches, with respect to that offshore company, any material change involving
increase or decrease of capital, transfer or swap of shares, merger, division,
equity or debt investment or creation of any security interest. Moreover, the
PRC subsidiaries of that offshore company are required to coordinate and
supervise the filing of SAFE registrations by the offshore company’s
shareholders who are PRC residents in a timely manner. If a PRC shareholder with
a direct or indirect stake in an offshore parent company fails to make the
required SAFE registration, the PRC subsidiaries of such offshore parent company
may be prohibited from making distributions of profit to the offshore parent and
from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries, and the offshore
parent company may also be prohibited from injecting additional capital into its
PRC subsidiaries. Furthermore, failure to comply with the various SAFE
registration requirements described above may result in liability for the PRC
shareholders and the PRC subsidiary
under PRC law for foreign exchange registration evasion.




There is
uncertainty concerning under what circumstances a foreign national can be
classified as a PRC resident. Mr. Shengcheng Wang, our controlling shareholder,
is a Canadian citizen who spends a certain amount of his time in China each year
for business purposes. We have been advised by our PRC legal counsel that Mr.
Wang is not subject to SAFE registration. However, the PRC government
authorities may interpret Mr. Wang’s status differently or Mr. Wang’s status may
change in the future if Mr. Wang extends his stay in China. Moreover, we may not
be fully informed of the identities of the beneficial owners of our company and
we cannot assure you that all of our PRC resident beneficial owners will comply
with the SAFE regulations. The failure of our beneficial owners who are PRC
residents to make any required registrations may subject us to fines and legal
sanctions, and prevent us from being able to make distributions or pay
dividends, as a result of which our business operations and our ability to
distribute profits to you could be materially and adversely
affected.





On March
28, 2007, SAFE issued the Operating Procedures on Administration of Foreign
Exchange regarding PRC Individuals’ Participation in Employee Share Ownership
Plans and Employee Stock Option Plans of Overseas Listed Companies, or the Stock
Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock
options by an overseas publicly listed company are required, through a PRC agent
or PRC subsidiary of such overseas publicly listed company, to register with
SAFE and complete certain other procedures. Our PRC Subsidiary and our PRC
employees who have been granted stock options are subject to the Stock Option
Rule. If we or our PRC employees fail to comply with such regulation, we or our
employees may be subject to fines and legal sanctions. See “Regulation—SAFE
Regulations on Offshore Investment by PRC Residents and Employee Stock
Options.”




We
rely principally on dividends and other distributions on equity paid by our
wholly owned operating subsidiary to fund any cash and financing requirements we
may have, and any limitation on the ability of our operating subsidiary to pay
dividends to us could have a material adverse effect on our ability to borrow
money or pay dividends.





As a
holding company, we rely principally on dividends and other distributions on
equity paid by Universal for our cash requirements, including funds necessary to
service any debt we may incur. If Universal incurs debt on its own behalf in the
future, the instruments governing the debt may restrict its ability to pay
dividends or make other distributions to us. Furthermore, relevant PRC laws and
regulations permit payments of dividends by Universal only out of its retained
earnings, if any, determined in accordance with PRC accounting standards and
regulations. Under PRC laws and regulations, Universal is required to set aside
a portion of its net income each year to fund a statutory surplus reserve. This
reserve is not distributable as dividends until the accumulated amount of such
reserve has exceeded 50% of its registered capital. Limitation on the ability of
Universal to pay dividends to us could materially and adversely limit our
ability to borrow money outside of the PRC or pay dividends to holders of our
ADSs. Also see “—Risks Related to Our Business and Industry—The dividends we
receive from our PRC subsidiary and our global income may be subject to PRC tax
under the new EIT law, which would have a material adverse effect on our results
of operations; our foreign ADS holders may be subject to a PRC withholding tax
upon the dividends payable by us and upon gains realized on the sale of our
ADSs, if we are classified as a PRC ‘resident enterprise.’”


25





PRC
regulation of loans and direct investment by offshore holding companies to PRC
entities may delay or prevent us from using the proceeds of our initial public
offering to make loans or additional capital contributions to our PRC operating
subsidiary.





In order
to utilize the proceeds of our initial public offering, we, as an offshore
holding company of our PRC operating subsidiary, may use the proceeds of our
initial public offering to make loans to our PRC subsidiary, or we may make
additional capital contributions to our PRC subsidiary. Any loans to our PRC
subsidiary are subject to PRC regulations and approvals. For example, loans by
us to finance the activities of Universal, a foreign-invested enterprise, cannot
exceed statutory limits and must be registered with SAFE or its local
counterpart.





We may
also decide to finance our PRC subsidiary by means of capital contributions. Any
additional capital contributions to Universal must be approved by MOFCOM. We
cannot assure you that we can obtain the necessary government registrations or
approvals on a timely basis, if at all, with respect to future loans or capital
contributions by us to Universal. If we fail to timely receive such
registrations or approvals, or at all, our ability to use the proceeds of our
initial public offering and to capitalize our PRC operations would be adversely
affected, which in turn would adversely and materially affect our business
prospects and growth plan.





Restrictions
on currency exchange under PRC laws may limit our ability to convert cash
derived from our operating activities into foreign currencies and may materially
and adversely affect the value of your investment.





Substantially
all of our revenues and operating expenses are denominated in Renminbi. Under
the relevant foreign exchange restrictions in the PRC, conversion of the
Renminbi is permitted, without the need for SAFE approval, for “current account”
transactions, which includes dividends, trade, and service-related foreign
exchange transactions. Conversion of the Renminbi for “capital account”
transactions, which includes foreign direct investment and loans, is still
subject to significant limitations and requires approvals from and registration
with SAFE and other PRC regulatory authorities. We cannot assure you that SAFE
or other PRC governmental authorities will not further limit, or eliminate, our
ability to purchase foreign currencies in the future. Any existing and future
restrictions on currency exchange in the PRC may limit our ability to convert
cash derived from our operating activities into foreign currencies to fund
expenditures denominated in foreign currencies. If the foreign exchange
restrictions in the PRC prevent us from obtaining U.S. dollars or other foreign
currencies as required, we may not be able to pay dividends in U.S. dollars or
other foreign currencies to our shareholders, including holders of our ADSs.
Furthermore, foreign exchange transactions under the capital account
transactions could affect Universal’s ability to obtain foreign exchange through
debt or equity financing, including by means of loans or capital contributions
from us.





Fluctuations
in exchange rates could result in foreign currency exchange losses.





As
substantially all of our cash and cash equivalents are denominated in Renminbi
and the net proceeds from our initial public offering were denominated in U.S.
dollars, fluctuations in exchange rates between the U.S. dollar and the Renminbi
will affect the relative purchasing power of these proceeds and our balance
sheet and earnings per share in U.S. dollars. In addition, appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business, financial condition or results of
operations. The Renminbi is reported to be pegged against a basket of
currencies, determined by the People’s Bank of China. The Renminbi may
appreciate or depreciate significantly in value against the U.S. dollar in the
long term, depending on the fluctuation of the basket of currencies against
which it is currently valued, or it may be permitted to enter into a full float,
which may also result in a significant appreciation or depreciation of the
Renminbi against the U.S. dollar. Fluctuations in the exchange rate will also
affect the relative value of any dividend we pay, which will be exchanged into
U.S. dollars, and earnings from and the value of any U.S. dollar-denominated
investments we make in the future.





26





Only
limited hedging transactions are available in the PRC to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert Renminbi into foreign currency.




We
face risks related to epidemics, which may severely disrupt our business and
operations.




Our
business could be materially and adversely affected by epidemics. For example,
from December 2002 to June 2003, PRC and certain other countries experienced an
outbreak of a new and highly contagious form of atypical pneumonia now known as
severe acute respiratory syndrome, or SARS. During May and June of 2003, the PRC
government closed many businesses in the PRC to prevent transmission of SARS.
Since 2003, there have been reports of occurrences of avian flu in various parts
of the PRC, including a number of confirmed human cases and deaths. In 2009,
there was an outbreak of H1N1 influenza virus (also know as “swine flu”) in
Mexico and that virus quickly spread to China and other countries in the world,
resulting in a world wide epidemic. Any actual or threatened outbreak of
epidemics in the PRC may, among other things, significantly disrupt our and our
clients’ business operations and severely restrict the level of economic
activities in affected areas, which will in turn reduce the demand for
advertising services.




Our
business may be adversely affected by unforeseen events or natural disasters
that are beyond our control.




Our
business may be adversely affected by certain events or natural disasters beyond
our control, such as the magnitude 8.0 earthquake that struck Sichuan Province
on May 12, 2008. Many television stations in China significantly changed their
programming after the earthquake to broadcast developments and rescue operations
relating to the earthquake. All television channels in China ceased to broadcast
any advertisements during a three-day national mourning period, from May 19,
2008 to May 21, 2008. In addition, certain television advertisements with
content that was deemed to be inappropriate for broadcast during coverage of
this tragic event were suspended in May and June 2008. Any natural disasters or
unforeseen events in the future may cause similar changes to the programming and
broadcasting schedules of television stations in China and may adversely affect
the broadcast of our clients’ advertisements, which may have a material adverse
effect on our business, financial condition and results of
operations.




Risks
Related to Our Ordinary Shares and ADSs




The
trading prices of our ADSs are likely to be volatile, which could result in
substantial losses to investors.




The
trading prices of our ADSs experienced, and may continue to experience,
significant volatility. For the period from August 4, 2008 to August 20, 2010,
the trading price of our ADSs on NYSE Arca and NYSE, as the case may be, has
ranged from a low of US$1.13 per ADS to a high of US$6.85 per ADS. This may
happen because of broad market and industry factors, like the performance and
fluctuation of the market prices of other companies with business operations
located mainly in the PRC that have listed their securities in the United
States. A number of PRC companies have listed or are in the process of listing
their securities on U.S. stock markets. The securities of some of these
companies have experienced significant volatility, including price declines in
connection with their initial public offerings. The trading performances of
these PRC companies’ securities after their offerings may affect the attitudes
of investors toward PRC companies listed in the United States in general and
consequently may impact the trading performance of our ADSs, regardless of our
actual operating performance.




In
addition to market and industry factors, the price and trading volume for our
ADSs may be highly volatile for factors specific to our own operations,
including the following:




•
            variations
      in our revenues, earnings and cash
flow;





27




•
            announcements
      of new investments, acquisitions, strategic partnerships, or joint
      ventures;





•
            announcements
      of new services and expansions by us or our
  competitors;





•
            changes
      in financial estimates by securities
analysts;





•
            additions
      or departures of key personnel;





•
              release
      of lock-up or other transfer restrictions on our outstanding equity
      securities or sales of additional equity
  securities;





•
            potential
      litigation or regulatory investigations;
and





•
            fluctuations
      in market prices for our services.




Any of
these factors may result in large and sudden changes in the volume and price at
which our ADSs will trade. We cannot assure you that these factors will not
occur in the future.





Substantial
future sales or perceived sales of our ADSs or ordinary shares in the public
market could cause the price of our ADSs to decline.





Sales of
our ADSs or ordinary shares in the public market, or the perception that these
sales could occur, could cause the market price of our ADSs to decline. As of
August 20, 2010, we had 716,375,000 ordinary shares outstanding, including
216,375,000 ordinary shares represented by 7,212,500 ADSs, and 17,655,093
ordinary shares issuable upon the exercise of options.All ADSs
are freely transferable without restriction or additional registration under the
Securities Act of 1933, as amended, or the Securities Act. The remaining
ordinary shares outstanding will be available for sale and, in the case of the
ordinary shares that certain option holders will receive when they exercise
their share options, until the later of (i) the first anniversary of the grant
date, and (ii) the expiration of any relevant lock-up periods, subject to volume
and other restrictions that may be applicable under Rule 144 and Rule 701 under
the Securities Act. We cannot predict what effect, if any, market sales of
securities held by our significant shareholders or any other shareholder or the
availability of these securities for future sale will have on the market price
of our ADSs.





Our
articles of association contain anti-takeover provisions that could have a
material adverse effect on the rights of holders of our ordinary shares and
ADSs.





Our
currently effective articles of association is our fourth amended and restated
memorandum and articles of association which limit the ability of others to
acquire control of our company or cause us to engage in change-of-control
transactions. These provisions could have the effect of depriving our
shareholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging third parties from seeking to obtain control of
our company in a tender offer or similar transaction. For example, our board of
directors has the authority, without further action by our shareholders, to
issue preferred shares in one or more series and to fix their designations,
powers, preferences, privileges, and relative participating, optional or special
rights and the qualifications, limitations or restrictions, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights associated with
our ordinary shares, in the form of ADS or otherwise. Preferred shares could be
issued quickly with terms calculated to delay or prevent a change in control of
our company or make removal of management more difficult. If our board of
directors decides to issue preferred shares, the price of our ADSs may fall and
the voting and other rights of the holders of our ordinary shares and ADSs may
be materially and adversely affected.





28





You
may face difficulties in protecting your interests, and your ability to protect
your rights through the U.S. federal courts may be limited, because we are
incorporated under Cayman Islands law.





We are an
exempted company incorporated under the laws of the Cayman Islands. Our
corporate affairs are governed by our memorandum and articles of association,
the Companies Law of the Cayman Islands (2010 Revision) and the common law of
the Cayman Islands. The rights of shareholders to take action against the
directors, actions by minority shareholders and the fiduciary responsibilities
of our directors to us under Cayman Islands law are to a large extent governed
by the common law of the Cayman Islands. The common law of the Cayman Islands is
derived in part from comparatively limited judicial precedent in the Cayman
Islands as well as from English common law, the decisions of whose courts are of
persuasive authority, but are not binding, on a court in the Cayman Islands. The
rights of our shareholders and the fiduciary responsibilities of our directors
under Cayman Islands law are not as clearly established as they would be under
statutes or judicial precedent in some jurisdictions in the United States. In
particular, the Cayman Islands has a less developed body of securities laws as
compared to the United States. Some U.S. states, such as Delaware, have more
fully developed and judicially interpreted bodies of corporate law than the
Cayman Islands. In addition, Cayman Islands companies may not have standing to
initiate a shareholder derivative action in a federal court of the United
States.





The
Cayman Islands courts are also unlikely:





•
            to
      recognize or enforce against us judgments of courts of the United States
      based on certain civil liability provisions of U.S. securities laws;
      and





•
            to
      impose liabilities against us, in original actions brought in the Cayman
      Islands, based on certain civil liability provisions of U.S. securities
      laws that are penal in nature.





There is
no statutory recognition in the Cayman Islands of judgments obtained in the
United States, although the courts of the Cayman Islands will in certain
circumstances recognize and enforce a non-penal judgment of a foreign court of
competent jurisdiction without retrial on the merits.





As a
result of all of the above, public shareholders may have more difficulty in
protecting their interests in the face of actions taken by management, members
of the board of directors or controlling shareholders than they would as public
shareholders of a company incorporated in the United States. For a discussion of
significant differences.





Certain
judgments obtained against us by our shareholders may not be
enforceable.





We are a
Cayman Islands company and all of our assets are located outside of the United
States. Substantially all of our current operations are conducted in the PRC. In
addition, most of our directors and officers are nationals and residents of
countries other than the United States. A substantial portion of the assets of
these persons are located outside the United States. As a result, it may be
difficult or impossible for you to bring an action against us or against these
individuals in the United States in the event that you believe that your rights
have been infringed under the United States federal securities laws or
otherwise. Even if you are successful in bringing an action of this kind, the
laws of the Cayman Islands and of the PRC may render you unable to enforce a
judgment against our assets or the assets of our directors and
officers.





The
voting rights of holders of ADSs are limited by the terms of the deposit
agreement, and you may not be able to exercise your right to vote your ordinary
shares.





As a
holder of our ADSs, you will only be able to exercise the voting rights with
respect to the underlying ordinary shares in accordance with the provisions of
the deposit agreement. Under the deposit agreement, you must vote by giving
voting instructions to the depositary. Upon receipt of your voting instructions,
the depositary will vote the underlying ordinary shares in accordance with these
instructions. You will not be able to directly exercise your right to vote with
respect to the underlying shares unless you withdraw the shares. Under our
currently effective articles of association, the minimum notice period required
for convening a general meeting is 14 days. When a general meeting is convened,
you may not receive sufficient advance notice to withdraw the shares underlying
your ADSs to allow you to vote with respect to any specific matter. If we ask
for your instructions, the depositary will notify you of the upcoming vote and
will arrange to deliver our voting materials to you. We cannot assure you that
you will receive the voting materials in time to ensure that you can instruct
the depositary to vote your shares. In addition, the depositary and its agents
are not responsible for failing to carry out voting instructions or for their
manner of carrying out your voting instructions. This means that you may not be
able to exercise your right to vote and you may have no legal remedy if the
shares underlying your ADSs are not voted as you requested.





29





If
our ordinary shares are listed on SEHK, the price of our ADSs may not be the
same as, and may be affected by, that of our ordinary shares on the Hong Kong
Stock Exchange.





We have
applied to list our ordinary shares on SEHK. If our application is approved, our
ordinary shares will be listed on SEHK. The NYSE and the SEHK have different
trading hours, trading volume, trading and listing rules, liquidity and investor
base (including different levels of retail and institutional participation). As
a result, the price of our ADSs on the NYSE may not be the same as that of our
ordinary shares on the SEHK and any changes in the price and trading volume of
our ordinary shares may affect that of our ADSs. The trading price of our
ordinary shares is denominated in HK dollars while that of our ADSs is
denominated in U.S. dollars and as a result, any change in the exchange rates
between HK dollars and U.S. dollars could also affect the price of our ADSs.
Furthermore, there is no direct trading or settlement between the NYSE and the
SEHK and you are required to return our ADSs in exchange for our ordinary shares
and go through certain other procedures if you want to trade on SEHK. There is
no assurance that such an exchange may be completed in a timely
manner.




The
depositary for our ADSs will give us a discretionary proxy to vote our ordinary
shares underlying your ADSs if you do not vote at shareholders’ meetings, except
in limited circumstances, which could adversely affect your
interests.





Under the
deposit agreement for the ADSs, if you do not vote, the depositary will give us
a discretionary proxy to vote our ordinary shares underlying your ADSs at
shareholders’ meetings unless:





•
            we
      have failed to timely provide the depositary with notice of meeting and
      related voting materials;





•
            we
      have instructed the depositary that we do not wish a discretionary proxy
      to be given;





•
              we
      have informed the depositary that there is substantial opposition as to a
      matter to be voted on at the
meeting;





•
            a
      matter to be voted on at the meeting would have a material adverse impact
      on shareholders; or





•
            the
      voting at the meeting is to be made on a show of
  hands.





The
effect of this discretionary proxy is that if you do not vote at shareholders’
meetings, you cannot prevent our ordinary shares underlying your ADSs from being
voted, except under the circumstances described above. This may make it more
difficult for shareholders to influence the management of our company. Holders
of our ordinary shares are not subject to this discretionary
proxy.





30


You
may not receive dividends or other distributions on our ordinary shares and you
may not receive any value for them, if it is illegal or impractical to make them
available to you.
  The
depositary of our ADSs has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on ordinary shares or other deposited
securities underlying our ADSs, after deducting its fees and expenses. You will
receive these distributions in proportion to the number of ordinary shares your
ADSs represent. However, the depositary is not responsible if it decides that it
is unlawful or impractical to make a distribution available to any holders of
ADSs. For example, it would be unlawful to make a distribution to a holder of
ADSs if it consists of securities that require registration under the Securities
Act but that are not properly registered or distributed under an applicable
exemption from registration. The depositary may also determine that it is not
feasible to distribute certain property through the mail. Additionally, the
value of certain distributions may be less than the cost of mailing them. In
these cases, the depositary may determine not to distribute such property. We
have no obligation to register under U.S. securities laws any ADSs, ordinary
shares, rights or other securities received through such distributions. We also
have no obligation to take any other action to permit the distribution of ADSs,
ordinary shares, rights or anything else to holders of ADSs. This means that you
may not receive distributions we make on our ordinary shares or any value for
them if it is illegal or impractical for us to make them available to you. These
restrictions may cause a material decline in the value of our ADSs.
  You
may not be able to participate in rights offerings and may experience dilution
of your holdings.
  We may,
from time to time, distribute rights to our shareholders, including rights to
acquire securities. Under the deposit agreement, the depositary will not
distribute rights to holders of ADSs unless the distribution and sale of rights
and the securities to which these rights relate are either exempt from
registration under the Securities Act with respect to all holders of ADSs, or
are registered under the provisions of the Securities Act. The depositary may,
but is not required to, attempt to sell these undistributed rights to third
parities, and may allow the rights to lapse. We may be unable to establish an
exemption from registration under the Securities Act, and we are under no
obligation to file a registration statement with respect to these rights or
underlying securities or to endeavor to have a registration statement declared
effective. Accordingly, holders of ADSs may be unable to participate in our
rights offerings and may experience dilution of their holdings as a
result.
  You
may be subject to limitations on transfer of your ADSs.
  Your ADSs
represented by American depositary receipts, or ADRs, are transferable on the
books of the depositary. However, the depositary may close its books at any time
or from time to time when it deems expedient in connection with the performance
of its duties. The depositary may close its books from time to time for a number
of reasons, including in connection with corporate events such as a rights
offering, during which time the depositary needs to maintain an exact number of
ADS holders on its books for a specified period. The depositary may also close
its books in emergencies, and on weekends and public holidays. The depositary
may refuse to deliver, transfer or register transfers of our ADSs generally when
our share register or the books of the depositary are closed, or at any time if
we or the depositary thinks it is advisable to do so because of any requirement
of law or of any government or governmental body, or under any provision of the
deposit agreement, or for any other reason.
  ITEM
      4.
              INFORMATION
      ON THE COMPANY
  A.
                History
      and Development of the
Company
 
 We have
been conducting our business through two companies in the PRC, Universal,
established in August 2006, and Mass Media, established in October 2003. Both
Universal and Mass Media are under common management, operated on an integrated
basis and ultimately controlled by Mr. Shengcheng Wang, our chairman and chief
executive officer, and his immediate family members. Since the establishment of
Universal, the advertising business of Mass Media has been gradually assumed by
Universal. Pursuant to an asset transfer agreement between Mass Media and
Universal dated December 29, 2007, Mass Media has ceased to conduct any business
relating to television advertising and transferred certain of its assets
relating to television advertising to Universal. Effective from December 31,
2007, Mass Media is no longer part of our company and is not involved in our
continued business operations.
  31
 
 Previously,
Universal was 70% owned by UIAL, a British Virgin Islands company established by
Mr. Shengcheng Wang’s father, and 30% owned by Shenzhen Guang Er Gao Zhi Co.,
Ltd., a PRC domestic holding company beneficially owned by Mr. Shengcheng Wang’s
immediate family members. In connection with our initial public offering, we
reorganized our corporate and shareholding structure. In November 2007, a new
holding company, CMM, was established by Mr. Shengcheng Wang in the Cayman
Islands to serve as our entity for listing on NYSE Arca. At the same time, Mr.
Shengcheng Wang’s father transferred all of the outstanding shares of UIAL to
CMM for nominal consideration of US$1.0, and UIAL became a wholly owned
subsidiary of CMM. UIAL subsequently purchased the remaining 30% equity
interests of Universal held by Shenzhen Guang Er Gao Zhi Co., Ltd. for RMB 15.0
million (US$2.1 million).
  In August
2008, we completed the initial public offering of our ADSs representing our
ordinary shares and listed on NYSE Arca.
  In
January 2009, UIAL established a subsidiary, Greatwall Film Production (Hong
Kong) Limited, in Hong Kong, which has not conducted any business activities
since its establishment.
  In April
2009, we changed our corporate name from China Mass Media International
Advertising Corp. to China Mass Media Corp.
  In August
2009, we transferred the listing of our ADSs from NYSE Arca to
NYSE.
  In May
2010, we applied to list our ordinary shares on the SEHK. Our listing
application is currently under review by the SEHK. There can be no assurance
that we will be able to achieve a successful listing on the
SEHK.
  32
  The
following diagram illustrates our current corporate structure:
  
  Our
principal executive offices are located at 6thFloor, Tower B, Corporate
Square, 35 Finance Street, Xicheng
District, Beijing 100033, People’s Republic of China. Our telephone number at
this address is (86-10)
8809-1099 and our fax number is (86-10) 8809-1088. Our registered office in the
Cayman Islands is at the offices of Maples Corporate Services Limited, PO Box
309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
  Investor
inquiries should be directed to us at the address and telephone number of our
principal executive offices set forth above. Our website is www.chinammia.com.The informationcontainedon our websitedoes not constitutea part of thisannual report.Our agent for service of
process in the United States is CT Corporation System, located at 111 Eighth
Avenue, New York, New York 10011.
  B.
              Business
      Overview
  Overview
  We
believe we are a leading independent television advertising company in China. We
provide a full range of integrated television advertising services, including
advertising agency services and production and sponsorship services. We believe
our extensive experience in media planning, packaging and sales, our access to
certain high quality advertising time slots on China Central Television, or
CCTV, and our ability to provide advertising services on an integrated basis
that are tailored to advertisers’ needs differentiate us from most other
television advertising companies operating in China. For our advertising agency
services, we obtain advertising time slots on selected nationally broadcast
television channels of CCTV, China’s largest television network, and procure
advertisers to place advertisements during such time slots. For our production
and sponsorship services, we design, produce and package content for public
service announcements or commercial advertisements. In addition, we solicit
sponsors for the public service announcements we produce and arrange for such
announcements, as well as announcements supplied by certain of our clients, to
be broadcast on CCTV.
  33
 
 We
believe we are one of the leading independent advertising companies that have
obtained a large volume of high quality advertising time slots from CCTV. We
have developed a good relationship and reputation with CCTV primarily as a
result of our extensive experience in media planning and packaging and the
substantial advertising revenues generated from our effective sales efforts. We
obtained advertising rights to an average of 35 minutes per day in 2007, 313
minutes per day in 2008 and 532 minutes per day in 2009 for regular daily
programs on CCTV Channel 1, 2, 4, E and F. In 2009, CCTV adopted a practice to
sell through auctions the advertising time slots for certain of its programs on
CCTV Channel 2 and 4 that were secured by us previously. We participated in the
auction and obtained the advertising time slots for the Periodic China News
Package on CCTV Channel 4. As a result, our aggregate advertising time obtained
from CCTV is expected to decline to an average of 482 minutes per day in 2010
for regular daily programs on CCTV Channel 1, 2, 4, E an F. In addition, CCTV
took an initiative to sell the advertising time slots for the 2010 Chinese New
Year Gala program by itself and as a result, we did not obtain such advertising
time slots.
  Our
clients include both advertising agencies as well as corporations or other
entities seeking to advertise their own products or services. In 2009, we
provided advertising agency services to over 80 non-agency advertisers that
purchased advertising time slots to advertise their products or services, either
directly from us or indirectly through other advertising agencies. These
non-agency advertisers include large and well-recognized companies in China,
most of which purchased time slots from us through their advertising agencies
but none of these non-agency advertisers individually accounted for more than
10% of our total revenues.
  We are
also a leading producer of public service announcements and commercial
television advertisements in China. Our production team has extensive experience
in content creation and production and designed and produced over 50public
service announcements and other television advertisements in 2009.
  Our
achievements have been widely recognized by CCTV, industry organizations and
government agencies. We have received numerous awards from the China Advertising
Association as well as national and local governmental authorities, including
the State Administration of Industry and Commerce, or SAIC, the State
Administration of Radio, Film and Television, and the State Administration of
Press and Publication. Our recent awards include:
  ·
              One
      of the “Best Advertising Agencies of the Year” named by CCTV for 2004,
      2005, 2006 and 2008.
  ·
              The
      Gold, Silver and Bronze Awards of the “China Advertisement Yellow River
      Awards” issued by the China Advertising Association for three of our
      public service announcements at the 15th China International Advertising
      Festival of 2008 and the Silver and Bronze Awards of “China Advertising
      Yellow River Awards” for two of our public service announcements at the
      16th China International Advertising Festival of 2009. The Yellow River
      Award is one of the most prestigious awards in public service announcement
      production in China.
  ·
              The
      Gold World Medal in the category of community service programs (China) for
      one of our commercial television advertisements that we created and
      produced for CCTV at the New York Festivals International Television &
      Film Awards of 2010.
  Our
Services
  We offer
a full range of integrated television advertising services, including
advertising agency services and production and sponsorship services. We believe
our extensive experience in media planning, packaging and sales, our access to
certain high quality advertising time slots on CCTV, and our ability to provide
advertising services on an integrated basis that tailor to advertisers’ needs
differentiate us from most other television advertising companies operating in
China.
  34
  Our
Advertising Agency Services
  We
provide advertising agency services to our clients by providing them with the
advertising time slots we have obtained from CCTV. We believe that we are among
the leading advertising companies that have obtained a large volume of
advertising time slots from CCTV. Advertisers purchase advertising time slots
either directly from us or through their advertising agencies. Our advertising
agency services typically start with an initial discussion between our sales and
marketing personnel and a potential advertiser. After learning more about the
advertiser, including its business and its goals for placing the advertisements,
we conduct the relevant market research for them and propose a marketing and
advertising plan, which includes our recommendations of advertising strategies
and specific television channels and time slots on which to place the
advertisement to maximize the desired effect. After the advertiser approves such
a plan, we enter into an advertising agency contract with the client who agrees
to engage us as its agent to procure the relevant advertising time slots. The
contract will specify, in the case of acquiring advertising time slots from us,
the time slots or the programs within which the advertisements will be broadcast
and the relevant price for the advertising time slots allocated to such client.
For those advertisers who use their advertising agents to seek access to the
advertising time slots from us, we enter into contracts with similar terms with
such advertising agents after negotiation. For those clients who engage us to
help them bid for other prime advertising time slots from CCTV, the contracts
specify the scope of the services we provide to these clients and we submit the
bid on behalf of our clients to seek the desired CCTV time slots.
  For those
clients whose goals can be better served by having their television
advertisements broadcast on other television channels or during time slots other
than those we have obtained from CCTV, we perform the same services as we do for
clients obtaining the advertising time slots from us, except that after our
client approves the advertising plan, we act as an agent for such clients to
procure advertising time slots from other advertising companies.
  After we
enter into contracts with CCTV to broadcast the relevant television
advertisements of our clients, our media relationship department will review
such television advertisements to ensure that the contents of the relevant
advertisements are in compliance with the applicable regulatory requirements in
China and the specific content or technical requirements of CCTV. We also help
our clients prepare and collect the relevant legal documents required by CCTV
for the release of the advertisements, including the business licenses and
trademark certificates of our clients. After receiving approvals from CCTV, such
advertisements will be broadcast. Our media relationship department monitors the
broadcasts of our advertisements every day to ensure they are broadcast during
the time slots and for the duration specified in the relevant contracts. We also
provide certain advertising clients with reports that analyze and evaluate the
advertising effect after the advertisements are broadcast.
  Our
Production and Sponsorship Services
  Our
ability to provide “one-stop shop” services by rendering a full range of
services, including designing, producing and packaging television advertisements
to our clients distinguishes us from other advertising agencies that compete
with us. In many cases, we provide production and sponsorship services as a part
of the integrated advertising services package we offer to our advertising
clients. We produced over 50public
service announcements and commercial television advertisements in
2009.
  We
provide production services directly at the request of our clients, including
both corporations and government agencies or non-governmental organizations, who
either aim to promote their corporate brand names, products and services through
commercial advertisements or intend to raise social consciousness or improve
their company image through public service announcement. In addition, we provide
sponsorship services in connection with the production of Guang Er Gao Zhi(广而告之), a 30-second
daily program on CCTV Channels 1 and 2 that broadcasts exclusively the public
service announcements we produce. We typically solicit sponsors for the public
service announcements we already produce. After such sponsor presents relevant
legal documents required by CCTV for the release of the announcement, such as
the business licenses of the sponsor, we will show the sponsor’s name at the end
of the announcement broadcast on the program.
  35
  The
production of public service announcements and commercial advertisements
involves various stages, including identifying concepts, formulating ideas,
drafting advertising strategies and story books, organizing pre-production
meetings, drafting and finalizing the shooting book, shooting, editing and
post-production procedures. We generally involve our advertising clients or
sponsors who commission a public service announcement,
in every production stage and receive their feedback throughout the production
process to ensure that the public service announcements and commercial
advertisements satisfy the specific needs and requirements of our sponsors and
advertising clients.
  Our
Media Resources
  Our media
resources primarily consist of the advertising time slots we acquire from CCTV.
We directly enter into contracts with CCTV to obtain exclusive advertising
rights to a number of television programs on CCTV Channels 1, 2, 4, E and F,
with contract terms ranging from one year to five years.
  The
following table sets forth the regular daily television programs for which we
have obtained from CCTV the exclusive rights to market the advertising time
slots or, in the case of Guang Er Gao Zhi, to produce the program, for
2010:
 
 Program
                    
                    CCTV
                      channel
                    
                    
                    Rating
                      in
                      the first
                      quarter
                      of
                      2010(1)
                    
                    
                    Advertising
                      time per
                      program
                    
                    
                    Broadcast
                      frequency per day
                    
                    
                    Total advertising
                      time per day(2)
                    
                    Year we
                      first
                      became
                      an
                      agent or
                      producerWeekday
                    
                    
                    Weekend
                    
                    
                    Weekday
                    
                    
                    Weekend(minutes)
                    
                    
                    (times)
                    
                    
                    (times)
                    
                    
                    (minutes)
                    
                    
                    (minutes)Daytime
      Advertising Package
                    
                    
                    1,
      2
                    
                    
                    
                    3.3
                    %
                    
                    
                    3
                    
                    
                    
                    10
                    (3)
                    
                    
                    10
                    (3)
                    
                    
                    30
                    
                    
                    
                    30
                    
                    2004Television
      Guides (daytime)
                    
                    
                    1
                    
                    
                    
                    4.5
                    %
                    
                    
                    0.5
                    
                    
                    
                    9
                    (3)(5)
                    
                    
                    9
                    (3)(5)
                    
                    
                    5
                    (5)
                    
                    
                    4.5
                    
                    2004Guang
      Er Gao Zhi (广而告之)
                    
                    
                    1,
      2
                    
                    
                    
                    1.6
                    %
                    
                    
                    0.5
                    (6)
                    
                    
                    4
                    
                    
                    
                    4
                    
                    
                    
                    2
                    
                    
                    
                    2
                    
                    2004Periodic
      China News Package
                    
                    
                    4
                    
                    
                    
                    1.9
                    %
                    
                    
                    1.5
                    (5)
                    
                    
                    10
                    (5)
                    
                    
                    7
                    (5)
                    
                    
                    15
                    (5)
                    
                    
                    10.5
                    (5)
                    2008Various
      programs
                    
                    
                    E,
      F
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    432
                    (7)
                    
                    
                    432
                    (7)
                    2008
 
 (1)
              Cumulative
      ratings at selected broadcasting times of the programs, including reruns,
      and calculated by us based on the data from Infosys TV, a television
      program rating analyzing system developed by TNS Group and operated in
      China by CSM Media Research Co., Ltd. A television program rating is an
      audience measurement that refers to the percentage of the number of
      viewers watching a program within a specific duration of time out of the
      total number of viewers. The rating information is not available for CCTV
      channels that are primarily broadcast overseas and have limited coverage
      within China, such as the Spanish (E) and French (F) channels. The rating
      for the first quarter of 2010 covers 29 provinces, autonomous regions or
      municipalities administered by the central
  government.
 (2)
              Total
      daily advertising time is calculated as an aggregate of all the available
      advertising time during different advertising time slots when the relevant
      program/advertising package is broadcast, including reruns, within the
      same day.
 (3)
              Represents
      the minimum number of reruns per day we agree with our advertising clients
      to broadcast on CCTV.
 (4)
              Television
      Guides is broadcast on CCTV Channel 1 only in 2010 and was broadcast on
      both CCTV Channel 1 and Channel 2 in
2009.
  36
  (5)
              Represents
      data for 2010.
 (6)
              Represents the duration
      of the program. We do not sell the advertising time slots of this program
      to advertisers; instead, we solicit sponsorships for the public service
      announcements broadcast on the
program.
 (7)
              Represents
      the total available advertising time slots on CCTV’s Spanish and French
      Channels.
 
 Daytime AdvertisingPackage andTelevisionGuides.The Daytime
Advertising Package is a package of advertisements that are broadcast at least
ten times per day on CCTV Channels 1 and Channel 2throughout daytime hours between various television programs. Television
Guides is a program that provides viewers with information about the schedules
of various television programs, which is broadcast nine times per day on CCTV
Channels 1 throughout the day. Many of such time slots are less desirable on a
stand-alone basis. But based on our market analysis, we bundle these various
segments of advertising time slots during certain of CCTV’s daytime programs,
and sell them as packages with higher cumulative ratings and more frequent
broadcasts at lower prices, and therefore create effective and cost-efficient
solutions for our targeted advertising clients. In particular, our Daytime
Advertising Package has become one of our most successful advertising offerings
to advertisers and generated significant revenues for CCTV, which demonstrates
our success in turning CCTV’s non-prime time slots into profitable advertising
resources.
  Each of
our current contracts with CCTV for the advertising time slots during the
Daytime Advertising Package and Television Guides has a term of three years,
starting from July 1, 2008. Under these contracts, we have obtained the
exclusive right to act as an agent to market such available advertising time
slots and procure advertisements for CCTV and are required to pay the
advertising revenues to CCTV at the agreed prices. We generally charge our
clients a premium over our agreed price with CCTV, which premium constitutes a
majority portion of our revenues from these contracts. We also receive a
percentage of our payments to CCTV as our commissions. Each of these contracts
provides that any party can terminate the contract with 90 days’ notice. We have
a right of first refusal to renew these contracts under specified terms, on the
condition that we deliver a notice to CCTV three months prior to the end of the
contractual term.
  Guang Er Gao Zhi(广而告之). Under
relevant Chinese laws and regulations, both central and regional television
stations are required to broadcast a minimum amount of public service
announcements between their television programs. We have arrangements with CCTV
for the production of “Guang Er Gao Zhi,” meaning “to spread the message far and
wide,” a 30-second daily public service announcement program. This program
includes 30-second public service announcements that are typically broadcast
twice a day on CCTV Channel 1 and Channel 2, respectively. We usually engage a
corporation or a governmental agency to be the sponsor and its name will be
displayed at the end of the public service announcement. We also display our
corporate name on each of the public service announcements broadcast in this
television program. We believe that this program has contributed significantly
to enhancing our company name recognition across China.
  Periodic China News Package.
The Periodic China News Package is a package of advertisements that are
broadcast at least ten times per weekday and seven times per weekend on periodic
China News programs on CCTV Channel 4. According to CCTV and the 2009 China
Radio and TV Yearbook, at the end of 2008 CCTV Channel 4 reached altogether more
than 15 million households in 93 countries, and is among the most popular
Chinese language television channels watched by overseas Chinese.
  We
obtained the advertising time slots for the Periodic China News Package in an
auction conducted by CCTV in 2009. We entered into a one year term contract with
CCTV for the Periodic China News Package for 2010. Under that contract we are
required to make a deposit with CCTV amounting to 30% of the annual media fee
and to pay the remaining medial fee in 12 monthly installments throughout 2010.
25% of that deposit can be credited against the payment of the annual media fee
every three months.
  37
  In July
2008, we entered into an agreement to obtain the exclusive rights to sell all of
the advertising time slots on CCTV’s Spanish Channel and French Channel for a
term of five years. Broadcast 24 hours a day to 36 countries, CCTV’s Spanish and
French Channels provide news, entertainment, tourism information, language
learning and sports programs and introduce the Chinese culture to Spanish- and
French- speaking viewers around the world. We assist CCTV in promoting these
channels in Spanish- and French- speaking countries, in program production and
packaging, and in procuring advertisements.
  In
addition, in 2009 we also obtained the advertising rights to certain other
programs on CCTV including Chinese New Year Gala, First News, Chinese World,
China News, View’s Guide and Asia Today. We did not obtain the advertising
rights to these programs for 2010 because CCTV took the initiatives to sell the
advertising time slots for these programs in 2010 directly by itself or through
auctions .
  Since
2009, CCTV has increased the use of auction in selling its prime-time as well as
non-prime-time media resources. When participating in these auctions and making
procurement decisions, we continue to implement our policy of prudently
evaluating the value of available television programs, their costs and
historical and potential sales volumes, among other factors. We believe we will
be able to maintain a stable supply of high quality advertising time slots from
CCTV through auctions.
  Our
Advertising Clients
  Our
Corporate Clients
  Our
corporate clients span a wide spectrum of industries, including
telecommunications, pharmaceuticals, financial services, and garment, food and
other consumer product industries. Our advertisers include many well- known
companies in China. A number of these clients utilize the full range of our
advertising services, including both agency and production services. We have
also established business relationships with many leading domestic and
international advertising agencies, some of which are members of the American
Association of Advertising Agencies, who introduce clients to us for all of our
services. Our access to advertising time slots on CCTV is a primary attraction
for these advertising agency clients.
  The
following table sets forth the breakdown of revenue contributions in 2009 by the
industries in which our corporate clients operate:
 
 Industry
                      
                      Percentage of Total
                        Revenues in 2009Food
      and beverages
                      
                      
                      26.7
                      %Pharmaceuticals
                      
                      
                      15.1
                      %Household
      products and electronic appliances
                      
                      
                      13.6
                      %Telecommunications
      and information technology
                      
                      
                      11.5
                      %Tourism
                      
                      
                      11.4
                      %Finance
      and services
                      
                      
                      8.7
                      %Automotive
                      
                      
                      6.0
                      %Fashion
                      
                      
                      1.6
                      %Others
                      
                      
                      5.6
                      %100.0
                      %
 
 Our
Governmental Agency Clients
 
 Many
government agencies in China formulate an annual plan to produce a certain
number of public service announcements to be broadcast on national and regional
television networks. As a leading public service announcement producer, we have
been engaged by governmental agencies and non-governmental organizations to
produce public service announcements for them. For example, we worked with the
Ministry of Health to produce public service announcements to promote public
awareness of measures to prevent AIDS. We also worked with the Beijing Olympics
Organizing Committee to produce a series of public service announcements
relating to the 2008 Beijing Olympic Games.
  38
 
 Client
Concentration
  In the
year ended December 31, 2007, individual customers accounting for more than 10%
of our total revenues in the aggregate contributed 32.3% to our total revenues.
None of our customers accounted for more than 10% of our total revenues in the
year ended December 31, 2008 and 2009 because we recorded our advertising
revenues from CCTV Channel 4 programs on a gross basis, which increased our
revenue basis. See Note 3(b) to our combined financial statements included
elsewhere in this annual report. Although our revenues from these advertising
clients generally constitute a substantial part of our total revenues, we
believe our business is not dependent on any individual advertising
client.
  Pricing
  For our
advertising agency services, we set the prices of our available advertising time
slots based on the quality, rating and target audience of the relevant
television programs where the advertisements will be broadcast, the sales prices
of our competitors, general market conditions and market demand. Different
advertising time slots are sold at different prices. CCTV annually publishes
rate cards for its advertising time slots after taking into account the input
from its advertising agencies, including our company. We use these rate cards as
a basis for negotiations with our clients and we typically provide discounts to
our clients. We typically require the agreed advertising fees to be paid in
advance before the advertisements are broadcast. CCTV has been increasing the
prices charged to us for many of its advertising time slots every year since our
establishment, and we expect that CCTV will continue to raise such prices in the
future. We believe that we will be able to pass on these price increases to our
clients. For our clients who use us as the agent to seek advertising time slots
from other advertising companies, we typically charge a certain percentage of
the total payment made by our clients to these advertising companies as our
commission.
  We price
our production and sponsorship services after taking into account the added
value and the related production costs of the content we produce and the value
we create for the sponsors of our public service announcements. We typically
require a deposit equal to the production cost of the advertisement to be paid
by the client at the time of the execution of the advertising production
agreement and prior to our commencement of work. We typically require our
clients to make payment in full at the time of delivery of our products. For
clients who have established good relationships with us and have solid credit
histories, we may, on a case-by-case basis, offer them a limited credit
period.
  Sales
and Marketing
  We
recruited a number of senior sales executives and doubled the size of our sales
force in 2009. As of December 31, 2009, we employed 72sales
representatives devoted to the sale and marketing of our services, whose
compensation is based, to a large extent, on the sales revenues they achieve for
our company. More than 50% of our sales representatives have more than five
years experience in the advertising industry. We have dedicated sales teams
focusing on the sales of advertising time slots we have obtained from CCTV to
advertising agency companies or directly to our corporate clients. We also
actively seek advertising time slots from other third party agencies if our
clients’ goals can be better served by having their television advertisements
broadcast at time slots other than those we have obtained from CCTV. Our
Shenzhen office is responsible for the advertising sales in five provinces in
southern China. We also have dedicated personnel responsible for the sales of
our public service announcements. We hold our own promotional fair each year to
promote the sale of the advertising time slots we have obtained from CCTV, in
which representatives from both CCTV and our long- term clients will
participate, and highlight the quality of our media resources and our services
to potential advertisers. We believe that our extensive experience in media
planning, packaging and sales, our access to desirable advertising time slots
and our leading production capabilities have attracted a broad base of
advertising clients and facilitated our sales efforts. We also have client
service teams within our sales department to serve our important
clients.
  39
  In
addition, when we provide any of our advertising agency services or
advertisement production services to our clients, we seek opportunities to
provide a full range of integrated advertising services to them. Some clients
that initially engage us only to provide advertising agency services ultimately
hire us to produce the relevant television advertisements. Similarly, our
production department also seeks opportunities to introduce clients to the sales
representatives of our advertising agency services.
  We market
our services primarily through direct marketing, trade shows and other media
events, which include:
  •
              participating
      in various nationwide advertisement promotional fairs, including the
      annual Prime Time Advertising Resources Auction organized by CCTV in the
      fourth quarter of each year, to promote our advertising agency
      services;
  •
              providing
      our public service announcements to regional television networks to
      enhance the awareness among the public regarding the public service
      announcements we produce; and
  •
              participating
      in industry award competitions, trade shows, advertisement festivals,
      academic seminars and conferences to promote the awareness of our company
      and our advertisement production
capabilities.
  In
addition, our sales and marketing activities benefit significantly from the fact
that we have achieved name recognition across China through years of
broadcasting the “Guang Er Gao Zhi” program on CCTV Channels 1 and 2. On this
program, the public service announcements we produce are broadcast nationwide
and our company name is displayed in each announcement. According to a survey
conducted by CTR Market Research Co., Ltd. in June 2007, our company is the most
recognized television advertising agency in China. Among the 500 randomly
selected interviewees sampled in the survey across ten cities in China, 64%
recognized our brand name, with our nearest competitor only recognized by less
than 30% of the interviewees.
  Information
Technology
  We use
information technology and operating tools to support our business operations.
We have purchased several databases from third-party market research firms and
employed these databases regularly to conduct relevant research as a basis to
formulate the advertising plans for our clients. The databases we currently use
include Adex Power and Infosys TV. Adex Power is an advertisement monitoring
database that contains original data for each advertisement on almost all of the
television stations across China, such as the length of the advertisement, the
content of the advertisement and the television programs within or between which
such advertisement was broadcast. We can also perform analysis under this Adex
Power system to produce the relevant data or comparison we need in order to
provide advice to our clients. Infosys has the largest samples of television
programs of CCTV, including the rating and the target audience of each
television program. We use the data provided by Infosys TV to form the basis of
our recommendations to our clients regarding the placement of relevant
advertisements.
  Service
Quality Control
  We aim to
provide the highest quality agency and production services to our clients. Our
media relationship department reviews the content of the television
advertisements to ensure their compliance with the applicable legal requirements
of China and the specific requirements of CCTV or the regional television
networks broadcasting the advertisement. In addition, our media relationship
department monitors the broadcasts of our advertisements every day to ensure
they are broadcast at the time slots and for the duration as specified in the
relevant contracts. We also provide certain advertising clients with reports
that analyze and evaluate the advertising effect after the advertisements are
broadcast.
  40
  Moreover,
in order to ensure the quality of our agency services, we provide regular
training to our sales force and our administrative staff with respect to the
changes in general market conditions, recent developments in different
industries in China and client communication skills. We also hold regular
meetings with our clients to receive their feedback on our
services.
  In order
to ensure the quality of the television advertisements and public service
announcements we produce, we closely analyze market trends and clients needs,
and employ advanced film and sound technology to deliver rich content. In
particular, when engaging a third-party producer is necessary in the production
of the advertisement, we typically select production crews that we have
previously worked with in the past and have proved to be able to provide high
quality production services.
  Competition
  The
advertising industry in China is intensely competitive and highly fragmented. We
compete with other industry participants mainly on the basis of service quality,
available advertising time slots, price, reputation and relationships with
television networks. We face significant competition mainly from domestic
advertising companies such as SinoMedia Holding Limited, AVIC Culture Co., Ltd.
and Charm Communication Group. We compete with other television advertising
agencies for the limited time slots available on the CCTV channels or other
television networks. In particular, some of our advertising clients are large
advertising agencies who could become our competitors for the same limited media
resources. We also compete with other television advertising agencies for
advertising clients’ spending on the basis of desirability of time slots
offered, television network coverage, service quality, brand name and
pricing.
  We also
face competition from new entrants in the television advertising sector,
including the wholly foreign-owned advertising companies that have been allowed
to operate in China since December 2005, which exposes us to increased
competition from international advertising media companies that have greater
financial and other resources than we do. In addition, television, upon which we
depend for our business, also competes with other forms of advertising media,
such as radio, newspapers, magazines, the Internet, indoor or outdoor flat panel
displays, billboards and public transport advertising, for overall advertising
spending.
  We
believe that our ability to execute important advertising events and to provide
integrated advertising services, ranging from the formulation of marketing plan
to television advertisement production to advertisement release and
broadcasting, represents a significant advantage over our competitors. However,
we may not be able to maintain our competitiveness in this industry. See “Item
3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We
face significant competition, and if we do not compete successfully against
existing and new competitors, we may lose our market share and our profitability
may be materially harmed.”
  Insurance
  We
maintain property insurance for our automobiles. We do not maintain business
interruption insurance or key-man life insurance. We believe our insurance
coverage is customary and standard for companies of comparable size in
comparable industries in China. However, we cannot assure you that our existing
insurance policies are sufficient to insulate us from all losses and liabilities
that we may incur. See “Item 3. Key Information—D. Risk Factors—Risks Related to
Our Business and Industry—Our insurance coverage is limited and we may incur
substantial costs as a result of a severe business liability or disruption or
other unexpected events, which could have a material adverse effect on our
financial condition and results of operations.”
  41
  Intellectual
Property
  We own
the copyrights to the public service announcements we produce for broadcast on
CCTV and regional television networks. Advertisers who choose to become the
sponsors to such public service announcements do not have intellectual property
rights with respect to such announcements. However, advertisers who engage us
for the production of television advertisements to meet their specific content
and production requirements generally hold the copyright to the relevant
television advertisements or public service announcements, while we only have
the right to identify our company in such advertisements or announcements as the
producer of these advertisements or announcements.
  Mass
Media has registered the trademark relating to our brand name “广而告之” and our logo
in the category of book publishing, movie production, radio and television
program production and in the category of advertisement by posters, outdoor
advertisement, mail advertisement, radio advertisement, television advertisement
and advertisement agency services. The registered trademark in the former
category is valid from 2007 to 2017 and in the latter category is from 2009 to
2019. According to the asset transfer agreement dated December 29, 2007 between
Mass Media and Universal, Mass Media will transfer the registered trademark to
Universal. The transfer of such registered trademarks is not completed as of
August 20, 2010.
  Regulation
  This
section sets forth a summary of the most significant PRC regulations that affect
the business and the industries in which we operate.
  We
operate our business in China under a legal regime consisting of the State
Council, which is the highest authority of the executive branch of the PRC
central government, and several ministries and agencies under its authority
including the State Administration for Industry and Commerce, or the SAIC.
China’s Advertising Law was promulgated in 1994. From time to time, the State
Council, the SAIC and other ministries and agencies have issued additional
regulations that apply to our business.
  Regulation
of Advertising Services
  Business
License for Advertising Companies
  The
principal regulations governing advertising businesses in China
include:
  •
              The
      Advertising Law (1994);
  •
              The
      Advertising Administrative Regulations (1987);
  and
  •
              The
      Implementing Rules for the Advertising Administrative Regulations
      (2004).
  Pursuant
to these regulations, companies that engage in advertising activities must
obtain from the SAIC or its local branches a business license which includes the
operation of an advertising business within its business scope. 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 laws or regulations. Our PRC
subsidiary has obtained such a business license from local SAIC branch and we do
not expect it to encounter any difficulties in maintaining its business
license.
  42
  Advertising
Content
  PRC
advertising laws and regulations set forth certain content requirements for
advertisements in China, which include prohibitions on, among other things,
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 also prohibited. It is prohibited
to disseminate tobacco advertisements via broadcast, film, television or print
media, or in any waiting lounge, theater, cinema, conference hall, stadium or
other public area. There are also specific restrictions and requirements
regarding advertisements that relate to matters such as patented products or
processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff,
alcohol and cosmetics. In addition, all advertisements relating to
pharmaceuticals, medical instruments, agrochemicals and veterinary
pharmaceuticals advertised through broadcast, film, television, newspaper,
magazine and other forms of media, together with any other advertisements which
are subject to censorship by administrative authorities according to relevant
laws and administrative regulations, must be submitted to the relevant
administrative authorities for content approval prior to
dissemination.
  Advertisers,
advertising service providers and advertising distributors are each required by
PRC advertising laws and regulations to ensure that the content of the
advertisements they prepare or distribute are true and accurate as well as in
full compliance with applicable laws and regulations. In providing advertising
services, advertising service providers and advertising distributors must review
the prescribed supporting documents provided by advertisers for advertisements
and verify that the content of the advertisements complies with applicable PRC
laws and regulations. In addition, prior to distributing advertisements for
certain commodities which are subject to government censorship and approval,
advertising distributors are obligated to ensure 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 advertising business operations. Furthermore,
advertisers, advertising service providers 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.
  Television
Advertising
  The
principal regulations governing television advertising in China
include:
  •
              The
      Regulations on Radio and Television Administration (1997);
    and
  •
              The
      Interim Measures on Administration for Broadcasting of Radio and
      Television Advertisement(2003).
  Consistent
with the principles provided in the Advertising Law of 1994, these regulations
set forth certain special requirements for television advertising in China,
which include, among other things, limitation on time and content of
advertisements. The aggregate time for broadcasting commercial advertisements
must not exceed 12 minutes per hour on each television channel. In particular,
the aggregate time for broadcasting commercial advertisements during the period
from 19:00 to 21:00 must not exceed 18 minutes per hour on each TV channel.
Television stations are also required to keep regular television programs
uninterrupted and may not interpose advertisements except during normal breaks
between programs. Furthermore, the broadcasting of television shall be formatted
reasonably, and the quantity of commercial advertisements shall be controlled in
balance. Television commercial advertisements must not include disturbing
content during meal times: from 6:30 to 7:30, from 11:30 to 12:30 and from 18:30
to 20:00. There are also specific requirements regarding commercial
advertisements that relate to certain special merchandise and/or services. For
example, alcohol commercial advertisement is strictly restricted with a daily
maximum limit of 12 advertisements and a maximum limit of two advertisements
from 19:00 to 21:00 for each television channel. In addition, each television
channel is required to broadcast public service announcements for no less than
3% of its commercial advertising time.
  Limitations
on Foreign Ownership in the Advertising Industry
  The
principal regulations governing foreign ownership in the advertising industry in
China include:
  43
  •
              The
      Catalogue for Guiding Foreign Investment in Industry (as amended in
      2007);
  •
              The
      Measures on Administration for Foreign-invested Advertising Enterprises
      (2004); and
  •
              The
      Notice Regarding Investment in the Advertising Enterprises by Foreign
      Investors through EquityAcquisitions
      (2006).
  These
regulations require foreign entities that directly invest in the advertising
industry in China to have at least two years of direct operations in the
advertising industry outside of China. Since December 10, 2005, foreign
investors have been permitted to own directly a 100% interest in advertising
companies in China, but such foreign investors are required to be a company with
advertising as its main business and to have at least three years of operations
outside of China. PRC laws and regulations do not permit the transfer of any
approvals, licenses or permits, including business licenses containing a scope
of business that permits engaging in the advertising business.
  The
establishment of a foreign-invested advertising enterprise, by means of either
new establishment or equity acquisition of an existing domestic advertising
company, is subject to examination by the SAIC or its authorized branch at the
provincial level and the issuance of an Opinion on the Examination and Approval
of the Foreign-invested Advertising Enterprise Project. Upon obtaining such
opinion from the SAIC or its relevant branch, an approval from the MOFCOM or its
competent local counterparts is required before a foreign-invested advertising
enterprise may apply for its business license. In addition, if a
foreign-invested advertising enterprise intends to set up any branch, it must
meet the requirements that (i) its registered capital has been fully subscribed
and (ii) its annual advertising sales revenues are not less than RMB 20
million.
  Regulations
on Trademarks
  Both the
PRC Trademark Law, adopted in 1982 and revised in 1993 and 2001, and the
Implementation Regulation of the PRC Trademark Law, adopted in 2002, give
protection to the holders of registered trademarks. The State Trademark Bureau,
under the authority of the SAIC, handles trademark registrations and grants
rights of a term of 10 years in connection with registered trademarks. License
agreements with respect to registered trademark shall be filed with the State
Trademark Bureau.
  Regulations
on Foreign Currency Exchange
  Under the
Foreign Currency Administration Rules (1996), as amended, and various
regulations issued by the SAFE, and other relevant PRC government authorities,
the Renminbi is convertible into other currencies for the purpose of current
account items, such as trade related receipts and payments, interest payments
and dividend distributions. The conversion of Renminbi into other currencies and
the remittance of converted foreign currency outside China for the purpose of
capital account items, such as direct equity investments, loans and repatriation
of investment, require prior approval from SAFE or its qualified local offices.
Payments for transactions that take place within China must be made in Renminbi.
PRC companies may repatriate foreign currency received from abroad or retain
such foreign currencies offshore. The terms and conditions of repatriating or
retaining offshore relevant foreign currency shall be stipulated by SAFE.
Foreign-invested enterprises may retain foreign exchange in accounts with
designated foreign exchange banks subject to a cap set by SAFE or its local
offices.
  Regulations
on Dividend Distributions
  The
principal regulations governing dividend distributions by wholly foreign-owned
enterprises include:
  •
              The
      Wholly Foreign-Owned Enterprise Law (1986), as
  amended;
  •
              Rules
      for the Implementation of the Wholly Foreign-Owned Enterprise Law (1990),
      as amended; and
  44
  •
              The
      Enterprise Income Tax Law (2007) and its Implementation Regulations
      (2007).
  Under
these laws and regulations, wholly foreign-owned enterprises in the PRC may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. Additionally, these
enterprises are required to set aside at least 10% of their after-tax profits
each year, if any, to fund certain statutory reserve funds until their
cumulative total reserve funds are equal to at least 50% of the enterprises’
registered capitals. At the discretion of these wholly foreign-owned
enterprises, they may allocate a portion of their after-tax profits based on PRC
accounting standards to staff welfare and bonus funds.
  On March
16, 2007, the PRC National People’s Congress enacted the Enterprise Income Tax
Law, and on December 6, 2007, the PRC State Council issued the Implementation
Regulations of the Enterprise Income Tax Law, both of which became effective on
January 1, 2008. Under this new law and its implementation regulations,
dividends payable by a foreign-invested enterprise in the PRC to its foreign
investor who is a non-resident enterprise are be subject to a 10% withholding
tax, unless any such foreign investor’s jurisdiction of incorporation has a tax
treaty with the PRC that provides for a lower withholding tax rate. However, the
new law also provides that, if a resident enterprise directly invests in another
resident enterprise, the dividends received by the investing resident enterprise
from the invested enterprise are exempted from income tax, subjected to certain
conditions. Therefore, if CMM and UIAL are classified as resident enterprise,
the dividends received from our PRC subsidiary may be exempted from income tax.
However, it remains unclear how the PRC tax authorities will
interpret the PRC tax resident treatment of an offshore company, like us, having
indirect ownership interests in PRC enterprises through intermediary holding
vehicles. See “Item 3. Key Information—D. Risk Factors—Risks Related to our
Business—The dividends we receive from our PRC subsidiary and our global income
may be subject to PRC tax under the new EIT law, which would have a material
adverse effect on our results of operations; our foreign ADS holders may be
subject to a PRC withholding tax upon the dividends payable by us and upon gains
realized on the sale of our ADSs, if we are classified as a PRC “resident
enterprise”.
  SAFE
Regulations on Offshore Investment by PRC Residents and Employee Stock
Options
  On
October 21, 2005, SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Reverse Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or Notice No. 75, which became effective as of November 1,
2005.
  According
to Notice No. 75, prior to establishing or assuming control of an offshore
company for the purpose of financing that offshore company with assets or equity
interests in an onshore enterprise in the PRC, each PRC resident, whether a
natural or legal person, must complete certain overseas investment foreign exchange
registration procedures with the relevant local SAFE branch. An amendment to the
registration with the local SAFE branch is required to be filed by any PRC
resident that directly or indirectly holds interests in that offshore company
upon either (i) the injection of equity interests or assets of an onshore
enterprise to the offshore company or (ii) the completion of any overseas fund
raising by such offshore company. An amendment to the registration with the
local SAFE branch is also required to be filed by such PRC resident when there
is any material change involving a change in the capital of the offshore
company, such as (i) an increase or decrease in its capital, (ii) a transfer or
swap of shares, (iii) a merger or division, (iv) a long-term equity or debt
investment or (v)
the creation of any security interests.
  Notice
No. 75 applies retroactively. As a result, PRC residents who established or
acquired control of offshore companies that made onshore investments in the PRC
in the past were required to complete the relevant overseas investment foreign
exchange registration procedures by March 31, 2006. Under Notice No. 75, failure
to comply with the registration procedures may result in restrictions on the
relevant onshore entity, including restrictions on the payment of dividends and
other distributions to its offshore parent or affiliate and restrictions on the
capital inflow from the offshore entity, and may also subject relevant PRC
residents to penalties under Chinese foreign exchange administration
regulations.
  45
  As a
Cayman Islands company, and therefore a foreign entity, if we purchase the
assets or equity interest of a PRC
company owned by PRC residents in exchange for our equity interests, such PRC
residents will be subject to the registration procedures described in Notice No.
75. Moreover, PRC residents who are beneficial holders of our shares are
required to register with SAFE in connection with their investment in
us.
  In
December 2006, the People’s Bank of China promulgated the Administrative
Measures of Foreign Exchange Matters for Individuals, or the PBOC Regulation,
setting forth the respective requirements for foreign exchange transactions by
PRC individuals under either the current account or the capital account. In
January 2007, SAFE issued implementing rules for the PBOC Regulation, which,
among other things, specified approval requirements for certain capital account
transactions such as a PRC citizen’s participation in the equity incentive plan
of an overseas publicly listed company. On March 28, 2007, SAFE issued the
Operating Procedures on Administration of Foreign Exchange regarding PRC
Individuals’ Participation in Employee Share Ownership Plans and Employee Stock
Option Plans of Overseas Listed Companies, or the Stock Option Rule. The purpose
of the Stock Option Rule is to regulate foreign exchange administration of PRC
citizens who participate in equity incentive plans of overseas-listed
companies.
  According
to the Stock Option Rule, if a PRC citizen participates in any equity incentive
plan of an overseas-listed company, a PRC domestic agent or the PRC related
company of such overseas listed company (such as the overseas-listed company
itself, its parent company or its subsidiaries or branches in China) must, among
others things, file an application with SAFE on behalf of such individual to
obtain approval for an annual allowance with respect to the purchase of foreign
exchange in connection with stock holding or stock option exercises. This is
because PRC citizens may not directly use overseas funds to purchase stock or
exercise stock options. Concurrent with the filing of such application with
SAFE, the PRC domestic agent or the PRC-related company must obtain approval
from SAFE to open a special foreign exchange account at a PRC domestic bank to
hold the funds required in connection with the stock purchase or option
exercise, any returned principal or profits upon sales of stock, any dividends
issued upon the stock and any other income or expenditures approved by SAFE. The
PRC domestic agent is also required to obtain approval from SAFE to open an
overseas special foreign exchange account at an overseas trust bank to hold
overseas funds used in connection with any stock purchase.
  All
proceeds obtained by PRC citizens from dividends acquired from the
overseas-listed company through employee stock holding plan or stock option
plans or sales of the overseas-listed company’s stock acquired through other
methods must be fully remitted back to China after relevant overseas expenses
are deducted. The foreign exchange proceeds from these sales can be converted
into Renminbi or transferred to the PRC citizen’s foreign exchange savings
account after the proceeds have been remitted back to the special foreign
exchange account opened at the PRC domestic bank. If a stock option is exercised
in a cashless transaction, the PRC citizen is required to remit the proceeds to
the special foreign exchange account.
  Although
the Stock Option Rule has been promulgated recently and many related issues
require further interpretation, we and our PRC employees who have been granted
stock options will be subject to the Stock Option Rule when our company becomes
an overseas-listed company. If we or our PRC employees fail to comply with the
Stock Option Rule, we and/or our PRC employees may face sanctions imposed by
SAFE or other PRC government authorities.
  In
addition, the State Administration for Taxation has issued circulars concerning
employee stock options. Under these circulars, our employees working in the PRC
who exercise stock options will be subject to PRC individual income tax. Our PRC
subsidiary has obligations to file documents related to employee stock options
with relevant tax authorities and to withhold individual income taxes of those
employees who exercise their stock options. If our employees fail to pay their
income taxes, or we fail to withhold them, we may face sanctions imposed by the
tax authorities or other PRC government authorities.
  46
  C.
              Organizational
      Structure
  For a
description of our organizational structure, See “Item 4. Information on the
Company—A. History and Development
of the Company.”
  D.
              Property,
      Plant and Equipment
  Our
corporate headquarters are located in approximately 1,564 square meters of
office space in Beijing, which we rented from related parties under two leases
before November 2008. In November 2008, we purchased such properties from the
related parties at their fair market value as determined by an independent
property valuation company. In addition, our Shenzhen office rents approximately
53 square meters of office space in Shenzhen, and its lease expires in December
2010. We believe that our existing facilities are adequate and suitable to meet
our present needs and that additional space can be obtained on commercially
reasonable terms to meet our future requirements.
  ITEM
      4A
              UNRESOLVEDSTAFFCOMMENTS
  Not
applicable.
  ITEM
      5.
              OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
 
 The
following discussion of our financial condition and results of operations is
based upon and should be read in conjunction with our audited combined financial
statements and related notes for the years ended December 31, 2007, 2008 and
2009, included elsewhere in this annual report. Our combined financial
statements have been prepared in accordance with U.S. GAAP. This discussion
contains forward-looking statements that involve risks and uncertainties. We
caution you that our business and financial performance are subject to
substantial risks and uncertainties. Actual results could differ materially from
those projected in the forward-looking statements. In evaluating our business,
you should carefully consider the information provided in “Item 3. Key
Information—D. Risk Factors.”
  A.
              Operating
      Results
  Overview
  We
believe we are a leading independent television advertising company in China. We
provide a full range of integrated television advertising services, including
advertising agency services and production and sponsorship services. We believe
our extensive experience in media planning, packaging and sales, our access to
certain high quality advertising time slots on CCTV, China’s largest television
network, and our ability to provide advertising services on an integrated basis
that are tailored to advertisers’ needs differentiate us from most other
television advertising companies operating in China.
  We derive
a substantial majority of our revenues from our advertising agency services, in
which we mainly procure advertisers for the time slots we have obtained on the
most popular national channels of CCTV. Our advertisers purchase these services
either directly from us or through advertising agencies. In the years ended
December 31, 2007, 2008 and 2009, we derived 72.7%, 90.5% and 92.9%,
respectively, of our total revenues from advertising agency services.
Substantially all of our revenues from advertising agency services are derived
from the advertising time slots on CCTV. We obtained advertising rights to an
average of approximately 35 minutes per day in 2007, 313 minutes per day in 2008
and 532 minutes per day in 2009 for regular daily programs on CCTV Channels 1,
2, 4, E and F. In 2009, CCTV adopted a practice to sell through auctions the
advertising time slots for certain of its programs on CCTV Channel 2 and 4 that
were secured by us previously. We participated in the auction and obtained the
advertising time slots for the Periodic China News Package on CCTV Channel 4. As
a result, our aggregate advertising time obtained from CCTV is expected to drop
to an average of 482 minutes per day in 2010 for regular daily programs on CCTV
Channel 1, 2, 4, E, F. In addition, CCTV took an initiative to sell the
advertising time slots for the 2010 Chinese New Year Gala program by itself and
as a result, we did not obtain such advertising time slots.
  47
  We also
derive revenues from producing public service announcements and commercial
television advertisements for advertisers, and soliciting sponsors for the
public service announcements we produce and arranging for such announcements, as
well as announcements supplied by certain of our clients, to be broadcast on
CCTV. In 2009, we produced over 50 public service announcements and commercial
advertisements.
  We also
derived a small portion of revenues from our special events services that we
provided in prior years to assist CCTV in the sales and marketing of advertising
time slots during major sporting events that are broadcast on CCTV’s Channels 1
and 2. The service contract with CCTV was not renewed for 2010 and we will not
provide such services to CCTV in 2010.
  Our net
revenues increased from RMB 255.5 million in 2007 to RMB 353.0 million in 2008,
and further increased to RMB 411.6 million (US$60.3 million) in 2009. Our net
income decreased from RMB 208.3 million in 2007 to RMB 110.4 million in 2008,
and further decreased to RMB 86.5 million (US$12.7 million) in
2009.
  Factors
Affecting Our Financial Performance and Results of Operations
  We
believe that the main factors affecting our financial performance and results of
operations are:
  •
              overall
      demand for our services;
  •
              our
      ability to obtain high quality advertising time slots on favorable
      terms;
  •
              our
      ability to increase the size, quality and the level of diversification of
      our advertising client base;
  •
              pricing
      of our services; and
  •
              seasonality.
  Overall
Demand for Our Services
  Demand
for our services and, as a result, growth in our revenues are driven by overall
advertising spending in China, which is influenced by the pace of overall
economic growth. Any slowdown in China’s economic growth may slow our revenue
growth. In 2008, the global financial crisis has given rise to a worldwide
economic recession which also significantly slowed down China’s economic growth.
The demand for our services had declined in the second half of 2008 and the
first half of 2009. In the second half of 2009, as China’s economy continued to
recover from the global financial crisis, the demand for our service had grown
significantly. As a result, the revenues generated from the second half of 2009
increased significantly compared to the first half of 2009. However, if the
global financial crisis continues or deteriorates or China’s economy does not
recover as expected, the demand for our services could decrease again. This
adverse effect could be offset if we can successfully increase our market share
in the overall advertising market, which we plan to achieve through optimizing
and expanding our media resources, expanding our client base and strengthening
our production capabilities.
  In
addition, the demand for our services is affected by the level of television
advertising spending in China, which is in turn affected by the popularity of
television programs in China and advertisers’ perceptions regarding the
effectiveness of television advertising. Television advertising also competes
with other advertising media, such as billboards, Internet, mobile phones and
out-of-home advertising networks. If television advertising becomes a less
favorable choice for advertisers in China, we may not be able to successfully
attract enough advertisers for our advertising time slots and our revenues and
earnings growth may be affected.
  48
  Ability
to Obtain High Quality Advertising Time Slots on Favorable Terms
  We depend
on the high quality advertising time slots we obtain from CCTV for our
advertising agency services. Substantially all of our revenues for our
advertising agency services are derived from the advertising time slots we
obtain from CCTV. Our ability to continue to obtain our existing advertising
time slots and to add additional high quality advertising time slots will have a
significant effect on our results of operations. In 2008, we secured advertising
rights to several additional television programs on CCTV Channels 2, 4, E and F.
However, we did not generate enough revenues from the time slots on CCTV Channel
4 to cover the fixed amount we were required to pay in 2008 and 2009, and as a
result, we incurred a loss from such programs. For 2010, we did not obtain the
advertising rights to all such programs except the Periodic China News Package
on CCTV Channel 4 and the programs on Channel E and F. Consequently, the fixed
amount of media fee we are required to pay relating to such programs will
decrease in 2010. We also expect that the revenues to be generated from such
programs will decrease in 2010.
  In
addition, the availability of advertising time slots may also affect the growth
of our production and sponsorship services. For example, we derived a
significant portion of our revenues in production and sponsorship services in
2007 from soliciting sponsorships for public service announcements broadcast on
certain time slots that CCTV allocated to us when they remained unsold. Such
advertising time slots were not available to us in 2008 and 2009.
  The
quality of advertising time slots available to us is measured based on the
perceived effectiveness of advertisements placed during such time slots, which
is in turn affected by the ratings and the geographical and demographic coverage
of the relevant television programs. Our results of operations will be affected
by any changes with respect to the popularity, rating or coverage of the
television programs during which our advertising time slots occur.
  Our
profitability also depends on the price of advertising time slots charged to us
by CCTV or other agencies. CCTV has been increasing the prices for many of its
advertising time slots in recent years, and we expect that CCTV will continue to
raise such prices in the future. In addition, if CCTV continues the practice to
sell more of its advertising time slots through auctions, we will face increased
pricing competition to obtain desired advertising time slots. Our profit margin
may be affected if we are not able to obtain the rights to these advertising
time slots on favorable terms or pass on the increasing costs to our clients. If
any other advertising agency is able to obtain such high quality advertising
time slots on terms more favorable than ours, we may lose our clients and our
revenues may decline.
  Ability
to Increase the Size, Quality and the Level of Diversification of Our
Advertising Client Base
  We
compete for the advertising spending of advertisers with other advertising
agencies, including both international advertising agencies and domestic Chinese
advertising agencies, some of which are also our clients. From time to time
these agencies introduce their clients to us, primarily due to our exclusive
rights over certain advertising time slots on CCTV. We believe that we
distinguish ourselves from other advertising agencies in China by our ability to
provide integrated advertising services that encompass media planning,
packaging, creative content production and access to desirable advertising time
slots to reach targeted audiences. We plan to continue to attract new business
from potential clients, as well as to gain more business from our existing
corporate clients, by increasing our sales efforts and by seeking opportunities
to provide these clients with the full range of our services. We also intend to
strategically adjust our advertising client portfolio by increasing the ratio of
corporate advertising clients to advertising agency clients and by diversifying
the industry mix of our advertisers, to better balance and optimize the profile
of our client base. We will continue to improve the size, quality and level of
diversification of our client base, leveraging our ability to provide integrated
advertising services and the high quality advertising time slots we have
obtained from CCTV.
  49
  Pricing
of Our Services and Media Fee Payment Terms
  Our
results of operations significantly depend on the price of our advertising
agency services, particularly the price we charge to our advertising clients for
advertising time slots and, to a lesser extent, the price of our production and
sponsorship services. We typically retain the difference between the price we
charge to advertising clients and the price we pay for the advertising time
slots as the premium for our advertising agency services. We price the
advertising time slots of CCTV’s daily television programs available to us based
on a number of factors, including market demand for such advertising time slots,
target audiences, ratings and the quality of the relevant television programs as
well as prices charged by our competitors. We price our production and
sponsorship services by taking into account the added value and the related
production costs of the content we provide or the value created by us for the
sponsors of our public service announcements. Any factors that influence the
pricing of our services will in turn affect our revenues, profitability and
other operating results.
  In
addition, changes in the payment terms for our media fee payable to CCTV may
have a significant impact upon our cash flow. For example, we obtained in an
auction the advertising rights to the Periodic China News Package on CCTV
Channel 4 in 2010. Under the auction arrangements, we are required to make a
deposit in advance with CCTV amounting to 30% of the media fee with the
remaining media fee payable in 12 monthly installments through 2010. We expect
that such payment terms will have a significant impact upon our cash
flow.
  Seasonality
  Aside
from fluctuations in the level of advertising spending resulting from changes in
the overall economic and market conditions in China, our revenues are affected
by seasonal fluctuations in consumer spending that also affect the level of
advertising spending in China. Although the first quarter of each year is
expected to be a slow season for the sale of the advertising time slots of the
CCTV Channels 2 and 4 programs we newly secured in 2008, historically our total
revenues were typically higher in the first quarter than in other quarters of
the year because the Chinese New Year Gala program, which generates significant
revenues for us, falls in that period each year. However, in 2010 CCTV sold the
advertising time slots for the 2010 Chinese New Year Gala program by itself. As
a result, our results of operations for the first quarter of 2010 decreased
significantly compared to the first quarter in 2009. In addition, we provided
services to CCTV on an ad hoc basis in the sales and marketing of the
advertising time slots for 2006 World Cup and 2008 Beijing Olympic Games. We
recognized revenues from such services in connection with 2006 World Cup when we
received statements or supporting documents from CCTV in 2007. We did not
recognize any revenues from such services in connection with the 2008 Beijing
Olympic Games, as we have not yet received payment for such services. Due to the
seasonal fluctuations in advertising spending, the ad hoc basis of special event
services and other factors, our quarterly results of operations may fluctuate
significantly from period to period.
  50
  Revenue
  The table
below sets forth the breakdown of our three revenue sources for the periods
indicated:
 
 Year Ended December 31,2007
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2009Amount
                                                    
                                                    
                                                    % of
                                                      Total
                                                      Revenues
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    % of
                                                      Total
                                                      Revenues
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    % of
                                                      Total
                                                      Revenues(RMB)
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (RMB)
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (RMB)
                                                    
                                                    
                                                    (US$)(In thousands, except percentages)Revenues:Advertising
      agency services
                                                    
                                                    
                                                    202,637
                                                    
                                                    
                                                    
                                                    72.7
                                                    %
                                                    
                                                    
                                                    334,053
                                                    
                                                    
                                                    
                                                    90.5
                                                    %
                                                    
                                                    
                                                    397,279
                                                    
                                                    
                                                    
                                                    58,202
                                                    
                                                    
                                                    
                                                    92.9
                                                    %Special
      events services
                                                    
                                                    
                                                    15,991
                                                    
                                                    
                                                    
                                                    5.7
                                                    %
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —Production
      and sponsorship services
                                                    
                                                    
                                                    60,018
                                                    
                                                    
                                                    
                                                    21.5
                                                    %
                                                    
                                                    
                                                    34,935
                                                    
                                                    
                                                    
                                                    9.5
                                                    %
                                                    
                                                    
                                                    30,305
                                                    
                                                    
                                                    
                                                    4,439
                                                    
                                                    
                                                    
                                                    7.1
                                                    %Total
      revenues
                                                    
                                                    
                                                    278,646
                                                    
                                                    
                                                    
                                                    100.0
                                                    %
                                                    
                                                    
                                                    368,988
                                                    
                                                    
                                                    
                                                    100
                                                    %
                                                    
                                                    
                                                    427,584
                                                    
                                                    
                                                    
                                                    62,641
                                                    
                                                    
                                                    
                                                    100
                                                    %Less:
      business tax
                                                    
                                                    
                                                    (23,110
                                                    )
                                                    
                                                    
                                                    8.3
                                                    %
                                                    
                                                    
                                                    (16,006
                                                    )
                                                    
                                                    
                                                    4.3
                                                    %
                                                    
                                                    
                                                    (16,022
                                                    )
                                                    
                                                    
                                                    (2,347
                                                    )
                                                    
                                                    
                                                    -3.7
                                                    %Total
      net revenues
                                                    
                                                    
                                                    255,536
                                                    
                                                    
                                                    
                                                    91.7
                                                    %
                                                    
                                                    
                                                    352,982
                                                    
                                                    
                                                    
                                                    95.7
                                                    %
                                                    
                                                    
                                                    411,562
                                                    
                                                    
                                                    
                                                    60,294
                                                    
                                                    
                                                    
                                                    96.3
                                                    %
 
 We derive
revenues from the following sources:
  •
                Advertisingagency
      services.We
      currently derive a substantial majority of our revenues from providing
      advertising agency services, in which we obtain advertising time slots on
      popular television channels of CCTV and procure advertisers to place
      advertisements on such time
slots.
  Our
commission for advertising agency services typically represents the difference
between the price we charge to our advertising clients and the price we pay for
the available advertising time slots. Our advertising clients typically make
payments for our agency services at least one week before the relevant
advertisements are broadcast, but we only recognize revenues when those
advertisements are broadcast. If the advertisements are not broadcast, for
instance due to CCTV’s change of program schedule, the advance payments will be
returned to our clients.
  We
generally record revenue with amounts of billings to our clients net of media
fees because we believe that the media supplier, not us, is the primary obligor
and bears the majority of the risks and rewards in these arrangements. However,
when we purchase blocks of advertising time slots and attempt to sell these
advertising time slots to advertisers, we bear the majority of the risks and
rewards in these arrangements. In such cases, revenues are recognized at gross
billings to our clients and the cost for purchasing the advertising time slots
is allocated to cost of revenues on a straight-line basis. We also assist some
of our advertising clients in bidding for prime advertising time slots from
CCTV, for which we receive a certain percentage of our clients’ related
advertising expenditures as our fees.
  •
                Specialeventsservices.From time to time we provide special events services to CCTV, in
      which we assist CCTV in the sales and marketing of advertising time slots
      in connection with major sporting events broadcast on CCTV. Under this
      arrangement, our sales representatives will, together with CCTV and sales
      representatives from an independent third-party advertising company, form
      an advertising sales team for these special events. Our fees for such
      services will be determined on a case-by-case basis by CCTV based on the
      total advertising sales on CCTV Channels 1 and 2 relating to such special
      event. We typically receive a certain percentage of the total advertising
      sales as our compensation. Due to our inability to estimate the amount of
      revenues we will receive, we do not recognize the revenues from our
      special events services until we receive settlement statements from CCTV
      and the settlement of our service fees is reasonably assured, which
      generally occur several months after our services are rendered. We usually
      receive payment for these services several months after receiving the
      related statements. As a result, there is often a significant time lag
      between our performance of these services, our recognition of the related
      revenues and our actual receipt of payment. We have not recognized any
      revenues from our special events services provided in connection with the
      marketing and sales of the advertising time slots relating to 2008 Beijing
      Olympic Games. The service contract with CCTV was not renewed for 2010 and
      we will not provide such services to CCTV in
  2010.
  51
  •
                Productionand
      sponsorshipservices.We
      derive a portion of our revenues from our production and sponsorship
      services. We design, produce and package content for public service
      announcements and commercial advertisements. We also solicit sponsors for
      the public service announcements we produce and arrange for such
      announcements, as well as announcements supplied by certain of our
      clients, to be broadcast on CCTV. The sponsor’s name will be shown at the
      end of the announcement.
  For
commercial television advertisements, advertisers will pay for our production
services and sometimes for the broadcast of the advertisements produced by us if
we also arrange for such broadcast. For public service announcements,
advertisers will pay for the sponsorships. We typically require a prepayment
from our clients at the time of the execution of the advertising production
agreements and prior to the commencement of our work, but our revenues are
typically recognized at the time the final work products are delivered to our
clients or are broadcast.
  Operating
Costs and Expenses
  The
following table sets forth our operating costs and expenses for the periods
indicated, both in absolute amounts and as percentages of our net
revenues:
 Year Ended December 31,2007
                              
                              
                              2008
                              
                              
                              2009Amount
                              
                              
                              % of
                                Net
                                Revenues
                              
                              
                              Amount
                              
                              
                              % of
                                Net
                                Revenues
                              
                              
                              Amount
                              
                              
                              % of
                                Net
                                Revenues(RMB)
                              
                              
                              
                              
                              
                              (RMB)
                              
                              
                              
                              
                              
                              (RMB)
                              
                              
                              (US$)(In thousands, except percentages)Cost
      of revenues
                              
                              
                              30,148
                              
                              
                              
                              11.8
                              %
                              
                              
                              203,400
                              
                              
                              
                              57.6
                              %
                              
                              
                              270,239
                              
                              
                              
                              39,590
                              
                              
                              
                              65.7
                              %Sales
      and marketing expenses
                              
                              
                              5,600
                              
                              
                              
                              2.2
                              %
                              
                              
                              8,204
                              
                              
                              
                              2.3
                              %
                              
                              
                              17,362
                              
                              
                              
                              2,544
                              
                              
                              
                              4.2
                              %General
      and administrative expenses
                              
                              
                              8,505
                              
                              
                              
                              3.3
                              %
                              
                              
                              24,487
                              
                              
                              
                              6.9
                              %
                              
                              
                              33,194
                              
                              
                              
                              4,863
                              
                              
                              
                              8.1
                              %Total
      operating costs and expenses
                              
                              
                              44,253
                              
                              
                              
                              17.3
                              %
                              
                              
                              236,091
                              
                              
                              
                              66.8
                              %
                              
                              
                              320,795
                              
                              
                              
                              46,997
                              
                              
                              
                              78.0
                              %
 
 Cost
of Revenues
 
 Prior to
2008, we recorded all of our revenues from our advertising agency services after
deducting the media costs. Our cost of revenues consisted primarily of the costs
that we incurred to produce our public service announcements and commercial
advertisements and production and promotional costs related to the Chinese New
Year Gala program and special events, including wages of production personnel,
costs and depreciation of the production equipment, office rental expenses
directly related to our production services, wages of media research and
relationship personnel and costs associated with the monitoring, assessment and
evaluation of the advertisements. In 2008, we obtained advertising rights to
certain CCTV Channel 4 programs for which we are committed to pay a fixed amount
of media fees. We record such media fees as our cost of revenues when the
advertising time slots purchased are consumed on a straight-line basis and
record the revenues from such Channel 4 programs on a gross basis. As a result,
the media fee costs for the Channel 4 programs account for a substantial
majority of our cost of revenues in 2008 and 2009, with the media fees
accounting for a higher percentage of our cost of revenues in 2009 as CCTV
increased the media fees for such Channel 4 programs by approximately 40.9% in
that period. In 2010 we did not obtain the advertising rights to most of such
programs on CCTV Channel 4 that we had in 2008 and 2009 and as a result, we
expect that our cost of revenues will drop in 2010.
  52
  Sales
and Marketing Expenses
  Our sales
and marketing expenses consist primarily of salaries and benefits for our sales
and marketing personnel, office rental expenses directly related to our sales
and marketing activities, traveling expenses incurred by our sales personnel and
promotional and entertainment expenses. Our sales personnel receive
performance-based compensation and we market our services primarily through the
efforts of our sales and marketing personnel. Our sales and marketing expenses
increased significantly in 2009 partly due to the fact that we significantly
expanded our sales team. We expect selling and marketing expenses to increase as
we expand our sales force.
  General
and Administrative Expenses
  Our
general and administrative expenses primarily consist of salaries and benefits
for our management, accounting and administrative personnel, professional
service fees, office rental and maintenance expenses directly related to our
general office administration activities, depreciation of office equipment,
other administrative expenses and allowances for doubtful accounts. We expect
our general and administrative expenses to increase as we hire additional
personnel, improve our corporate infrastructure and incur additional costs to
meet the requirements of being a public company in the U.S. For example, we
hired additional financial staff with experience in U.S. GAAP and SEC reporting
requirements and engaged outside legal counsels. In particular, we engaged an
outside consulting firm to assist us in our efforts to comply with Section 404
of the Sarbanes-Oxley Act, which requires a public company to include a report
of management on the effectiveness of its internal control over financial
reporting. All of these measures have considerably increased our general and
administrative expenses in the periods following our initial public offering. In
addition, we also incurred, and will continue to incur, costs associated with
public company reporting requirements, such as the requirements to file an
annual report and other event-related reports with the SEC.
  Share-Based
Compensation Expenses
  We
adopted an equity incentive plan in July 2008, pursuant to which we may issue up
to 50,000,000 ordinary shares upon exercise of awards granted under the plan. On
July 1, 2008, options to purchase 42,891,000 ordinary shares were granted under
this plan at an exercise price of US$0.685 per ordinary share. On February 21,
2009, our board of directors resolved to offer to the grantees of our stock
options the opportunity to modify the terms of their existing options through
(i) resetting the exercise price of each option to US$0.0726 per ordinary share,
which equals approximately one-thirtieth (owing to the 30 to 1 ordinary share to
ADS ratio) of the average closing trading price per ADS of our company as
reported on NYSE Arca in the last 60 days immediately prior to February 13,
2009; and (ii) reducing the number of each award of options by 50%. No other
changes were made to the terms and conditions of the stock options. All grantees
of our stock options accepted this offer. As of August 20, 2010, options to
purchase 17,655,093 ordinary shares were outstanding, at an exercise price of
US$0.0726 per ordinary share.
  We have
adopted Financial Accounting Standard Board’s (“FASB”) Accounting Standards
Codification (“ASC”) 718 and ASC 505-50 for the accounting treatment of our
stock option plan and we will record compensation expenses based on the fair
value of the award. See “—Critical Accounting Policies—Share-Based Compensation”
and “Item 6. Directors, Senior Management and Employees—B. Compensation of
Directors and Executive Officers.” We expect to amortize the total amount of
share-based compensation expenses over the vesting period of four years
commencing July 2008 on a straight line basis over the requisite service period
for each separately vesting portion of the awards. We incurred RMB 2,139,736
(US$313,473) in share-based compensation expenses in 2009.
  53
  Taxation
  Taxation
in the Cayman Islands and the British Virgin Islands
  Neither
the Cayman Islands nor the British Virgin Islands currently levies taxes on
individuals or corporations based upon profits, income, gains or appreciation
and there is no taxation in the nature of inheritance tax or estate duty. There
are no other taxes likely to be material to our company levied by the government
of the Cayman Islands or by the government of the British Virgin Islands, except
for stamp duties that may be applicable on instruments executed in, or after
execution brought within the jurisdiction of, the Cayman Islands. Neither the
Cayman Islands nor the British Virgin Islands is a party to any double taxation
treaties that are applicable to any payments made to or by the Company. There
are no exchange control regulations or currency restrictions in the Cayman
Islands or the British Virgin Islands.
  PRC
Enterprise Income Tax
  Prior to
January 1, 2008, both Mass Media and Universal were subject to the PRC
Enterprise Income Tax Law Concerning Foreign-Invested Enterprises and Foreign
Enterprises, or the old EIT law. Under the old EIT law, each of Mass Media and
Universal, as a foreign-invested enterprise established in the Shenzhen Special
Economic Zone, was entitled to a preferential income tax rate of 15% on the
income generated by its offices based in Shenzhen and an income tax rate of 30%
on the income generated by its offices based outside of Shenzhen, as compared to
the statutory enterprise income tax rate of 33%. In addition, each of Mass Media
and Universal was fully exempted from PRC income tax commencing from its first
profit-making year, followed by a 50% reduction in PRC income tax for the next
two years. As a result, Universal was exempted from PRC income tax for the year
ended December 31, 2007 and was entitled to a 50% income tax reduction for the
years ending December 31, 2008 and 2009.
  On March
16, 2007, the PRC National People’s Congress enacted the Enterprise Income Tax
Law, and on December 6, 2007, the PRC State Council issued the Implementation
Regulations of the Enterprise Income Tax Law, both of which became effective on
January 1, 2008. The Enterprise Income Tax Law and its Implementation
Regulations, or the new EIT law, imposes a uniform tax rate of 25% on all PRC
enterprises, including foreign-invested enterprises, and eliminates or modifies
most of the tax exemptions, reductions and preferential treatments available
under the old EIT law. Under the new EIT law, enterprises that were established
before March 16, 2007 and already enjoy preferential tax treatments, in
accordance with any detailed directives to be issued by the State Council, (i)
in the case of preferential tax rates, continue to enjoy the preferential tax
rates which are being gradually increased to the new tax rates within five years
from January 1, 2008 or (ii) in the case of preferential tax exemption or
reduction for a specified term, continue to enjoy the preferential tax holiday
until the expiration of such term. According to the new EIT law, Universal’s 50%
income tax reduction treatment expired on December 31, 2009. However, Universal
will continue to enjoy the preferential tax rates which are being gradually
increased to the new tax rates within five years from January 1,
2008.
  Under the
old EIT law, dividend payments to foreign investors made by foreign-invested
enterprises in the PRC, such as our PRC subsidiary, were exempted from PRC
withholding tax. Under the new EIT law, however, dividends, interests, rent,
royalties and gains on transfers of property payable by a foreign-invested
enterprise in the PRC to its foreign investor who is a non-resident enterprise
are subject to a 10% withholding tax, unless such non-resident enterprise’s
jurisdiction of incorporation has a tax treaty with the PRC that provides for a
reduced rate of withholding tax. The British Virgin Islands, where UIAL is
incorporated, does not have such a tax treaty with the PRC. If UIAL is
considered a non-resident enterprise, the 10% withholding tax impacted on
divided income received from our PRC subsidiary would reduce our net income and
have an adverse effect on our operating results.
  We intend
to permanently reinvest 70% of the earnings made by our PRC subsidiary. Starting
from January 1, 2008, we accrued 10% withholding tax on those earnings from our
PRC subsidiary that we have no intention to permanently reinvest, which
represents 30% of the earnings made by our PRC subsidiary.
  54
  Under the
new EIT law, an enterprise established outside the PRC with its “de facto
management body” within the PRC is considered a resident enterprise and is
subject to the enterprise income tax at the rate of 25% on its worldwide income.
The “de facto management body” is defined as the organizational body that
effectively exercises overall management and control over production and
business operations, personnel, finance and accounting, and properties of the
enterprise. It remains unclear how the PRC tax authorities will interpret such a
broad definition. Substantially all of our management members are based in the
PRC. If the PRC tax authorities subsequently determine that we should be
classified as a resident enterprise, then our worldwide income will be subject
to income tax at a uniform rate of 25%, which may have a material adverse effect
on our financial condition and results of operations. Notwithstanding the
foregoing provision, the new EIT law also provides that, if a resident
enterprise directly invests in another resident enterprise, the dividends
received by the investing resident enterprise from the invested enterprise are
exempted from income tax, subject to certain conditions. Therefore, if CMM and
UIAL, our PRC subsidiary’s direct holding company, are classified as resident
enterprises, the dividends received from our PRC subsidiary may be exempted from
income tax. However, it remains unclear how the PRC tax authorities will
interpret the treatment of an offshore company, like us, having indirect
ownership interests in PRC enterprises through intermediary holding
vehicles.
  Our
effective tax rate was 4.9% in 2007, 14.8% in 2008 and 12.6% in 2009. Our
effective tax rate in 2008 and 2009 increased as a result of the expiration on
January 1, 2008 of Universal’s income tax exemption status as well as the
accrual of withholding tax on distributable earnings from PRC operations that we
do not intend to permanently reinvest.
  PRC
Business Tax and Related Surcharges
  Our PRC
subsidiary is required to pay business tax at a rate of 5.0%, and related
surcharges at a rate of approximately 3.0%, on our revenues from providing
advertising services. Under the PRC tax law, business tax is levied on the net
amount of total advertising revenues less media fees paid to the media
providers. As we reported revenues from certain of our advertising time slots on
a gross basis, our effective business tax rate was approximately 3.7% of our
total revenues in 2009.
  Critical
Accounting Policies
  We
prepare our combined financial statements in conformity with U.S. GAAP, which
requires us to make estimates and assumptions that affect the reported amounts
of our assets and liabilities as of the date of our financial statements and our
revenues and expenses during the financial reporting period. Our estimates and
assumptions are based on available information and our historical experience, as
well as other estimates and assumptions that we believe to be reasonable. The
estimates and assumptions that form the basis for our judgments may not be
readily apparent from other sources. We continually evaluate these estimates and
assumptions based on the most recently available information, our own experience
and other assumptions that we believe to be reasonable. Our actual results may
differ significantly from estimated amounts as a result of changes in our
estimates or changes in the facts or circumstances underlying our estimates and
assumptions. Some of our accounting policies require higher degrees of judgment
than others in their application. We consider the policies discussed below to be
critical to an understanding of our financial statements as their application
places the most significant demands on our management’s judgment. When reviewing
our combined financial statements, you should take into account:
  •
              our
      critical accounting policies discussed
below;
  •
                the
      related judgments made by our management and other uncertainties affecting
      the application of these
policies;
  •
              the
      sensitivity of our reported results to changes in prevailing facts and
      circumstances and our related estimates and assumptions;
      and
  •
              the
      risks and uncertainties described under “Risk
  Factors.”
  See note
2 to our combined financial statements for additional information regarding our
critical accounting policies.
  55
  Revenue
Recognition
  We derive
revenues primarily from providing services in three areas: (i) advertising
agency services, in which we procure advertising clients to place television
advertisements in the time slots we have obtained from CCTV, (ii) special events
services to CCTV, in which we assist CCTV in the sales and marketing of
advertising time slots for major sporting events broadcast on CCTV, and (iii)
production and sponsorship services, in which we produce public service
announcements, or commercial advertisements, for our clients or solicit sponsors
for the public service announcements we produce and arrange for such
announcements, as well as announcements supplied by certain of our clients, to
be broadcast on CCTV.
  We
recognize revenues when persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed or determinable and collection is reasonably
assured. Revenue arrangements involving multiple deliverables are broken down
into single-element arrangements based on their relative fair value for revenue
recognition purposes, when possible. We recognize revenues on the elements
delivered and defer the recognition of revenues for the fair value of the
undelivered elements until the remaining obligations have been satisfied. When
there is no objective and reliable evidence of the fair value of the undelivered
items, we recognize revenues of the elements delivered as a single unit of
accounting. Generally, we receive advanced payments for our advertising services
and record them as customer advances. Such prepayments are only recognized as
revenues when the services are rendered.
  We have
adopted the net presentation for business tax and related surcharges. Business
tax and related surcharges are deducted from revenues before arriving at net
revenues. Alternatively, we could adopt the gross presentation and present our
revenues gross of business tax and related surcharges, while recording the
business tax and related surcharges in cost of revenues. However, we believe
that the net presentation better reflects our results of operations, since we
consider business tax and related surcharges as taxes based on revenues
collected from customers that reduce revenues earned by us.
  Advertising agency services. In the
substantial majority of our advertising agency arrangements, we contract
separately with our clients and the media supplier and are responsible for the
payments to the media supplier and collections from our clients. In compliance
with ASC 605-45, “Revenue Recognition: Principal Agent Considerations”, , or ASC
605-45, we assess whether we or the media supplier is the primary obligor in
these service contracts. We evaluate the terms of our agreements with our
clients and give appropriate consideration to other key indicators, such as
inventory risk, latitude in establishing price, variability of earnings, ability
to change the programs the media supplier provides, discretion in supplier
selection and credit risk to the vendor.
  Since the
first year of operation, we have been arranging our clients’ advertisements on
the advertising time slots of the regular daily programs on CCTV Channel 1 and
Channel 2 and the annual Chinese New Year Gala program. In general, we are not
obligated to pay the media fees until we have sold the advertising time slots to
our clients. In these cases, we record the net amounts of the gross billings to
our clients less media fees as revenues on the dates of broadcast in accordance
with the guidance in ASC 605-45 because we believe that the media supplier, not
us, is the primary obligor and bears the majority of the risks and rewards under
such arrangements.
  In order
to obtain exclusive access to the advertising time slots on certain CCTV Channel
4 programs, starting from 2008, we purchase the advertising time slots on
certain CCTV Channel 4 programs with a fixed media cost and attempt to sell
these advertising time slots to our clients. We believe we bear the majority of
the risks and rewards under such arrangements. Therefore, revenues are
recognized at gross billings to our clients in accordance with the guidance in
ASC 605-45 on the dates of broadcast of the advertisements. Cost for purchasing
the advertising time slots from the media supplier is recorded as our cost of
revenues on a straight- line basis. If we had recorded all revenues from
advertising agency services on a gross basis, total revenues and cost of
revenues would have been higher. However, operating income would remain
unchanged for the periods presented.
  56
  Specialeventsservicesto CCTV.We historically assisted
CCTV on an ad hoc basis in the sales and marketing of advertising time slots
during major sporting events that were broadcast on CCTV Channels 1 and 2 under
general framework agreements between CCTV and us. Our fees were determined on a
case-by-case basis by CCTV and represented a certain percentage of the total
advertising revenues earned by CCTV Channels 1 and 2 relating to each major
sporting event. We were not able to estimate our service fees earned until we
received settlement statements from CCTV, which generally occurred several
months after our services were rendered. As such, we recognized revenues from
our special events services when we received such settlement statements from
CCTV and settlement of our service fees is reasonably assured. If we were able
to estimate our service fees earned or were able to receive settlement
statements from CCTV and are reasonably assured that CCTV would settle our
service fees on a more timely basis, the timing of recognizing revenues from
special events services to CCTV would be accelerated. We have not recognized any
revenues from our special events services provided in connection with the
marketing and sales of the advertising time slots relating to 2008 Beijing
Olympic Games. The service contract with CCTV was not renewed for 2010 and we
will not provide such services to CCTV in 2010..
  Productionand sponsorshipservices.We recognize revenues from
production services at the time the productions are completed. For sponsorship
services, we either provide sponsors with a pool of public service announcements
already produced by us to choose from, or produce new announcements based on
sponsors’ original ideas, and arrange to broadcast such public service
announcements, as well as announcements supplied by clients themselves, in which
sponsors’ names will be shown. We recognize revenues from sponsorship services
only at the time such announcements with sponsors’ names are broadcast on the
time slots we obtain from CCTV and other criteria, such as the execution of
sponsorship agreements, are met.
  Income
Tax
  On
January 1, 2007, we adopted ASC 740-10, “Income Taxes,” or ASC 740-10. ASC
740-10 clarified the accounting for uncertainty in an enterprise’s financial
statements by prescribing a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC 740-10 requires management to evaluate
its open tax positions that exist on the date of initial adoption in each
jurisdiction. We did not have any unrecognized tax benefits and there was no
effect on our financial condition or results of operations as a result of
implementing ASC 740-10.
  Under the
new EIT Law adopted by the Chinese National People’s Congress in March 2007,
effective from January 1, 2008, dividends from earnings made after January 1,
2008, interests, rent, royalties and gains on transfers of property payable by a
foreign-invested enterprise in the PRC to its foreign investor who is a
non-resident enterprise are subject to a 10% withholding tax, unless such
non-resident enterprise’s jurisdiction of incorporation has a tax treaty with
the PRC that provides for a reduced rate of withholding tax. The British Virgin
Islands, where UIAL is incorporated, does not have such a tax treaty with the
PRC. This new 10% withholding tax imposed on the dividend income received from
our PRC subsidiary will reduce our net income in accordance with ASC 740-30. It
is our intention to permanently reinvest part of the earnings made by our PRC
foreign-invested enterprise. Starting from January 1, 2008, we have accrued the
10% withholding tax on those earnings from China operations that we have no
intention to permanently reinvest. As we only distribute up to 30% of our PRC
subsidiary’s annual income as dividends, our effective withholding tax rate is
approximately 3%.
  We make
assumptions, judgments and estimates in the recognition and measurement of a tax
position taken or expected to be taken in a tax return. These judgments,
assumptions and estimates take into account current tax laws, our interpretation
of current tax laws and possible outcomes of current and future audits conducted
by foreign and domestic tax authorities. Changes in tax law or our
interpretation of tax laws and the resolution of current and future tax audits
could significantly impact the amounts of unrecognized, uncertain tax positions,
if any, provided or to be provided for in our combined financial
statements.
  57
  Share-Based
Compensation
  Share-based
compensation is accounted for in accordance with ASC 718, “Compensation-Stock
Compensation”, or ASC 718, for share-based payment transactions with employees.
For service-based share option awards, share-based compensation cost is measured
at the grant date based on the fair value of the award and is recognized as an
expense on a graded-vesting basis, net of estimated forfeitures, over the
requisite service period, which is generally the vesting period. For
performance-based share option awards, our board of directors determines the
performance goals and vesting schedule of these awards and an evaluation is made
each quarter as to the likelihood of the performance criteria being met;
share-based compensation cost is then recorded based on the fair value for the
number of options expected to vest on a graded-vesting basis, net of estimated
forfeitures, over the requisite service period, which is generally the vesting
period.
  We use
the Black-Scholes option pricing model to determine the fair value of share
options. The determination of the fair value of share-based compensation awards
on the date of grant using the Black-Scholes option pricing model is affected by
the share price as well as assumptions regarding a number of complex and
subjective variables, including the expected term of the awards, the expected
share price volatility over the expected term of the awards, actual and
projected employee share option exercise behavior, risk-free interest rates and
expected dividends.
  If we use
different assumptions for estimating stock-based compensation expense in future
periods or if we decide to use a different valuation model, the change in our
stock-based compensation expense could materially affect our operating income,
net income and net income per share. Furthermore, we are required to estimate
forfeitures at the time of grant and record stock-based compensation expense
only for those awards that are expected to vest. If actual forfeitures differ
materially from our estimated forfeitures, we may need to revise those estimates
used in subsequent periods.
  Results
of Operations
  The
following tables present our summary combined statements of operations for each
of the years ended December 31, 2007, 2008 and 2009. Our historical results
presented below are not necessarily indicative of the results for any future
periods.
 
 Year Ended December 31,2007
                    
                    
                    2008
                    
                    
                    2009(RMB)
                    
                    
                    (RMB)
                    
                    
                    (RMB)
                    
                    
                    (US$)(In
      thousands)Revenues:Advertising
      agency services
                    
                    
                    202,637
                    
                    
                    
                    334,053
                    
                    
                    
                    397,279
                    
                    
                    
                    58,202Special
      events services
                    
                    
                    15,991
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Production
      and sponsorship services
                    
                    
                    60,018
                    
                    
                    
                    34,935
                    
                    
                    
                    30,305
                    
                    
                    
                    4.439Total
      revenues
                    
                    
                    278,646
                    
                    
                    
                    368,988
                    
                    
                    
                    427,584
                    
                    
                    
                    62,641Less:
      business tax
                    
                    
                    (23,110
                    )
                    
                    
                    (16,006
                    )
                    
                    
                    (16,022
                    )
                    
                    
                    (2,347
                    )Total
      net revenues
                    
                    
                    255,536
                    
                    
                    
                    352,982
                    
                    
                    
                    411,562
                    
                    
                    
                    60,294Operating
      costs and expenses:Cost
      of revenues
                    
                    
                    (30,148
                    )
                    
                    
                    (40,200
                    )
                    
                    
                    (40,239
                    )
                    
                    
                    (5,895
                    )Cost
      of revenues – media fees to a related party
                    
                    
                    
                    
                    
                    
                    (163,200
                    )
                    
                    
                    (230,000
                    )
                    
                    
                    (33,695
                    )Sales
      and marketing expenses
                    
                    
                    (5,600
                    )
                    
                    
                    (8,204
                    )
                    
                    
                    (17,362
                    )
                    
                    
                    (2,544
                    )General
      and administrative expenses
                    
                    
                    (8,505
                    )
                    
                    
                    (24,487
                    )
                    
                    
                    (33,194
                    )
                    
                    
                    (4,863
                    )Total
      operating costs and expenses
                    
                    
                    (44,253
                    )
                    
                    
                    (236,091
                    )
                    
                    
                    (320,795
                    )
                    
                    
                    (46,997
                    )Operating
      income
                    
                    
                    211,283
                    
                    
                    
                    116,891
                    
                    
                    
                    90,767
                    
                    
                    
                    13,297Interest
      and investment income
                    
                    
                    10,774
                    
                    
                    
                    15,103
                    
                    
                    
                    9,494
                    
                    
                    
                    1,391Other
      expenses, net
                    
                    
                    (3,128
                    )
                    
                    
                    (1,441
                    )
                    
                    
                    533
                    
                    
                    
                    78Income
      before tax
                    
                    
                    218,929
                    
                    
                    
                    130,553
                    
                    
                    
                    100,794
                    
                    
                    
                    14,766Income
      tax expense
                    
                    
                    (10,619
                    )
                    
                    
                    (20,139
                    )
                    
                    
                    (14,328
                    )
                    
                    
                    (2,099
                    )Net
      income
                    
                    
                    208,310
                    
                    
                    
                    110,414
                    
                    
                    
                    86,466
                    
                    
                    
                    12,667
  58
  The
table below sets forth certain operating data in
connection with our advertising agency services:
 Year Ended December 31,2007
                    
                    
                    2008
                    
                    
                    2009Number
      of programs secured during the period
                    
                    
                    3
                    
                    
                    
                    40
                    
                    
                    
                    41Total advertising time obtained
      (seconds)(1)
                    
                    
                    783,240
                    
                    
                    
                    6,818,220
                    
                    
                    
                    11,660,760Total
      advertising time sold (seconds)
                    
                    
                    631,620
                    
                    
                    
                    1,022,861
                    
                    
                    
                    2,127,473
 
 (1)
              Represents
      the total amount of time during regular television programs secured from
      CCTV.
 
 Year
ended December 31, 2009 compared to year ended December 31, 2008
  Revenues
  Our total
revenues increased by 15.9% to RMB 427.6 million (US$62.6 million) in the year
ended December 31, 2009 from RMB 369.0 million in the year ended December 31,
2008. This increase was attributable to the increase in revenues from our
advertising agency services, partially offset by the decrease in revenues from
our production and sponsorship services during this period.
  Revenues
from our advertising agency services increased by 18.9% to RMB 397.3 million
(US$58.2 million) in the year ended December 31, 2009 from RMB 334.1 million in
the year ended December 31, 2008. This increase was primarily attributable to an
increase in the selling price of advertising time slots sold by us in the year
ended December 31, 2009 compared to the year ended December 31, 2008. Our
overall sales of advertising time slots were higher in 2009 compared to 2008,
primarily because (i) the demand for our services was higher in 2009 when
China’s economy began to recover from the financial crisis and (ii) we expanded
our sales force starting from the second quarter of 2009, which helped us
develop and strengthen the relationship with our direct clients and take
advantage of the economic recovery in 2009.
  Revenues
from our production and sponsorship services decreased by 13.3% to RMB 30.3
million (US$4.4 million) in the year ended December 31, 2009 from RMB 34.9
million in the year ended December 31, 2008. The decrease was primarily due to
the fact that our clients reduced their sponsorship for the public service
announcements due to fewer national events in 2009.
  We did
not recognize any revenues from special events services in 2008 or 2009. While
we provided special events services to CCTV in connection with the 2008 Beijing
Olympic Games, the timing and likelihood of the final settlement from CCTV for
such services remain uncertain as of this annual report and therefore we have
not recorded revenues relating to such services in 2008 or 2009.
  Net
Revenues
  Our net
revenues increased by 16.6% to RMB 411.6 million (US$60.3 million) in the year
ended December 31, 2009 from RMB 353.0 million in the year ended December 31,
2008. This was mainly due to the increase in revenues from advertising agency
services.
  Operating
Costs and Expenses
  Our
operating costs and expenses increased by 35.9% to RMB 320.8 million (US$47.0
million) in the year ended December 31, 2009 from RMB 236.1 million in the year
ended December 31, 2008.
  59
 
 Cost of revenues. Our cost of revenues
increased by 32.9% to RMB 270.2 million (US$39.6 million) in the year ended
December 31, 2009 from RMB 203.4 million in year ended December 31, 2008. This
increase was primarily due to a 40.9% increase of the media fee for CCTV Channel
4 programs to RMB 230.0 million (US$33.7 million) in the year ended December 31,
2009 from RMB 163.2 million in the year ended December 31, 2008. In 2008, we
obtained the advertising rights to certain programs on CCTV Channel 4 for which
we were committed to pay a fixed amount of media fees. We recorded such media
fees as the cost of revenues on a straight-line basis and recorded the revenues
from the advertising on such CCTV Channel 4 programs on a gross basis. As a
result, the media fee costs for CCTV Channel 4 accounted for a substantial
majority of our cost of revenues in 2008 and 2009. We sustained a loss on our
advertising rights to CCTV Channel 4 programs in 2008 and 2009. In 2010, we
reduced our procurement of the advertising rights to CCTV Channel 4 programs and
as a result we expect that our cost of revenues will decrease in
2010.
  Salesand marketingexpenses. Our sales and marketing
expenses increased by 111.6% to RMB 17.4 million (US$2.5
million) in the year ended December 31, 2009 from RMB 8.2 million in the year
ended December 31, 2008.
This increase was primarily due to the increase in an amount of RMB 7.6 million
(US$1.1 million) in the compensation related to our increased sales efforts,
including (i) the payment of sales commissions and bonuses of RMB 2.0 million
(US$0.3 million) in connection with the 2009 Chinese New Year Gala and (ii) an
increase in an amount of 5.6 million (US$0.8 million) in the compensation to our
sales personnel as we recruited more senior sales executives, doubled the size
of our sales force and increased the sales commissions in 2009. The increase, to
a lesser extent, was due to (i) an increase in an amount of RMB 1.1 million
(US$0.2 million) in depreciation as we purchased an office premises in late 2008
and (ii) an increase in an amount of RMB 2.1 million (US$0.3 million) in other
expenses that principally include travel expenses, office costs and welfare and
social security insurance expenses due to our increased efforts to develop and
maintain direct customers and our doubled sales force.
  Generaland administrativeexpenses. Our general and
administrative expenses increased by 35.6% to RMB 33.2 million (US$4.9 million)
in the year ended December 31, 2009 from RMB 24.5 million in the year ended
December 31, 2008. This increase was primarily due to (i) an increase in an
amount of RMB 7.9 million (US$1.2 million) in accounting and auditing, legal and
consulting expenses, principally in connection with our compliance with U.S.
securities laws as a public company and a litigation against Hasee Computer Co.,
Ltd. for unpaid advertising fee and (ii) an increase in an amount of RMB 1.6
million (US$0.2 million) in the compensation to our directors, management and
employees. The increase was partially offset by a decrease in an amount of RMB
2.1 million (US$0.3 million) in our provision for accounts receivable recognized
in general and administrative expenses as we recovered certain provision from a
customer in 2009.
  Operating
Incomes
  As a
result of the foregoing, our operating income decreased by 22.3% to RMB 90.8
million (US$13.3 million) in the year ended December 31, 2009 from RMB 116.9
million in the year ended December 31, 2008. Our operating margin was 22.1% and
33.1% in the years ended December 31, 2009 and 2008, respectively.
  Interest
and Investment Income
  Our interest and investment income
decreased by 37.1% to RMB 9.5 million (US$1.4 million) in the year ended
December 31, 2009 from RMB 15.1 million in the year ended December 31, 2008.
This decrease was attributable to a decrease in an amount of RMB 1.8 million
(US$0.3 million) in the interest income generated from our deposit with banks
and a decrease in an amount of RMB 3.8 million (US$0.6 million) in the interest
and investment income generated from the reduced aggregate principal amount of
short-term investment products that we held in this period.
  Income
Tax Expenses
  Our
income tax expenses decreased by 28.9% to RMB 14.3 million (US$2.1 million) in
the year ended December 31, 2009 from RMB 20.1 million in the year ended
December 31, 2008. This decrease was mainly due to the decrease of our taxable
income in this period.
 
 60
 
 Net
Income
  As a
result of the foregoing, our net income decreased by 21.7% to RMB 86.5 million
(US$12.7 million) in the year ended December 31, 2009 from RMB 110.4 million in
the year ended December 31, 2008. Our net margin was 21.0% and 31.3% in the
years ended December 31, 2009 and 2008, respectively.
  Year
ended December 31, 2008 compared to year ended December 31, 2007
  Revenues
  Our total
revenues increased by 32.4% to RMB 369.0 million in the year ended December 31,
2008 from RMB 278.6 million in the year ended December 31, 2007. This increase
was attributable to the increase in revenues from our advertising agency
services, partially offset by the decrease in revenues from our production and
sponsorship services and a lack of revenues from special events services during
this period.
  Revenues
from our advertising agency services increased by 64.9% to RMB 334.1 million in
the year ended December 31, 2008 from RMB 202.6 million in the year ended
December 31, 2007. This increase was primarily attributable to the fact that,
while we report revenues from all other programs on a net basis, we use the
gross method to report revenues generated from the sale of the advertising time
slots of the CCTV Channel 4 programs newly secured in 2008. We recorded the
gross amount received from our advertising clients for Channel 4 programs in
2008 as our advertising agency services revenues without netting the
corresponding media fees. In addition, the increase of our advertising agency
service revenues was also attributable to an increase in the total advertising
time slots sold by us in the year ended December 31, 2008 compared to the year
ended December 31, 2007, particularly for the CCTV Channel 2 and Channel 4
programs newly secured for 2008. Our overall sales of advertising time slots
were lower in the second half of 2008 compared to the first half of 2008,
primarily because (i) the global financial crisis that began in the third
quarter of 2008 significantly slowed down China’s economic growth, and the
advertising spending in China and the demand for our services began to decline
in the fourth quarter of 2008; and (ii) the suspension of regularly scheduled
television programs during Beijing Olympic Games in the third quarter of 2008
led to the cancellation or rescheduling of advertising time slots for certain of
our television programs.
  Revenues
from our production and sponsorship services decreased by 41.8% to RMB 34.9
million in the year ended December 31, 2008 from RMB 60.0 million in the year
ended December 31, 2007. The decrease was primarily due to the fact that certain
temporary time slots, which CCTV was unable to sell otherwise
and thus provided to us in 2007 to broadcast public interest announcements and
generated significant revenues for us from our sponsorship services, were no
longer available to us in 2008.
  We
recognized nil revenues from our special events services in the year ended
December 31, 2008, while we recognized RMB 16.0 million in the year ended
December 31, 2007 for our special events services to CCTV in connection with the
2006 FIFA World Cup. As of December 31, 2008, we had not received payment from
CCTV and therefore no revenues were recognized in connection with the special
events services we provided for 2008 Beijing Olympic Games in the year ended
December 31, 2008.
  Net
Revenues
  Our net
revenues increased by 38.1% to RMB 353.0 million in the year ended December 31,
2008 from RMB 255.5 million in the year ended December 31,
2007.
 Operating
Costs and Expenses
  Our
operating costs and expenses increased by 433.5% to RMB 236.1 million in the
year ended December 31, 2008 from RMB 44.3 million in the year ended December
31, 2007.
 
 61
 
 Cost of revenues. Our cost of revenues
increased by 574.7% to RMB 203.4 million in the year ended December 31, 2008
from RMB 30.1 million in year ended December 31, 2007. This significant increase
was primarily due to the inclusion of the guaranteed media fees of RMB 163.2
million in the cost of revenues in the year ended December 31, 2008 as a result
of our using the gross method of reporting for the revenues generated from the
newly secured CCTV Channel 4 programs. Under our agreements with Guang Er Gao
Zhi FTP, we are committed to pay a fixed amount of media fees of RMB 163.2
million for the CCTV Channel 4 programs that we secured through those
agreements. The increase of our cost of revenues was to a lesser extent due to
the increase of the compensation paid to our employees as a result of our
workforce expansion in 2008.
  Salesand marketingexpenses. Our sales and marketing
expenses increased by 46.5% to RMB 8.2 million in the year ended December 31,
2008 from RMB 5.6 million in the year ended December 31, 2007. This increase was
primarily due to the increase in the average compensation per employee paid to
our sales personnel as well as the increase in marketing expenses as the number
of our customers expanded.
  Generaland administrativeexpenses. Our general and
administrative expenses increased by 187.9% to RMB 24.5 million in the year
ended December 31, 2008 from RMB 8.5 million in the year ended December 31,
2007. This increase was primarily due to (i) the provision for doubtful accounts
of RMB 4.3 million, (ii) the increase in the compensation paid to our expanded
administrative personnel of RMB 5.4 million, and (iii) the increase of our
professional service costs in connection with the preparation of our initial
public offering in 2008 of RMB 2.3 million.
  Operating
Income
  As a
result of the foregoing, our operating income decreased by 44.7% to RMB 116.9
million in the year ended December 31, 2008 from RMB 211.3 million in the year
ended December 31, 2007. Our operating margin was 33.1% and 82.7% in the years
ended December 31, 2008 and 2007, respectively.
  Interest
and Investment Income
  Our
interest and investment income increased by 40.2% to RMB 15.1 million in the
year ended December 31, 2008 from RMB 10.8 million in the year ended December
31, 2007. This increase was attributable to the interest income generated from
the proceeds of our initial public offering and the interest and investment
income generated from the greater aggregate principal amount of short-term
investment products that we purchased in this period.
  Income
Tax Expenses
  Our
income tax expenses increased by 89.6% to RMB 20.1 million in the year ended
December 31, 2008 from RMB 10.6 million in the year ended December 31, 2007.
This increase was mainly due to the imposition of withholding tax in 2008 on
part of the earnings from UIAL under the New EIT Law and the expiration on
January 1, 2008 of the enterprise income tax exemption that our primary
operating subsidiary in China, Universal, had enjoyed in 2007.
  Net
Income
  As a
result of the foregoing, our net income decreased by 47.0% to RMB 110.4 million
in the year ended December 31, 2008 from RMB 208.3 million in the year ended
December 31, 2007. Our net margin was 31.3% and 81.5% in the years ended
December 31, 2008 and 2007, respectively.
 
 62
  B.
              Liquidity and
      Capital Resources
 
 Liquidity
 
 The
following table sets forth a summary of our
cash flows for the periods indicated:
 
 Year Ended December 31,2007
                  
                  
                  2008
                  
                  
                  2009(RMB)
                  
                  
                  (RMB)
                  
                  
                  (RMB)
                  
                  
                  (US$)(In thousands)Net
      cash (used in)/ provided by operating activities
                  
                  
                  454,107
                  
                  
                  
                  451,738
                  
                  
                  
                  (349,550
                  )
                  
                  
                  (51,209
                  )Net
      cash provided by/ (used in) investing activities
                  
                  
                  (278,394
                  )
                  
                  
                  (262,494
                  )
                  
                  
                  403,152
                  
                  
                  
                  59,062Net
      cash (used in)/ provided by financing activities
                  
                  
                  (547,453
                  )
                  
                  
                  240,824
                  
                  
                  
                  (111,335
                  )
                  
                  
                  (16,311
                  )Effect
      of foreign currency exchange
                  
                  
                  (913
                  )
                  
                  
                  (1,441
                  )
                  
                  
                  (378
                  )
                  
                  
                  (55
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  510,915
                  
                  
                  
                  138,262
                  
                  
                  
                  566,889
                  
                  
                  
                  83,049Cash
      and cash equivalents at end of year
                  
                  
                  138,262
                  
                  
                  
                  566,889
                  
                  
                  
                  508,778
                  
                  
                  
                  74,536Net
      (decrease)/ increase in cash and cash equivalents
                  
                  
                  (372,653
                  )
                  
                  
                  428,627
                  
                  
                  
                  (58,111
                  )
                  
                  
                  (8,513
                  )
 
 Cash
flow from operating activities
 
 Our cash
provided by or used in operating activities primarily consists of net income, as
adjusted by depreciation expenses, share-based compensation expenses, investment
income, exchange loss and changes in assets and liabilities, which include
accounts receivable, prepaid expenses and other current assets, other
non-current assets, accounts payable, customer advances, accrued expenses and
other current liabilities, taxes payable and amounts due from, and due to,
related parties.
  Net cash
used in the operating activities in the year ended December 31, 2009 was RMB
349.6 million (US$51.2 million), which was derived from net income of RMB 86.5
million (US$12.7 million), as adjusted primarily by adding back a decrease of
RMB14.0 million (US$2.0 million) in accounts receivable and by deducting a
decease of RMB 279.6 million (US$41.0 million) in accounts payable, a decrease
of RMB 88.0 million (US$12.9 million) in amount due to related parties, a
decrease of RMB 54.8 million (US$8.0 million) in customer advancement and an
increase of RMB 29.4 million (US$4.3 million) in prepaid expenses and other
current assets. The decrease in accounts receivable resulted from the successful
collections of fees from a small number of advertising clients. The significant
decrease of accounts payable reflected the fact that we made significant amounts
of payments to CCTV for advertising fees owed to CCTV for the past three years.
The decrease in amount due to related parties resulted from our payments to
Guang Er Gao Zhi FTP for advertising fee for the advertising time slots on CCTV
programs we secured through Guang Er Gao Zhi FTP. The decrease in customer
advances was mainly due to the fact that we did not obtain the advertising time
slots for 2010 Chinese New Year Gala program and for certain programs on CCTV
Channel 2 and 4 in 2010 and as a result, we did not receive any advances from
our customers relating to such advertising time slots. The increase in prepaid
expense and other current assets primarily resulted from the deposit we were
required to make with CCTV in connection with the advertising time slots in 2010
for the Periodic China News Package on CCTV Channel 4 that we
obtained.
 
 63
 
 Net cash
provided by operating activities in the year ended December 31, 2008 was RMB
451.7 million, which was derived from net income of RMB 110.4 million, as
adjusted primarily by adding back an increase of RMB 211.5 million in accounts
payable, an increase of RMB 169.2 million in amount due to related parties and
an increase of RMB 9.0 million in accrued expenses and other current
liabilities. Net income was primarily reduced by a decrease of RMB 24.5 million
in customer advances, an increase of RMB 14.0 million in prepaid expenses and
other current assets and an increase of RMB 9.0 million in accounts receivable.
The increase in accounts payable reflected the increase of our unpaid
advertising fees to CCTV. The increase in amount due to related parties resulted
mainly from our transactions with Guang Er Gao Zhi FTP regarding the newly added
television programs. The significant increase of accrued expenses and other
current liabilities reflected the increase in customer security deposits as the
number of our customers significantly increased in 2008 and the increase in
accruals for professional services fees and dividend withholding tax. The
decrease in customer advances was mainly due to the absence of a customer’s
one-off transaction to place prime time advertisement on CCTV in 2008, which
occurred in 2007. The significant increase in prepaid expenses and other current
assets reflected the increase of the deposits we made to CCTV in connection with
our more active participation in the CCTV’s prime time advertising auction and
bidding events, as well as the increase in deferred business tax arising from
our unpaid media fees. The increase in accounts receivable resulted from our
increased uncollected fees from a small number of advertising
clients.
  Net cash
provided by operating activities in the year ended December 31, 2007 was RMB
454.1 million, which was derived from net income of RMB 208.3 million, as
adjusted primarily by adding back an increase of RMB 191.9 million in accounts
payable and an increase of RMB 52.5 million in customer advances. The increase
in accounts payable reflected the increase of our unpaid advertising fees to
CCTV as a result of CCTV’s delay in its settlement with us of payments for the
advertising revenues generated from our agency services. The increase in
customer advances reflected the increased client prepayments as a result of the
sales relating to our newly added television programs for 2008.
  Cash
flow from investing activities
  Net cash
provided by investing activities was RMB 403.2 million (US$59.1 million) in the
year ended December 31, 2009. We redeemed short-term investment funds of
RMB420.0 million (US$61.5 million) from Industrial and Commercial Bank of China
to satisfy the payment obligations to CCTV with respect to historical unpaid
media fees. We also received proceeds of RMB 6.6 million (US$1.0 million) from
our short-term investment funds issued by domestic banks. We used RMB 23.5
million (US$3.4 million) to pay for certain fixed assets, which principally
included the office premises we purchased from a related party in
2008.
  Net cash
used in investing activities was RMB 262.5 million in the year ended December
31, 2008. We used RMB 280.0 million in purchasing short-term investment funds
offered by domestic banks and received RMB 9.2 million of proceeds from such
investment. We purchased short-term investment funds to derive a higher return
on our cash balance than we had previously earned from bank deposits. Short-term
funds are offered by domestic banks that in turn invest in government bonds,
central bank bills, corporate bonds or commercial paper. We also received RMB
15.0 million of proceeds from disposing of the long- term investments that we
had held on behalf of UIAL’s shareholder and his immediate family, which we
repaid to the shareholder’s immediate family.
  Net cash
used in investing activities was RMB 278.4 million in the year ended December
31, 2007, including RMB 280.0 million used in purchasing investment products
provided by domestic banks, which was offset by RMB 1.9 million of proceeds from
investment income.
  Cash
flow from financing activities
  Net cash
used in our financing activities was RMB 111.3 million (US$16.3 million) in the
year ended December 31, 2009. We paid dividends of RMB 96.3 million (US$14.1
million) to our shareholders and we paid cash of RMB 15.0 million (US$2.2
million) to satisfy our payment obligation for a 30% equity interest in
Universal we acquired from a related party in 2008.
  Our net
cash provided by financing activities was RMB 240.8 million in the year ended
December 31, 2008, primarily consisting of RMB 287.7 million of proceeds we
received from the issuance of ordinary shares in our initial public offering,
which were primarily offset by RMB 29.2 million in dividends paid to our
shareholders and RMB 15.0 million in repayment of the proceeds from disposing of
the long-term investments that we had held on behalf of UIAL’s shareholder and
his immediate family.
 
 64
 
 Our net
cash used in financing activities was RMB 547.5 million in the year ended
December 31, 2007. We declared and paid dividends of RMB 177.4 million and, in
connection with our reorganization in 2007, Mass Media also retained RMB 370.8
million in cash to settle the liabilities it owed to CCTV and other
liabilities.
   Capital
Resources and Capital Expenditures
  Historically
we have financed our operations primarily through cash flows from operations and
have not relied on any other sources to finance our operations. After our
successful initial public offering in August 2008, we intend to continue to
explore ways to finance our operations in the future, including short-term or
long-term credit facilities and offerings of debt or equity
securities.
  Our
capital expenditures, consisting of purchase of property and equipment, were RMB
0.3 million, RMB 55.9 million and RMB 1.3 million (US$0.2 million) for the years
ended December 31, 2007, 2008 and 2009, respectively. The increase in the
capital expenditures in 2008 was mainly due to the purchase of our office
premises that we previously leased in an amount of approximately RMB 52.6
million. We expect to incur capital expenditures of up to approximately RMB 35.0
million in 2010, which will be used primarily to purchase additional property
and equipment for our advertisement production business.
  We
believe that our current cash and cash equivalents, which include the net
proceeds from our initial public offering in August 2008, and anticipated cash
flow from operations in the near future, will be sufficient to meet our expected
cash requirements, including for working capital and capital expenditure
purposes, for at least the next 12 months. We may, however, require additional
cash due to changing business conditions or other future developments, including
any investments or acquisitions we may decide to pursue. In addition, we have
become a public company and will incur a significantly higher level of legal,
accounting and other expenses than we did as a private company and we may need
to obtain additional capital resources to cover these costs. If our existing
cash is insufficient to meet our requirements, we may seek to sell additional
equity securities, debt securities or borrow from lending institutions. We
cannot assure you that financing will be available in the amounts we need or on
terms acceptable to us, if at all. The sale of additional equity securities,
including convertible debt securities, would dilute our shareholders. The
incurrence of debt would divert cash for working capital and capital
expenditures to service debt obligations and could result in operating and
financial covenants that restrict our operations and our ability to pay
dividends to our shareholders. If we are unable to obtain additional equity or
debt financing as required, our business operations and prospects may
suffer.
  C.
              Research
      and Development
  Not
applicable.
  D.
              Trend
      Information
  Other
than as disclosed elsewhere in this annual report, we are not aware of any
trends, uncertainties, demands, commitments or events for the periods from
January 1, 2007 to December 31, 2009 that are reasonably likely to have a
material adverse effect on our net revenues, income, profitability, liquidity or
capital resources, or that
caused the disclosed financial information to be not necessarily indicative of
future operating results or financial conditions. For a discussion of any
trends, uncertainties or events for the first quarter ended March 31, 2010, see
“Item 8. Financial Information — B. Significant Changes.”
  E.
              Off-Balance
      Sheet Arrangements
  As of
December 31, 2009, we did not have any off-balance sheet commitments or
arrangements. We do not anticipate entering into any such commitments or
arrangements in the foreseeable future.
 
 65
 
 F.
              Tabular
      Disclosure of
Contractual Obligations
 
 Operating
lease commitments
 
 We entered into certain leasing
arrangements relating to the lease of our office premises. Rental expense under
operating leases for the years ended December 31, 2007, 2008 and 2009 were RMB
4,140,498, RMB 3,553,469 and RMB 104,004, respectively.
 
 As at December 31, 2009, we had
commitments under non-cancellable operating leases to make minimum payments as
follows:
 
 Within
      1 year
                    
                    RMB
      70,264After
      1 year but within 3 years
                    
                    
                    -After
      3 year but within 5 years
                    
                    
                    -After
      5 years
                    
                    
                    -Total
                    
                    RMB70,264
 
 Operating
fixed or guaranteed payment contracts
 
 i)
              To
      secure exclusive access to some advertising time slots on CCTV, we
      sometimes enters into guaranteed minimum payment contracts with CCTV.
      Under these agreements, we have committed to procure certain time slots at
      a guaranteed minimum amount. As of December 31, 2007 and 2008, we had a
      guaranteed minimum payment of RMB 127.5 million and RMB 136.0 million to
      secure exclusive access to the 2008 and 2009 Chinese New Year Gala program
      with CCTV, respectively.
 
 ii)
              On
      June 20, 2008, Universal entered into a five-year contract to secure the
      exclusive advertising rights to CCTV’s Spanish and French Channels, under
      which Universal is committed to pay media fees of RMB 1.0 million in the
      second year and RMB 2.0 million in the third year of the contract. The
      media fees for the remaining term will be determined by CCTV and Universal
      in the future.
 
 iii)
              As
      of December 31, 2009, we had agreed to pay RMB 96.5 million to obtain the
      advertising rights to the Periodic China News Package on CCTV Channel 4 in
      2010. As at December 31, 2009, we had paid RMB 39.1 million to CCTV as
      security deposit and advances.
 
 Capital
and other commitments
 
 We did not have any significant capital
and other commitments as of December 31, 2007 and 2008. We have the following
significant capital and other commitments as of December 31, 2009:
 
 (RMB, in
                      thousands)Contracted
      and scheduled for delivery in 2010:Outstanding
      commitment to purchase a vehicle
                    
                    
                    2,500
 
 ITEM 6.
              DIRECTORS, SENIOR MANAGEMENT AND
      EMPLOYEES
  A.
              Directorsand Senior
      Management
  Directors and
Executive Officers
 
 The
following table sets forth information regarding our directors and executive
officers as of the date of August
20, 2010.
 
 66
  Name
                
                Age
                
                Position/
      TitleShengcheng
      Wang
                
                56
                
                Chairman
      and Chief Executive OfficerJulie
      Zhili Sun
                
                42
                
                Director
      and Vice PresidentHaiyan
      Xing
                
                38
                
                Director
      and Chief Administrative OfficerKun
      Allen Chien
                
                49
                
                Independent
      DirectorJianmin
      Qu
                
                62
                
                Independent
      DirectorXingzhao
      Liu
                
                48
                
                Independent
      DirectorYong
      Chen
                
                53
                
                Independent
      DirectorEric
      Wang Lam Cheung
                
                38
                
                Chief
      Financial OfficerShuo
      Cheng
                
                33
                
                Vice
      PresidentXingyu
      Zhang
                
                43
                
                Vice
      PresidentWeitao
      Xu
                
                35
                
                Vice
      President
 
 Directors
 
 Mr.ShengchengWangis the chairman of our
board of directors and our chief executive officer. Before establishing Mass
Media in 2003, Mr. Wang worked as a senior manager at a number of advertising
companies from 1996 to 2002, and during such period, also acted as a chief
producer in charge of the production of “Guang Er Gao Zhi,” a daily public
service announcement program on CCTV. From 1981 to 1996, Mr. Wang worked as a
senior reporter, television program director and producer at CCTV. From 1979 to
1981, Mr. Wang was a reporter and television program director at Xuzhou
Television Station in Jiangsu Province.
  Ms.JulieZhiliSunis our director and vice
president in charge of corporate development and joined our company in March
2008. Ms. Sun was a director of investment banking at Polaris Securities (Hong
Kong) Limited between 2005 and 2008, and an associate director of corporate
finance at HSBC in 2004. Between 1997 and 2004, she was a senior associate at
BNP Paribas Asia Limited. Ms. Sun received her master’s degree from the
University of Houston and bachelor’s degree from Nanjing Normal University. Ms
Sun is also an independent non-executive director of Yueshou Environmental
Holdings Limited, a Hong Kong Stock Exchange-listed company.
  Ms.Haiyan Xingis our director
and chief administrative officer and joined our company in 2003. Ms. Xing is
responsible for managing the office administration and human resources functions
at our company. Prior to 2003, she was employed at a television network and a
number of advertising companies and accumulated extensive experience in office
administration and human resources management. Ms. Xing received her bachelor’s
degree in Chinese Literature from Capital Normal University in
China.
  Mr.Kun AllenChienis an independent
director of our company and was elected to the board in May 2009. Mr. Chien also
serves at the chief financial officer of Besunyen Holdings Company Limited. Mr.
Chien served as the chief financial officer of Xiwang Sugar Holdings Company
Limited, a China-based glucose manufacturer listed on the Hong Kong Stock
Exchange, in 2007 and 2008. Prior to 2007, Mr. Chien was an investment banker
for 14 years, holding positions such as managing director and Asia Pacific
regional head of transport and logistics in the investment banking division of
HSBC, director at Salomon Smith Barney Hong Kong Limited and senior manager at
BZW Asia Limited. Mr. Chien holds a master’s degree in Business Administration
from the Richard Ivey Business School of the University of Western Ontario in
Canada, a master of science degree in Mathematics from the University of Alberta
in Canada and a bachelor of science degree in Mathematics from Fudan University
in China.
  Mr.JianminQuis an independent director
of our company. Mr. Qu is currently a vice president and secretary of the China
Advertising Association and an independent director of China Aviation Cultural
Development Co., Ltd. Mr. Qu was the director of the Advertising Division of
China’s State Administration for Industry and Commerce from 1998 to 2006. Mr. Qu
holds a master’s degree in Economic Law from Beijing University.
 
 67
 
 Dr. Xingzhao Liuis an
independent director of our company. Dr. Liu is currently a professor of the
Shanghai Jiaotong University School of Electronic Information and Electrical
Engineering. Dr. Liu received his doctorate degree in System Engineering from
the University of Tokushima and his master and bachelor degrees in Electric
Engineering from Harbin Institute of Technology.
 Mr. Yong Chen is the
editor-in-chief and director of Modern Advertising magazine. He is also the
secretary general of the Interactive Internet Advertising Committee of China
Advertising Association and a member of the International Advertising
Association and the Academic Committee of China Advertising Association. Mr.
Chen has more than ten years of experience in the media industry in China. Mr.
Chen studied at Beijing Economic Management College and the postgraduate program
of liberal arts management at Beijing University.
 Executive
Officers
 Mr. Eric Wang Lam Cheung is
our chief financial officer. Prior to joining our company in March 2008, Mr.
Cheung was a vice president of investor relations at Simcere Pharmaceutical
Group, a company listed on the New York Stock Exchange. From 2005 to 2007, Mr.
Cheung was a senior manager of PricewaterhouseCoopers Global Capital Markets
Group. From 1999 to 2005, he was a manager of PricewaterhouseCoopers Assurance
Group and Global Capital Markets Group. Mr. Cheung received a bachelor’s degree
in Business Administration (Professional Accountancy) from the Chinese
University of Hong Kong in 1994. He is a member of the Association of Chartered
Certified Accountants.
 Mr.Shuo Chengis our vice
president in charge of media purchase. Mr. Cheng joined us in 2003 as a media
resource manager and was promoted to deputy general manager in 2006. Between
2002 to 2003, Mr. Cheng worked as a media resource manager at Mass
Communications International Advertising Co., Ltd. He was a sales representative
at DHL Sinotrans International Air Courier Ltd. from 2000 to 2001. Mr. Cheng
received his bachelor’s degree in Economics from Renmin University in
China.
 Mr.Xinyu Zhangis our vice
president in charge of accounting, treasury management and budgetary control.
Mr. Zhang joined our company in 2003 and has worked as an accountant or
accounting manager at a number of advertising or media companies since 1997. Mr.
Zhang received his bachelor’s degree in Accounting from Capital Economic and
Trade University in China.
  Mr.WeitaoXuis our vice president in
charge of the media relationship. Mr. Xu joined us in 2003 and worked as a
manager and subsequently a director for the media relationship. Prior to joining
us, Mr. Yu worked at a number of other advertising companies. Mr. Xu received
his bachelor’s degree in Graphic Design from China Central Academy of Fine
Art.
 B.
              Compensation
      of Directors and Executive Officers
  Compensation
of Directors and Executive Officers
 In the
year ended December 31, 2009, we paid aggregate cash compensation of RMB 13.2
million (US$1.9 million) to our directors and executive officers, respectively.
For options granted to our officers and directors, see “—2008 Equity Incentive
Plan.”
 
 68
 
 2008
Equity Incentive Plan
 We
adopted an equity incentive plan in July 2008. Our 2008 equity incentive plan
provided for the grant of options, share appreciation rights, restricted shares,
restricted share units, and other share-based awards. The maximum aggregate
number of our ordinary shares that may be issued under the 2008 equity incentive
plan is 50,000,000, plus an annual increase in the number of ordinary shares
available for issuance equal to 2% of the outstanding ordinary shares on the
first day of our fiscal year or such lesser amount as may be determined by our
board of directors. The purposes of the plan are to attract and retain the best
available personnel for positions of substantial responsibility, provide
additional incentive to employees, directors and consultants and promote the
success of our business. Our board of directors believes that our company’s
long-term success is dependent upon our ability to attract and retain superior
individuals who, by virtue of their ability, experience and qualifications, make
important contributions to our business.
 Options.The exercise price of
incentive stock options must be at least equal to the fair market value of our
ordinary shares on the date of grant. However, the exercise price of all other
options may be as determined by the administrator. The term of an incentive
stock option may not exceed ten years, except that with respect to any
participant who owns 10% of the voting power of all classes of our outstanding
shares as of the grant date, the term must not exceed five years and the
exercise price must equal at least 110% of the fair market value on the grant
date. The administrator determines the term of all other options. After
termination of employment or services of an employee, director or consultant, he
or she may exercise his or her options for the period of time stated in the
option agreement. Generally, if termination is due to death or disability, the
option will remain exercisable for six months. In all other cases, the option
will generally remain exercisable for thirty days. However, an option generally
may not be exercised later than the expiration of its
term.
 RestrictedStock.Restricted stock awards are
ordinary shares that vest in accordance with terms and conditions established by
the administrator and set forth in an award agreement. The administrator
determines the number of shares of restricted stock granted to any employee and
may impose whatever conditions to vesting it determines to be
appropriate.
 StockAppreciationRights.Stock appreciation rights
allow the recipient to receive the appreciation in the fair market value of our
ordinary stock between the date of grant and the exercise date. The exercise
price of stock appreciation rights granted under our plan may be as determined
by the administrator. Stock appreciation rights expire under the same rules that
apply to options on the date as determined by the
administrator.
 PerformanceUnitsand PerformanceShares.Performance units and
performance shares are awards that will result in a payment to a participant
generally if performance goals established by the administrator are achieved.
The administrator establishes organizational or individual performance goals in
its discretion, which, depending on the extent to which they are met, will
determine the number and the value of performance units and performance shares
to be paid out to participants.
  RestrictedStockUnits.Restricted stock units are
similar to awards of restricted stock and represent the right to receive
ordinary shares or the cash equivalent thereof upon settlement, which typically
occurs when the award vests or at some later date if the date of settlement is
deferred. Restricted stock units may consist of performance share or performance
unit awards, and the administrator may set forth restrictions based on the
achievement of specific performance goals.
 Amendment and Termination.
Our 2008 equity incentive plan is scheduled to automatically terminate in 2018.
Our board of directors, however, has the authority to amend, alter, suspend or
terminate the plan at any time, provided such action does not impair the rights
of any participant with respect to any outstanding
awards.
 In July
2008, our board of directors granted stock options to purchase 42,891,000
ordinary shares under the 2008 Equity Incentive Plan to our executive officers,
directors and employees. All of the options have an exercise price of US$0.685
per share with a vesting period of four years and a term of ten
years.
 
 69
 
 The
options granted to each of our sales personnel are divided into category A and
category B. Fifty percent of the category A options will vest over a four-year
period, with one-fourth of the options vesting at each anniversary of the
vesting commencement date. The remaining 50% of the category A options will vest
over a four-year period based on the employee’s performance, with one-fourth of
the options allocated to each year. This portion of the category A options only
vests in proportion to such employee’s actual annual sales performance as a
percentage of his or her annual sales target, but only if such percentage equals
or exceeds 70%. If such employee’s sales performance is lower than 70% of his or
her annual sales target, his or her performance- based options in category A for
that year will automatically expire. The category B options will also vest over
a four-year period in proportion to an employee’s sales performance as a
percentage of his or her annual sales target, but only to the extent that such
percentage exceeds 100%. The category B options that remain unvested each year
will automatically expire.
 
 Of all
the options granted to each person other than our sales personnel, 70% will vest
over a four-year period, with one-fourth of the options vesting at each
anniversary of the vesting commencement date. The remaining 30% of the options
will vest over a four-year period subject to our company’s performance, with
one-fourth of the options allocated to each year. This portion of the options
will vest in proportion to our company’s actual revenues as a percentage of our
company’s annual target, but only if such percentage equals or exceeds 70%. If
our revenues are lower than 70% of our annual target, the performance-based
options for that year will automatically expire.
 
 On
February 21, 2009, our board of directors resolved to offer to the holders of
our stock options the opportunity to modify the terms of their existing options
through (i) resetting the exercise price of each option to US$0.0726 per
ordinary share, which equals approximately one-thirtieth (owing to the 30 to 1
ordinary share to ADS ratio) of the average closing trading price per ADS of our
company as reported on NYSE Arca in the last 60 trading days immediately prior
to February 13, 2009; and (ii) reducing the number of each award of options by
50%. No other changes were made to the terms and conditions of the stock
options. All holders of our stock options accepted the offer by February 27,
2009. As a result of this modification, options to purchase 19,858,500 ordinary
shares were outstanding as of the date of this annual report.
 
 The
annual increase in the number of ordinary shares available for issuance was
14,327,500 shares in 2009 and 14,327,500 shares in 2010. As of the date of this
annual report, an aggregate of 60,999,907 shares are available for future
issuance under our 2008 equity incentive plan.
  We will
not grant any further options under the 2008 equity incentive plan if and when
our ordinary shares are listed on SEHK and our 2010 share option scheme becomes
effective. See “— 2010 Share Option Scheme.”
 
 The
following table sets forth information on stock options that have been granted
and are outstanding as of the date of this annual report, taking into account
the modification described in the preceding paragraph, under the 2008 Equity
Incentive Plan:
 
 Name
                  
                  Ordinary Shares
                    Underlying
                    Outstanding
                    Options
                  
                  
                  Ordinary Shares
                    Exercisable*
                  
                  
                  Exercise Price
                    (US$/Share)
                  
                  
                  Grant Date
                  
                  
                  Expiration DateShengcheng
      Wang
                  
                  
                  7,190,287
                  
                  
                  
                  3,440,287
                  
                  
                  
                  0.0726
                  
                  
                  July
      1, 2008
                  
                  
                  July
      1, 2018Julie
      Zhili Sun
                  
                  
                  3,595,144
                  
                  
                  
                  1,720,144
                  
                  
                  
                  0.0726
                  
                  
                  July
      1, 2008
                  
                  
                  July
      1, 2018Haiyan
      Xing
                  
                  
                  599,191
                  
                  
                  
                  286,691
                  
                  
                  
                  0.0726
                  
                  
                  July
      1, 2008
                  
                  
                  July
      1, 2018Eric
      Wang Lam Cheung
                  
                  
                  2,396,763
                  
                  
                  
                  1,146,763
                  
                  
                  
                  0.0726
                  
                  
                  July
      1, 2008
                  
                  
                  July
      1, 2018Shuo
      Cheng
                  
                  
                  479,353
                  
                  
                  
                  229,353
                  
                  
                  
                  0.0726
                  
                  
                  July
      1, 2008
                  
                  
                  July
      1, 2018Xinyu
      Zhang
                  
                  
                  599,191
                  
                  
                  
                  286,691
                  
                  
                  
                  0.0726
                  
                  
                  July
      1, 2008
                  
                  
                  July
      1, 2018Weitao
      Xu
                  
                  
                  115,045
                  
                  
                  
                  55,045
                  
                  
                  
                  0.0726
                  
                  
                  July
      1, 2008
                  
                  
                  July
      1, 2018Other
      employees and consultant as a group
                  
                  
                  2,680,119
                  
                  
                  
                  1,176,119
                  
                  
                  
                  0.0726
                  
                  
                  July
      1, 2008
                  
                  
                  July
      1, 2018Total
                  
                  
                  17,655,093
                  
                  
                  
                  8,341,093
 
 70
  * A
portion of the options granted under our 2008 equity incentive plan only vests
subject to our company’s performance. Therefore, the number of share options
exercisable by each listed person in the above table is based on our current
estimate of the company’s performance for the one-year vesting period ending
July 1, 2010. The actual number of share options that can be vested on July 1,
2010 may be different from our estimate.
  2010
Share Option Scheme
 
 In July 2010, our shareholders’ meeting
adopted a 2010 share option scheme, which will only become effective if and when
our ordinary shares are listed on the SEHK. Once our 2010 share option scheme is
effective, no further option will be granted under our 2008 equity incentive
plan. The 2010 share option scheme will be valid for a term of ten years from
the date of its effectiveness.
  Our 2010 share option scheme will be
subject to the administration of our board of directors, and the decision of the
board will be final and binding on all parties. The board has the right to (i)
interpret and construe the provisions of the scheme, (ii) determine who will be
offered options under the scheme, and the number of shares and subscription
price of the options, (iii) make such appropriate and equitable adjustments to
the terms of options granted under the scheme as it deems necessary, and (iv)
make such other decisions or determinations as it deems appropriate in relation
to the grant of options and/or the administration of the scheme. The board’s
interpretation must comply with the listing rules of the SEHK.
  The subscription price of the options
to be granted under the scheme shall be such price determined by the board at
its absolute discretion and notified to the scheme participant in the offer but
shall be no less than the highest of (i) the closing price of the shares as
stated in the daily quotation sheets issued by the SEHK on the grant date; (ii)
the average closing price of the shares as stated in the daily quotation sheets
issued by the SEHK for the five business days immediately preceding the grant
date; and (iii) the nominal value of a share on the date of the
grant.
  The total number of shares that can be
issued upon exercise of all options to be granted under the 2010 share option
scheme and other share option plans of our company shall not exceed 10% of the
outstanding shares on the date of adopting the share option scheme. We may renew
this limit at any time subject to prior shareholders’ approval. However, the
limit as renewed shall not exceed 10% of the outstanding shares as of the date
of the aforesaid shareholders’ approval.
  C.
              Board
      Practices
 
 Duties of
Directors
 
 Under
Cayman Islands law, our directors have a duty of loyalty to act honestly, in
good faith and with a view to our best interests. Our directors also have a duty
to exercise the skill they actually possess and such care and diligence that a
reasonably prudent person would exercise in comparable circumstances. In
fulfilling their duty of care to us, our directors must ensure compliance with
our memorandum and articles of association, as amended and restated from time to
time. A shareholder has the right to seek damages if a duty owed by our
directors is breached.
 
 The
functions and powers of our board of
directors include, among others:
 
 •
              convening shareholders’ annual general meetings and
      reporting its work to shareholders at such
      meetings;
  •
              declaring dividends and
      distributions;
  •
              appointing officers and
      determining the term of office of
      officers;
 
 71
 
 •
              exercising the borrowing powers
      of our company and mortgaging the property of our
      company; and
  •
              approving the transfer of
      shares of our
      company, including the registering of such
      shares in our share register.
 
 Terms of
Directors and Executive Officers
 
 Our
directors are not subject to a term of office and hold office until such time as
they are removed from office by ordinary resolution or the unanimous written
resolution of all shareholders. A director will be removed from office
automatically if, among other things, the director becomes bankrupt or makes any
arrangement or composition with his creditors, or dies or is found by our
company to be or to have become of unsound mind. Our officers are appointed by
and serve at the discretion of our board of directors.
 
 Committees of
the Board of Directors
 
 We have
established an audit committee, a compensation committee and a corporate
governance and nominating committee prior to the completion of our initial
public offering.
  Audit
Committee
 
 Our audit
committee consists of Messrs. Kun Allen Chien, Yong Chen, Jianmin Qu and
Xingzhao Liu. Mr. Kun Allen Chien has the accounting and financial management
expertise required by the relevant rules of NYSE Arca, or the NYSE Arca Rules,
or under the NYSE Listed Company Manual. All of our audit committee members
satisfy the “independence” requirements of the Listed Company Manual. Our audit
committee consists solely of independent directors. The audit committee oversees
our accounting and financial reporting processes and the audits of the financial
statements of our company. The audit committee is responsible for, among other
things:
 
 •
              selecting our
      independent auditors and
      pre-approving all auditing and
      non-auditing services permitted to be performed by our
      independent auditors;
  •
              reviewing with
      our independent auditors any audit problems or
      difficulties and management’s
response;
  •
                  reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-Kunder the Securities Act;
 
 •
              discussing the annual audited financial statements with
      management and our
  independent auditors;
  •
              reviewing major issues as
      to the adequacy of our internal controls and any
      special audit steps adopted in light of
      material control deficiencies;
  •
              annually reviewing and
      reassessing the adequacy of our
      audit committee charter;
  •
              such
      other matters that are specifically delegated to
      our audit committee by our board of directors from
      time to time;
  •
              meeting separately and
      periodically with management and our internal and
      independent auditors; and
  •
              reporting regularly to
      our board of directors.
 
 72
 
 Compensation
Committee
 
 Our
compensation committee consists of Messrs. Kun Allen Chien, Yong Chen, Jianmin
Qu and Xingzhao Liu, all of whom satisfy the “independence” requirements of the
NYSE Arca Rules or the NYSE Listed Company Manual, as the case may be. Our
compensation committee assists our board of directors in reviewing and approving
the compensation structure of our directors and executive officers, including
all forms of compensation to be provided to our directors and executive
officers. Members of the compensation committee are not prohibited from direct
involvement in determining their own compensation. Our chief executive officer
may not be present at any committee meeting during which his compensation is
deliberated. The compensation committee is responsible for, among other
things:
 
 •
              approving
      and overseeing the compensation package for our executive
      officers;
  •
              reviewing
      and making recommendations to our board of directors with respect to the
      compensation of our directors;
  •
              reviewing
      and approving corporate goals and objectives relevant to the compensation
      of our chief executive officer, evaluating the performance of our chief
      executive officer in light of those goals and objectives, and setting the
      compensation level of our chief executive officer based on this
      evaluation; and
  •
              reviewing
      periodically and making recommendations to our board of directors
      regarding any long-term incentive compensation or equity plans, programs
      or similar arrangements, annual bonuses, employee pension and welfare
      benefit plans.
 
 Corporate
Governance and Nominating Committee
 
 Our
corporate governance and nominating committee consists of Messrs. Kun Allen
Chien, Yong Chen, Jianmin Qu and Xingzhao Liu and governance and nominating
committee assists our board of directors in identifying individuals qualified to
become our directors and in determining the composition of our board of
directors and its committees. The corporate governance and nominating committee
is responsible for, among other things:
 
 •
              identifying
      and recommending nominees for election or re-election to our board of
      directors, or for appointment to fill any
  vacancy;
  •
              reviewing
      annually with our board of directors its current composition in light of
      the characteristics of independence, age, skills, experience and
      availability of service to us;
  •
              identifying
      and recommending to our board the directors to serve as members of
      committees;
  •
              advising
      the board periodically with respect to significant developments in the law
      and practice of corporate governance as well as our compliance with
      applicable laws and regulations, and making recommendations to our board
      of directors on all matters of corporate governance and on any corrective
      action to be taken; and
  •
              monitoring
      compliance with our code of business conduct and ethics, including
      reviewing the adequacy and effectiveness of our procedures to ensure
      proper compliance.
 
 73
 
 Duties
of Directors
 
 Under
Cayman Islands law, our directors have a duty of loyalty to act honestly, in
good faith and with a view to our best interests. Our directors also have a duty
to exercise the skill they actually possess and such care and diligence that a
reasonably prudent person would exercise in comparable circumstances. In
fulfilling their duty of care to us, our directors must ensure compliance with
our memorandum and articles of association, as amended and restated from time to
time. A shareholder has the right to seek damages if a duty owed by our
directors is breached.
 
 The
functions and powers of our board of directors include, among
others:
 
 •
              convening
      shareholders’ annual general meetings and reporting its work to
      shareholders at such meetings;
  •
              declaring
      dividends and distributions;
  •
              appointing
      officers and determining the term of office of
  officers;
  •
              exercising
      the borrowing powers of our company and mortgaging the property of our
      company; and
  •
              approving
      the transfer of shares of our company, including the registering of such
      shares in our share register.
 
 Terms
of Directors and Executive Officers
 
 Our
directors are not subject to a term of office and hold office until such time as
they are removed from office by ordinary resolution or the unanimous written
resolution of all shareholders. A director will be removed from office
automatically if, among other things, the director becomes bankrupt or makes any
arrangement or composition with his creditors, or dies or is found by our
company to be or to have become of unsound mind. Our officers are appointed by
and serve at the discretion of our board of directors.
 Employment
Agreements
 We have
entered into employment agreements with all of our executive officers. Under
these employment agreements, each of our executive officers is employed for a
specified time period, subject to automatic extension unless either we or the
executive officer gives a three-month prior notice of non-renewal. We may
terminate the employment of an executive officer for cause, at any time, without
notice or remuneration, for certain acts, including but not limited to, his or
her conviction of crimes, his or her breach of material corporate policy and his
or her failure to perform his or her duties to our detriment. An executive
officer may terminate his or her employment at any time without penalty if there
is a material reduction in his or her authority, responsibilities or position or
if we fail to pay material compensation due to him or her after a reasonable
opportunity to cure. Furthermore, either we or an executive officer may
terminate his or her employment at any time without cause upon advance written
notice to the other party. If we terminate an executive officer’s employment
without cause, we will pay the executive officer severance pay in accordance
with applicable law. We do not have other arrangements with any executive
officers for special termination benefits.
 Each
executive officer has agreed to hold, both during the employment term and after
employment terminates, in confidence and not to use, except in pursuance of his
or her duties in connection with his or her employment, any of our trade
secrets, know-how or financial, trading or other confidential information. In
addition, each executive officer has agreed to be bound by non-competition
restrictions set forth in his or her employment agreement and is prohibited from
providing services to our competitors or operating businesses that compete
against us for a period of two years following termination or expiration of his
or her employment agreement.
 
 74
 
 D.
              Employees
 
 As of
December 31, 2007, 2008 and 2009, we had 95, 130 and 143 full-time employees,
respectively. The following table sets forth the number of our staff by area of
business as of December 31, 2009:
 
 Number of employees
                    
                    
                    PercentageSales,
      marketing and customer services
                    
                    
                    72
                    
                    
                    
                    50.3
                    %Production
                    
                    
                    27
                    
                    
                    
                    18.9
                    %Strategy,
      media relationship and market research
                    
                    
                    11
                    
                    
                    
                    7.7
                    %Management
      and administration
                    
                    
                    33
                    
                    
                    
                    23.1
                    %Total
      number of employees
                    
                    
                    143
                    
                    
                    
                    100.0
                    %
  We offer
our employees competitive compensation packages and various training programs,
which are intended to attract and retain qualified personnel. As of December 31,
2009, over 90% of our employees held undergraduate or associate
degrees.
  As
required by PRC regulations, we participate in various employee benefit plans
that are organized by municipal and provincial governments, including housing,
pension, medical and unemployment benefit plans. We are required under PRC law
to make contributions to the employee benefit plans at specified percentages of
the salaries, bonuses and certain allowances of our employees, up to a maximum
amount specified by the local government from time to time. Members of the
retirement plan are entitled to a pension equal to a fixed proportion of the
salary prevailing at the member’s retirement date. The total amount of
contributions we made to employee benefit plans for the years ended December 31,
2007, 2008 and 2009 was approximately RMB 0.6 million, RMB 1.4 million and RMB
2.5 million (US$ 0.4 million), respectively.
 
 We
believe that we maintain a good working relationship with
our employees and we have not experienced any
significant labor disputes or any difficulty in
recruiting staff for our operations. Our
employees are not represented by any
collective bargaining agreements or
labor unions.
   E.
              Share
      Ownership
 
 Under
U.S. securities laws, a person is deemed to be a “beneficial owner” of a
security if that person has or shares “voting power,” which includes the power
to vote or to direct the voting of such security, or “investment power,” which
includes the power to dispose of or to direct the disposition of such security.
A person is also deemed to be the beneficial owner of any securities of which
that person has a right to acquire beneficial ownership within 60
days.
 
 The
following table sets forth information with
respect to
the beneficial ownership, within the meaning of Rule
13(d)(3) of the Exchange Act, of our ordinary shares, as of
August 20, 2010, by:
 
 •
              each of
      our directors and
  executive officers; and
  •
              each person known
      to us to own beneficially more than 5% of our
      ordinary shares.
 
 75
  Shares Beneficially
      Owned(1)Number
                  
                  
                  %Directors
      and Executive Officers:Shengcheng
      Wang(2)
                  
                  
                  503,440,287
                  (2)
                  
                  
                  69.9Julie
      Zhili Sun
                  
                  
                  *
                  
                  
                  
                  *Haiyan
      Xing
                  
                  
                  *
                  
                  
                  
                  *Kun
      Allen Chien
                  
                  
                  —
                  
                  
                  
                  —Jianmin
      Qu
                  
                  
                  —
                  
                  
                  
                  —Xingzhao
      Liu
                  
                  
                  —
                  
                  
                  
                  —Yong
      Chen
                  
                  
                  —
                  
                  
                  
                  —Eric
      Wang Lam Cheung
                  
                  
                  *
                  
                  
                  
                  *Shuo
      Cheng
                  
                  
                  *
                  
                  
                  
                  *Weitao
      Xu
                  
                  
                  *
                  
                  
                  
                  *Xinyu
      Zhang
                  
                  
                  *
                  
                  
                  
                  *All
      Directors and Executive Officers as a group
                  
                  
                  507,164,974
                  
                  
                  
                  70.1Principal
      Shareholders:Shengcheng
      Wang(2)
                  
                  
                  503,440,287
                  (2)
                  
                  
                  69.9Columbia
      Wanger Asset Management, L.P.
                  
                  
                  56,529,360
                  
                  
                  
                  7.9
 
 *
              Upon
      exercise of
      all share options exercisable within 60 days of
      August 20, 2010, would beneficially own less than 1% of our
      ordinary shares.
 (1)
                Percentage
      of beneficial ownership of each listed person is based on 716,375,000
      ordinary shares outstanding as of August 20, 2010 as well as the estimated
      number of ordinary shares underlying share options exercisable by such
      person within 60 days of August 20, 2010. A portion of the options granted
      under our 2008 equity incentive plan only vests subject to our company’s
      performance. Therefore, the number of share options exercisable by each
      listed person in the above table is based on our current estimate of the
      company’s performance for the one-year vesting period ending July 1, 2010.
      The actual number of share options that can be vested on July 1, 2010 may
      be different from our estimate. See “Item 6. Directors, Senior Management
      and Employees—B. Compensation of Directors and Executive Officers—2008
      Equity Incentive Plan.”
 (2)
                Consists
      of ordinary shares owned by Happy Indian Ocean Limited and Arctic Spring
      Limited and the estimated number of ordinary shares issuable upon on
      exercise of share options within 60 days of August 20, 2010 by Mr.
      Shengcheng Wang. Happy Indian Ocean Limited is the record holder of
      400,000,000 of our ordinary shares. Arctic Spring Limited is the record
      holder of 100,000,000 of our ordinary shares. Mr. Shengcheng Wang has the
      right to vote in respect of the 400,000,000 ordinary shares owned by Happy
      Indian Ocean Limited by virtue of a voting trust agreement among Mr.
      Shengcheng Wang, Happy Indian Ocean Limited and our company. Mr.
      Shengcheng Wang also has the right to vote in respect of the 100,000,000
      ordinary shares owned by Arctic Spring Limited by virtue of a voting trust
      agreement among Mr. Shengcheng Wang, Arctic Spring Limited and our
      company. Mr. Shengcheng Wang has no direct or indirect equity interests in
      either Happy Indian Ocean Limited or Arctic Spring Limited. Both Happy
      Indian Ocean Limited and Arctic Spring Limited are part of an estate and
      asset preservation structure that was established for the ultimate
      benefit, and to advance the interests, of Mr. Wang and his
      family.
  ITEM 7.
              MAJOR SHAREHOLDERS AND RELATED PARTY
      TRANSACTIONS
  A.
MajorShareholders
  Please refer to
“Item 6. Directors, Senior Management and
Employees—E. Share Ownership.”
 
 For
information regarding the significant change in
the ownership held by our major shareholders during 2008,
see “—B.
Related Party Transactions—Private Placements.”
 
 None of
our major shareholders has voting rights different from those of our other
shareholders. To the best of our knowledge, we are not directly or indirectly
controlled by another corporation, by any foreign government or by any other
natural or legal person severally or jointly not disclosed in this annual
report. We are not aware of any arrangement that may, at a subsequent date,
result in a change of control of our company.
 
 76
 
 B.
RelatedPartyTransactions
 
 Transactions with
Guang Er Gao Zhi FTP
 
 Guang Er
Gao Zhi FTP is an advertising agency 50% owned by CCTV and 50% beneficially
owned by the immediate family members of our chairman and chief executive
officer, Mr. Shengcheng Wang. Guang Er Gao Zhi FTP is not controlled by our
company, Mr. Shengcheng Wang or his immediate family members.
 
 In
December 2007, we entered into a framework agreement with Guang Er Gao Zhi FTP
under which we obtained a right of first refusal with respect to any advertising
time slots that Guang Er Gao Zhi FTP has obtained, or will obtain, from CCTV or
any local television networks for a term of four years. Once Guang Er Gao Zhi
FTP notifies us that it has obtained the advertising right to a specific
television program, we are required to inform Guang Er Gao Zhi FTP within seven
days of our receipt of such notice whether we choose to exercise our right of
first refusal. If we decide to exercise our right of first refusal for specific
programs, we and Guang Er Gao Zhi FTP will enter into a separate agency contract
in connection with such programs. Under this arrangement, we have obtained the
advertising rights to a number of programs on CCTV Channels 2 and 4 in 2008 and
2009.
 
 In
January 2008, we entered into a lease agreement with Guang Er Gao Zhi FTP for
part of its office space at a rent of approximately RMB 1.9 million per year,
for a term of ten years. In December 2008, we purchased all such office space
from Guang Er Gao Zhi FTP at its fair market value as determined by an
independent real estate valuation company. In January 2009, we entered into a
lease agreement with a term of one year with Guang Er Gao Zhi FTP pursuant to
which Guang Er Gao Zhi FTP leased from us part of our office space at a rent of
RMB 493.4 thousand. In January 2010, the lease agreement is automatically
renewed for an indefinite term unless and until terminated by either of the
parties to the lease agreement.
 
 Transactions with
Mr. Zhiyi Wang
 
 In
January 2008, we entered into a lease with Mr. Zhiyi Wang, the father of our
chairman and chief executive officer, with respect to an office space for a term
of ten years at a rent of approximately RMB 1.9 million per year. In December
2008, we purchased such properties from Mr. Zhiyi Wang at their fair market
value as determined by an independent real estate valuation
company.
 
 Under a
custody arrangement, UIAL had held personal cash and investment funds on behalf
of the shareholder of UIAL and his immediate family, in its own bank account. In
February 2008, such arrangement was terminated and the account balance of
approximately RMB 15.0 million was transferred back to the shareholder and his
immediate family.
 
 Asset Transfer Agreement between
Mass Media and Universal
 
 Under an
asset transfer agreement between Mass Media and Universal, dated December 29,
2007, Mass Media transferred to Universal certain of its assets relating to the
television advertising business for RMB 21.6 million, including fixed assets and
copyrights to over 100 public service announcements Mass Media has produced.
Mass Media also agreed to transfer the relevant trademarks used in the business
to Universal when the Trademark Bureau approves the trademark applications. The
remaining assets and liabilities of Mass Media, including liabilities owed to
CCTV in an amount of RMB 368.2 million relating to advertising revenues
generated for CCTV and the cash needed to settle those liabilities in an amount
of RMB 370.8 million as of December 31, 2007, were retained by Mass Media.
Effective from December 31, 2007, Mass Media is no longer part of our company
and is not involved in our continued business operations.
 
 77
 
 In the
year ended December 31, 2008, we provided advertising agency services to Mass
Media’s clients under the three remaining contracts of Mass Media that had not
been transferred to us, for which we charged a fee of RMB 2.0
million.
  Non-Competition Agreement
between Mr. Shengcheng Wang and His Family Members and
Universal
  Mr.
Shengcheng Wang, his spouse and his parents entered into a non-competition
agreement with Universal in January 2008. Under such agreement, none of Mr.
Shengcheng Wang, his spouse or his parents may (i) directly or indirectly engage
or invest in any business that directly or indirectly competes with Universal,
(ii) directly or indirectly solicit, or assist in soliciting, Universal’s
clients or potential clients other than on behalf of Universal or (iii) directly
or indirectly solicit, or assist in soliciting, or cause any of Universal’s
employees to terminate their employment with Universal, until the earliest of
such time as Mr. Shengcheng Wang no longer holds at least 20% of our outstanding
shares or such time as securities representing our share capital are no longer
publicly listed on a stock exchange. In addition, Mr. Shengcheng Wang and his
spouse and parents are required to refer to Universal any new business
opportunities relating to advertising of which they become aware, and Universal
has a right of first refusal relating to such business
opportunities.
 
 Private
Placements
 
 All share
and per share information in this section gives effect to the 1,000-for-one
share split of our ordinary shares and series A preferred shares effected in the
form of a grant of bonus shares on July 17, 2008.
 
 In
November 2007, we issued 1,000 ordinary shares to Mr. Shengcheng Wang, at par
value US$0.001 per share. On March 6, 2008, we issued 99,000 ordinary shares at
US$0.001 per share to Wide Atlantic Limited, a company controlled by Mr.
Shengcheng Wang. On March 10, 2008, through a series of transactions, Happy
Indian Ocean Limited and Arctic Spring Limited became the holders of 80,000 and
20,000 of our ordinary shares, respectively.
 
 In June
2008, we issued 329,840,000 ordinary shares and 70,080,000 series A preferred
shares to Happy Indian Ocean Limited, and 82,460,000 ordinary shares and
17,520,000 series A preferred shares to Arctic Spring Limited, at par value of
US$0.001 per share, for the purpose of facilitating the sale by these two
entities of their holdings in our company to certain third parties. Subsequently
Happy Indian Ocean Limited and Arctic Spring Limited sold all of their series A
preferred shares to Winner Wide Limited, CTF Capital Ltd., Goldcorn Development
Limited, Jumbo Right Holdings Limited, True Wise Investments Limited and Ever
Kingdom Limited for an aggregate consideration of US$60.0 million. The holders
of the series A preferred shares were granted certain preferential rights by the
existing shareholders with no recourse back to us, including put option rights
and anti-dilution rights, but such rights were to terminate, and the Series A
preferred shares were to automatically convert into ordinary shares at a
conversion rate of one preferred share to one ordinary share, upon the
completion of a qualified public offering. A qualified public offering means,
among other things, a public offering that is conducted at an offering price per
share that values our company at a total post-money market capitalization of no
less than US$450 million and results in minimum gross proceeds to our company of
US$45 million (before deduction of underwriting discounts and registration
expenses).
 
 Since our
initial public offering did not qualify as a qualified public offering (as
defined above), on July 23, 2008, Happy Indian Ocean Limited and Arctic Spring
Limited entered into an agreement to repurchase, at the original purchase price
plus one month of interest at an annual rate of 8.0%, all of the series A
preferred shares they previously sold to Winner Wide Limited, CTF Capital Ltd.,
Goldcorn Development Limited, Jumbo Right Holdings Limited, True Wise
Investments and Ever Kingdom Limited on June 24, 2008. This share repurchase was
closed shortly prior to the closing of our initial public offering. In addition,
Happy Indian Ocean Limited and Arctic Spring Limited converted all of the
outstanding series A preferred shares into ordinary shares at a one-to one
conversion ratio immediately prior to the completion of our initial public
offering. The investor rights agreement entered into among us and our
shareholders on June 24, 2008 was terminated upon the completion of our initial
public offering.
 
 78
 
 C.
              Interests
      of Experts and Counsel
 
 Not
applicable.
  ITEM
      8.
              FINANCIAL
      INFORMATION
  A.
              Consolidated
      Statements and Other Financial
Information
 
 We have
appended combined financial statements filed as part of this annual report. See
“Item 18. Financial Statements.”
 
 Legal
and Administrative Proceedings
 
 From time
to time, we may be involved in legal proceedings, both as plaintiff and as
defendant, arising in the ordinary course of our business. We do not expect any
of these claims or actions, individually or in the aggregate, to have a material
adverse effect on our business, results of operations or financial
condition.
 
 In April
2008, Hasee Computer Co., Ltd., a customer of Universal, filed two lawsuits
against Universal at the District Court of Futian, Shenzhen, alleging that some
of its advertisements were not broadcast in accordance with its two contracts
with Universal, petitioning to terminate the contracts and claiming total
damages of approximately RMB 3.3 million. In the years ended December 31, 2006
and 2007, revenues contributed by Hasee Computer Co., Ltd. were approximately
RMB 3.9 million, RMB 3.2 million, respectively, accounting for approximately
1.5% and 1.1% of our total revenues for the respective periods. We are disputing
the claim and, in July 2008, we filed countersuits against this customer for its
unpaid advertising fees and damages of approximately RMB 24.8 million under the
two contracts as of June 30, 2008. The court hearings were held in July 2008 and
May 2009. In June 2009, the court entered into an judgment ordering Hasee
Computer Co., Ltd. to pay Universal the unpaid advertising fees and damages of
approximately RMB 2.6 million and denied all other claims raised by Hasee
Computer Co., Ltd. or us. We filed an appeal to a higher court in Shenzhen. In
June 2010, we entered into a settlement agreement with Hasee Computer Co., Ltd.
pursuant to which Hasee Computer Co., Ltd. shall pay Universal the unpaid
advertising fees and damages of approximately RMB 2.6 million and purchase from
Universal certain advertising slots on CCTV programs in 2011. We reversed the
provision for relevant accounts receivable in August 2010 when we received such
payment from Hasee Computer Co., Ltd.
 
 In March
2010, Universal filed an action against Beijing Shidai Charm Advertising Company
Limited, or Beijing Shidai Charm, at Tongzhou District Court, Beijing, for
outstanding advertising fees in an amount of RMB 3.6 million and related
interest of approximately RMB 0.5 million in connection with certain advertising
time slots we sold to Beijing Shidai Charm on the 2008 Chinese New Year Gala
program on CCTV. Beijing Shidai Charm disputed the jurisdiction of Tongzhou
District Court on the case, which was dismissed by Tongzhou District Court in
April 2010. Beijing Shidai Charm appealed to a higher court in Beijing on the
dismissal and requested for transferring the case to Chaoyang District Court,
Beijing. The higher court ruled in favor of Beijing Shidai Charm and transferred
the case to Chaoyang District Court. This case is pending as of August 20,
2010.
 
 In May
2010, Beijing Yida Charm Advertising Co., Ltd., or Beijing Yida Charm, an
affiliate of Beijing Shidai Charm, filed an action against Universal at Haidian
District Court, Beijing, alleging that Universal failed to pay them certain
promotion and advertising services fee in an amount of RMB 3.6 million. Haidian
District Court entered into a judgment in favor of Beijing Yida Charm. Universal
has filed an appeal to a higher court in Beijing and this appeal is pending as
of August 20, 2010.
 
 79
 
 Dividend
Policy
 
 We
declared and paid out dividends of RMB 174.3 million and RMB 177.4 million to
our shareholder during the years ended December 31, 2006 and 2007, respectively.
On June 23, 2008, we declared dividends of RMB 96.3 million to our shareholders.
We intend to distribute 20% to 30% of our annual net income as dividends,
subject to our results of operations, capital requirements and surplus, general
financial condition, contractual restrictions and other factors that the board
of directors may deem relevant.
 
 In May 2010, our board of directors
declared a special stock dividend of 71,637,500 additional ordinary shares of
our company for the financial year ended December 31, 2009. The special dividend
was approved by an ordinary resolution of the shareholders of the company at an
extraordinary general on July 19, 2010. Each holder of our ordinary shares as of
June 16, 2010, or the share record date, will be entitled to receive one
additional ordinary share for every ten ordinary shares held as of the share
record date. We have requested that the depositary make the special stock
dividend available to the holders of our ADSs as of June 16, 2010, or the ADS
record date. In the event we are listed on the SEHK on or prior to December 31,
2010, the special stock dividend will be payable, at the irrevocable election of
each holder of our ADSs as of the ADS record date, in the form of our
SEHK-listed ordinary shares in Hong Kong and each holder of our ADSs as of the
ADS record date will be entitled to elect to receive three SEHK-listed ordinary
shares for each ADS held as of the ADS record date. If such holder does not so
elect to receive our SEHK-listed ordinary shares, it will be entitled to the net
cash proceeds from the sale of such shares on the SEHK. In the event we are not
listed on the SEHK on or prior to December 31, 2010, holders of our ADSs as of
the ADS record date will be entitled to receive one ADS for every ten ADSs held
as of the ADS record date notwithstanding any election previously
made.
 
 Our board
of directors has complete discretion regarding whether to pay dividends, subject
to the approval of our shareholders. If we pay any dividends, we will pay our
ADS holders to the same extent as we pay holders of our ordinary shares, subject
to the terms of the deposit agreement, including the fees and expenses payable
under that agreement, and any withholding taxes. Cash dividends on our ordinary
shares, if any, will be paid in U.S. dollars.
 
 B.
              Significant
      Changes
 
 In the
first quarter of 2010, our total net revenues were RMB 56.0 million (US$8.2
million), a decrease of 62.6% from the first quarter of 2009 and a decrease of
52.2% from the fourth quarter of 2009; our operating income was RMB 13.9 million
(US$2.0 million), a decrease of 78.6% from the first quarter of 2009 and a
decrease of 62.0 % from the fourth quarter of 2009; and our net income was RMB
10.1 million (US$1.5 million), a decrease of 83.0% from the first quarter of
2009 and a decrease of 68.4 % from the fourth quarter of 2009. In the same
period, the net cash provided by operating activities was RMB 40.3 million
(US$5.9 million), compared to net cash provided by operating activities of RMB
232.5 million in the first quarter of 2009 and net cash used in operating
activities of RMB 171.9 million in the fourth quarter of 2009.
 
 The
decrease in our net revenues, operating income and net income in the first
quarter of 2010 from one year earlier was primarily due to the fact that (i) we
did not obtain the advertising right to the time slots on CCTV’s 2010 Chinese
New Year Gala program as CCTV took the initiative to sell such time slots by
itself and the sales of Chinese New Year Gala program traditionally constitute a
significant portion of our revenue in the first quarter and (ii) the time slots
on CCTV Channel 4 we obtained dropped significantly and so did our sales of such
time slots.
 
 The
decrease in our net revenues, operating income and net income in the first
quarter of 2010 from the fourth quarter of 2009 was primarily due to the fact
that (i) we faced heightened competition in the first quarter of 2010, which
negatively affected our net revenues; (ii) the fourth quarter is traditionally
the peak season for the advertising industry in China; and (iii) the time slots
on CCTV Channel 4 we obtained dropped significantly and so did our sales of such
time slots.
 
 80
 
 ITEM
      9.
              THE OFFER AND
  LISTING
  A.
              Offering
      and Listing Details.
  Our ADSs,
each representing thirty of our ordinary shares, have been listed on NYSE Arca
since August 4, 2008 under the symbol “CMM.”
 
 On August
25, 2009, we transferred the listing of our ADSs from NYSE Arca to
NYSE.
 
 In 2008
(from August 4, 2008) and 2009, the trading price of our ADSs, on NYSE Arca or
NYSE, as the case may be, ranged US$1.20 to US$6.85 and from US$1.40 to US$6.85
per ADS, respectively.
 
 The
following table provides the high and low trading prices for our ADSs on NYSE
Arca or NYSE, as the case may be, for (1) each quarter in 2008 (from August 4,
2008) and 2009 and (2) each of the past six months.
 
 Share PriceHigh
                  
                  
                  LowQuarterly
      High and LowThird
      Quarter 2008 (from August 4, 2008)
                  
                  
                  6.85
                  
                  
                  
                  3.13Fourth
      Quarter 2008
                  
                  
                  5.35
                  
                  
                  
                  1.20First
      Quarter 2009
                  
                  
                  2.93
                  
                  
                  
                  1.40Second
      Quarter 2009
                  
                  
                  6.85
                  
                  
                  
                  1.78Third
      Quarter 2009
                  
                  
                  6.00
                  
                  
                  
                  3.20Fourth
      Quarter 2009
                  
                  
                  4.71
                  
                  
                  
                  2.40First
      Quarter 2010
                  
                  
                  3.80
                  
                  
                  
                  2.63Second
      Quarter 2010
                  
                  
                  3.08
                  
                  
                  
                  1.13Monthly
      Highs and LowsJanuary
      2010
                  
                  
                  3.80
                  
                  
                  
                  2.63February
      2010
                  
                  
                  3.45
                  
                  
                  
                  2.92March
      2010
                  
                  
                  3.80
                  
                  
                  
                  2.65April
      2010
                  
                  
                  3.08
                  
                  
                  
                  2.65May
      2010
                  
                  
                  2.76
                  
                  
                  
                  1.86June
      2010
                  
                  
                  2.21
                  
                  
                  
                  1.13July
      2010
                  
                  
                  2.68
                  
                  
                  
                  1.52August
      2010 (through August 20)
                  
                  
                  3.12
                  
                  
                  
                  2.29
 
 B.
              Plan
      of Distribution
 
 Not
applicable.
 
 C.
              Markets
 
 Our ADSs,
each representing thirty of our ordinary shares, have been listed on NYSE Arca
since August 4, 2008 through August 24, 2009 under the symbol “CMM.” On August
25, 2009, we transferred the listing of our ADSs from NYSE Arca to NYSE and our
ADSs have been listed on NYSE since then under the same symbol.
 
 D.
              Selling Shareholders
  Not
applicable.
 
 81
 
 E.
              Dilution
 
 Not
applicable.
  F.
              Expenses
      of the Issue
 
 Not
applicable.
 
 ITEM 10.
              ADDITIONAL
  INFORMATION
  A.
              Share
      Capital
  Not
applicable.
 
 B.
              Memorandum and
      Articles of Association
 
 We
incorporate by reference into this annual report the description of our third
amended and restated memorandum and articles of association contained in our F-1
registration statement (File No. 333-152305), as amended. Our shareholders
adopted our third amended and restated memorandum and articles of association by
special resolutions passed on July 18, 2008. The third amended and restated
memorandum and articles of association became effective on August 4, 2008. On
December 10, 2009, our third amended and restated memorandum and articles of
association was amended to increase our authorized share capital from
US$1,000,000 divided into 1,000,000,000 ordinary shares of a par value of
US$0.001 each to US$3,000,000 divided into 3,000,000,000 ordinary shares of a
par value of US$0.001 each. The third amended and restated memorandum and
articles of association, as so amended, is our fourth amended and restated
memorandum and articles of association. Other than the above, there is no other
difference between our fourth and third amended and restated memorandum and
articles of association.
  Our
shareholders conditionally adopted our fifth amended and restated memorandum and
articles of association on July 19, 2010, which will become effective upon the
listing of our ordinary shares on SEHK. We are a Cayman Islands exempted company
with limited liability and our affairs are governed by our memorandum and
articles of association, as amended and restated from time to time, and the
Companies Law (2010 Revision) of the Cayman Islands, which is referred to
as the Companies Law below. Some material provisions of our fifth amended
and restated memorandum and articles of association and of the Company Law are
summarized as below.
 
 Ordinary
Shares
 
 General
 
 All of
our outstanding ordinary shares are fully paid and non-assessable. Certificates
representing the ordinary shares are issued in registered form. Our shareholders
who are non-residents of the Cayman Islands may freely hold and vote their
ordinary shares.
 
 Dividends
 
 The
holders of our ordinary shares are entitled to such dividends as may be declared
by our board of directors subject to the Companies Law. Under our fifth amended
and restated memorandum and articles of association, all dividends unclaimed for
one year after having been declared may be invested or otherwise made use of by
our board of directors for our exclusive benefit until claimed, and we will not
be deemed a trustee in respect of such dividend or be required to account for
any money earned. All dividends unclaimed for six years after having been
declared may be forfeited by our board of directors and will revert to us and
after such forfeiture no shareholder or other person shall have any right to or
claim in respect of such dividends.
 
 82
 
 Voting
Rights
 
 On a
poll, each ordinary share is entitled to one vote on all matters upon which the
ordinary shares are entitled to vote. At any general meeting a resolution put to
the vote of the meeting shall be decided on a poll. A quorum required for a
meeting of shareholders consists of at least two shareholders present in person
or by proxy or, if a corporation or other non-natural person, by its duly
authorized representative. Shareholders’ meetings may be convened by our board
of directors on its own initiative or upon a request to the directors by at
least two shareholders of our company deposited at the principal office of our
company in Hong Kong, or shareholders holding in the aggregate not less than
one-tenth of the paid up capital of our company, or a recognized clearing house
or its nominee which is a shareholder. Advance notice of at least 21 calendar
days is required for the convening of our annual general shareholders’ meeting
and any other general shareholders’ meeting calling for the passing of a special
resolution. Any other extraordinary general meeting shall be called by not less
than 14 calendar days’ notice.
  An
ordinary resolution to be passed by the shareholders requires the affirmative
vote of a simple majority of the votes attaching to the ordinary shares cast in
a general meeting, while a special resolution requires the affirmative vote of
no less than a three-fourths majority of the votes cast attaching to the
ordinary shares cast in a general meeting. A special resolution will be required
for important matters such as a change of name or making changes to our fifth
amended and restated memorandum and articles of association.
 
 Transfer
of Ordinary Shares
 
 Subject
to the restrictions of our fifth amended and restated memorandum of articles of
association, as applicable, any of our shareholders may transfer all or any of
his or her ordinary shares by an instrument of transfer in the usual or common
form or any other form approved by our board of directors.
 
 Our board
of directors may, in its absolute discretion, decline to register any transfer
of any ordinary share which is not fully paid up, or which is issued under an
employee share incentive scheme and upon which a transfer restriction subsists,
or on which we have a lien. Our board of directors may also decline to register
any transfer of any ordinary share unless:
  • the
instrument of transfer is lodged with us, accompanied by the certificate for the
ordinary shares to which it relates and such other evidence as our board of
directors may reasonably require to show the right of the transferor to make the
transfer;
  •
              the
      instrument of transfer is in respect of only one class of
      shares;
  •
              the
      instrument of transfer is properly stamped, if
  required;
  • in the
case of a transfer to joint holders, the number of joint holders to whom the
shares are to be transferred does not exceed four;
 •
              any
      fee related to the transfer has been paid to
us;
  •
              the
      shares concerned are free of any lien in favor of us;
  and
 
 83
  •
              the
      transfer to be registered is not to an infant or a person suffering from
      mental disorder
  If our
directors refuse to register a transfer they shall, within two months after the
date on which the instrument of transfer was lodged, send to each of the
transferor and the transferee notice of such refusal.
  The
registration of transfers may be suspended and the register closed at such times
and for such periods as our board of directors may from time to time determine,
provided, however, that the registration of transfers shall not be suspended nor
the register closed for more than 30 calendar days in any year.
  Liquidation
 
 On a
return of capital on winding up or otherwise (other than on conversion,
redemption or purchase of ordinary shares), assets available for distribution
among the holders of ordinary shares shall be distributed among our shareholders
in proportion to the capital paid up at the commencement of the winding up on
the shares held by them respectively. If our assets available for distribution
are insufficient to repay all of the paid-up capital, the assets will be
distributed so that the losses are borne by our shareholders
proportionately.
 
 Calls
on Ordinary Shares and Forfeiture of Ordinary Shares
 
 Our board
of directors may from time to time make calls upon shareholders for any amounts
unpaid on their ordinary shares in a notice served to such shareholders at least
14 calendar days prior to the specified time of payment. The ordinary shares
that have been called upon and remain unpaid are subject to
forfeiture.
  Redemption
of Ordinary Shares
 
 Subject
to the provisions of the Companies Law and the Memorandum and Articles of
Association of the company, we may issue shares on terms that are subject to
redemption, at our option or at the option of the holders, on such terms and in
such manner as may be determined by special resolution.
 
 Variations
of Rights of Shares
 
 If at any
time our share capital is divided into different classes of shares, all or any
of the special rights attached to any class of shares may, subject to the
provisions of the Companies Law, be varied either with the consent in writing of
the holders of three-fourths of the issued shares of that class or by a special
resolution passed at a general meeting of the holders of the shares of that
class. The rights conferred upon the holders of the shares of any class issued
with preferred or other rights shall not, unless otherwise expressly provided by
the terms of issue of the shares of that class, be deemed to be varied by the
creation or issue of further shares ranking pari passu with such existing
class of shares.
 
 General
Meetings of Shareholders
 
 The
directors may, and shall on the requisition of shareholders holding at least
one-tenth of the paid up capital of us carrying voting rights at general
meetings, proceed to convene a general meeting of shareholders. If the directors
do not within 21 calendar days from the deposit of the requisition duly proceed
to convene a general meeting, which will be held within a further period of 21
calendar days, the requisitioning shareholders, or any of them holding more than
50% of the total voting rights of all of the requisitioning shareholders, may
themselves convene a general meeting. Any such general meeting must be convened
within three months from the date of deposit of the requisition. .
 
 84
 
 Inspection
of Books and Records
 
 Holders
of our ordinary shares will have no general right under Cayman Islands law to
inspect or obtain copies of our list of shareholders or our corporate records.
However, we will provide our shareholders with annual audited financial
statements. See “Where You Can Find Additional Information.”
 
 Changes
in Capital
 
 We may
from time to time by ordinary resolution:
  • increase
the share capital by such sum, to be divided into shares of such classes and
amount, as the resolution shall prescribe;
  • consolidate
and divide all or any of our share capital into shares of a larger amount than
our existing shares;
  • sub-divide
our existing shares, or any of them, into shares of a smaller amount;
or
  • cancel
any shares which, at the date of the passing of the resolution, have not been
taken or agreed to be taken by any person and diminish the amount of our share
capital by the amount of the shares so cancelled;
 
 We may by
special resolution reduce our share capital and any capital redemption reserve
in any manner authorized by the Companies Law.
  Exempted
Company
  We are an
exempted company with limited liability under the Companies Law of the Cayman
Islands. The Companies Law in the Cayman Islands distinguishes between ordinary
resident companies and exempted companies. Any company that is registered in the
Cayman Islands but conducts business mainly outside of the Cayman Islands may
apply to be registered as an exempted company. The requirements for an exempted
company are essentially the same as for an ordinary company except for the
exemptions and privileges listed below:
  •    an
exempted company does not have to file an annual return of its shareholders with
the Registrar of Companies;
  •    an
exempted company’s register of members is not open to inspection;
  •    an
exempted company does not have to hold an annual general meeting;
  •    an
exempted company may issue no par value, negotiable or bearer
shares;
  •    an
exempted company may obtain an undertaking against the imposition of any future
taxation (such undertakings are usually given for 20 years in the first
instance);
  •    an
exempted company may register by way of continuation in another jurisdiction and
be deregistered in the Cayman Islands;
  •    an
exempted company may register as a limited duration company; and
 
 85
  •    an
exempted company may register as a segregated portfolio company.
  “Limited
liability” means that the liability of each shareholder is limited to the amount
unpaid by the shareholder on the shares of the company.
  Corporate
Law
  The
Companies Law is modeled after that of English law but does not follow many
recent English law statutory enactments. In addition, the Companies Law differs
from laws applicable to United States corporations and their shareholders. Set
forth below is a summary of certain significant provisions of the Companies Law
applicable to us as compared with the laws applicable to companies incorporated
in the State of Delaware.
  Mergers
and Similar Arrangements
 Under
Part XVI of the Companies Law, one or more Cayman Islands companies and one or
more non-Cayman Islands companies can now merge or consolidate, provided that
the surviving or consolidated company is a Cayman Islands
company.
 As soon
as a merger or consolidation becomes effective, among other things, the rights,
the property of every description including choses in action, and the business,
undertaking, goodwill, benefits, immunities and privileges of each of the
constituent companies, shall immediately vest in the surviving or consolidated
company.
 The
Registrar of Companies of the Cayman Islands will strike off the register a
constituent company that is not the surviving company in a merger or a
constituent company that participates in a consolidation.
 In
addition, there are statutory provisions that facilitate the reconstruction and
amalgamation of companies, provided that the arrangement is approved by a
majority in number of each class of shareholders and creditors with whom the
arrangement is to be made, and who must in addition represent three- fourths in
value of each such class of shareholders or creditors, as the case may be, that
are present and voting either in person or by proxy at a meeting, or meetings,
convened for that purpose. The convening of the meetings and subsequently the
arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a
dissenting shareholder has the right to express to the court the view that the
transaction ought not to be approved, the court can be expected to approve the
arrangement if it determines that:
  •    the
statutory provisions as to the due majority vote have been met;
  •    the
shareholders have been fairly represented at the meeting in
question;
  •    the
arrangement is such that a businessman would reasonably approve;
and
  •    the
arrangement is not one that would more properly be sanctioned under some other
provision of the Companies Law.
 When a
takeover offer is made and accepted by holders of 90% of the shares within four
months, the offeror may, within a two-month period, require the holders of the
remaining shares to transfer such shares on the terms of the offer. An objection
can be made to the Grand Court of the Cayman Islands but this is unlikely to
succeed unless there is evidence of fraud, bad faith or collusion.
 
 86
 
 If the
arrangement and reconstruction is thus approved, the dissenting shareholder
would have no rights comparable to appraisal rights, which would ordinarily be
available to dissenting shareholders of Delaware corporations, providing rights
to receive payment in cash for the judicially determined value of the
shares.
 Shareholders’
Suits
 We are
not aware of any class action or derivative action having been brought in a
Cayman Islands court. In principle, we will normally be the proper plaintiff and
as a general rule a derivative action may not be brought by a minority
shareholder. However, based on English authorities, which would in all
likelihood be of persuasive authority in the Cayman Islands, there are
exceptions to the foregoing principle, including when:
 
 •   
a company acts or proposes to act illegally or ultravires;
  •   
the act complained of, although not ultravires, could only be effected
duly if authorized by more than a simple majority vote that has not been
obtained; and
  •  
 those who control the company are perpetrating a “fraud on the
minority.”
  Indemnification
of Directors and Executive Officers and Limitation of
Liability
 Cayman
Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except to
the extent any such provision may be held by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Our fifth amended and restated
memorandum and articles of association permit indemnification of officers and
directors for all losses or liabilities incurred in their capacities in
defending any proceedings, whether civil or criminal, in which judgment is given
in his favour, or in which he is acquitted . This standard of conduct is
generally the same as permitted under the Delaware General Corporation Law for a
Delaware corporation.
  Anti-takeover
Provisions in the Fifth Amended and Restated Memorandum and Articles of
Association
 Some
provisions of our fifth amended and restated memorandum and articles of
association may discourage, delay or prevent a change in control of our company
or management that shareholders may consider favorable, including provisions
that authorize our board of directors to issue preference shares in one or more
series and to designate the price, rights, preferences, privileges and
restrictions of such preference shares subject to provisions of the fifth
amended and restated memorandum and articles of
association.
 However,
under Cayman Islands law, our directors may only exercise the rights and powers
granted to them under our fifth amended and restated memorandum and articles of
association, as amended and restated from time to time, for what they believe in
good faith to be in the best interests of our company.
 Directors’
Fiduciary Duties
 Under
Delaware corporate law, a director of a Delaware corporation has a fiduciary
duty to the corporation and its shareholders. This duty has two components: the
duty of care and the duty of loyalty. The duty of care requires that a director
act in good faith, with the care that an ordinarily prudent person would
exercise under similar circumstances. Under this duty, a director must inform
himself of, and disclose to shareholders, all material information reasonably
available regarding a significant transaction. The duty of loyalty requires that
a director act in a manner he or she reasonably believes to be in the best
interests of the corporation. He or she must not use his or her corporate
position for personal gain or advantage. This duty prohibits self-dealing by a
director and mandates that the best interest of the corporation and its
shareholders take precedence over any interest possessed by a director, officer
or controlling shareholder and not shared by the shareholders generally. In
general, actions of a director are presumed to have been made on an informed
basis, in good faith and in the honest belief that the action taken was in the
best interests of the corporation. However, this presumption may be rebutted by
evidence of a breach of one of the fiduciary duties. Should such evidence be
presented concerning a transaction by a director, a director must prove the
procedural fairness of the transaction, and that the transaction was of fair
value to the corporation.
 
 87
 
 As a
matter of Cayman Islands law, a director of a Cayman Islands company is in the
position of a fiduciary with respect to the company and therefore owes the
following duties to the company—a duty to act bona fide in the best
interests of the company: a duty not to make a profit based on his or her
position as director (unless the company permits him to do so) and a duty not to
put himself in a position where the interests of the company conflict with his
or her personal interest or his or her duty to a third party. A director of a
Cayman Islands company owes to the company a duty to act with skill and care. It
was previously considered that a director need not exhibit in the performance of
his or her duties a greater degree of skill than may reasonably be expected from
a person of his or her knowledge and experience. However, English and
Commonwealth courts have moved towards an objective standard with regard to the
required skill and care and these authorities are likely to be followed in the
Cayman Islands.
  Shareholder
Proposals
 
 Under the
Delaware General Corporation Law, a shareholder has the right to put any
proposal before the annual meeting of shareholders, provided it complies with
the notice provisions in the governing documents. A special meeting may be
called by the board of directors or any other person authorized to do so in the
governing documents, but shareholders may be precluded from calling special
meetings.
 
 Cayman
Islands law and our fifth amended and restated articles of association allow our
shareholders holding not less than one-tenth of the paid up capital of the
company to requisition a shareholders’ meeting. As an exempted Cayman Islands
company, we are not obliged by law to call shareholders’ annual general
meetings. However, our fifth amended and restated memorandum and articles of
association require us to hold a shareholders’ general meeting in each
year.
 Cumulative
Voting
 Under the
Delaware General Corporation Law, cumulative voting for elections of directors
is not permitted unless the corporation’s certificate of incorporation
specifically provides for it. Cumulative voting potentially facilitates the
representation of minority shareholders on a board of directors since it permits
the minority shareholder to cast all the votes to which the shareholder is
entitled on a single director, which increases the shareholder’s voting power
with respect to electing such director. As permitted under Cayman Islands law,
our fifth amended and restated articles of association do not provide for
cumulative voting. As a result, our shareholders are not afforded any fewer
protections or rights on this issue than shareholders of a Delaware
corporation.
 Removal
of Directors
  Under the
Delaware General Corporation Law, a director of a corporation with a classified
board may be removed only for cause with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation
provides otherwise. Under our fifth amended and restated articles of
association, directors may be removed by ordinary resolution.
 
 88
 
 Transactions
with Interested Shareholders
  The
Delaware General Corporation Law contains a business combination statute
applicable to Delaware corporations whereby, unless the corporation has
specifically elected not to be governed by such statute by amendment to its
certificate of incorporation, it is prohibited from engaging in certain business
combinations with an “interested shareholder” for three years following the date
that such person becomes an interested shareholder. An interested shareholder
generally is a person or a group who or which owns or owned 15% or more of the
target’s outstanding voting stock within the past three years. This has the
effect of limiting the ability of a potential acquirer to make a two-tiered bid
for the target in which all shareholders would not be treated equally. The
statute does not apply if, among other things, prior to the date on which such
shareholder becomes an interested shareholder, the board of directors approves
either the business combination or the transaction which resulted in the person
becoming an interested shareholder. This encourages any potential acquirer of a
Delaware corporation to negotiate the terms of any acquisition transaction with
the target’s board of directors.
  Cayman
Islands law has no comparable statute. As a result, we cannot avail ourselves of
the types of protections afforded by the Delaware business combination statute.
However, although Cayman Islands law does not regulate transactions between a
company and its significant shareholders, it does provide that such transactions
must be entered into bona fide in the best interests of the company and not with
the effect of constituting a fraud on the minority shareholders.
  Dissolution;
Winding up
 Under the
Delaware General Corporation Law, unless the board of directors approves the
proposal to dissolve, dissolution must be approved by shareholders holding 100%
of the total voting power of the corporation. Only if the dissolution is
initiated by the board of directors may it be approved by a simple majority of
the corporation’s outstanding shares. Delaware law allows a Delaware corporation
to include in its certificate of incorporation a supermajority voting
requirement in connection with dissolutions initiated by the board. Under the
Companies Law of the Cayman Islands and our fifth amended and restated articles
of association, our company may be dissolved, liquidated or wound up voluntarily
by a special resolution or by ordinary resolution if it is unable to pay its
debts when they fall due.
 Variation
of Rights of Shares
 Under the
Delaware General Corporation Law, a corporation may vary the rights of a class
of shares with the approval of a majority of the outstanding shares of such
class, unless the certificate of incorporation provides otherwise. Under Cayman
Islands law and our fifth amended and restated articles of association, if our
share capital is divided into more than one class of shares, we may vary the
rights attached to any class only with the consent in writing of the holders of
75% in nominal value of the issued shares of that class or with the sanction of
a special resolution passed at a general meeting of the holders of the shares of
that class.
 Amendment
of Governing Documents
 Under the
Delaware General Corporation Law, a corporation’s governing documents may be
amended with the approval of a majority of the outstanding shares entitled to
vote, unless the certificate of incorporation provides otherwise. As permitted
by Cayman Islands law, our fifth amended and restated memorandum and articles of
association may be amended by special resolution.
 Rights
of Non-resident or Foreign Shareholders
 There are
no limitations imposed by our fifth amended and restated memorandum and articles
of association on the rights of non-resident or foreign shareholders to hold or
exercise voting rights on our shares. In addition, there are no provisions in
our fifth amended and restated memorandum and articles of association governing
the ownership threshold above which shareholder ownership must be
disclosed.
 
 89
 Directors’
Power to Issue Shares
  Our fifth
amended and restated memorandum and articles of association authorizes our board
of directors to issue any share with or attached preferred, deferred, qualified
or other special rights or restrictions, whether in regard to dividend, voting,
return of capital or otherwise, and to such persons at such time and for such
consideration as the board of directors may determine. Subject to the Companies
Law and to any special rights conferred on any shareholders or attaching to any
class of shares, any share may, with the sanction of a special resolution, be
issued on terms that it is, or at the option of the company or the holder
thereof, liable to be redeemed.
  The
issuance of preferred shares may be used as an anti-takeover device without
further action on the part of the shareholders. Issuance of preferred shares may
dilute the voting power of holders of ordinary shares.
 
 C.
                Material
      Contracts
 
 We have
not entered into any material contracts other than in the ordinary course of
business and other than those described in “Item 4. Information on the Company”
or elsewhere in this annual report on Form 20-F.
 
 D.
                Exchange
      Controls
 
 The
Cayman Islands currently have no exchange control restrictions. Also see “Item
4. Information on the Company—B. Business Overview—Regulation—Regulation on
Foreign Currency Exchange” for information regarding foreign exchange controls
in the PRC.
 
 E.
                Taxation
      for Our ADS Holders
 
 Cayman
Islands Taxation
 
 The
Cayman Islands currently levies no taxes on individuals or corporations based
upon profits, income, gains or appreciation and there is no taxation in the
nature of inheritance tax or estate duty. There are no other taxes likely to be
material to us levied by the Government of the Cayman Islands except for stamp
duties which may be applicable on instruments executed in, or brought within,
the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any
double tax treaties. There are no exchange control regulations or currency
restrictions in the Cayman Islands.
 
 PRC
Taxation
 
 Foreign
ADS holders may be subject to a 10% withholding tax upon dividends payable by us
and gains on the sale and other disposition of our ADSs or ordinary shares, if
such income is sourced from within the PRC. Under the Enterprise Income Tax Law
of 2007 and its Implementation Regulations, both of which became effective on
January 1, 2008, an enterprise established outside the PRC with its “de facto
management body” within the PRC is considered a resident enterprise. The “de
facto management body” of an enterprise is defined as the organizational body
that effectively exercises overall management and control over production and
business operations, personnel, finance and accounting, and properties of the
enterprise. It remains unclear how the PRC tax authorities will interpret such a
broad definition. Although we are incorporated in the Cayman Islands and the
immediate holding company of our PRC subsidiary is incorporated in the British
Virgin Islands, substantially all of our management members are based in the
PRC. It remains unclear how the PRC tax authorities will interpret the PRC tax
resident treatment of an offshore company, like us, having indirect ownership
interests in PRC enterprises through intermediary holding vehicles. Moreover,
even if we are classified as a PRC resident enterprise, it remains unclear
whether the dividends payable by us, a Cayman Islands company, and gains on the
sale and other disposition of our ADSs or ordinary shares will be regarded as
income from sources within the PRC.
  90
  U.S.
Federal Income Taxation
 
 The
following discussion describes the material U.S. federal income tax consequences
to U.S. Holders (defined below) under present law of an investment in the ADSs
or ordinary shares. This discussion applies only to investors that hold the ADSs
or ordinary shares as capital assets and that have the U.S. dollar as their
functional currency. This discussion is based on the tax laws of the United
States as in effect on the date of this annual report and on U.S. Treasury
regulations in effect as of the date of this annual report, as well as judicial
and administrative interpretations thereof available on or before such date. All
of the foregoing authorities are subject to change, which change could apply
retroactively and could affect the tax consequences described
below.
 
 The
following discussion does not deal with the tax consequences to any particular
investor or to persons in special tax situations such as:
 
 •
                banks;
  •
                certain
      financial institutions;
  •
                insurance
      companies;
  •
                regulated
      investment companies;
 
 •
                real
      estate investment trusts;
 
 •
                broker
      dealers;
 
 •
                U.S.
      expatriates;
 
 •
                traders
      that elect to mark-to-market;
 
 •
                tax-exempt
      entities;
 
 •
                persons
      liable for alternative minimum tax;
 
 •
                  persons
      holding an ADS or ordinary share as part of a straddle, hedging,
      conversion or integrated
transaction;
 
 •
                  persons
      who acquired ADSs or ordinary shares pursuant to the exercise of any
      employee stock option or otherwise as
  compensation;
 
 •
                persons
      that actually or constructively own 10% or more of our voting stock;
      or
 
 •
                persons
      holding ADSs or ordinary shares through partnerships or other pass-through
      entities.
 
 The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply to you if you are a beneficial owner of ADSs or ordinary shares and
you are, for U.S. federal income tax purposes,
 
 •
                an
      individual who is a citizen or resident of the United States for U.S.
      federal income tax purposes;
 
 •
                  a
      corporation (or other entity taxable as a corporation for U.S. federal
      income tax purposes) organized under the laws of the United States, any
      State thereof or the District of
Columbia;
  91
  •
                an
      estate whose income is subject to U.S. federal income taxation regardless
      of its source; or
 
 •
                a
      trust that (1) is subject to the primary supervision of a court within the
      United States and one or more U.S. persons have the authority to control
      all substantial decisions of the trust or (2) was in existence on August
      20, 1996, was treated as a U.S. person under the U.S. Internal Revenue
      Code of 1986, as amended, on the previous day and has a valid election in
      effect under applicable U.S. Treasury regulations to be treated as a U.S.
      person.
  If you
are a partner in a partnership or other entity taxable as a partnership for U.S.
federal income tax purposes that holds ADSs or ordinary shares, your tax
treatment will depend on your status and the activities of the partnership or
other entity. If you are such a partner, partnership, or other entity taxable as
a partnership for U.S. federal income tax purposes, you should consult your tax
advisors.
  The
discussion below assumes that the representations contained in the deposit
agreement are true and that the obligations in the deposit agreement and any
related agreement will be complied with in accordance with their terms. If you
hold ADSs, you should be treated as the holder of the underlying ordinary shares
represented by those ADSs for U.S. federal income tax purposes. Exchanges of
ordinary shares for ADSs and ADSs for ordinary shares generally will not be
subject to U.S. federal income tax.
 
 The U.S.
Treasury has expressed concerns that intermediaries in the chain of ownership
between the holder of an ADS and the issuer of the security underlying the ADS
may be taking actions that are inconsistent with the beneficial ownership of the
underlying shares (for example, pre-releasing ADSs to persons who do not have
the beneficial ownership of the securities underlying the ADSs). Accordingly,
the availability of the reduced tax rate for dividends received by certain
non-corporate U.S. Holders, including individuals (discussed below), could be
affected by actions taken by intermediaries in the chain of ownership between
the holders of ADSs and our company if as a result of such action the holders of
ADSs are not properly treated as beneficial owners of underlying
shares.
 
 Taxation
of Dividends and Other Distributions on the ADSs or Ordinary Shares
 
 Subject
to the PFIC company rules discussed below, the gross amount of all our
distributions to you with respect to the ADSs or ordinary shares will be
included in your gross income as dividend income on the date of actual or
constructive receipt by the depositary, in the case of ADSs, or by you, in the
case of ordinary shares, but only to the extent that the distribution is paid
out of our current or accumulated earnings and profits (as determined under U.S.
federal income tax principles). The dividends will not be eligible for the
dividends-received deduction allowed to corporations in respect of dividends
received from other U.S. corporations.
  With
respect to non-corporate U.S. Holders including individual U.S. Holders, for
taxable years beginning before January 1, 2011, dividends may be taxed at the
lower applicable capital gains rate, and thus may constitute “qualified dividend
income,” provided that (1) either (a) the ADSs or ordinary shares are readily
tradable on an established securities market in the United States, or (b) we are
eligible for the benefits of a qualifying income tax treaty with the United
States that includes an exchange of information program (2) we are not PFIC (as
discussed below) for either our taxable year in which the dividend was paid or
the preceding taxable year, and (3) certain holding period requirements are met.
Under IRS authority, ordinary shares, or ADSs representing such shares, are
considered for the purpose of clause (1) above to be readily tradable on an
established securities market in the United States if they are listed on NYSE
Arca or NYSE, as the case may be, as our ADSs are. If we are treated as a
“resident enterprise” for PRC tax purposes, you may be eligible for the benefits
of the income tax treaty between the United States and the PRC. You should
consult your tax advisors regarding the availability of the lower rate for
dividends paid with respect to our ADSs or ordinary shares.
  92
  Dividends
will constitute foreign source income for U.S. foreign tax credit limitation
purposes. If the dividends are qualified dividend income (as discussed above),
the amount of the dividend taken into account for purposes of calculating the
U.S. foreign tax credit limitation will be limited to the gross amount of the
dividend, multiplied by the reduced rate divided by the highest rate of tax
normally applicable to dividends. The limitation on foreign taxes eligible for
credit is calculated separately with respect to specific classes of income.
Dividends distributed by us with respect to ADSs or ordinary shares will
generally constitute “passive category income” but could, in the case of certain
U.S. Holders, constitute “general category income.”
 
 If PRC
withholding taxes apply to dividends paid to you with respect to the ADSs or
ordinary shares, such withholding taxes may be treated as foreign taxes eligible
for credit against your U.S. federal income tax liability. U.S. Holders should
consult their own tax advisors regarding the creditability of any PRC
tax.
 
 To the
extent that the amount of the distribution exceeds our current and accumulated
earnings and profits, it will be treated first as a tax-free return of your tax
basis in your ADSs or ordinary shares, and to the extent the amount of the
distribution exceeds your tax basis, the excess will be taxed as capital gain.
We do not intend to calculate our earnings and profits under U.S. federal income
tax principles. Therefore, you should expect that any distribution we make will
be treated as a dividend.
 
 Taxation
of Disposition of ADSs or Ordinary Shares
 
 Subject
to the PFIC rules discussed below, you will recognize capital gain or loss on
any sale, exchange or other taxable disposition of an ADS or ordinary share
equal to the difference between the amount realized (in U.S. dollars) for the
ADS or ordinary share and your tax basis (in U.S. dollars) in the ADS or
ordinary share. If you are a non-corporate U.S. Holder, including an individual
U.S. Holder, who has held the ADS or ordinary share for more than one year, you
will be eligible for reduced tax rates. The deductibility of capital losses is
subject to limitations. Any such gain or loss that you recognize will generally
be treated as U.S. source income or loss for foreign tax credit limitation
purposes. If, as a result of the new EIT law, PRC tax were to be imposed on any
gain from the disposition of the ADSs or ordinary share, a U.S. Holder that is
eligible for the benefit of the income tax treaty between the United States and
the PRC might be able to elect to treat such gains as PRC source income. U.S.
Holders should consult their own tax advisors regarding the creditability of any
PRC tax.
 
 PFIC
 
 We
believe that we were a PFIC for the taxable year ending December 31, 2009 and it
is possible that we may be a PFIC for the current taxable year. Our status for
the current taxable year will be based in part on the average value of our
assets as determined based on the price of the ADSs and our ordinary shares. Our
actual PFIC status for the current taxable year ending December 31, 2010 will
not be determinable until the close of the current taxable year ending December
31, 2010. A non-U.S. corporation is considered to be a PFIC for any taxable year
if either:
 
 •
                at
      least 75% of its gross income is passive income,
  or
 
 •
                at
      least 50% of the value of its assets (based on an average of the quarterly
      values of the assets during a taxable year) is attributable to assets that
      produce or are held for the production of passive
  income.
 
 For the
purposes of our PFIC determination, we will be treated as owning our
proportionate share of the assets and earning our proportionate share of the
income of any other corporation in which we own, directly or indirectly, more
than 25% (by value) of the stock.
  93
  We must
make a separate determination each year as to whether we are a PFIC. As a
result, our PFIC status may change. If we are a PFIC for any year during which
you hold ADSs or ordinary shares, we generally will continue to be treated as a
PFIC for all succeeding years during which you hold ADSs or ordinary shares.
However, if we cease to be a PFIC, your may avoid some of the adverse effects of
the PFIC regime by making a “deemed sale” election with respect to the ADSs or
ordinary shares, as applicable.
 
 If we are
a PFIC for any taxable year during which you hold ADSs or ordinary shares,
dividends paid by us to you that year and the following year will not be
eligible for the reduced rate of taxation applicable to non-corporate U.S.
Holders, including individuals. See “—Taxation of Dividends and Other
Distributions on the ADSs or Ordinary Shares.” Instead, you must include the
gross amount of any such dividend paid by us out of our accumulated earnings and
profits (as determined for U.S. federal income tax purposes) in your gross
income, and it will be subject to tax at rates applicable to ordinary income.
Additionally, you will be subject to special tax rules with respect to any
“excess distribution” that you receive and any gain you realize from a sale or
other disposition (including a pledge) of the ADSs or ordinary shares, unless
you make a “mark-to-market” election as discussed below. Distributions you
receive in a taxable year that are greater than 125% of the average annual
distributions you received during the shorter of the three preceding taxable
years or your holding period for the ADSs or ordinary shares will be treated as
an excess distribution. Under these special tax rules:
 
 •
                the
      excess distribution or gain will be allocated ratably over your holding
      period for the ADSs or ordinary
shares,
 
 •
                the
      amount allocated to the current taxable year, and any taxable year prior
      to the first taxable year in which we became a PFIC, will be treated as
      ordinary income, and
 
 •
                the
      amount allocated to each other year will be subject to the highest tax
      rate in effect for that year and the interest charge generally applicable
      to underpayments of tax will be imposed on the resulting tax attributable
      to each such year.
 
 The tax
liability for amounts allocated to years prior to the year of disposition or
“excess distribution” cannot be offset by any net operating losses for such
years, and gains (but not losses) realized on the sale of the ADSs or ordinary
shares cannot be treated as capital gains, even if you hold the ADSs or ordinary
shares as capital assets.
 
 If we are
a PFIC, to the extent any of our subsidiaries are also PFICs, you may be deemed
to own shares in such lower-tier PFICs that are directly or indirectly owned by
us in that proportion which the value of the ADSs or ordinary shares you own so
bears to the value of all of our ADSs and ordinary shares, and may be subject to
the adverse tax consequences described above with respect to the shares of such
lower-tier PFICs that you would be deemed to own. You should consult your tax
advisors regarding the application of the PFIC rules to any of our
subsidiaries.
 
 A U.S.
Holder of “marketable stock” (as defined below) in a PFIC may make a timely
mark-to-market election for such stock of a PFIC to elect out of the tax
treatment discussed above. If you make a mark-to-market election for the ADSs or
ordinary shares, you will include in income each year an amount equal to the
excess, if any, of the fair market value of the ADSs or ordinary shares as of
the close of your taxable year over your adjusted basis in such ADSs or ordinary
shares. You are allowed a deduction for the excess, if any, of the adjusted
basis of the ADSs or ordinary shares over their fair market value as of the
close of the taxable year. However, deductions are allowable only to the extent
of any net mark-to-market gains on the ADSs or ordinary shares included in your
income for prior taxable years. Amounts included in your income under a
mark-to-market election, as well as gain on the actual sale or other disposition
of the ADSs or ordinary shares, are treated as ordinary income. Ordinary loss
treatment also applies to the deductible portion of any mark-to-market loss on
the ADSs or ordinary shares, as well as to any loss realized on the actual sale
or disposition of the ADSs or ordinary shares, to the extent that the amount of
such loss does not exceed the net mark-to-market gains previously included for
such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts.
  94
  The
mark-to-market election is available only for “marketable stock,” which is stock
that is regularly traded in other than de minimis quantities on at least 15 days
during each calendar quarter on a qualified exchange, including NYSE, or other
market, as defined in applicable U.S. Treasury regulations. We expect that the
ADSs will be listed and regularly traded on NYSE and, consequently, if you are a
holder of ADSs the mark-to-market election would be available to you were we to
be or become a PFIC. Because a mark-to-market election cannot be made for equity
interests in lower-tier PFICs that we own, a U.S. Holder may continue to be
subject to the PFIC rules with respect to its indirect interest in any
investments held by us that are treated as equity interest in a PFIC for U.S.
federal income tax purposes. You may make a timely mark-to-market election with
respect to our ADSs by filing IRS Form 8621 with your original or amended U.S.
federal income tax return for the first taxable year in which we are a PFIC and
you hold ADSs by the due date of the return (including extensions). U.S. Holders
of ADSs or ordinary shares should consult their tax advisors as to the
availability and desirability of a mark-to-market election, as well as the
impact of such election on interests in any lower-tier PFICs.
 
 Alternatively,
a U.S. Holder of stock in a PFIC generally may make a “qualified electing fund”
election with respect to such PFIC to elect out of the tax treatment discussed
above. A U.S. Holder who makes a valid qualified electing fund election with
respect to a PFIC will generally include in gross income for a taxable year such
holder’s pro rata share of the corporation’s earnings and profits for the
taxable year. However, the qualified electing fund election is available only if
such PFIC provides such U.S. Holder with certain information regarding its
earnings and profits as required under applicable U.S. Treasury regulations. We
do not currently intend to prepare or provide the information that would enable
you to make a qualified electing fund election.
 
 If you
hold ADSs or ordinary shares in any year in which we are a PFIC, you generally
will be required to file IRS Form 8621 (or any other form specified by the U.S.
Department of the Treasury) with your U.S. federal income tax return for the
appropriate tax year.
 
 You are
urged to consult your tax advisor regarding the application of the PFIC rules to
your investment in ADSs or ordinary shares and the elections discussed
above.
 
 Information
Reporting and Backup Withholding
 
 Dividend
payments with respect to ADSs or ordinary shares and proceeds from the sale,
exchange or redemption of ADSs or ordinary shares may be subject to information
reporting to the IRS and possible U.S. backup withholding at a current rate of
28%. Backup withholding will not apply, however, if you are a corporation or a
U.S. Holder who furnishes a correct taxpayer identification number and makes any
other required certification or if you are otherwise exempt from backup
withholding. If you are a U.S. Holder who is required to establish exempt
status, you generally must provide such certification on IRS Form W-9. U.S.
Holders should consult their tax advisors regarding the application of the U.S.
information reporting and backup withholding rules.
 
 Backup
withholding is not an additional tax. Amounts withheld as backup withholding may
be credited against your U.S. federal income tax liability, and you may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS and furnishing any required
information in a timely manner.
  95
  Recent
legislative developments
 
 Newly
enacted legislation requires certain U.S. Holders who are individuals, estates
or trusts to pay up to an additional 3.8% tax on, among other things, dividends
and capital gains for taxable years beginning after December 31, 2012. In
addition, for taxable years beginning after March 18, 2010, new legislation
requires certain U.S. Holders who are individuals that hold certain foreign
financial assets (which may include ADSs or ordinary shares) to report
information relating to such assets, subject to certain exceptions. You should
consult your tax advisor regarding the effect, if any, of this legislation on
your ownership and disposition of ADSs or ordinary shares.
 
 F.
                Dividends
      and Paying Agents
 
 Not
applicable.
 
 G.
                Statement
      by Experts
 
 Not
applicable.
 
 H.
                Documents
      on Display
 
 You may
read and copy documents referred to in this annual report on Form 20-F that have
been filed with the U.S. Securities and Exchange Commission at the Commission’s
public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C.
20549. Please call the Commission at 1-800-SEC-0330 for further information on
the public reference rooms and their copy charges.
 
 The
Commission allows us to “incorporate by reference” the information we file with
the Commission. This means that we can disclose important information to you by
referring you to another document filed separately with the Commission. The
information incorporated by reference is considered to be part of this annual
report on Form 20-F.
  I.
                Subsidiary
      Information
 
 For a
list of our significant subsidiaries, see “Item 4. Information on the Company—A.
History and Development of the Company.”
  ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
 
 Interest
Rate Risk
 
 Our
exposure to interest rate risk primarily relates to our interest income
generated by excess cash, which is mostly held in interest-bearing bank deposits
or investment products provided by domestic banks. We have not used derivative
financial instruments in our investment portfolio. Interest-earning instruments
carry a degree of interest rate risk. We have not been exposed nor do we
anticipate being exposed to material risks due to changes in market interest
rates. However, our future interest income may fall short of expectations due to
changes in market interest rates.
 
 Foreign
Exchange Risk
 
 The value
of the Renminbi against the U.S. dollar and other currencies is affected by,
among other things, changes in China’s political and economic conditions. Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although
currently the Renminbi exchange rate versus the U.S. dollar is restricted to a
rise or fall of no more than 0.3% per day and the People’s Bank of China
regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the Renminbi may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long
term. Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market.
  96
  Because
substantially all of our earnings and cash assets are denominated in Renminbi
and the net proceeds from our initial public offering were denominated in U.S.
dollars, fluctuations in the exchange rate between the U.S. dollar and the
Renminbi affect the relative purchasing power of these proceeds and our balance
sheet and earnings per share in U.S. dollars. In addition, appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business or results of operations. Fluctuations
in the exchange rate will also affect the relative value of any dividend we
issue after our initial public offering that will be exchanged into U.S. dollars
and earnings from, and the value of, any U.S. dollar-denominated investments we
make in the future.
 
 We do not
believe that we currently have any significant foreign currency exchange risk
and we have not entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk.
  ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
  Fees
paid by our ADS holders
 
 Citibank,
N.A., the depositary of our ADS program, collects its fees for delivery and
surrender of ADSs directly from investors depositing shares or surrendering ADSs
for the purpose of withdrawal or from intermediaries acting for them. The
depositary collects fees for making distributions to investors by deducting
those fees from the amounts distributed or by selling a portion of distributable
property to pay the fees. The depositary may collect its annual fee for
depositary services by deducting from cash distributions or by directly billing
investors or by charging the book-entry system accounts of participants acting
for them. The depositary may generally refuse to provide fee-attracting services
until its fees for those services are paid. Set forth below is a summary of fees
holders of our ADSs may be required to pay for various services the depositary
may provide:
 
 Services
                    
                    Rate·
                    Issuance
      of ADSs upon deposit of our ordianry shares (excluding issuances as a
      result of distributions described in paragraph (4) below)
                    
                    Up
      to U.S. $5.00 per 100 ADSs (or fraction thereof) issued·
                    Delivery
      of deposited securities against surrender of ADSs
                    
                    Up
      to U.S. $5.00 per 100 ADSs (or fraction thereof)
    surrendered·
                    Distribution
      of cash dividends or other cash distributions (i.e., sale of rights and
      other entitlements)
                    
                    Up
      to U.S. $5.00 per 100 ADSs (or fraction thereof) held·
                    Distribution
      of ADSs pursuant to (i) stock dividends or other free stock distributions,
      or (ii) exercise of rights to purchase additional
ADSs
                    
                    Up
      to U.S. $5.00 per 100 ADSs (or fraction thereof) held·
                    Distribution
      of securities other than ADSs or rights to purchase additional ADSs (i.e.,
      spin-off shares)
                    
                    Up
      to U.S. $5.00 per 100 ADSs (or fraction thereof) held·
                    Depositary
      services
                    
                    Up
      to U.S. $5.00 per 100 ADSs (or fraction thereof) held on the applicable
      record date(s) established by the
depositary
  97
  Our ADS
holders, persons depositing our ordinary shares and persons surrendering ADSs
for cancellation and for the purpose of withdrawing deposited securities shall
be responsible for the following charges:
 
 ·
                taxes
      (including applicable interest and penalties) and other governmental
      charges;
 ·
                such
      registration fees as may from time to time be in effect for the
      registration of our ordinary shares or other deposited securities on the
      share register and applicable to transfers of our ordinary shares or other
      deposited securities to or from the name of the custodian, the depositary
      or any nominees upon the making of deposits and withdrawals,
      respectively;
 ·
                such
      cable, telex and facsimile transmission and delivery expenses as are
      expressly provided in the deposit agreement to be at the expense of the
      person depositing or withdrawing our ordinary shares or the holders of our
      ADSs;
 ·
                the
      expenses and charges incurred by the depositary in the conversion of
      foreign currency;
 ·
                such
      fees and expenses as are incurred by the depositary in connection with
      compliance with exchange control regulations and other regulatory
      requirements applicable to our ordinary shares, the deposited securities,
      ADSs and ADRs; and
 ·
                the
      fees and expenses incurred by the depositary, the custodian, or any
      nominee in connection with the servicing or delivery of deposited
      securities.
  Fees
and Payments from the Depositary to Us
 
 From
January 1, 2009 to December 31, 2009, we received from the depositary a
reimbursement of US$14,817.96, for our expenses incurred in connection
with the maintenance of the ADS program. In addition, the depositary has
agreed to reimburse us annually for our expenses incurred in connection with the
maintenance of the ADSs program in the future. The amount of such reimbursements
is subject to certain limits.
  98
  PART
II
 
 ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES
 
 None.
  ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
 
 There
have been no material modifications to the rights of holders of our registered
securities.
 
 We
completed our initial public offering of 216,375,000 ordinary shares,
represented by 7,212,500 ADSs, at US$6.80 per ADS on August 7, 2008, after our
ordinary shares and ADSs were registered under the Securities Act and all of the
registered securities were sold. The aggregate price of the offering amount
registered and sold was US$49.0 million, of which we received net proceeds of
US$42.0 million. The effective date of our registration statement on Form F-1
(File number: 333-152305) was August 4, 2008. The offering consisted of a U.S.
offering and an international offering. Merrill Lynch, Pierce, Fenner &
Smith Incorporated was the representative of the U.S. underwriters and Merrill
Lynch Far East Limited was the representative of the international
underwriters.
 
 Total
expenses incurred for our account in connection with our initial public offering
were approximately US$7.0 million, including approximately US$3.4 million for
underwriting discounts and commissions and approximately US$3.6 million for
other expenses. None of the above expenses included direct or indirect payments
to directors or officers of our company or their associates, persons owning 10%
or more of our equity securities or our affiliates.
 
 The net
proceeds we received from our initial public offering have been allocated as
follows:
 
 •
                approximately
      US$10.0 million to increase our sales, marketing and production
      capabilities;
 
 •
                approximately
      US$30.0 million to fund our potential acquisitions of complementary media
      businesses;and
 
 •
                the
      remaining amount to fund our working capital, including the capital needed
      to expand our available advertising time slots on television networks, our
      purchase of the premises occupied by our corporate headquarters and other
      general corporate purposes.
 
 None of
the net proceeds from our initial public offering were paid directly or
indirectly to directors or officers of our company or their associates, persons
owning 10% or more of our equity securities or our affiliates.
  ITEM
      15.
                CONTROLS AND
      PROCEDURES
 
 Disclosure Controls and
Procedures
 
 Under the
supervision and with the participation of our management, including our chief
executive officer and our chief financial officer, we conducted an evaluation of
our disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based
on that evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this annual report.
  99
  Management’s Annual Report on
Internal Control Over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined under
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, for
our company. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements in accordance with
generally accepted accounting principles and includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of a company’s assets, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting
principles, and that a company’s receipts and expenditures are being made only
in accordance with authorizations of a company’s management and directors, and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of a company’s assets that
could have a material effect on the consolidated financial
statements.
 
 Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance with respect to the preparation
and presentation of consolidated financial statement and may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
 
 Our
company’s management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2009 using criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, our
company’s management concluded that our internal control over financial
reporting was effective as of December 31, 2009.
 
 Our
independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian
CPAs Limited Company, has audited the effectiveness of internal control over
financial reporting as of December 31, 2009, as stated in its report, which
appears on page F-2 of this annual report.
 
 Changes in Internal
Controls
 
 During
2009, we implemented a number of measures to strengthen our control over the
drafting, approval and management of our business contracts. In addition, we
adopted our internal control policies, developed comprehensive internal control
policies and procedures and accounting policies manual, implemented controls to
ensure that such policies and procedures be followed strictly and made other
improvements as we deemed necessary to improve our internal control over
financial reporting.
  There
were no other significant changes in our internal control over financial
reporting that occurred during the period covered by this annual report on Form
20-F that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting as described
above.
  ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT
 
 Our board
of directors has determined that Mr. Kun Allen Chien, who is one of our
independent directors under the applicable rules of the Securities and Exchange
Commission and NYSE Arca or NYSE (as the case may be), is an audit committee
financial expert within the meaning of the rules of the Securities and Exchange
Commission. See “Item 6. Directors, Senior Management and
Employees.”
  100
  ITEM
16B. CODE OF ETHICS
 
 Our board
of directors has adopted a code of ethics that applies to our directors,
officers, employees and agents, We have filed our code of business conduct and
ethics as an exhibit to this annual report on Form 20-F, and posted the code on
our website www.chinammia.com. We hereby undertake to provide to any person
without charge, a copy of our code of business conduct and ethics within ten
working days after we receive such person’s written request.
 
 ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The
following table sets forth the aggregate fees by categories specified below in
connection with certain professional services rendered by PricewaterhouseCoopers
Zhong Tian CPAs Limited Company, our principal external auditors, for the
periods indicated. We did not pay any tax related or other fees to our auditors
during the periods indicated below.
 
 Year Ended December 31,2007
                      
                      
                      2008
                      
                      
                      2009(RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (US$)Audit
      fees(1)
                      
                      
                      3,385,560
                      
                      
                      
                      4,982,643
                      
                      
                      
                      7,969,828
                      
                      
                      
                      1,167,586Audit-related
      fees(2)
                      
                      
                      –
                      
                      
                      
                      6,021,224
                      
                      
                      
                      –
                      
                      
                      
                      –Tax
      fees(3)
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –All
      other fees(4)
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –
 
 (1)
                “Audit
      fees” means the aggregate fees billed in each of the fiscal years listed
      for professional services rendered by our independent registered public
      accounting firm for the audit of our annual financial statements that are
      normally provided in connection with statutory and regulatory filings or
      engagements for those fiscal years.
 (2)
                “Audit-related
      fees” means the aggregate fees billed in each of the fiscal years listed
      for assurance and related services by our independent registered public
      accounting firm that are reasonably related to the performance of the
      audit or review of our financial statements and are not reported under
      “Audit fees.” Services comprising the fees disclosed under category of
      “Audit-related fees” involve principally the issue of comfort letter,
      rendering of listing advice and other audit-related services for the years
      ended December 31, 2007, 2008 and
2009.
 (3)
                “Tax
      fees” means the aggregate fees billed in each of the fiscal years listed
      for professional services rendered by our independent registered public
      accounting firm for tax compliance, tax advice, and tax
      planning.
 (4)
                “All
      other fees” means the aggregate fees billed in each of the fiscal years
      listed for products and services provided by our independent registered
      public accounting firm, other than the services reported in the other
      categories.
 
 The audit
committee of our board of directors is directly responsible for the appointment,
retention, evaluation, compensation, oversight and termination of the work of
the independent auditors employed by our company. Pursuant to the audit
committee charter adopted by the board of directors on July 18, 2008, the
committee has the authority and responsibility to appoint, retain and terminate
our independent auditors and has the sole authority to pre-approve any audit and
non-audit services, including tax services, to be provided by our independent
auditors. In addition, the audit committee has the power to pre-approve the
hiring of any employee or former employee of the independent auditors who was a
member of our company’s audit team during the preceding two fiscal years, or the
hiring of any employee or former employee of the independent auditors (within
the preceding two fiscal years) for a senior position within our company,
regardless of whether that person was a member of our company’s audit
team.
 
 ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
 Not
applicable.
  101
  ITEM
      16E.
                PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS
 
 None.
 
 ITEM
      16F.
                CHANGE
      IN REGISTRANT’S CERTIFYING
ACCOUNTANT
 
 Not
applicable.
 
 ITEM
      16G.
                CORPORATE
      GOVERNANCE
 
 We have
followed and intend to continue to follow the applicable corporate governance
standards under the NYSE Corporate Governance Rules. We are not aware of any
significant differences between our corporate governance practices and those
followed by domestic companies under NYSE listing standards.
 
 PART
III
  ITEM
      17.
                FINANCIAL
      STATEMENTS
 
 We have
elected to provide financial statements pursuant to Item 18.
 
 ITEM
      18.
                FINANCIAL
      STATEMENTS
 
 See
“Index to Combined Financial Statements” on page F-1 for a list of all financial
statements filed as part of this annual report.
  102
  ITEM
19. EXHIBITS
 
 The
following exhibits are furnished along with annual report or are incorporated by
reference as indicated.
 
 Number
                            
                            Description
      of Document1.1
                            *
                            
                            Third
      Amended and Restated Memorandum and Articles of Association of China Mass
      Media Corp.1.2
                            
                            
                            Fifth
      Amended and Restated Memorandum and Articles of Association of China Mass
      Media Corp.2.1
                            *
                            
                            Specimen
      Certificate for Ordinary Shares2.2
                            *
                            
                            Form
      of Deposit Agreement, including form of American Depositary
      Receipts2.3
                            *
                            
                            Investor
      Rights Agreement dated June 24, 2008 among China Mass Media International
      Advertising Corp., Happy Indian Ocean Limited, Arctic Spring Limited,
      Winner Wide Limited, CTF Capital Ltd., Goldcorn Development Limited, Jumbo
      Right Holdings Limited, True Wise Investments Limited and Ever Kingdom
      Limited4.1
                            *
                            
                            Form
      of 2008 Share Incentive Plan4.2
                            *
                            
                            Termination
      Agreement dated July 23, 2008, among China Mass Media International
      Advertising Corp., Happy Indian Ocean Limited, Arctic Spring Limited,
      Winner Wide Limited, CTF Capital Ltd., Goldcorn Development Limited, Jumbo
      Right Holdings Limited, True Wise Investments Limited and Ever Kingdom
      Limited4.3
                            *
                            
                            English
      Translation of Non-Competition Agreement dated January 31, 2008, among Mr.
      Shengcheng Wang, Ms. Kun Zhang, Mr. Zhiyi Wang, Ms. Wenkai Zhang and Mass
      Media & Universal International Advertising Co.,
  Ltd.4.4
                            *
                            
                            Form
      of Employment Agreement4.5
                            *
                            
                            English
      Translation of Equity Transfer Agreement between Universal International
      Advertising Limited and Shenzhen Guang Er Gao Zhi Co.,
  Ltd.4.6
                            *
                            
                            English
      Translation of Framework Agreement dated December 20, 2007 between Mass
      Media & Universal International Advertising Co., Ltd. and Beijing
      Guang Er Gao Zhi Film and Television Production Company
    Ltd.4.7
                            *
                            
                            English
      Translation of Advertising Agency Agreement dated January 22, 2008 between
      Mass Media & Universal International Advertising Co., Ltd. and Beijing
      Guang Er Gao Zhi Film and Television Production Company
    Ltd.4.8
                            *
                            
                            English
      Translation of Advertising Agency Agreement on 2008 Chinese New Year Gala
      Program dated December 6, 2007 between Mass Media & Universal
      International Advertising Co., Ltd. and CCTV4.9
                            *
                            
                            English
      Translation of Advertising Agency Agreement on Special Events dated
      December 12, 2007 between Mass Media & Universal International
      Advertising Co., Ltd. and CCTV4.10
                            *
                            
                            English
      Translation of Form of Media Resource Purchase Agreement between Mass
      Media & Universal International Advertising Co., Ltd. and
      CCTV4.11
                            *
                            
                            English
      Translation of Form of Advertising Agency Agreement between Mass Media
      & Universal International Advertising Co., Ltd. and advertising
      clients4.12
                            *
                            
                            English
      Translation of Lease Agreement dated December 30, 2007 between Mass Media
      & Universal International Advertising Co., Ltd. and Beijing Guang Er
      Gao Zhi Film and Television Production Company Ltd.4.13
                            *
                            
                            English
      Translation of Lease Agreement dated December 30, 2007 between Mass Media
      & Universal International Advertising Co., Ltd. and Zhiyi
      Wang
  103
 
 4.14
                    *
                    
                    Investment
      Agreement dated June 24, 2008 among China Mass Media International
      Advertising Corp., Happy Indian Ocean Limited, Arctic Spring Limited and
      Winner Wide Limited4.15
                    *
                    
                    Investment
      Agreement dated June 24, 2008 among China Mass Media International
      Advertising Corp., Happy Indian Ocean Limited, Arctic Spring Limited and
      CTF Capital Ltd.4.16
                    *
                    
                    Investment
      Agreement dated June 24, 2008 among China Mass Media International
      Advertising Corp., Happy Indian Ocean Limited, Arctic Spring Limited and
      Goldcorn Development Limited4.17
                    *
                    
                    Investment
      Agreement dated June 24, 2008 among China Mass Media International
      Advertising Corp., Happy Indian Ocean Limited, Arctic Spring Limited and
      Jumbo Right Holdings Limited4.18
                    *
                    
                    Investment
      Agreement dated June 24, 2008 among China Mass Media International
      Advertising Corp., Happy Indian Ocean Limited, Arctic Spring Limited and
      True Wise Investments Limited4.19
                    *
                    
                    Investment
      Agreement dated June 24, 2008 among China Mass Media International
      Advertising Corp., Happy Indian Ocean Limited, Arctic Spring Limited and
      Ever Kingdom Limited4.20
                    *
                    
                    Share
      Purchase Agreement dated July 23, 2008 among Happy Indian Ocean Limited,
      Arctic Spring Limited, Winner Wide Limited, CTF Capital Ltd., Goldcorn
      Development Limited, Jumbo Right Holdings Limited, China Mass Media
      International Advertising Corp. and Shengcheng Wang4.21
                    *
                    
                    Share
      Purchase Agreement dated July 23, 2008 among Happy Indian Ocean Limited,
      Arctic Spring Limited, True Wise Investments Limited, China Mass Media
      International Advertising Corp. and Shengcheng Wang4.22
                    *
                    
                    Share
      Purchase Agreement dated July 23, 2008 among Happy Indian Ocean Limited,
      Arctic Spring Limited, Ever Kingdom Limited, China Mass Media
      International Advertising Corp. and Shengcheng Wang4.23
                    *
                    
                    Preferred
      Share Conversion Agreement dated July 23, 2008 among Happy Indian Ocean
      Limited, Arctic Spring Limited and China Mass Media International
      Advertising Corp.4.24
                    
                    
                    Form
      of 2010 Share Option Scheme8.1
                    
                    
                    List
      of Subsidiaries of China Mass Media Corp.11.1
                    *
                    
                    Code
      of Business Conduct and Ethics of China Mass Media
Corp.12.1
                    
                    
                    CEO
      Certification pursuant to Rule 13a-14(a)12.2
                    
                    
                    CFO
      Certification pursuant to Rule 13a-14(a)13.1
                    
                    
                    CEO
      Certification pursuant to Rule 13a-14(b)13.2
                    
                    
                    CFO
      Certification pursuant to Rule
13a-14(b)
  
 *
                Incorporated
      by reference to our Registration Statement on Form F-1 (File No.
      333-152305) filed with the Securities and Exchange Commission, as declared
      effective on August 4, 2008.
  104
  SIGNATURE
 
 The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
 
 China
      Mass Media Corp./s/        Shengcheng
      WangName:
                    Shengcheng
      WangTitle:
                    Chairman
      and Chief
Executive Officer
 
 Date:
August 31, 2010
  
  CHINA
MASS MEDIA CORP.
  INDEX
TO COMBINED FINANCIAL STATEMENTS
 
 PageReport
      of Independent Registered Public Accounting Firm
                      
                      F-2Combined
      Balance Sheets as of December 31, 2007, 2008 and 2009
                      
                      F-3Combined
      Statements of Operations for the Years Ended December 31, 2007, 2008
      and 2009
                      
                      F-4Combined
      Statements of Shareholders’ Equity for the Years Ended December 31,
      2007, 2008 and 2009
                      
                      F-5Combined
      Statements of Cash Flows for the Years Ended December  31, 2007, 2008
      and 2009
                      
                      F-6Notes
      to the Combined Financial Statements
                      
                      F-7
  F-1
  Report of Independent Registered Public
Accounting Firm
  To the
Board of Directors and Shareholders of China Mass Media
Corp.:
  In our
opinion, the accompanying combined balance sheets and the related combined
statements of operations, changes in shareholders’ equity and cash flows present
fairly, in all material respects, the financial position of China Mass Media
Corp. and its subsidiaries at December 31, 2009, 2008 and 2007, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these
financial statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management’s Annual Report on Internal Control
over Financial Reporting appearing under Item 15 of the accompanying Form 20-F.
Our responsibility is to express opinions on these financial statements and on
the Company’s internal control over financial reporting based on our audits
(which was an integrated audit in 2009). 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  /s/
PricewaterhouseCoopers Zhong Tian CPAs Limited Company
 Beijing,
the People’s Republic of China
 August
31, 2010
  F-2
  CHINA
MASS MEDIA CORP.
  COMBINED
BALANCE SHEETS
 
 December
      31,2007
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2009Notes
                                  
                                  
                                  RMB
                                  
                                  
                                  RMB
                                  
                                  
                                  RMB
                                  
                                  
                                  US$See
      Note 2 (v)AssetsCurrent
      assets:Cash
      and cash equivalents
                                  
                                  2(c),
      15
                                  
                                  
                                  
                                  138,262,170
                                  
                                  
                                  
                                  566,889,261
                                  
                                  
                                  
                                  508,778,014
                                  
                                  
                                  
                                  74,536,400Short-term
      investments
                                  
                                  2(d),
      4, 15
                                  
                                  
                                  
                                  220,000,000
                                  
                                  
                                  
                                  500,000,000
                                  
                                  
                                  
                                  80,000,000
                                  
                                  
                                  
                                  11,720,066Notes
      receivable
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,937,450
                                  
                                  
                                  
                                  283,838Accounts
      receivable, net
                                  
                                  2(e),
      3(c), 5
                                  
                                  
                                  
                                  5,299,331
                                  
                                  
                                  
                                  14,367,193
                                  
                                  
                                  
                                  375,568
                                  
                                  
                                  
                                  55,021Prepaid
      expenses and other current assets
                                  
                                  6
                                  
                                  
                                  
                                  21,888,980
                                  
                                  
                                  
                                  68,301,523
                                  
                                  
                                  
                                  66,560,752
                                  
                                  
                                  
                                  9,751,205Deposit
      paid to a related party
                                  
                                  17
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,000,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
      current assets
                                  
                                  
                                  
                                  
                                  
                                  385,450,481
                                  
                                  
                                  
                                  1,150,557,977
                                  
                                  
                                  
                                  657,651,784
                                  
                                  
                                  
                                  96,346,530Non-current
      assets:Property
      and equipment, net
                                  
                                  2(f),
      7
                                  
                                  
                                  
                                  2,453,044
                                  
                                  
                                  
                                  57,261,208
                                  
                                  
                                  
                                  55,464,401
                                  
                                  
                                  
                                  8,125,581Long-term
      investments
                                  
                                  2(d),
      4
                                  
                                  
                                  
                                  15,638,800
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
      non-current assets
                                  
                                  
                                  
                                  
                                  
                                  18,091,844
                                  
                                  
                                  
                                  57,261,208
                                  
                                  
                                  
                                  55,464,401
                                  
                                  
                                  
                                  8,125,581Total
      Assets
                                  
                                  
                                  
                                  
                                  
                                  403,542,325
                                  
                                  
                                  
                                  1,207,819,185
                                  
                                  
                                  
                                  713,116,185
                                  
                                  
                                  
                                  104,472,111Liabilities
      and Shareholder’s EquityCurrent
      liabilities:Accounts
      payable
                                  
                                  
                                  
                                  
                                  
                                  118,546,766
                                  
                                  
                                  
                                  330,085,426
                                  
                                  
                                  
                                  50,446,460
                                  
                                  
                                  
                                  7,390,448Customer
      advances
                                  
                                  2(i)
                                  
                                  
                                  
                                  99,885,671
                                  
                                  
                                  
                                  75,422,483
                                  
                                  
                                  
                                  20,657,147
                                  
                                  
                                  
                                  3,026,289Dividend
      payable
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  96,335,115
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Accrued
      expenses and other current liabilities
                                  
                                  8
                                  
                                  
                                  
                                  4,754,154
                                  
                                  
                                  
                                  13,765,090
                                  
                                  
                                  
                                  17,776,049
                                  
                                  
                                  
                                  2,604,206Taxes
      payable
                                  
                                  9(a)
                                  
                                  
                                  
                                  14,434,229
                                  
                                  
                                  
                                  51,958,677
                                  
                                  
                                  
                                  20,519,899
                                  
                                  
                                  
                                  3,006,182Amount
      due to related parties
                                  
                                  17
                                  
                                  
                                  
                                  21,562,056
                                  
                                  
                                  
                                  252,209,794
                                  
                                  
                                  
                                  127,068,624
                                  
                                  
                                  
                                  18,615,659Payable
      to shareholder
                                  
                                  17
                                  
                                  
                                  
                                  15,644,646
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
      current liabilities
                                  
                                  
                                  
                                  
                                  
                                  274,827,522
                                  
                                  
                                  
                                  819,776,585
                                  
                                  
                                  
                                  236,468,179
                                  
                                  
                                  
                                  34,642,784Total
      Liabilities
                                  
                                  
                                  
                                  
                                  
                                  274,827,522
                                  
                                  
                                  
                                  819,776,585
                                  
                                  
                                  
                                  236,468,179
                                  
                                  
                                  
                                  34,642,784Commitments
      and Contingencies
                                  
                                  16
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Shareholder’s
      equity:Ordinary
      shares (US$0.001 par value; 900,000,000 shares authorized as of December
      31, 2007 and 2008; 3,000,000,000 shares authorized as of December 31,
      2009; 412,400,000 shares issued and outstanding as of December 31, 2007;
      716,375,000 issued and outstanding as of December 31, 2008 and
      2009)
                                  
                                  11
                                  
                                  
                                  
                                  2,812,149
                                  
                                  
                                  
                                  4,893,500
                                  
                                  
                                  
                                  4,893,500
                                  
                                  
                                  
                                  716,902Series
      A convertible preferred shares (US$0.001 par value; 100,000,000 shares
      authorized, 87,600,000 shares issued and outstanding as of December 31,
      2007; none issued and outstanding as of December 31, 2008 and
      2009)
                                  
                                  11
                                  
                                  
                                  
                                  597,343
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Additional
      paid-in capital
                                  
                                  
                                  
                                  
                                  
                                  46,700,503
                                  
                                  
                                  
                                  330,214,330
                                  
                                  
                                  
                                  332,354,066
                                  
                                  
                                  
                                  48,690,146Statutory
      reserves
                                  
                                  13(b)
                                  
                                  
                                  
                                  18,450,237
                                  
                                  
                                  
                                  25,000,000
                                  
                                  
                                  
                                  25,000,000
                                  
                                  
                                  
                                  3,662,521Retained
      earnings
                                  
                                  
                                  
                                  
                                  
                                  60,154,571
                                  
                                  
                                  
                                  27,934,770
                                  
                                  
                                  
                                  114,400,440
                                  
                                  
                                  
                                  16,759,758Total
      Shareholder’s Equity
                                  
                                  
                                  
                                  
                                  
                                  128,714,803
                                  
                                  
                                  
                                  388,042,600
                                  
                                  
                                  
                                  476,648,006
                                  
                                  
                                  
                                  69,829,327Total
      Liabilities and Shareholder’s Equity
                                  
                                  
                                  
                                  
                                  
                                  403,542,325
                                  
                                  
                                  
                                  1,207,819,185
                                  
                                  
                                  
                                  713,116,185
                                  
                                  
                                  
                                  104,472,111
  The
accompanying notes are an integral part of these combined financial
statements.
  F-3
  CHINA MASS MEDIA CORP.
  COMBINED
STATEMENTS OF OPERATIONS
  Year
      ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2009Notes
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        US$See
      Note 2 (v)Revenues:
                        
                        2(h)Advertising
      agency services
                        
                        
                        
                        
                        
                        202,637,180
                        
                        
                        
                        334,052,626
                        
                        
                        
                        397,279,413
                        
                        
                        
                        58,201,763Special
      events services
                        
                        
                        
                        
                        
                        15,990,464
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Advertisement
      production and sponsorship services
                        
                        
                        
                        
                        
                        60,018,223
                        
                        
                        
                        34,934,895
                        
                        
                        
                        30,304,634
                        
                        
                        
                        4,439,654Total
      revenues
                        
                        
                        
                        
                        
                        278,645,867
                        
                        
                        
                        368,987,521
                        
                        
                        
                        427,584,047
                        
                        
                        
                        62,641,417Less:
      Business tax
                        
                        
                        
                        
                        
                        (23,110,351
                        )
                        
                        
                        (16,005,683
                        )
                        
                        
                        (16,021,579
                        )
                        
                        
                        (2,347,175
                        )Total
      net revenues
                        
                        
                        
                        
                        
                        255,535,516
                        
                        
                        
                        352,981,838
                        
                        
                        
                        411,562,468
                        
                        
                        
                        60,294,242Operating
      costs and expenses:Cost
      of revenues
                        
                        
                        
                        
                        
                        (30,147,760
                        )
                        
                        
                        (40,199,803
                        )
                        
                        
                        (40,239,024
                        )
                        
                        
                        (5,895,051
                        )Cost
      of revenues – media fees to a related party
                        
                        17(c)
                        
                        
                        
                        -
                        
                        
                        
                        (163,200,000
                        )
                        
                        
                        (230,000,000
                        )
                        
                        
                        (33,695,190
                        )Sales
      and marketing expenses
                        
                        
                        
                        
                        
                        (5,599,870
                        )
                        
                        
                        (8,204,365
                        )
                        
                        
                        (17,362,444
                        )
                        
                        
                        (2,543,612
                        )General
      and administrative expenses
                        
                        
                        
                        
                        
                        (8,504,520
                        )
                        
                        
                        (24,486,814
                        )
                        
                        
                        (33,193,760
                        )
                        
                        
                        (4,862,913
                        )Total
      operating costs and expenses
                        
                        
                        
                        
                        
                        (44,252,150
                        )
                        
                        
                        (236,090,982
                        )
                        
                        
                        (320,795,228
                        )
                        
                        
                        (46,996,766
                        )Operating
      income
                        
                        
                        
                        
                        
                        211,283,366
                        
                        
                        
                        116,890,856
                        
                        
                        
                        90,767,240
                        
                        
                        
                        13,297,476Interest
      and investment income
                        
                        
                        
                        
                        
                        10,773,971
                        
                        
                        
                        15,102,846
                        
                        
                        
                        9,494,036
                        
                        
                        
                        1,390,884Other
      income / (expense), net
                        
                        
                        
                        
                        
                        (3,128,447
                        )
                        
                        
                        (1,441,420
                        )
                        
                        
                        532,325
                        
                        
                        
                        77,986Income
      before tax
                        
                        9(b)
                        
                        
                        
                        218,928,890
                        
                        
                        
                        130,552,282
                        
                        
                        
                        100,793,601
                        
                        
                        
                        14,766,346Income
      tax expense
                        
                        9(b)
                        
                        
                        
                        (10,618,863
                        )
                        
                        
                        (20,138,650
                        )
                        
                        
                        (14,327,931
                        )
                        
                        
                        (2,099,054
                        )Net
      income
                        
                        
                        
                        
                        
                        208,310,027
                        
                        
                        
                        110,413,632
                        
                        
                        
                        86,465,670
                        
                        
                        
                        12,667,292Net
      income allocated to participating preferred shares
                        
                        
                        
                        
                        
                        (36,495,917
                        )
                        
                        
                        (9,751,329
                        )
                        
                        
                        -
                        
                        
                        
                        -Net
      income available to ordinary shareholders
                        
                        
                        
                        
                        
                        171,814,110
                        
                        
                        
                        100,662,303
                        
                        
                        
                        86,465,670
                        
                        
                        
                        12,667,292Earnings
      per ordinary share, basic and diluted
                        
                        10
                        
                        
                        
                        0.38
                        
                        
                        
                        0.17
                        
                        
                        
                        0.11
                        
                        
                        
                        0.02Earnings
      per ADS, basic
                        
                        10
                        
                        
                        
                        11.36
                        
                        
                        
                        5.12
                        
                        
                        
                        3.29
                        
                        
                        
                        0.48Earnings
      per ADS, diluted
                        
                        10
                        
                        
                        
                        11.36
                        
                        
                        
                        5.12
                        
                        
                        
                        3.28
                        
                        
                        
                        0.48Shares
      used in calculating earnings per ordinary share, basic
                        
                        10
                        
                        
                        
                        453,640,000
                        
                        
                        
                        589,764,324
                        
                        
                        
                        788,012,500
                        
                        
                        
                        788,012,500Shares
      used in calculating earnings per ordinary share, diluted
                        
                        10
                        
                        
                        
                        453,640,000
                        
                        
                        
                        589,764,324
                        
                        
                        
                        789,860,806
                        
                        
                        
                        789,860,806Shares
      used in calculating earnings per ADS, basic
                        
                        10
                        
                        
                        
                        15,121,333
                        
                        
                        
                        19,658,811
                        
                        
                        
                        26,267,083
                        
                        
                        
                        26,267,083Shares
      used in calculating earnings per ADS, diluted
                        
                        10
                        
                        
                        
                        15,121,333
                        
                        
                        
                        19,658,811
                        
                        
                        
                        26,328,694
                        
                        
                        
                        26,328,694
  The accompanying notes are an integral part of these combined
financial statements.
  F-4
  CHINA
MASS MEDIA CORP.
  COMBINED
STATEMENTS OF SHAREHOLDERS’ EQUITY
 
 Series
      AConvertible
                        
                        
                        Additional
                        
                        
                        
                        
                        
                        
                        
                        
                        TotalShare
      Capital
                        
                        
                        Preferred
      Shares
                        
                        
                        Paid-in
                        
                        
                        Statutory
                        
                        
                        Retained
                        
                        
                        Shareholder'sShares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Reserve
                        
                        
                        Earnings
                        
                        
                        EquityRMB
                        
                        
                        
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        RMBBalance
      at January 1, 2007
                        
                        
                        412,400,000
                        
                        
                        
                        2,812,149
                        
                        
                        
                        87,600,000
                        
                        
                        
                        597,343
                        
                        
                        
                        70,656,669
                        
                        
                        
                        13,920,037
                        
                        
                        
                        49,317,427
                        
                        
                        
                        137,303,625Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        208,310,027
                        
                        
                        
                        208,310,027Deemed
      related party contribution (Note 17)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,977,497
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,977,497Appropriation
      of earnings to statutory reserve (Note 13(b))
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        18,450,237
                        
                        
                        
                        (18,450,237
                        )
                        
                        
                        -Dividends
      declared and paid (Note 12)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (177,390,728
                        )
                        
                        
                        (177,390,728
                        )Distribution
      of Mass Media’s net assets to shareholder
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (25,933,663
                        )
                        
                        
                        (13,920,037
                        )
                        
                        
                        (1,631,918
                        )
                        
                        
                        (41,485,618
                        )Balance
      at December 31, 2007
                        
                        
                        412,400,000
                        
                        
                        
                        2,812,149
                        
                        
                        
                        87,600,000
                        
                        
                        
                        597,343
                        
                        
                        
                        46,700,503
                        
                        
                        
                        18,450,237
                        
                        
                        
                        60,154,571
                        
                        
                        
                        128,714,803Deemed
      distribution in connection with the Reorganization (Note
    1(b))
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,446,259
                        )
                        
                        
                        -
                        
                        
                        
                        (10,553,741
                        )
                        
                        
                        (15,000,000
                        )Conversion
      of preferred shares (Note 11)
                        
                        
                        87,600,000
                        
                        
                        
                        597,343
                        
                        
                        
                        (87,600,000
                        )
                        
                        
                        (597,343
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Issuance
      of ordinary shares upon initial public offering (“IPO”) (Note
      1(a))
                        
                        
                        216,375,000
                        
                        
                        
                        1,484,008
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        311,349,019
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        312,833,027Issuance
      cost (Note 1(a))
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (25,088,362
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (25,088,362
                        )Share-based
      compensation (Note 14)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,699,429
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,699,429Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        110,413,632
                        
                        
                        
                        110,413,632Appropriation
      of earnings to statutory reserve (Note 13(b))
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,549,763
                        
                        
                        
                        (6,549,763
                        )
                        
                        
                        -Dividends
      declared (Note 12)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (125,529,929
                        )
                        
                        
                        (125,529,929
                        )Balance
      at December 31, 2008
                        
                        
                        716,375,000
                        
                        
                        
                        4,893,500
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        330,214,330
                        
                        
                        
                        25,000,000
                        
                        
                        
                        27,934,770
                        
                        
                        
                        388,042,600Share-based
      compensation (Note 14)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,139,736
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,139,736Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        86,465,670
                        
                        
                        
                        86,465,670Balance
      at December 31, 2009
                        
                        
                        716,375,000
                        
                        
                        
                        4,893,500
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        332,354,066
                        
                        
                        
                        25,000,000
                        
                        
                        
                        114,400,440
                        
                        
                        
                        476,648,006
  The
accompanying notes are an integral part of these combined financial
statements.
  F-5
  CHINA
MASS MEDIA CORP.
  COMBINED
STATEMENTS OF CASH FLOWS
 
 Year
      ended December 31,2007
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2009RMB
                                          
                                          
                                          RMB
                                          
                                          
                                          RMB
                                          
                                          
                                          US$Notes
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          See
      Note 2 (v)Cash
      flows from operating activities:Net
      income
                                          
                                          
                                          
                                          
                                          
                                          208,310,027
                                          
                                          
                                          
                                          110,413,632
                                          
                                          
                                          
                                          86,465,670
                                          
                                          
                                          
                                          12,667,292Adjustments
      to reconcile net income to net cash (used in) / provided by operating
      activities:Depreciation
      expense
                                          
                                          
                                          
                                          
                                          
                                          1,202,418
                                          
                                          
                                          
                                          1,045,357
                                          
                                          
                                          
                                          3,074,157
                                          
                                          
                                          
                                          450,367Deemed
      related party contribution
                                          
                                          17
                                          
                                          
                                          
                                          1,977,497
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Investment
      income
                                          
                                          
                                          
                                          
                                          
                                          (2,040,583
                                          )
                                          
                                          
                                          (9,772,000
                                          )
                                          
                                          
                                          (5,994,921
                                          )
                                          
                                          
                                          (878,261
                                          )Exchange
      loss
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,440,592
                                          
                                          
                                          
                                          363,439
                                          
                                          
                                          
                                          53,244Share-based
      compensation
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,699,429
                                          
                                          
                                          
                                          2,139,736
                                          
                                          
                                          
                                          313,473Changes
      in assets and liabilities:Notes
      receivable
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,937,450
                                          )
                                          
                                          
                                          (283,838
                                          )Accounts
      receivable
                                          
                                          
                                          
                                          
                                          
                                          (5,105,931
                                          )
                                          
                                          
                                          (9,067,862
                                          )
                                          
                                          
                                          13,991,625
                                          
                                          
                                          
                                          2,049,785Prepaid
      expense and other current assets
                                          
                                          
                                          
                                          
                                          
                                          (4,093,197
                                          )
                                          
                                          
                                          (13,963,074
                                          )
                                          
                                          
                                          (29,448,793
                                          )
                                          
                                          
                                          (4,314,272
                                          )Amount
      due from a related party
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,000,000
                                          )
                                          
                                          
                                          1,000,000
                                          
                                          
                                          
                                          146,501Other
      non-current assets
                                          
                                          
                                          
                                          
                                          
                                          1,930,830
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Accounts
      payable
                                          
                                          
                                          
                                          
                                          
                                          191,910,225
                                          
                                          
                                          
                                          211,538,660
                                          
                                          
                                          
                                          (279,638,966
                                          )
                                          
                                          
                                          (40,967,340
                                          )Customer
      advances
                                          
                                          
                                          
                                          
                                          
                                          52,467,975
                                          
                                          
                                          
                                          (24,463,189
                                          )
                                          
                                          
                                          (54,765,336
                                          )
                                          
                                          
                                          (8,023,167
                                          )Accrued
      expenses and other current liabilities
                                          
                                          
                                          
                                          
                                          
                                          (867,638
                                          )
                                          
                                          
                                          9,010,938
                                          
                                          
                                          
                                          4,010,959
                                          
                                          
                                          
                                          587,608Taxes
      payable
                                          
                                          
                                          
                                          
                                          
                                          8,415,217
                                          
                                          
                                          
                                          5,693,062
                                          
                                          
                                          
                                          (857,216
                                          )
                                          
                                          
                                          (125,583
                                          )Amount
      due to related parties
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          169,162,446
                                          
                                          
                                          
                                          (87,952,669
                                          )
                                          
                                          
                                          (12,885,139
                                          )Net
      cash (used in) / provided by  operating
    activities
                                          
                                          
                                          
                                          
                                          
                                          454,106,840
                                          
                                          
                                          
                                          451,737,991
                                          
                                          
                                          
                                          (349,549,765
                                          )
                                          
                                          
                                          (51,209,330
                                          )Cash
      flows from investing activities:Net
      proceeds from redemption / (purchase of) short-term investments with terms
      of three months or less
                                          
                                          
                                          
                                          
                                          
                                          (280,000,000
                                          )
                                          
                                          
                                          (280,000,000
                                          )
                                          
                                          
                                          420,000,000
                                          
                                          
                                          
                                          61,530,348Proceed
      from sale of long-term investments held on behalf of
      shareholder
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          15,037,390
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Purchase
      of property and equipment
                                          
                                          
                                          
                                          
                                          
                                          (255,257
                                          )
                                          
                                          
                                          (6,685,021
                                          )
                                          
                                          
                                          (23,451,242
                                          )
                                          
                                          
                                          (3,435,626
                                          )Proceeds
      from investment income
                                          
                                          
                                          
                                          
                                          
                                          1,861,139
                                          
                                          
                                          
                                          9,153,918
                                          
                                          
                                          
                                          6,602,921
                                          
                                          
                                          
                                          967,333Net
      cash provided by / (used in)  investing
    activities
                                          
                                          
                                          
                                          
                                          
                                          (278,394,118
                                          )
                                          
                                          
                                          (262,493,713
                                          )
                                          
                                          
                                          403,151,679
                                          
                                          
                                          
                                          59,062,055Cash
      flows from financing activities:Net
      proceeds from issuance of ordinary shares upon IPO
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          287,744,663
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Increase
      / (decrease) of investment held on behalf of shareholder
                                          
                                          17(b)
                                          
                                          
                                          
                                          766,967
                                          
                                          
                                          
                                          (15,043,236
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Cash
      distributed in connection with the Reorganization
                                          
                                          1(b)
                                          
                                          
                                          
                                          (370,828,921
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (15,000,000
                                          )
                                          
                                          
                                          (2,197,512
                                          )Cash
      payment for fixed assets transferred in connection with the
      Reorganization
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (2,683,208
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Dividends
      distributed
                                          
                                          12
                                          
                                          
                                          
                                          (177,390,728
                                          )
                                          
                                          
                                          (29,194,814
                                          )
                                          
                                          
                                          (96,335,115
                                          )
                                          
                                          
                                          (14,113,174
                                          )Net
      cash (used in) / provided by financing activities
                                          
                                          
                                          
                                          
                                          
                                          (547,452,682
                                          )
                                          
                                          
                                          240,823,405
                                          
                                          
                                          
                                          (111,335,115
                                          )
                                          
                                          
                                          (16,310,686
                                          )Effect
      of exchange rate changes on cash and cash equivalents
                                          
                                          
                                          
                                          
                                          
                                          (912,908
                                          )
                                          
                                          
                                          (1,440,592
                                          )
                                          
                                          
                                          (378,046
                                          )
                                          
                                          
                                          (55,385
                                          )Net
      (decrease) / increase in cash and cash equivalents
                                          
                                          
                                          
                                          
                                          
                                          (372,652,868
                                          )
                                          
                                          
                                          428,627,091
                                          
                                          
                                          
                                          (58,111,247
                                          )
                                          
                                          
                                          (8,513,346
                                          )Cash
      and cash equivalents at beginning of the period
                                          
                                          
                                          
                                          
                                          
                                          510,915,038
                                          
                                          
                                          
                                          138,262,170
                                          
                                          
                                          
                                          566,889,261
                                          
                                          
                                          
                                          83,049,746Cash
      and cash equivalents at end of the period
                                          
                                          
                                          
                                          
                                          
                                          138,262,170
                                          
                                          
                                          
                                          566,889,261
                                          
                                          
                                          
                                          508,778,014
                                          
                                          
                                          
                                          74,536,400Cash
      paid for income taxes
                                          
                                          
                                          
                                          
                                          
                                          6,804,045
                                          
                                          
                                          
                                          8,669,897
                                          
                                          
                                          
                                          16,201,167
                                          
                                          
                                          
                                          2,373,484Deemed
      related party contribution
                                          
                                          
                                          
                                          
                                          
                                          1,977,497
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Dividend
      declared but not paid
                                          
                                          12
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          96,335,115
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Purchase
      of property and equipment included in amounts due to related
      parties
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          51,000,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Conversion
      of Series A convertible prefer shares into ordinary shares
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          597,343
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
  The
accompanying notes are an integral part of these combined financial
statements.
  F-6
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS
  1
                Organization,
      principle activities and
reorganization
 
 (a)
                Organization
      and principle activities
 
 China
Mass Media Corp. (the “Company”), formerly known as China Mass Media
International Advertising Corp. was incorporated under the laws of Cayman
Islands in November 2007 as a company with limited liability. The address of its
registered office is PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman
Islands. The Company currently conducts all of its business through Universal
International Advertising Co., Ltd. (“Universal”), an operating subsidiary in
the People’s Republic of China (the “PRC” or “China”) established in August
2006.
 
 The
Company’s predecessor was Mass Media International Advertising Co., Ltd. (“Mass
Media”), a PRC company established in October 2003. Both Universal and Mass
Media are ultimately controlled by Mr. Shengcheng Wang and his immediate family
members. Since the establishment of Universal, the business of Mass Media was
gradually assumed by Universal (Please see details of the Reorganization set out
in Note 1(b) below). The Company, its subsidiaries and Mass Media are
collectively referred to as the “Group”.
 
 The Group
is principally engaged in advertising agency services, in which the Company
purchases and sells advertising time slots on leading national television
channels, including 5 channels of China Central Television (“CCTV”), to its
customers to allow them to reach a large audience across China. The Group also
provides sales and marketing services to CCTV for special sport events on an ad
hoc basis and provides advertisement production and public service announcement
sponsorship services to its customers.
 
 On
August 7, 2008, the Company completed its IPO on New York Stock Exchange
ARCA (“NYSE Arca”) where 7,212,500 American Depositary Bank Shares (“ADSs”),
representing 216,375,000 ordinary shares, were sold at a price US$6.80 per ADS
(or US$0.23 per ordinary share). The net proceeds from the IPO after deducting
commissions and IPO costs were approximately RMB287.7 million.
 
 In
January 2009, Universal International Advertising Limited (“UIAL”), subsidiary
of the Company, established a subsidiary, Greatwall Film Production (Hong Kong)
Limited, in Hong Kong for the purpose of securing potential film production
related business opportunities outside PRC..
 
 In August
2009, the Company transferred from NYSE Arca to New York Stock Exchange and
retained its ticker symbol as CMM.
 
 (b)
                Reorganization
 
 Prior to
the consummation of the Reorganization, Universal was 70% owned by UIAL, a
British Virgin Islands (“BVI”) company established by Mr. Shengcheng Wang’s
father, and 30% owned by Shenzhen Guang Er Gao Zhi Co., Ltd. (“Shenzhen Guang Er
Gao Zhi”), a PRC domestic holding company owned by Mr. Shengcheng Wang’s
immediate family members. In connection with IPO of the Company on NYSE Arca,
the Group reorganized its corporate and shareholding structure (the
“Reorganization”). In November 2007, the Company was established by Mr.
Shengcheng Wang in the Cayman Islands in anticipation of a listing on New York
Stock Exchange. Thereafter, Mr. Shengcheng Wang’s father transferred all of the
outstanding shares of UIAL to the Company, and UIAL became a wholly owned
subsidiary of the Company. In June 2008, UIAL agreed to complete the purchase of
the remaining 30% equity interests of Universal held by Shenzhen Guang Er Gao
Zhi for RMB 15,000,000, which represents the initial cost of investment made and
capital contributed by Shenzhen Guang Er Gao Zhi. This payment was recorded as a
distribution to shareholder in 2008 and made in 2009.
  F-7
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  In
addition, as part of the Reorganization, Universal entered into a series of
agreements with Mass Media and its employees to ensure all the key business
elements of Mass Media were assumed by Universal by December 30, 2007,
including the transfer of substantially all equipment and copyrights for public
service announcements of Mass Media in exchange for cash consideration of RMB
21,562,056. Since Mass Media and Universal are commonly controlled by Mr.
Shengcheng Wang and his immediate family members, the transaction has been
accounted for as a transaction between commonly controlled entities. Historical
assets and liabilities and results of operations of Mass Media have been
included in the historical combined financial statements of the Group for all
the periods presented up to December 30, 2007. The consideration paid over
carrying value of the transferred assets was RMB 19,107,567, and is part of the
total cash consideration of RMB 21,562,056 that is included in the RMB
41,485,618 distribution to shareholders.
 
 As a result of the aforementioned
arrangement, effective from December 30, 2007, Mass Media was not part of the
Group or involved in the business operations of the Group. The advertising
agency businesses were assumed by Universal and Mass Media was excluded from the
Group. Certain assets and liabilities remained in Mass Media as these assets and
liabilities were not assumed by Universal. The exclusion of such assets and
liabilities from the Group was accounted for as a distribution to shareholders.
The fair values of these assets and liabilities that remained with Mass Media
approximated their carrying values at December 30, 2007. Mass Media did not have
any contingent liabilities and there was no contingent liability arising from
the exclusion of Mass Media. The following were the assets and liabilities of
Mass Media excluded from the combined financial statements of the Group as at
December 30, 2007:
 
 RMBCash
      and cash equivalents
                                              
                                              
                                              370,828,921Short-term
      investments
                                              
                                              
                                              62,000,000Amount
      due from Universal
                                              
                                              
                                              21,562,056Prepaid
      expenses and other assets (see note (i) below)
                                              
                                              
                                              37,337,554Property
      and equipment, net (see note (ii) below)
                                              
                                              
                                              349,202Long-term
      investments—Chinese government bond
                                              
                                              
                                              1,057,567Total
      assets
                                              
                                              
                                              493,135,300Accounts
      payable
                                              
                                              
                                              368,153,491Customer
      advances
                                              
                                              
                                              1,861,564Accrued
      expenses and other current liabilities (see note
      (iii) below)
                                              
                                              
                                              20,437,893Taxes
      payable (see note (iv) below)
                                              
                                              
                                              61,196,734Total
      liabilities
                                              
                                              
                                              451,649,682Shareholder’s
      equity
                                              
                                              
                                              41,485,618Total
      liabilities and shareholder’s equity
                                              
                                              
                                              493,135,300
 
 Notes:
  (i)
                Prepaid expenses and other
      assets
 
 RMBBidding
      deposits to CCTV
                              
                              
                              1,700,000Deferred
      business tax and related surcharges
                              
                              
                              29,040,279Interest
      receivable from bank deposits
                              
                              
                              2,712,913Prepaid
      rental fee refund receivable from Mr. Zhiyi Wang (see also note
      18(d))
                              
                              
                              2,966,246Others
                              
                              
                              918,116Total
                              
                              
                              37,337,554
  F-8
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
 (ii)
                Property and
      equipment
  RMBComputers
      and electronic equipment
                              
                              
                              66,614Office
      equipment
                              
                              
                              57,541Office
      furniture
                              
                              
                              225,047Total
                              
                              
                              349,202
 
 (iii)
                Accrued expenses and other
      liabilities
  RMBAccrued
      expenses
                              
                              
                              559,150Statutory
      staff welfare fund
                              
                              
                              15,095,001Accrued
      interest payable on late payment of income taxes
                              
                              
                              4,542,436Other
      payables
                              
                              
                              241,306Total
                              
                              
                              20,437,893
 
 (iv)
                Taxes
    payable
  RMBBusiness
      tax and related surcharges payable
                            
                            
                            29,920,729Income
      tax payable
                            
                            
                            31,276,005Total
                            
                            
                            61,196,734
 
 2
                Summary
      of Significant Accounting Policies
 
 (a)
                Basis
      of preparation and combination
 
 The
significant accounting policies applied in the preparation of the financial
statements are set out below. These policies have been consistently applied to
all years presented, unless otherwise stated.
 
 The
combined financial statements of the Group have been prepared in accordance with
the accounting principles generally accepted in the United States of America
(“US GAAP”).
 
 The
Reorganization has been accounted for as a reorganization of businesses under
common control in a manner similar to a pooling of interests. The entities that
were under common control of Mr. Shengcheng Wang and his immediate family
members but were managed separately from the Group were excluded from the Group.
The accompanying combined statements of operations and combined statements of
cash flows include the results of operations and cash flows of the Group, as if
the current group structure had been in existence throughout the years
presented. All significant intra-group transactions and balances have been
eliminated on combination.
 
 On this
basis, the combined financial statements of the Group include the financial
statements for the years ended December 31, 2007, 2008 and 2009 of the
Company, its subsidiary companies and Mass Media except that the assets and
liabilities retained by Mass Media were included up to December 30, 2007,
the effective date of the Reorganization. No adjustments have been made to the
statements of results of operations for periods prior to the completion of the
Reorganization as a result of the exclusion of Mass Media from the Group on the
date of the Reorganization. Subsequent to the completion of the Reorganization,
the combined financial statements do not include the results of operations and
cash flows of Mass Media.
 
 Subsidiary
companies are those entities in which the Company, directly or indirectly,
controls more than one half of the voting power or has the power to govern the
financial and operating policies, to appoint or remove the majority of the
members of the board of directors, or to cast majority of votes at the meeting
of directors.
  F-9
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  (b)
                Use
      of estimates
 
 The
preparation of the combined financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of the assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amount of
revenue and expenses during the reported periods. Actual results could differ
from these estimates. Significant accounting estimates reflected in the Group’s
combined financial statements mainly include the estimation of amounts to be
recognized as revenues, allowances for doubtful accounts, accounts payable,
customer advances and taxes payable in relation to certain contracts with CCTV
and a related party, share-based compensation expense, tax provision and
economic useful lives of property and equipment.
 
 (c)
                Cash
      and cash equivalents
 
 Cash and
cash equivalents represent cash on hand, demand deposits and time deposits with
fixed rate of interest with a term of three months or less at
banks.
 
 (d)
                Short
      and long-term investments
 
 Short-term
investments include investment funds with no fixed term or with terms less than
one year. The investment funds are classified as available-for-sale investments
and they are reported at fair value with unrealized gains (losses), if any,
recorded as accumulated other comprehensive income in shareholder’s equity.
Realized gains or losses are charged to the combined statements of operations
during the period in which the gain or loss is realized. The Group recognized
RMB 1,960,289, RMB 9,772,000 and RMB 5,994,921 gains from the available-for-sale
investments for the years ended December 31, 2007, 2008 and 2009
respectively. There was no material unrealized gain (loss) at the end of each
reporting period presented.
 
 Long-term
investments include time deposits placed with a bank. The difference between the
recorded cost and the fair value was not significant at the end of each
reporting period presented.
 
 The Group
considers available evidence, including the duration and extent to which
declines in fair value of the available-for-sale investments compared to cost,
in determining whether an unrealized loss is “other-than-temporary”. If the
decline is considered other than temporary, the unrealized loss is recorded as
other expense in the combined statement of operations. For each period
presented, the Company did not record any charges to write down
investments.
 
 (e)
                Allowances
      for doubtful accounts
 
 The Group
provides specific provisions for bad debts when facts and circumstances indicate
that 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. Allowances for
doubtful accounts charged to the statement of operations were nil, RMB 4,319,808
and RMB 2,187,830 for the years ended December 31, 2007, 2008 and 2009,
respectively. Accounts receivable were stated net of such
provisions.
  F-10
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  (f)
                Property
      and equipment, net
 
 Property
and equipment are stated at cost less accumulated depreciation and impairment,
if any. Depreciation is calculated on a straight-line basis over the following
estimated useful lives:
  Computers
      and electronic equipment
                    3 yearsOffice
      equipment
                    5
      yearsOffice
      furniture
                    5
      yearsVehicles
                    5
      yearsOffice
      property
                    37.5
      – 38.5 years
 
 Expenditures
for repairs and maintenance are expenses as incurred. The gain or loss on
disposal of property and equipment, if any, is the difference between the net
sales proceeds and the carrying amount of the disposed assets, and is recognized
in the combined statements of operations upon disposal.
 
 (g)
                Impairment
      of long-lived assets
 
 Long-lived
assets are reviewed for impairment whenever events or changes in the
circumstances indicate that the carrying value of an asset may not be
recoverable. The Group assesses the recoverability of the long-lived assets by
comparing the carrying amount to the estimated future undiscounted cash flows
associated with the related assets. The Group recognizes impairment of
long-lived assets in the event that the book value of such assets exceeds the
estimated future discounted cash flows attributable to such assets. No
impairment of long-lived assets was recognized for any of the periods presented.
 
 (h)
                Revenue
      recognition
 
 Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable and collection is reasonably
assured. In accordance with the Financial Accounting Standard Board’s (“FASB”)
Accounting Standards Codification (“ASC”) 605-25, “Revenue Recognition:
Multiple-Element Arrangements”, revenue arrangements involving multiple
deliverables are broken down into single element arrangements based on their
relative fair value for revenue recognition purposes, when possible. When there
is no objective and reliable evidence of the fair value of the undelivered
items, the Group recognizes revenue of the elements delivered as a single unit
of accounting.
 
 The Group
has adopted the net presentation for business tax (“BT”) and related surcharges
pursuant to ASC 605-45, “Revenue Recognition:Principal
Agent Considerations”, i.e., BT and related surcharges are excluded from the net
revenues. BT and related surcharges are approximately 8% of the net amount
between gross revenue received/receivable from the advertisers less media fee
paid/payable to the media vendor.
 
 Revenues
presented in the combined statements of operations include revenues from
advertising agency services, special events services, and production and
sponsorship services.
 
 Advertising
agency services
 
 The Group
earns advertising agency services fee income from arranging broadcast of
customers’ advertisements during its selected media suppliers’ programs. The
revenues from advertising agency services are recognized net of agency rebates,
ratably over the period in which the agency services are
performed.
  F-11
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  The Group
contracts separately with its customers and the media suppliers and is
responsible for the payments to the media suppliers and collections from the
customers. In compliance with ASC 605-45, “Revenue Recognition:Principal
Agent Considerations”, the Group assesses whether the Group or the media
supplier is the primary obligor in these service contracts. The Group evaluates
the terms of its customer agreements and gives appropriate consideration to
other key indicators, such as inventory risk, latitude in establishing price,
variability of its earnings, ability to change the programs media supplier
provides, discretion in supplier selection and credit risk to the
vendor.
 
 Since the
first year operation, the Group has arranged its customers’ advertisements on
the regular daily programs advertising time slots on CCTV-1 and CCTV-2 and
annual Chinese New Year Gala program. The Group generally is not obligated to
pay the media fees until it has sold the time slots to its customers. In these
cases, the Group records the net amounts of gross billings to customers less
media fees as revenues on the date of broadcast in accordance with the guidance
in ASC 605-45 because the Group believes that the media supplier, not the Group,
is the primary obligor and undertakes the majority of the risks and rewards in
these arrangements.
 
 In order
to obtain exclusive access to the CCTV-4 news related programs advertising time
slots, starting from 2008, the Group purchases those CCTV-4 advertising time
slots for a fixed media cost and attempts to sell the time slots to its
customers. The Group believes it undertakes the majority of the risks and
rewards in these arrangements. Therefore, revenues are recognized at gross
billings to customers in accordance with the guidance from ASC 605-45 on the
date of broadcast of their advertisements. Cost of purchasing the advertising
time slots from the media supplier is recorded to cost of revenues over the
period the time slots are broadcast on a straight line basis. The revenues
recognized at gross billing were approximately nil, RMB149.6 million and
RMB164.3 million for the years ended December 31, 2007, 2008 and 2009,
respectively.
 
 Special
events services
 
 On an ad
hoc basis, the Group provides sales and marketing support services for special
events to CCTV under general framework agreements. The fees for such services
are determined on a case-by-case basis by CCTV based on its evaluation of the
Group’s performance. The Group generally receives a certain percentage of the
total advertising revenues that CCTV Channels 1 and 2 earned from the special
events; however, the Group does not receive the underlying information with
which to estimate the compensation amount. As such, the Group recognizes
revenues from such services when the Group receives statements from CCTV and
when the settlement of the service fees is reasonably assured.
 
 Production
and sponsorship services
 
 Revenues
from production services are recognized in the period in which the advertisement
is delivered to clients, provided that no additional performance obligations
remain. Revenues from sponsorship services primarily include production and
broadcast of public service announcements with sponsors’ brand names, as well as
the announcements supplied by clients, in the public service announcements time
slots that are allocated to the Group. The revenues from sponsorship for public
service announcements are recognized ratably over the period in which the public
service announcements are broadcast when all other revenue recognition criteria
have been met.
 
 (i)
                Customer
      advances
 
 From time
to time, the Group receives advances from customers for the advertising agency
service fees, advertisement production and sponsorship service fees and media
fees to be paid to the media suppliers. These advances are usually refundable to
the customers if the media suppliers are unable to deliver the broadcast
services.
  F-12
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  (j)
                Operating
      leases
 
 Leases
where substantially all the risks and rewards of ownership of assets remain with
the lessor are accounted for as operating leases. Payments made under operating
leases net of any incentives received from the lessor are charged to the
combined statements of operations on a straight-line basis over the terms of the
underlying lease.
 
 (k)
                Purchase
      commitments
 
 The Group
evaluates purchase commitments, including commitments made under guaranteed
minimum payment contracts, for future losses and will accrue for any losses
during the period in which such losses are anticipated.
 
 (l)
                Advertising
      expenses
 
 The Group
expenses advertising costs as incurred. There were no material advertising
expenses during the periods presented.
 
 (m)
                Foreign
      Currency Translation
 
 The
Group’s functional and reporting currency is the Renminbi (“RMB”). Transactions
denominated in currencies other than RMB are translated into RMB at the exchange
rate quoted by the People’s Bank of China (“PBOC”) prevailing at the dates of
the transactions. Gains and losses resulting from foreign currency transactions
are included in the combined statements of operations. Monetary assets and
liabilities denominated in foreign currencies are translated into RMB using the
applicable exchange rates quoted by the PBOC at the balance sheet dates. All
such exchange gains and losses are included in the combined statements of
operations.
 
 (n)
                Income
      taxes
 
 The Group
adopted ASC 740-10, “Income Taxes”. ASC 740-10 clarified the accounting for
uncertainty in an enterprise’s financial statements by prescribing a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC
740-10 requires management to evaluate its open tax positions that exist on the
date of initial adoption in each jurisdiction. The Group does not have any
significant uncertain tax positions and there was no effect on its financial
condition or results of operations as a result of implementing ASC
740-10.
 
 Under the
Enterprise Income Tax Law (the “New EIT Law”) adopted by the Chinese National
People’s Congress in March 2007, effective from January 1, 2008, dividends
from earnings made after January 1, 2008, interests, rent, royalties and
gains on transfers of property payable by a foreign-invested enterprise in the
PRC to its foreign investor who is a non-resident enterprise will be subject to
a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of
incorporation has a tax treaty with the PRC that provides for a reduced rate of
withholding tax. The BVI, where UIAL is incorporated, does not have such tax
treaty with the PRC. This new 10% withholding tax imposed on the dividend income
received from the Group’s PRC subsidiary will reduce the Group’s net income in
accordance with ASC 740-30, “Income Taxes: Other Considerations or Special
Areas”. It is the Company’s intention to permanently reinvest part of the
earnings made by the Group’s PRC foreign-invested enterprise. Starting from
January 1, 2008, the Group has accrued 10% withholding tax on those
earnings from China operations that the Group have no intention to permanently
reinvest.
  F-13
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  (o)
                Comprehensive
      income
 
 The Group
has adopted the provision of ASC 220, “Comprehensive Income”. ASC 220
establishes standards for the reporting and display of comprehensive income, its
components and accumulated balances. ASC 220 defines comprehensive income (loss)
to include all changes in equity, including adjustments to minimum pension
liabilities, accumulated foreign currency transaction, and unrealized gains or
losses on marketable securities, except those resulting from investments by
owners and distributions to owners. There have been no sources of other
comprehensive income (loss) during the periods covered by these combined
financials statements.
 
 (p)
                Fair
      value of financial instruments
 
 Financial
instruments include cash and cash equivalents, notes receivable, accounts
receivable, short and long-term investments, accounts payable, accrued expenses
and other current liabilities. As of December 31, 2007, 2008 and 2009, the
carrying values of cash and cash equivalents, notes receivable, accounts
receivable, short and long-term investments, accounts payable, accrued expenses
and other current liabilities approximate their fair values.
 
 (q)
                Earnings
      per share
 
 In
accordance with ASC 260, “Earnings per Share”, the Group presents basic earnings
per share and diluted earnings per share. Basic earnings per share is computed
by dividing net income attributable to holders of ordinary shares by the
weighted average number of ordinary shares outstanding during the year using the
two-class method. Under the two-class method, net income is allocated between
ordinary shareholders and other participating securities based on their
respective participating rights. Diluted earnings per share reflect the
potential dilution that could occur if securities or other contracts to issue
ordinary shares were exercised or converted into ordinary shares. Ordinary share
equivalents are excluded from the computation in loss periods as their effects
would be anti-dilutive.
 
 (r)
                Segment
      reporting
 
 The Group
operates and manages its business as a single segment. As the Group primarily
generates its revenues from customers in the PRC, no geographical segments are
presented.
 
 (s)
                Share-based
      compensation
 
 The Group
has accounted for share-based compensation in accordance with ASC 718,
“Compensation-Stock Compensation” for share-based payment transactions with
employees. For service-based share options awards, share-based compensation cost
is measured at the grant date based on the fair value of the award and is
recognized as an expense on a straight-line basis over the requisite service
period for each separately vesting portion of the award, net of estimated
forfeitures, over the requisite service period, which is generally the vesting
period. For performance-based share options awards, share-based compensation
cost is measured at the date that the performance goals and vesting schedule of
these awards are determined by the board of directors. Share-based compensation
costs are then recorded on a graded-vesting basis, net of estimated forfeitures,
over the requisite service period, which is generally the vesting period; an
evaluation is made each quarter as to the likelihood of the performance criteria
being met.
 
 The Group
has accounted for share-based compensation in accordance with ASC 505-50,
“Equity: Equity-Based Payments to Non-Employees” for share-based payment
transactions with consultants. For each quarter, share-based compensation cost
is measured at reporting date based on the fair value of the
award.
  F-14
 CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  The
Black-Scholes option pricing model is used to determine the fair value of share
options. The determination of the fair values of share-based compensation awards
on the date of grant using the Black-Scholes option pricing model is affected by
the share price as well as assumptions regarding a number of complex and
subjective variables, including the expected term of the awards, the expected
share price volatility over the expected term of the awards, actual and
projected employee share option exercise behavior, risk-free interest rates and
expected dividends.
 
 (t)
                Fair
      value measurements
 
 The Group
adopted ASC 820, “Fair Value Measurements and Disclosures” for financial assets
and liabilities. ASC 820 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles, and expands
disclosures about fair value measurement. The carrying amounts of the Group’s
cash and cash equivalents, and short and long-term investments approximate their
fair value due to the short maturity of those instruments. The carrying value of
receivables and payables approximates their market value based on their
short-term maturities. The adoption of ASC 820 had no effect on the combined
results of operations and financial condition.
 
 (u)
                Recently
      issued accounting standards
 
 During
2009, the FASB issued changes relating to the authoritative hierarchy of GAAP.
These changes establish the FASB ASC as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with GAAP, effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. Rules and interpretive releases of the Securities and
Exchange Commission ("SEC") under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. The FASB will no longer
issue new standards in the form of Statements of Financial Accounting Standards,
FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB
will issue Accounting Standards Updates ("ASU"). ASU will not be authoritative
in their own right as they will only serve to update the ASC. These changes and
the ASC itself do not change GAAP. Other than the manner in which the new
accounting guidance is referenced, the adoption of these changes had no material
impact on the Group’s combined financial statements. References to accounting
literature throughout this document have been updated to reflect the
codification.
 
 In June
2008, the FASB issued new requirements as codified in ASC 260-10, which specify
that all outstanding unvested share-based payment awards that contain rights to
non-forfeitable dividends or dividend equivalents are considered participating
securities and should be included in the computation of earnings per share
(“EPS”) pursuant to the two-class method as defined in ASC 260-10. The new
requirements of ASC 260-10 are effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. All prior
period EPS data presented must be adjusted retrospectively. The adoption of ASC
260-10 in 2009 did not have a material impact on the Group’s combined financial
statements.
 
 In April
2009, the FASB issued certain amendments as codified in ASC 820-10-65, “Fair
Value Disclosures”. ASC 820-10-65 affirms that the objective of fair value when
the market for an asset is not active is the price that would be received to
sell the asset in an orderly transaction, and includes additional factors for
determining whether there has been a significant decrease in market activity for
an asset when the market for that asset is not active.  An entity is
required to base its conclusion about whether a transaction was not orderly on
the weight of the evidence. The adoption did not have a material impact on the
Group’s combined financial statements.
  F-15
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  In April
2009, the FASB issued certain amendments as codified in ASC 320-10,
“Investments: Debt and Equity Securities”. These amendments (i) change previous
guidance for determining whether an impairment is other than temporary to debt
securities and (ii) replace the previous requirement that the entity’s
management assert it has both the intent and ability to hold an impaired
security until recovery with a requirement that management assert: (a) it does
not have the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost basis. Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses to the extent the impairment is related to credit losses. The
amount of the impairment related to other factors is recognized in other
comprehensive income. The adoption did not have a material impact on the Group’s
combined financial statements.
 
 In August
2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value”
(“ASU 2009-05”). ASU 2009-05 amends ASC 820, “Fair Value Measurements”. ASU
2009-05 provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
methods: 1) a valuation technique that uses a) the quoted price of the identical
liability when traded as an asset or b) quoted prices for similar liabilities or
similar liabilities when traded as assets and/or 2) a valuation technique that
is consistent with the principles of ASC 820 (e.g. an income approach or market
approach). ASU 2009-05 also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to adjust to include inputs
relating to the existence of transfer restrictions on that liability. The
adoption did not have a material impact on the Group’s combined financial
statements.
 
 In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition: Multiple-Element Arrangements”. These amendments provide
clarification on whether multiple deliverables exist, how the arrangement should
be separated, and the consideration allocated. An entity is required to allocate
revenue in an arrangement using estimated selling prices of deliverables in the
absence of vendor-specific objective evidence or third-party evidence of selling
price. These amendments also eliminate the use of the residual method and
require an entity to allocate revenue using the relative selling price method.
The amendments significantly expand the disclosure requirements for
multiple-deliverable revenue arrangements. These provisions are to be applied on
a prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with earlier application
permitted. The Group is currently evaluating the impact of these amendments on
the Group’s combined financial statements.
 
 In
February 2010, the FASB issued ASU 2010-09 to amend ASC 855, “Subsequent
Events”. ASC 855, which was originally issued by the FASB in May 2009, provides
guidance on events that occur after the balance sheet date but prior to the
issuance of the financial statements. ASC 855 distinguishes events requiring
recognition in the financial statements and those that may require disclosure in
the financial statements. As a result of ASU 2010-09, SEC registrants will not
disclose the date through which management evaluated subsequent events in the
financial statements, either in originally issued financial statements or
reissued financial statements. The Group has evaluated subsequent events in
accordance with ASU 2010-09.
  F-16
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  (v)
                Convenience
      translation
 
 Translations
of amounts in the combined balance sheets and combined statements of operations
and of cash flows as of and for the year ended December 31, 2009, from RMB
into United States dollars (“US$”) are solely for the convenience of the reader
and were calculated at the rate of USD 1.00 = RMB 6.8259, representing the noon
buying rate in the City of New York for cable transfers of RMB, as certified for
customs purposes by the Federal Reserve Bank of New York, on December 31,
2009. No representation is made that the RMB amounts could have been, or could
be, converted, realized or settled into US$ at that rate on December 31,
2009, or at any other rate.
 
 3
                Concentration
      and Risks
 
 (a)
                Ultimate
      media supplier
 
 The
Group’s business substantially depends on CCTV. The Group relies on its access
to advertising time slots on CCTV, to broadcast the customers’ advertisements.
Any unfavorable change of CCTV’s advertising model, any change that adversely
affect CCTV’s marketing option or limitation on the Group’s access to desired
television time slots could harm the effectiveness and attractiveness of the
Group’s advertising services.
 
 (b)
                Major
      customers
 
 A summary
of the customers who accounted for 10% or more of the Group’s combined revenues
is as follows:
 
 YearendedDecember31,Customers
                    
                    2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBCustomer
      A
                    
                    
                    33,861,834
                    
                    
                    
                    *
                    
                    
                    
                    *Customer
      B
                    
                    
                    28,173,600
                    
                    
                    
                    *
                    
                    
                    
                    *Customer
      C
                    
                    
                    27,962,295
                    
                    
                    
                    *
                    
                    
                    
                    *
 
 *
                Revenues
      from this customer during the period presented were less than 10% of the
      Group’s combined revenues.
 
 (c)
                Credit
      risk
 
 Financial
instruments that potentially expose the Group to concentrations of credit risk
consist primarily of cash, cash equivalents, short and long-term investments and
accounts receivable. The Group places its cash, cash equivalents, short and
long-term investments with financial institutions that management believes are
of high-credit ratings and quality.
 
 The Group
primarily collects revenues for advertising services up front and has not
experienced significant losses from uncollectible accounts. The Group will
continue to evaluate its collection experience and will provide for an allowance
for doubtful accounts as appropriate.
 
 (d)
                Foreign
      currency risk
 
 A
majority of the Group’s sales and expenses transactions and a significant
portion of the Group’s assets and liabilities are denominated in RMB. RMB is not
freely convertible into foreign currencies. In the PRC, certain foreign exchange
transactions are required by law to be transacted only by authorized financial
institutions at exchange rates set by the People’s Bank of China (“PBOC”).
Remittances in currencies other than RMB by the Group in China must be processed
through the PBOC or other China foreign exchange regulatory bodies which require
certain supporting documentation in order to affect the
remittance.
  F-17
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  4
                Short
      and Long-term Investments
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBShort-term
      investments:Investment
      funds - unlisted
                    
                    
                    220,000,000
                    
                    
                    
                    500,000,000
                    
                    
                    
                    80,000,000Long-term
      investments:Bank
      time deposits with original maturities more than one year
                    
                    
                    15,638,800
                    
                    
                    
                    -
                    
                    
                    
                    -
 
 The fair
value of above short and long-term investments approximately equal to their
carrying value and the unrealized gains and losses were immaterial as of
December 31, 2007, 2008 and 2009.
 
 At
December 31, 2009, the Group has invested RMB 80,000,000 (December 31,
2008, RMB 500,000,000; December 31, 2007, RMB 220,000,000) into certain
investment funds issued by Industrial and Commercial Bank of China. These
investment funds invest in highly rated government bonds, bank notes, financial
bonds and inter-bank short-term financial instruments. The Group’s investment in
these investment funds mature within three months.
 
 5
                Accounts
      Receivable, Net
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBAccounts
      receivable, gross
                    
                    
                    5,299,331
                    
                    
                    
                    18,687,001
                    
                    
                    
                    6,883,206Allowance
      for doubtful accounts
                    
                    
                    -
                    
                    
                    
                    (4,319,808
                    )
                    
                    
                    (6,507,638
                    )Accounts
      receivable, net
                    
                    
                    5,299,331
                    
                    
                    
                    14,367,193
                    
                    
                    
                    375,568
 
 Generally,
no credit is granted to customers and advances are to be paid by the customers
before the broadcasts of the advertisements. In some cases of credits to be
granted, special approvals are to be obtained from authorized person. The
Group’s exposure to credit risks related to accounts receivable are disclosed in
Note 3(c).
 
 The
movement of the allowance for doubtful accounts receivable for the years ended
December 31, 2007, 2008 and 2009 are as below:
 
 YearendedDecember31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBBeginning
      of the period
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,319,808
                    )Additions
                    
                    
                    -
                    
                    
                    
                    (4,319,808
                    )
                    
                    
                    (4,035,920
                    )Recoveries
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,848,090End
      of the period
                    
                    
                    -
                    
                    
                    
                    (4,319,808
                    )
                    
                    
                    (6,507,638
                    )
  F-18
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  6
                Prepaid
      Expenses and Other Current Assets
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBBidding
      and agency deposits to CCTV
                    
                    
                    9,500,000
                    
                    
                    
                    16,005,000
                    
                    
                    
                    37,064,000Deferred
      business tax and related surcharges
                    
                    
                    9,483,741
                    
                    
                    
                    41,315,128
                    
                    
                    
                    10,733,566Prepayment
      for  advertising time slots
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,623,096Capitalized
      project cost
                    
                    
                    2,723,150
                    
                    
                    
                    7,457,063
                    
                    
                    
                    2,701,267Advances
      to staff
                    
                    
                    81,930
                    
                    
                    
                    1,687,876
                    
                    
                    
                    3,760,306Others
                    
                    
                    100,159
                    
                    
                    
                    1,836,456
                    
                    
                    
                    3,678,517Total
                    
                    
                    21,888,980
                    
                    
                    
                    68,301,523
                    
                    
                    
                    66,560,752
 
 7
                Property
      and Equipment, Net
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBComputers
      and electronic equipment
                    
                    
                    147,214
                    
                    
                    
                    709,685
                    
                    
                    
                    1,175,560Office
      equipment
                    
                    
                    123,567
                    
                    
                    
                    173,556
                    
                    
                    
                    778,459Office
      furniture
                    
                    
                    19,451
                    
                    
                    
                    99,658
                    
                    
                    
                    306,230Vehicles
                    
                    
                    2,163,706
                    
                    
                    
                    4,714,560
                    
                    
                    
                    4,714,560Office
      property (Note 17(b))
                    
                    
                    -
                    
                    
                    
                    52,610,000
                    
                    
                    
                    52,610,000Total
                    
                    
                    2,453,938
                    
                    
                    
                    58,307,459
                    
                    
                    
                    59,584,809Less:
      accumulated depreciation
                    
                    
                    (894
                    )
                    
                    
                    (1,046,251
                    )
                    
                    
                    (4,120,408
                    )Net
      book value
                    
                    
                    2,453,044
                    
                    
                    
                    57,261,208
                    
                    
                    
                    55,464,401
 
 The
depreciation expenses for property and equipment were RMB 1,202,418,
RMB 1,045,357 and RMB 3,074,157 for the years ended December 31, 2007,
2008 and 2009, respectively.
 
 On
December 30, 2007, in connection with the Reorganization, Mass Media sold most
of its property and equipment to Universal at their net book values. Certain
equipment, with net book values of RMB 349,202 (cost of RMB 1,285,539 and
accumulated depreciation of RMB 936,337) was retained by Mass Media and
distributed to the shareholders as part of the Reorganization (see Note
1(b)).
 
 8
                Accrued
      Expenses and Other Current
Liabilities
 
 Accrued
expenses and other current liabilities consist of the following:
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBDeposits
      from customers
                    
                    
                    2,700,000
                    
                    
                    
                    5,638,510
                    
                    
                    
                    4,821,658Accrued
      professional fees
                    
                    
                    1,500,000
                    
                    
                    
                    2,928,152
                    
                    
                    
                    5,214,163Accrued
      production fees
                    
                    
                    181,930
                    
                    
                    
                    1,686,583
                    
                    
                    
                    1,845,577Deferred
      income tax liabilities
                    
                    
                    -
                    
                    
                    
                    2,263,171
                    
                    
                    
                    2,955,794Accrued
      payroll
                    
                    
                    372,224
                    
                    
                    
                    424,642
                    
                    
                    
                    1,954,314Others
                    
                    
                    -
                    
                    
                    
                    824,032
                    
                    
                    
                    984,543Total
                    
                    
                    4,754,154
                    
                    
                    
                    13,765,090
                    
                    
                    
                    17,776,049
  F-19
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  9
                Taxation
 
 (a)
                Taxes
      payable
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBIncome
      tax payable
                    
                    
                    -
                    
                    
                    
                    9,175,580
                    
                    
                    
                    6,609,723Business
      tax and related surcharges payable
                    
                    
                    14,353,264
                    
                    
                    
                    42,623,211
                    
                    
                    
                    13,568,058Other
      taxes payable
                    
                    
                    80,965
                    
                    
                    
                    159,886
                    
                    
                    
                    342,118Total
                    
                    
                    14,434,229
                    
                    
                    
                    51,958,677
                    
                    
                    
                    20,519,899
 
 (b)
                Income
      tax
 
 The
Company was incorporated in Cayman Islands and only has operations in the
PRC.
 
 Components
of income before income taxes are as follows:
 
 YearendedDecember31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBIncome
      before taxes
                    
                    
                    218,928,890
                    
                    
                    
                    130,552,282
                    
                    
                    
                    100,793,601Loss
      from non PRC operation
                    
                    
                    -
                    
                    
                    
                    5,352,609
                    
                    
                    
                    12,888,391Income
      from the PRC operation
                    
                    
                    218,928,890
                    
                    
                    
                    135,904,891
                    
                    
                    
                    113,681,992Income
      tax expenses applicable to the PRC operation
                    
                    
                    10,618,863
                    
                    
                    
                    20,138,650
                    
                    
                    
                    14,327,931Effective
      tax rate for PRC operations
                    
                    
                    4.9
                    %
                    
                    
                    14.8
                    %
                    
                    
                    12.6
                    %
 
 Cayman
Islands and BVI
 
 Under the
current laws of the Cayman Islands and BVI, the Company is not subject to tax on
income or capital gain. Additionally, upon payments of dividends by the Company
to its shareholders, no Cayman Islands or BVI withholding tax will be
imposed.
 
 China
 
 Prior to
January 1, 2008, pursuant to the Income Tax Law of the People’s Republic of
China concerning Foreign Investment Enterprises and Foreign Enterprises and
local income tax laws (“the previous income tax laws and rules”), the income
taxes were generally assessed at a statutory rate of 33%, which comprises 30%
national income tax and 3% local income tax. Under the previous income tax laws
and rules, an enterprise established in the Shenzhen Special Economic Zone
(“SZSEZ”) was entitled to a preferential tax rate of 15% for the income
generated from operations within SZSEZ and the local income tax was exempted for
both the operations within and outside of SZSEZ. In addition, such enterprises
were further entitled to a one-year income tax exemption followed by two years
of a 50% tax reduction when certain criteria could be met, commencing from the
first cumulative profit-making year net of losses carried forward. Mass Media
and Universal were both established in SZSEZ. The three-year tax holiday ended
on December 31, 2006 for Mass Media and ended on December 31, 2009 for
Universal. For the year ended December 31, 2007, operations of Mass Media
in SZSEZ were subject to the preferential tax rate of 15%, and Universal was
exempted from income taxes.
  F-20
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  On
January 1, 2008, the New EIT Law, which unifies the statutory income tax
rate of enterprises in China to 25%, became effective. In accordance with the
New EIT Law, there is a transition period for enterprises, which currently
receive preferential tax treatments granted by relevant tax authorities.
Enterprises that are subject to an enterprise income tax rate lower than 25% may
continue to enjoy the lower rate and gradually transit to the new tax rate
within five years after the effective date of the New EIT Law. During the
transition period, the preferential tax rates for operations within SZSEZ are
18%, 20%, 22%, 24% and 25% for the years ending December 31, 2008, 2009,
2010, 2011 and 2012, respectively. In addition, the tax holiday grandfathering
provision allows enterprises to continue to enjoy their unexpired tax holiday
under the previous income tax laws and rules. Universal continues to enjoy a 50%
tax reduction from the preferential tax rate if certain criteria can be met for
the years ended December 31, 2008 and 2009. Thereafter, Universal’s tax
rate will transit from the preferential rates to the new uniform tax rate of 25%
from 2010 to 2012. Accordingly, the tax rates for Universal’s operations within
SZSEZ are 9% and 10% for the years ended December 31, 2008 and 2009,
respectively. The tax rates for Universal’s operations outside of SZSEZ are
12.5% for the years ended December 31, 2008 and 2009.
 
 Under the
New EIT Law, dividends, interests, rent, royalties and gains on transfers of
property payable by a foreign-invested enterprise in the PRC to its foreign
investor who is a non-resident enterprise will be subject to a 10% withholding
tax, unless such non-resident enterprise’s jurisdiction of incorporation has a
tax treaty with the PRC that provides for a reduced rate of withholding tax. The
British Virgin Islands, where UIAL is incorporated, does not have such tax
treaty with the PRC. This new 10% withholding tax imposed on the dividend income
received from the Group’s PRC subsidiary reduced the Group’s net income. On
February 22, 2008, the Ministry of Finance and State Tax Bureau jointly
issued a circular which stated that for foreign invested enterprises, all
profits accumulated up to December 31, 2007 are exempted from withholding
tax when they are distributed to foreign investors. Accordingly, the Group
accrued 10% withholding tax, amounted to RMB 5,398,047 and RMB 2,274,872
respectively, on net income attributable to UIAL, the foreign investor of
Universal, which arose in 2008 and 2009 that will not be indefinitely
reinvested. Unrecognized deferred tax liability related to undistributed
earnings considered to be indefinitely reinvested was RMB 3,491,264 and RMB
9,116,114 as of December 31, 2008 and December 31, 2009, respectively. No
withholding taxes were accrued for the profits accumulated up to
December 31, 2007. There were no material deferred tax assets or
liabilities other than those related to undistributed earnings that will not be
indefinitely reinvested.
  Reconciliation
of the difference between statutory tax rate and the effective tax rate for the
PRC operation for the periods presented:
 
 YearendedDecember31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBStatutory
      income tax rate
                    
                    
                    33.0
                    %
                    
                    
                    25.0
                    %
                    
                    
                    25.0
                    %Effect
      of tax holiday
                    
                    
                    -26.6
                    %
                    
                    
                    -12.5
                    %
                    
                    
                    -12.5
                    %Effect
      of preferential tax rate for operations in SZSEZ
                    
                    
                    -1.9
                    %
                    
                    
                    -1.7
                    %
                    
                    
                    -1.3
                    %Effect
      of withholding income tax in relation to net income attributable to
      foreign investor of the PRC operation
                    
                    
                    -
                    
                    
                    
                    4.0
                    %
                    
                    
                    2.0
                    %Difference
      between enacted tax rate and current tax rate
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -0.8
                    %Permanent
      book-tax differences
                    
                    
                    0.4
                    %
                    
                    
                    -
                    
                    
                    
                    0.2
                    %Effective
      tax rate
                    
                    
                    4.9
                    %
                    
                    
                    14.8
                    %
                    
                    
                    12.6
                    %
  F-21
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  The
aggregate amount and per share effect of the benefit of the tax holiday are as
follows:
  YearendedDecember31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBThe
      aggregate dollar effect
                    
                    
                    58,181,558
                    
                    
                    
                    16,988,111
                    
                    
                    
                    14,210,249Per
      share effect, basic and diluted
                    
                    
                    0.12
                    
                    
                    
                    0.03
                    
                    
                    
                    0.02
 
 (c)
                Business
      tax (“BT”) and related surcharges
 
 The Group
is subject to BT and related surcharges levied on advertising services in China,
which are approximately 8% of certain net or value added advertising revenues.
Deferred business tax and related surcharges assets are recognized when the tax
invoice has not been received from the media suppliers for the media fees
accrued. Upon receipt of the tax invoice from the media suppliers, the deferred
business tax and related surcharges assets are offset against the business tax
and related surcharges payable.
  Hong
Kong
  No
provision has been made for Hong Kong profits tax as the Group did not earn any
taxable income subject to Hong Kong profits tax for the periods
presented.
  F-22
 
 CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  10
                Earnings
      Per Share
 
 The
following table sets forth the computation of basic and diluted earnings per
share as retroactively adjusted for all periods presented for the 1 for 10 stock
dividends declared by the Board on May 22, 2010:
 
 YearendedDecember31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBNumerator:Net
      income
                    
                    
                    208,310,027
                    
                    
                    
                    110,413,632
                    
                    
                    
                    86,465,670Net
      income allocated to participating Series A convertible preferred
      shares
                    
                    
                    (36,495,917
                    )
                    
                    
                    (9,751,329
                    )
                    
                    
                    -Net
      income available to ordinary shareholders
                    
                    
                    171,814,110
                    
                    
                    
                    100,662,303
                    
                    
                    
                    86,465,670Numerator
      for computing earnings per ordinary share, basic and
    diluted
                    
                    
                    171,814,110
                    
                    
                    
                    100,662,303
                    
                    
                    
                    86,465,670Numerator
      for computing earnings per preferred share, basic and
    diluted
                    
                    
                    36,495,917
                    
                    
                    
                    9,751,329
                    
                    
                    
                    -Denominator:Weighted
      average shares outstanding used in computing basic earnings per ordinary
      share
                    
                    
                    453,640,000
                    
                    
                    
                    589,764,324
                    
                    
                    
                    788,012,500Effect
      of dilutive share options for ordinary shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,848,306Weighted
      average shares used in computing diluted earnings per ordinary
      share
                    
                    
                    453,640,000
                    
                    
                    
                    589,764,324
                    
                    
                    
                    789,860,806Weighted
      average preferred shares outstanding used in computing basic and diluted
      earnings per preferred share
                    
                    
                    96,360,000
                    
                    
                    
                    57,131,476
                    
                    
                    
                    -Weighted
      average shares used in computing basic earnings per ADS
                    
                    
                    15,121,333
                    
                    
                    
                    19,658,811
                    
                    
                    
                    26,267,083Effect
      of dilutive share options for ADS
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    61,611Weighted
      average shares used in computing diluted earnings per ADS
                    
                    
                    15,121,333
                    
                    
                    
                    19,658,811
                    
                    
                    
                    26,328,694Earnings
      per ordinary share, basic and diluted
                    
                    
                    0.38
                    
                    
                    
                    0.17
                    
                    
                    
                    0.11Earnings
      per preferred share, basic and diluted
                    
                    
                    0.38
                    
                    
                    
                    0.17
                    
                    
                    
                    -Earnings
      per ADS, basic
                    
                    
                    11.36
                    
                    
                    
                    5.12
                    
                    
                    
                    3.29Earnings
      per ADS, diluted
                    
                    
                    11.36
                    
                    
                    
                    5.12
                    
                    
                    
                    3.28
 
 For the
years ended December 31, 2007, 2008 and 2009, options to purchase ordinary
shares that were anti-dilutive and excluded from the calculation of diluted net
income per share were approximately nil, 40,637,000 and nil,
respectively.
  F-23
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  11
                Ordinary
      Shares and Series A Convertible Preferred Shares (“Preferred
      Shares”)
 
 The
Company was authorized to issue 900,000,000 ordinary shares and 100,000,000
preferred shares, at par value of US$0.001 per share. On November 13,
2007, the Group issued 1,000 ordinary shares to Mr. Shengcheng Wang, for
cash consideration of US$0.001 (adjusted for the effect of the share split on
July 18, 2008).
 
 On
March 6, 2008, the Company issued 99,000 ordinary shares for cash
consideration of US$99 (adjusted for the effect of the share split on
July 18, 2008) to companies controlled by Mr. Shengcheng Wang, the
Company’s chairman and chief executive officer. Such issuance was accounted for
in a manner similar to a share split.
 
 On
June 16, 2008, the Company issued 412,300,000 ordinary shares for cash
consideration of US$412 (adjusted for the effect of the share split on
July 18, 2008). After the issuance, the issued and outstanding ordinary
shares of the Company have been increased to 412,400,000 (adjusted for the
effect of the share split on July 18, 2008). At the same time, the Company
issued 87,600,000 Preferred Shares (adjusted for the effect of the share split
on July 18, 2008) to the existing shareholders controlled by
Mr. Shengcheng Wang for cash consideration of US$88. Both issuances were
treated as stock splits.
 
 Subsequent
to the issuance of the shares, on June 24, 2008, the existing shareholders
controlled by Mr. Shengcheng Wang entered into investment agreements with a
group of third parties and sold the Preferred Shares at US$60
million.
 
 When the
existing shareholders sold the Preferred Shares, they granted additional rights
to the group of third parties with no recourse back to the Company. None of the
proceeds from the sale proceeds were received by the Company.
 
 The
Preferred Shares have been treated as a stock split because the purpose of the
Preferred Shares issuance was to obtain wider distribution and to improve
marketability of the Company’s equity, and that the issuance did not grant the
existing shareholders controlled by Mr. Shengcheng Wang any additional
ownership rights to the residual net assets of the Company they did not have
previously.
 
 On
July 18, 2008, the Company issued 999 additional shares for every
outstanding ordinary and Preferred Share. The share issuances were accounted for
as a 1,000-for-one share split.
 
 Accordingly,
all shares and per share amounts in the accompanying combined financial
statements have been revised on a retroactive basis to reflect the effect of the
issuances on March 6, 2008, June 16, 2008, and July 18,
2008.
 
 On
July 23, 2008, the existing shareholders controlled by Mr. Shengcheng
Wang entered into an agreement to repurchase all the Preferred Shares for USD
60 million plus one month of interest at an annual rate of 8.0%. None of
the repurchase cost was borne by the Company. The existing shareholders
controlled by Mr. Shengcheng Wang agreed to convert all the existing
Preferred Shares into ordinary shares upon completion of the Company’s
IPO.
 
 On
August 7, 2008, the Company completed its IPO where 7,212,500 ADS,
representing 216,375,000 ordinary shares, were sold at a price of US$6.80 per
ADS (or US$0.23 per ordinary share). Upon completion of IPO, all outstanding
Preferred Shares were automatically converted into 87,600,000 ordinary
shares.
 
 On
December 10, 2009, at the Company’s annual general meeting of shareholders,
shareholders approved the increase of the Company’s authorized share capital to
US$3,000,000 divided into 3,000,000,000 shares of a par value of US$0.001
each.
  F-24
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  12
                Dividends
 
 YearendedDecember31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBOrdinary
      dividend declared and paidOrdinary
      dividend declared and paid attributable to earnings from the
      period
                    
                    
                    88,355,415
                    
                    
                    
                    -
                    
                    
                    
                    -Ordinary
      dividend declared and paid attributable to earnings from the previous
      periods
                    
                    
                    89,035,313
                    
                    
                    
                    29,194,814
                    
                    
                    
                    -Subtotal
                    
                    
                    177,390,728
                    
                    
                    
                    29,194,814
                    
                    
                    
                    -Ordinary
      dividend declared but unpaidOrdinary
      dividend declared but unpaid at December 31, 2008 (paid in 2009)
      attributable to earnings from the period
                    
                    
                    -
                    
                    
                    
                    28,213,880
                    
                    
                    
                    -Ordinary
      dividend declared but unpaid at December 31, 2008 (paid in 2009)
      attributable to earnings from the previous periods
                    
                    
                    -
                    
                    
                    
                    68,121,235
                    
                    
                    
                    -Subtotal
                    
                    
                    -
                    
                    
                    
                    96,335,115
                    
                    
                    
                    -Total
      cash dividend declared during the period
                    
                    
                    177,390,728
                    
                    
                    
                    125,529,929
                    
                    
                    
                    -Distribution
      of Mass Media’s net assets to shareholder
                    
                    
                    41,485,618
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    218,876,346
                    
                    
                    
                    125,529,929
                    
                    
                    
                    -Dividends
      declared per ordinary share
                    
                    
                    0.40
                    
                    
                    
                    0.19
                    
                    
                    
                    -
 
 13
                Mainland
      China Contribution Plan and Profit
Appropriation
 
 (a)
                China
      contribution plan
 
 Full-time
employees of the Group are entitled to staff welfare benefits including medical
care, welfare subsidies, unemployment insurance and pension benefits through a
PRC government mandated multi-employer defined contribution plan. The Group is
required to make contributions to the Chinese government based on certain
percentages of the employees’ salaries. The Chinese government is responsible
for the medical benefits and the pension liability to be paid to these employees
and the Group’s obligations are limited to the amounts contributed. The total
contribution for such employee benefits were not material for the periods
presented.
 
 (b)
                Statutory
      reserves
 
 Universal
and Mass Media are required to make appropriations to reserves, comprising the
statutory surplus reserve and discretionary surplus reserve, based on after-tax
net income determined in accordance with generally accepted accounting
principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus
reserve should be at least 10% of the after-tax net income determined in
accordance with the legal requirements in the PRC until the reserve is equal to
50% of the entities’ registered capital. Appropriation to the discretionary
surplus reserve is made at the discretion of the Board of Directors. Statutory
surplus reserve and discretionary surplus reserve are established for the
purpose of offsetting accumulated losses, enlarging productions or increasing
share capital. The Group had appropriated RMB 18,450,237, RMB 6,549,763 and
nil to the statutory surplus reserve for the years ended December 31, 2007,
2008 and 2009 following the first year of operation for Universal in accordance
with the PRC GAAP.
  F-25
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  14
                Share-based
      Compensation
 
 On July
1, 2008, the Company adopted an equity incentive plan (the “2008 Equity
Incentive Plan”). The 2008 Equity Incentive Plan provided for the grant of
options, share appreciation rights, restricted shares, restricted share units,
and other share-based awards. The maximum aggregate number of ordinary shares
that may be issued under the plan is 50,000,000, plus an annual increase in the
number of ordinary shares available for issuance equal to 2% of the outstanding
ordinary shares on the first day of a fiscal year or such lesser amount as
determined by the board of directors. The maximum term of any issued stock right
is 10 years from the grant date. In 2008, the Company granted 42,891,000 options
to its directors, senior executive officers and employees to acquire ordinary
shares of the Company. These options have an exercise price of US$0.685 per
share, vesting period of 4 years and a contractual life of 10 years from the
date of grant. On December 31, 2009, the Company granted 1,516,750 options to
its directors, senior executive officers and employees to acquire ordinary
shares of the Company. These options have an exercise price of US$0.0726 per
share, vesting period of 6 months and a contractual life of 10 years from the
date of grant.
 
 The
options granted to each of the sales personnel are divided into category A and
category B. 50% of the category A options will vest over a four-year period,
with one-fourth of the options vesting at each anniversary of the vesting
commencement date. The remaining 50% of the category A options will vest over a
four-year period based on the employee’s performance, with one-fourth of the
options allocated to each year. This portion of the category A options only
vests in proportion to such employee’s actual annual sales performance as a
percentage of his or her annual sales target, but only if such percentage equals
or exceeds 70%. If such employee’s sales performance is lower than 70% of his or
her annual sales target, his or her performance-based options in category A for
that year will automatically expire. The category B options will also vest over
a four-year period in proportion to an employee’s sales performance as a
percentage of his or her annual sales target, but only to the extent that such
percentage exceeds 100%. The category B options that remain unvested each year
will automatically expire.
 
 Of all
the options granted to each person other than the sales personnel, 70% will vest
over a four-year period, with one-fourth of the options vesting at each
anniversary of the vesting commencement date. The remaining 30% of the options
will vest over a four-year period subject to the company’s performance, with
one-fourth of the options allocated to each year. This portion of the options
will vest in proportion to the Group’s actual revenues as a percentage of the
Group’s annual target, but only if such percentage equals or exceeds 70%. If the
Group’s revenues are lower than 70% of the annual target, the performance-based
options for that year will automatically expire.
 
 For those
awards with performance conditions, an evaluation is made each quarter as to the
likelihood of performance criteria being met. Compensation expenses are then
adjusted to reflect the number of shares expected to vest to date.
 
 On
February 21, 2009, the Company’s board of directors resolved to offer to the
holders of stock options the opportunity to modify the terms of their existing
options through (i) resetting the exercise price of each option to US$0.0726 per
ordinary share, which equals approximately one-thirtieth (owing to the 30 to 1
ordinary share to ADS ratio) of the average closing trading price per ADS of the
Company reported on NYSE Arca in the last 60 trading days immediately prior to
February 13, 2009; and (ii) reducing the number of each award of options by 50%.
No other changes were made to the terms and conditions of the stock options. All
holders of stock options accepted the offer by February 27, 2009. As a result of
this modification, a total of RMB 1.8 million (US$0.3 million) additional
share-based compensation expense will be amortized over the remaining vesting
period of 3 years and 4 months since March 1, 2009.
  F-26
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  No
options were granted in 2007 and the option activities for the years ended
December 31, 2008 and 2009 are as follows:
 
 Number of
                                  options
                                
                                
                                Weighted
                                  average
                                  exercise price
                                
                                
                                Weighted
                                  average
                                  remaining
                                  contractual
                                  term
                                
                                
                                Aggregate
                                  intrinsic
                                  valueBalance
      at January 1, 2008
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Granted
      on July 1, 2008
                                
                                
                                42,891,000
                                
                                
                                US$
                                0.685
                                
                                
                                6.25
      yearsForfeited
                                
                                
                                (2,254,000
                                )
                                
                                US$
                                0.685
                                
                                
                                6.25
      yearsBalance
      at December 31, 2008
                                
                                
                                40,637,000
                                
                                
                                US$
                                0.685
                                
                                
                                5.75
      years
                                
                                
                                
                                —Modifications
                                
                                
                                (25,813,625
                                )Granted
      on December 31, 2009
                                
                                
                                1,516,750
                                
                                
                                US$
                                0.0726
                                
                                
                                6.25
      yearsForfeited
                                
                                
                                (912,916
                                )
                                
                                US$
                                0.0726
                                
                                
                                5.75
      yearsBalance
      at December 31, 2009
                                
                                
                                15,427,209
                                
                                
                                US$
                                0.0726
                                
                                
                                4.75
      years
                                
                                
                                RMB
                                1,580,100Vested
      and expected to vest at December 31, 2009
                                
                                
                                14,882,362
                                
                                
                                US$
                                0.0726
                                
                                
                                4.75
      years
                                
                                
                                RMB
                                1,524,293Exercisable
      at December 31, 2009
                                
                                
                                4,401,584
                                
                                
                                US$
                                0.0726
                                
                                
                                4.75
      years
                                
                                
                                RMB
                                450,825
 
 There was
no option exercisable at December 31, 2008 because the earliest vesting
date for the option granted is July 1, 2009.
 
 The
aggregate intrinsic value of options outstanding, options vested and expected to
vest, and option exercisable as of December 31, 2008 was all nil because the
market value of the Company’s shares as of the last trading day in 2008 was
below the exercise price of the options outstanding.
 
 Valuation
of Stock Options
 
 The fair
value of options granted under the 2008 Equity Incentive Plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
 
 2008
                    
                    
                    2009Expected
      term (in years)
                    
                    
                    6.25
                    
                    
                    
                    4.75Expected
      volatility
                    
                    
                    50
                    %
                    
                    
                    60
                    %Risk-free
      interest rate
                    
                    
                    3.49
                    %
                    
                    
                    2.53
                    %Expected
      dividend yield
                    
                    
                    6
                    %
                    
                    
                    6.73
                    %
 
 The
expected term represents the weighted average period of time that share-based
awards granted are expected to be outstanding.
 
 The
expected volatility of 50% in 2008 was based on the average volatility of
several comparable U.S. listed companies in the advertising industry. Since the
Company did not have a trading history at the time the options were issued, the
Company estimated the potential volatility of its ordinary share price by
referring to the average volatility of these comparable companies because
management believes that the average volatility of such companies was a
reasonable benchmark to use in estimating the expected volatility of the
Company’s ordinary shares. The expected volatility of 60% in 2009 was estimated
based on historical volatility.
 
 Risk-free
interest rate is based on US Treasury zero-coupon issues with maturity terms
similar to the expected term on the share-based awards. The Company anticipates
to distribute 20-30% of its annual earnings as cash dividends in the foreseeable
future.
  F-27
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  Compensation
Costs
 
 For the
years ended December 31, 2008 and 2009, the Company recognized share-based
compensation expenses in the Company’s combined statement of operations for the
share options granted to directors and employees in accordance with ASC 718 and
for the share options granted to consultants in accordance with ASC 505-50. The
total compensation costs have been recognized on a straight line basis over the
requisite service period for each separately vesting portion of the
award.
 
 YearendedDecember31,2008
                    
                    
                    2009RMB
                    
                    
                    RMBCost
      of revenues
                    
                    
                    33,757
                    
                    
                    
                    432,876Sales
      and marketing
                    
                    
                    221,166
                    
                    
                    
                    516,512General
      and administrative
                    
                    
                    1,444,506
                    
                    
                    
                    1,190,348Total
                    
                    
                    1,699,429
                    
                    
                    
                    2,139,736
 
 As of
December 31, 2009, there were RMB 2.3 million (December 31, 2008: RMB
4.4 million) of unrecognized compensation cost, adjusted for estimated
forfeitures, related to non-vested share-based awards granted to the Company’s
employees which will be recognized over a weighted-average period of
2.5 years (December 31, 2008: 3.5 years). When estimating forfeitures, the
Company considers voluntary termination behavior as well as analysis of actual
option forfeitures. Total unrecognized compensation cost may be adjusted for
future changes in estimated forfeitures.
 
 15
                Fair
      Value Measurements
 
 Effective
January 1, 2009, the Group adopted ASC 820. ASC 820 clarifies that fair
value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or a liability. As a basis for considering such assumptions,
ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs
used in the valuation methodologies in measuring fair value:
 
 Level
1—Inputs are defined as quoted prices (unadjusted) in active markets for
identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
 
 Level
2—Inputs are defined as inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or
indirectly.
 
 Level
3—Inputs are defined as unobservable inputs for the asset or
liability.
 
 The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. In
accordance with ASC 820, the Group measures its cash equivalents and investment
funds at fair value. The Group’s cash equivalents and investment funds are
classified within Level 2. This is because its cash equivalents and investment
funds are valued using the estimated value of cash equivalents and investment
funds when realized provided by the banks, discounted using estimated risk-free
interest rate.
  F-28
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  Assets
measured at fair value on a recurring basis are summarized below:
  Fair value measurement at reporting date usingDecember 31,
                            2009
                          
                          
                          Quoted
                            Prices in
                            Active
                            Markets for
                            Identical
                            Assets
                            (Level 1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs
                            (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level 3)AssetsCash
      equivalents:Time
      deposits
                          
                          
                          40,000,000
                          
                          
                          
                          —
                          
                          
                          
                          40,000,000
                          
                          
                          
                          —Short
      term investments:Investment
      funds
                          
                          
                          80,000,000
                          
                          
                          
                          —
                          
                          
                          
                          80,000,000
                          
                          
                          
                          —120,000,000
                          
                          
                          
                          —
                          
                          
                          
                          120,000,000
                          
                          
                          
                          —
 
 Fair value measurement at reporting date usingDecember 31,
                            2008
                          
                          
                          Quoted
                            Prices in
                            Active
                            Markets for
                            Identical
                            Assets
                            (Level 1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs
                            (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level 3)AssetsCash
      equivalents:Time
      deposits
                          
                          
                          438,349,411
                          
                          
                          
                          —
                          
                          
                          
                          438,349,411
                          
                          
                          
                          —Short
      term investments:Investment
      funds
                          
                          
                          500,000,000
                          
                          
                          
                          —
                          
                          
                          
                          500,000,000
                          
                          
                          
                          —938,349,411
                          
                          
                          
                          —
                          
                          
                          
                          938,349,411
                          
                          
                          
                          —
 
 Fair value measurement at reporting date
      usingDecember 31,
                            2007
                          
                          
                          Quoted
                            Prices in
                            Active
                            Markets for
                            Identical
                            Assets
                            (Level 1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs
                            (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level 3)AssetsShort
      term investments:Investment
      funds
                          
                          
                          220,000,000
                          
                          
                          
                          —
                          
                          
                          
                          220,000,000
                          
                          
                          
                          —Long
      term investments:Bank
      time deposits with original maturities more than one year
                          
                          
                          15,638,800
                          
                          
                          
                          —
                          
                          
                          
                          15,638,800
                          
                          
                          
                          —235,638,800
                          
                          
                          
                          —
                          
                          
                          
                          235,638,800
                          
                          
                          
                          —
  F-29
 
 CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  16
                Commitments
      and Contingencies
 
 (a)
                Operating
      lease commitments
 
 The Group
has entered into certain leasing arrangements relating to the lease of the
Group’s office premises. Rental expense under operating leases for the years
ended December 31, 2007, 2008 and 2009 were RMB 4,140,498, RMB 3,553,469
and RMB 104,004, respectively.
 
 As at
December 31, 2007, 2008 and 2009, the Group has commitments under
non-cancellable operating leases to make minimum payments as
follows:
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBWithin
      1 year
                    
                    
                    3,753,240
                    
                    
                    
                    70,264
                    
                    
                    
                    70,264After
      1 year but within 5 years
                    
                    
                    15,012,960
                    
                    
                    
                    -
                    
                    
                    
                    -After
      5 years
                    
                    
                    18,766,200
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    37,532,400
                    
                    
                    
                    70,264
                    
                    
                    
                    70,264
 
 (b)
                Operating
      fixed or guaranteed payment
contract
 
 i)
                To
      secure exclusive access to some advertising time slots on CCTV, the Group
      sometimes enters into guaranteed minimum payment contracts with CCTV.
      Under these agreements, the Group has committed to procure certain time
      slots at a guaranteed minimum amount. As of December 31, 2007 and
      2008, the Group had a guaranteed minimum payment of RMB 127,500,000 and
      RMB 136,000,000 to secure exclusive access to the 2008 and 2009 Chinese
      New Year Gala program with CCTV
respectively.
 ii)
                On
      June 20, 2008, Universal entered into a five-year contract to secure the
      exclusive advertising rights to CCTV’s Spanish and French Channels, under
      which Universal is committed to pay media fees of RMB 1.0 million in the
      second year and RMB 2.0 million in the third year of the contract. The
      media fees for the remaining term will be determined by CCTV and Universal
      in the future.
 
 iii)
                As
      of December 31, 2009, the Group had agreed to pay RMB 96.5 million to
      purchase the related advertising time slots of the CCTV-4 News at Periodic
      China News package in 2010. As at December 31, 2009, the Group had paid
      RMB 39.1 million of RMB 96.5 million to CCTV as security deposit and
      advances.
 
 (c)
                Capital
      and other commitments
 
 The Group
did not have any significant capital and other commitments as of December 31,
2007 and 2008.  The Group has the following significant capital and
other commitments as of December 31, 2009:
 
 RMBContracted
      and scheduled for delivery in 2010:Outstanding
      commitment to purchase of a vehicle
                    
                    
                    2,500,000
  F-30
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  (d)
                Legal
      contingencies
 
 On
April 16, 2008, Universal received a subpoena from the Shenzhen Municipal
Futian District Court (“Court”) to appear as the defendant of a commercial legal
dispute. Hasee Computer Co., Ltd. (“Hasee Computer”), a customer of Universal,
complained to the Court alleging that some of the advertisements it had
contracted with Universal to be broadcast in February 2008 were not broadcast.
Hasee Computer applied to the Court to cancel the one year advertising contracts
signed with Universal starting from March 15, 2008 and demanded
compensation of RMB 3,328,654. The Group believes that Universal did not violate
any terms of the corresponding advertising contracts, and no missing
advertisements were noted in the broadcasting report issued by a research
company authorized by CCTV. The Group continued to broadcast the advertisements
according to the contracts until June 30, 2008.
 
 Universal
filed countersuits against Hasee Computer for its unpaid advertising fees and
damages of approximately RMB 24.8 million under the contracts as of
June 30, 2008.
 
 The Group
has not recognized any revenue from this customer since April 1, 2008. As
of June 30, 2008, the outstanding receivable and deposit balance from Hasee
Computer was RMB 4.8 million and RMB 2.3 million, respectively. The
unsecured receivable balance of RMB 2.5 million was fully reserved as of
June 30, 2008.
 
 In June
2009, the Court ordered Hasee Computer to pay Universal approximately RMB 2.6
million for the unpaid advertising service fees and damages. The Court denied
all other claims raised by Hasee Computer and Universal. Universal has filed an
appeal to a higher court in Shenzhen. Upon filing the appeal, the Court’s
initial ruling was suspended.
  F-31
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  17
                  Related
      Party Transactions
 
 (a)
                  The
      table below sets forth the major related parties and their relationships
      with the Group:
  Related party’s name
                  
                  Relationship with the GroupMr. Zhiyi
      Wang
                  
                  Father
      of Mr. Shengcheng Wang, controlling shareholder of the Group before
      reorganizationShenzhen
      Guang Er Gao Zhi Co., Ltd. (“Shenzhen Guang Er Gao Zhi”)
                  
                  Shareholder
      of Mass Media (51%), under the control of Mr. Shengcheng Wang’s
      parentsBeijing
      Guang Er Gao Zhi Media Advertising Co., Ltd. (“Beijing Guang Er Gao
      Zhi”)
                  
                  Under
      the control of Mr. Shengcheng Wang’s parentsGuang
      Er Gao Zhi Film and Television Production Co., Ltd. (“Guang Er Gao Zhi
      FTP”)
                  
                  50%
      controlled by Beijing Guang Er Gao ZhiBeijing
      Mass Media Web Media Co., Ltd. (“Beijing Mass Media Web
      Media”)
                  
                  Under
      the control of Mr. Shengcheng Wang’s parentsMass
      Media International Advertising Co., Ltd. (Mass Media)
                  
                  Predecessor
      of Universal, which was excluded from the Group, effective from December
      30, 2007
 
 (b)   
       Details of significant related party
transactions are as follows during the periods presented:
 
 YearendedDecember31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBContinuing
      related party transactions:Lease
      office premise to Guang Er Gao Zhi FTP
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    493,440Discontinuing
      related party transactions:Lease
      office premise from Mr. Zhiyi Wang
                    
                    
                    1,977,497
                    
                    
                    
                    1,735,646
                    
                    
                    
                    -Lease
      office premise from Guang Er Gao Zhi FTP *
                    
                    
                    1,977,497
                    
                    
                    
                    1,704,824
                    
                    
                    
                    -Purchase
      of equipment and public service announcement film inventory from Mass
      Media (Note 1(b))
                    
                    
                    21,562,056
                    
                    
                    
                    -
                    
                    
                    
                    -Purchase of
      advertising time slots from Guang Er Gao Zhi FTP
                    
                    
                    -
                    
                    
                    
                    211,506,020
                    
                    
                    
                    296,559,920Provision
      of advertising services to Guang Er Gao Zhi FTP
                    
                    
                    -
                    
                    
                    
                    3,786,800
                    
                    
                    
                    -Film
      production and advertising services to Mass Media
                    
                    
                    -
                    
                    
                    
                    2,025,772
                    
                    
                    
                    -Purchase
      of remaining 30% equity interests of Universal held by Shenzhen Guang Er
      Gao Zhi
                    
                    
                    -
                    
                    
                    
                    15,000,000
                    
                    
                    
                    -Purchase
      of office property from Mr. Zhiyi Wang
                    
                    
                    -
                    
                    
                    
                    24,020,000
                    
                    
                    
                    -Purchase
      of office property from Guang Er Gao Zhi FTP
                    
                    
                    -
                    
                    
                    
                    26,980,000
                    
                    
                    
                    -
 *
                Guang
      Er Gao Zhi FTP allowed the Group to use its office space at no charge
      before December 31, 2007. The Group recorded the rent expense for the
      space used at market price and treated it as contribution from related
      party. The group recorded the related contribution of RMB 1,977,497 as
      additional paid-in capital for the year ended December 31,
      2007.
  F-32
 
 CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
 Prior to
February 15, 2008, UIAL’s shareholder and his immediate family used the
cash and investment accounts of UIAL to hold their personal cash and
investments. On February 15, 2008, such cash and investment amounts were
transferred to a company outside of the Group, which is controlled by
Mr. Shengcheng Wang’s immediate family. The cash and investment balances
were included in the combined balance sheets and accounted for as loan from
shareholder as of December 31, 2007. Since the cash and investment balances
were held on trust for the shareholder, no interest expense for the loan or
investment income for the cash and investment account were recognized by the
Group. The net movements of these balances were included in financing activities
in cash flow statements.
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBCash
      and cash equivalent
                    
                    
                    5,846
                    
                    
                    
                    -
                    
                    
                    
                    -Long-term
      investments
                    
                    
                    15,638,800
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    15,644,646
                    
                    
                    
                    -
                    
                    
                    
                    -Payable
      to Mr. Shengcheng Wang
                    
                    
                    15,644,646
                    
                    
                    
                    -
                    
                    
                    
                    -
 
 YearendedDecember31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBMovement
      of shareholder's cash and investment accounts / payable to shareholder,
      excluding effect of foreign currency exchange
                    
                    
                    766,967
                    
                    
                    
                    (15,043,236
                    )
                    
                    
                    -
 
 According
to the Reorganization agreement, starting from January 1, 2008, Mass Media
ceased all its advertising and film production operations. However, there were
three advertisement production and sponsorship service contracts outstanding to
be completed as at December 31, 2007, and the customers declined to sign
another set of agreements with Universal as those projects were close to
completion. In order to deliver uncompleted services, Mass Media engaged
Universal as a service contractor and paid the net income earned from these
service contracts, amounted to RMB 2,025,772, to Universal as advertisement
production and sponsorship service fees.
 
 In June
2008, UIAL agreed to complete the purchase of the remaining 30% equity interests
of Universal held by Shenzhen Guang Er Gao Zhi for RMB 15,000,000, which
represents the initial cost of investment made and capital contributed by
Shenzhen Guang Er Gao Zhi. This amount was recorded as a distribution to
shareholder.
 
 (c)       
   Purchase of advertising time slots from Guang Er Gao Zhi
FTP
 
 In
December 2007, the Group entered into a framework agreement with Guang Er Gao
Zhi FTP, an advertising agency that has secured advertising rights relating to a
number of television programs on CCTV. Guang Er Gao Zhi FTP is 50%-owned by CCTV
and 50%-owned by Beijing Guang Er Gao Zhi. Beijing Guang Er Gao Zhi is
controlled by the parents of Mr. Shengcheng Wang. Under the framework
agreement, the Group has obtained the exclusive right from Guang Er Gao Zhi FTP
to procure advertisers for the advertising time slots Guang Er Gao Zhi FTP has
secured from CCTV, effective from January 1, 2008.
 
 On
January 22, 2008, Universal entered into an exclusive advertising service
agency contract with Guang Er Gao Zhi FTP to secure exclusive access to some
advertising time slots that Guang Er Gao Zhi FTP obtained from CCTV Channel 2
and Channel 4 and paid a guarantee deposit of RMB 1,000,000 to Guang Er Gao Zhi
FTP. For the year ended December 31, 2008, the purchase of advertising time
slots on CCTV Channel 2 and Channel 4 from Guang Er Gao Zhi FTP was RMB
48,306,020 and RMB163,200,000, respectively. For the year ended December 31,
2009, the purchase of advertising time slots on CCTV Channel 2 and Channel 4
from Guang Er Gao Zhi FTP was RMB 66,559,920 and RMB 230,000,000,
respectively.
  F-33
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  (d)    
      Details of amount due from/to related
parties were as follows:
 
 December31,2007
                    
                    
                    2008
                    
                    
                    2009RMB
                    
                    
                    RMB
                    
                    
                    RMBDue
      from Guang Er Gao Zhi FTP
                    
                    
                    -
                    
                    
                    
                    1,000,000
                    
                    
                    
                    -Due
      to Mass Media (Note 1(b))
                    
                    
                    21,562,056
                    
                    
                    
                    18,878,848
                    
                    
                    
                    18,878,848Accounts
      payable to Guang Er Gao Zhi FTP
                    
                    
                    -
                    
                    
                    
                    194,544,236
                    
                    
                    
                    108,189,776Due
      to Mr. Zhiyi Wang
                    
                    
                    -
                    
                    
                    
                    23,505,994
                    
                    
                    
                    -Due
      to Mr. Shengcheng Wang
                    
                    
                    15,644,646
                    
                    
                    
                    280,716
                    
                    
                    
                    -Due
      to Shenzhen Guang Er Gao Zhi Co., Ltd.
                    
                    
                    -
                    
                    
                    
                    15,000,000
                    
                    
                    
                    -
 
 As part
of the Reorganization, Mass Media was no longer part of the Group, effective
from December 30, 2007. The remaining balance of prepaid rental expenses
had been distributed to the shareholders (see Note 1(b)).
 
 The
balances due from/to related parties are unsecured, non-interest bearing and
have no fixed terms of payment.
 
 18
                Subsequent
      Events
 
 (a)          Stock
Dividend
 
 On May
22, 2010, the Board declared the distribution of a dividend in form of issuing
new fully paid ordinary shares (“New Shares”) at the rate of one New Share for
every 10 existing issued ordinary shares held by any shareholder whose name
appear on the register of members of the Company at the close of business on
June 16, 2010. The New Shares so issued rank pari passu in all respect with the
existing issued ordinary shares. As a condition for the distribution of such
stock dividend, the New Shares will be registered in the Hong Kong Share
Registrar and traded on the Stock Exchange.
 
 The
number of options and exercise price of all options issued and outstanding has
been adjusted to prevent dilution caused by this stock dividend to holders of
stock options as approved by the Board of Directors.
 
 In
accordance with the guidance in ASC 260-10-55-12, “Earnings Per Share”, the
Group has retroactively adjusted basic and diluted earnings per share for all
periods presented to reflect this stock dividend.
 
 (b)         Litigation
with Hasee Computer (Note 16(d))
 
 In July
2010, Universal signed a settlement agreement with Hasee Computer where Hasee
Computer agreed to pay Universal the unpaid advertising fees and damages of
approximately RMB2.6 million and commit to place two months order of
advertisements in 2011. This settlement agreement was subsequently approved by
the Court on July 8, 2010. The Group reversed the related provision of doubtful
debt when it received the payment in August 2010.
  F-34
  CHINA
MASS MEDIA CORP.
  NOTES
TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
  (c) Litigations
with Charm Communications Inc. ("Charm").
 
 In March
2010, Universal initiated an action against a customer, Beijing Shidai Charm
Advertising Co., Ltd. (“Shidai Charm”), a subsidiary of Charm, for outstanding
advertising agent fees of RMB 3.6 million and interest of RMB 0.5 million based
on a supplemental agreement dated June 30, 2009. This case is pending as of
August 20, 2010.
 
 In May
2010, Beijing Yida Charm Advertising Co., Ltd. (“Yida Charm”), another
subsidiary of Charm, filed an action against Universal, alleging that Universal
failed to pay them certain promotion and advertising services fee in an amount
of RMB 3.6 million based on a supplemental agreement also dated June 30, 2009.
In June 2010, Universal received a court ruling in favour of Yida Charm’s claim.
Universal has filed an appeal to a higher court in Beijing and this appeal is
pending as of August 20, 2010.
 
 These two
cases with Charm are related. Based on the Company's assessments on status of
these litigations and discussions with its PRC counsel, the Company does not
expect that the litigations with Charm will have any significant financial
impact on the Company.
 
 19
                Additional
      Information—Condensed Financial Statements of the
  Company
 
 Rule
12-04(a) and 4-08(e)(3) of Regulation S-X 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 consolidated and unconsolidated subsidiaries together
exceed 25 percent of consolidated net assets as of the end of the most recently
completed fiscal year. As of December 31, 2009, RMB 75,109,995 of the
Group’s combined net assets was not available for distribution, representing
approximately 15.8% of the Group’s combined net asset value. There were no
undistributed retained earnings by the equity accounted investees in the
consolidated retained earnings.
  F-35