F-1/A 1 h03633a2fv1za.htm F-1/A fv1za
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As filed with the Securities and Exchange Commission on March 15, 2010.
Registration No. 333-164983
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Amendment No. 2 to Form F-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
Redgate Media Group
(Exact Name of Registrant as Specified in Its Charter)
 
Not Applicable
(Translation of Registrant’s name into English)
 
         
Cayman Islands
(State or Other Jurisdiction of
Incorporation or Organization)
  7310
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification No.)
 
8th Floor, CITIC Building, Tower B
19 Jianguomenwai Street, Chaoyang District
Beijing 100004, People’s Republic of China
(+86-10) 8526-3128
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 590-9200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
 
     
Chun Wei, Esq.
Sullivan & Cromwell LLP
28th Floor
Nine Queen’s Road Central
Hong Kong
(+852) 2826-8688
  S. Eugene Buttrill III, Esq.
DLA Piper Hong Kong
17/F Edinburgh Tower
The Landmark, 15 Queen’s Road Central
Hong Kong
(+852) 2103-0808
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o ­ ­
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o ­ ­
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o ­ ­
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
Title of Each Class of
    Aggregate
    Registration
Securities to be Registered     Offering Price(1)(2)     Fee
Common shares, par value $0.0025 per share(3)
    $50,600,000     $3,607.78(4)
             
(1) Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
 
(2) Includes common shares initially offered and sold outside the United States that may be resold from time to time in the United States, including common shares that may be purchased by the underwriters pursuant to an over-allotment option. The common shares are not being registered for the purpose of sales outside the United States.
 
(3) American depositary shares issuable upon deposit of the common shares registered hereby have been registered under a separate registration statement on Form F-6 filed with the Securities and Exchange Commission on February 24, 2010 (Registration No. 333-165039). Each American depositary share represents two common shares.
 
(4) Paid previously.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
Subject to Completion, Dated March 15, 2010
 
5,500,000 American Depositary Shares
 
(REDGATE MEDIA GROUP LOGO)
 
Redgate Media Group
 
Representing 11,000,000 Common Shares
 
$           per ADS
 
This is an initial public offering of American depositary shares, or ADSs, of Redgate Media Group. Redgate Media Group is offering 5,500,000 ADSs. Each ADS represents two common shares, par value $0.0025 per share.
 
We anticipate that the initial public offering price will be between $6 and $8 per ADS.
 
We have applied to include the ADSs on the NASDAQ Global Market under the symbol “RGM.”
 
Investing in the ADSs involves risk. See “Risk Factors” beginning on page 17.
 
                 
    Per ADS   Total
 
Price to the public
  $           $        
Underwriting discounts and commissions
  $       $    
Non-accountable expense allowance
  $       $    
Proceeds to Redgate Media Group (before expenses)
  $       $  
 
We have granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of 825,000 additional ADSs from us within 30 days following the date of this prospectus to cover over-allotments, if any.
 
We have also agreed to issue to Brean Murray, Carret & Co. LLC and I-Bankers Securities, Inc. warrants to purchase an aggregate number of our common shares equal to 5% of the common shares sold in this offering at an exercise price equal to 120% of the offering price of the common shares sold in this offering. See “Underwriting.”
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
 
 
Brean Murray, Carret & Co. I-Bankers Securities, Inc.
 
The date of this prospectus is                    , 2010


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You should rely only on the information contained in this prospectus. No dealer, salesperson or other person is authorized to give information that is not contained in this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of these securities.
 
Until           (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
 
 
 
 
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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in the prospectus. This summary does not contain all of the information you should consider before investing in our ADSs. You should read carefully the entire prospectus, including the “Risk Factors” section, and our audited consolidated financial statements and the accompanying notes contained elsewhere in this prospectus before making an investment decision. Unless the context otherwise requires, information contained in this prospectus assumes that the underwriters do not exercise their over-allotment option. Unless the context otherwise requires, references to “Redgate Media Group,” “we,” “us” or “our” include Redgate Media Group, its subsidiaries and, in the context of describing our business, operations and consolidated financial information, its consolidated variable interest entities, Redgate Media AD Co., Ltd., or Wanli, Beijing Redgate Online Information Technology Co., Ltd., or Redgate Online, and their subsidiaries. References to and statements regarding China and the People’s Republic of China, or the PRC, in this prospectus do not apply to Hong Kong, Macau or Taiwan. References to “RMB” or “Renminbi” are to the legal currency of China, references to “U.S. dollars” and “$” are to the legal currency of the United States, or “U.S.” and references to “HK$” or “Hong Kong dollars” are to the legal currency of Hong Kong. All references to the number and per share data of the common shares and the preference shares of our company take into account a 40-for-1 share split executed by us in February 2010, and do not take into account the forfeited common shares previously owned by Lawdobo Limited as the trustee for our employee share option scheme.
 
Business
 
We are a diversified media company in China. We primarily provide advertising and advertising agency services through an integrated cross-media platform that enables advertisers to conduct multiple-channel marketing campaigns targeting higher-income demographics. Our comprehensive portfolio of assets in television, radio, outdoor and Internet media reaches over 226 million people in key metropolitan markets, such as Beijing and Shanghai, as well as more than 160 other cities or counties throughout China. The wide coverage and diversity of our advertising channels allow leading international and domestic brand names flexibility and efficiency in executing effective marketing campaigns. Our cross-media platform is composed of: (i) our broadcast network, consisting of our television advertising platform and radio network; (ii) our outdoor advertising network, consisting of large-format billboards, light boxes and other displays at commercial and residential locations; and (iii) our Internet and interactive services. We own our light-box network in Shanghai and operate the remainder of our platform’s assets through contractual arrangements with the owners or operators of such assets. Our cross-media platform is enhanced by our ability to support clients’ advertising campaigns with our production studio, which is licensed to produce both radio and television content, and our public relations and event marketing services.
 
Our advertising clients are primarily international and domestic corporations. In the nine months ended September 30, 2009, our top four advertising client categories, based on revenues derived from these categories, were automotive, information technologies, electronics and consumer products. Our top advertising clients from each of those categories, measured by contribution to our revenues in the nine months ended September 30, 2009, included leading brand names in their respective industries, such as Mercedes-Benz, Volkswagen, SAP, Intel, Samsung and Häagen-Dazs.
 
We generate revenues primarily from: (i) selling advertising time slots for the television programs for which we act as the exclusive advertising agent; (ii) selling radio advertising time, radio programs and radio media planning and buying services; (iii) selling advertising space on our outdoor advertising network; (iv) sharing service charges generated through our Internet and interactive services; and (v) providing public relations and event marketing services.
 
Our radio business was formed through our acquisition of Beijing Daren Culture Media Co., Ltd., or Daren, in November 2005, while all other businesses were formed through acquisitions that took place in or after October 2007. See “Recent Acquisitions.” We have grown significantly since then. We generated total net revenues of $2.3 million, $4.2 million, $10.8 million, $5.1 million and $18.3 million in 2006, 2007, 2008, and the nine months ended September 30, 2008 and 2009, respectively. We incurred net losses attributable to common shareholders of $5.2 million, $3.3 million, $7.4 million, $5.9 million and $0.1 million in 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009, respectively. Assuming the completed acquisitions of Beijing Yanhuang


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Shengshi Advertising Company Limited, or Yanhuang, and Shanghai Dianguang Media Broadcasting Company, or Dianguang, and the pending acquisition of Shanghai Yarun Culture Communications Co., Ltd., or Yarun, had all been consummated on January 1, 2008, our total net revenues in 2008 and the nine months ended September 30, 2009 would have been $39.9 million and $29.8 million, respectively, and we would have had a net loss attributable to common shareholders of $3.4 million in 2008 and net income attributable to common shareholders of $1.3 million in the nine months ended September 30, 2009, in each case, on a pro forma basis.
 
Our Solutions
 
Our integrated cross-media platform provides a “one-stop shop” for advertisers to reach the rapidly growing higher-income demographics in China through multiple-channel marketing campaigns. Our comprehensive portfolio of media assets provides advertisers flexibility and efficiency in designing and executing effective marketing campaigns in one of the world’s largest and fastest-growing advertising markets. We expect our complementary media to continue to benefit from the key drivers in China’s advertising industry, including rapid economic growth and corresponding increases in disposable income, advertisers’ focus on increasing brand penetration and awareness, urbanization and increases in advertising spending.
 
Our television advertising platform operates in the largest television viewing nation in the world, where television is the most popular advertising media. Our radio network is a leading content provider in one of the largest radio markets in the world. Our outdoor advertising network allows advertisers access to a rapidly developing media in China which accounts for a larger percentage of total advertising spending in China compared to the United States and many countries in Asia and Europe. As more and more advertisers conduct marketing campaigns across multiple media, we believe that our client base of both international and domestic brand names will increasingly launch cross-media advertising campaigns in China aimed at the higher-income demographics reached by our platform, and that our platform offers flexibility and efficiency in allocating their advertising spending among different media.
 
Our Strengths
 
We believe that we have the following strengths, which, combined together, differentiate us from competitors and constitute a solid foundation for our future growth:
 
  •  integrated cross-media platform with extensive reach and higher-income demographic focus;
 
  •  attractive concessions and contractual arrangements;
 
  •  recognized capabilities with an established “blue chip” advertising client base;
 
  •  high-quality broadcast offering and content creation capabilities; and
 
  •  strong management team with extensive industry expertise and significant experience in business acquisition and integration.
 
Our Strategies
 
We have identified the following strategies in order to achieve our goal of becoming the leading cross-media platform in China:
 
  •  continued organic expansion of existing media assets;
 
  •  expansion of current clients’ use of our cross-media platform;
 
  •  broadening of in-house content production;
 
  •  further building our brand recognition; and
 
  •  opportunistic acquisitions to strengthen position in fragmented markets.


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Going Concern
 
The report of the independent registered public accounting firm of our company, included elsewhere in this prospectus, contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern, without regard to the proceeds from this offering. See “Risk Factors — Risks Relating to Our Business — If this offering is significantly delayed or terminated, and we otherwise fail to obtain sufficient financing from alternative resources, we may not have adequate liquidity to pay earn-out and other consideration in connection with our recent acquisitions when it becomes due, and our ability to continue as going concern would be materially and adversely affected as a result.” We expect to use a portion of the proceeds from this offering to fund earn-out payments and other consideration due in relation to our recent acquisitions. See “Use of Proceeds” and “Recent Acquisitions — Earn-Out and Other Consideration.”
 
Our Corporate Structure
 
We were incorporated on January 8, 2003 in the Cayman Islands. In October 2003, we acquired 100% equity interest in Media2U Company Limited, or Media2U, a Hong Kong company, whose principal assets were exclusive PRC licensing and advertising rights in respect of the Chinese editions of international lifestyle magazines. In April 2004, we subscribed for 40% equity interest in Winmax Resources Limited, or Winmax, a wholly-owned subsidiary of Media Chinese International Limited, or Media Chinese International, then known as Ming Pao Enterprise Corporation Limited, in exchange for cash and our entire equity interest in Media2U. Winmax held One Media Group Limited, or One Media Group, as a wholly-owned subsidiary, which subsequently conducted an initial public offering and listed its shares on the Hong Kong Stock Exchange. Subsequent to certain shareholding adjustments based on Media2U’s financial performance target and the dissolution of Winmax, we currently own approximately 11.07% interest in One Media Group through our subsidiary RGM Ventures Limited, or RGM Ventures. See Note 8 to our audited consolidated financial statements included elsewhere in this prospectus. Since November 2005, we have acquired a number of companies that form our various business divisions, including Dianguang, Beijing Meiyixinfeng Media Technology Co., Ltd., or Breeze, Shanghai Hongmen Advertising Co., Ltd., or Hongmen, Yanhuang, Shanghai FLOG Media Culture Company Ltd., or FLOG, and Beijing Alliance Online Advertising Company Ltd., or Alliance Online, and entered into agreements to acquire Yarun and Guangzhou Winclick Information and Technology Co., Ltd., or WinClick, pending completion.
 
Due to PRC regulatory restrictions on foreign investment in certain business activities in some of the industries in which our business divisions operate or are expected to operate after the completion of our acquisition of WinClick, including the production of radio programs and provision of mobile value-added advertising services, we are not permitted to have any equity interest or 100% ownership in companies engaging in such restricted business activities in China. See “Regulation — Regulations on Foreign Investment in the Media, Advertising and Telecommunications Industries.” Therefore, we have entered into contractual arrangements with Wanli and its shareholders, all of whom are PRC citizens, which enable us to exercise effective control over Wanli and, indirectly, its subsidiaries and to have an exclusive option to purchase all of the equity interest in Wanli. We have also entered into a set of similar contractual arrangements with the shareholders of Redgate Online, though Redgate Online currently does not own any operating assets. See “Our Corporate Structure — Contractual Arrangements.”


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The following diagram illustrates our main corporate and operating structure as of the date of this prospectus, assuming that the acquisitions of Yarun and WinClick had been completed prior to the date of this prospectus:
 
(DIAGRAM)
 
 
(1) Include loan agreements, equity interest pledge agreements and option deeds.
 
(2) These contracting shareholders are Mr. Yue Jin, husband of Ms. Ying Zhu, our co-founder, President, General Manager and director, and Ms. Fujun Chen, mother-in-law of Ms. Zhu. Both Mr. Jin and Ms. Chen are PRC citizens.
 
(3) Our acquisition of 100% equity interest in Yarun has not been consummated and, if consummated, is expected to be completed after this offering.
 
(4) We have agreed to purchase the remaining 49% equity interest in Yanhuang and expect to complete the purchase after this offering. Yanhuang operates a portion of its business through four wholly- or majority-owned subsidiaries.
 
(5) We have an option to acquire the remaining 89.29% equity interest in FLOG. We do not currently intend to exercise this call option. See “Recent Acquisitions — Outdoor Advertising Network — Our Acquisition of a Minority Stake in FLOG.”
 
(6) We have agreed to purchase the remaining 40% equity interest in Hongmen and expect to complete the purchase after this offering.
 
(7) Our acquisition of 100% equity interest in WinClick has not been consummated and, if consummated, is expected to be completed after this offering.


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Recent Acquisitions
 
We have built our business largely through a series of acquisitions. Set forth below is a summary of our acquisitions since October 2007.
 
                                             
            Remaining
           
            Consideration
           
        Consideration
  to be Paid
      Percent of
   
        Already
  (Excluding
      Equity
  Consideration
    Percent of
  Paid as of
  Call Option/
      Interest
  Required for
    Equity
  February 28,
  Purchase
      Subject
  Exercising
    Interest
  2010(1)
  Obligation)(2)
      to Call
  Call Option/
    Acquired
  (in Millions
  (in Millions
      Option/
  Satisfying
    or to be
  of RMB or $,
  of RMB or $,
  Status of
  Purchase
  Purchase
Entity
  Acquired  
as Indicated)
  as Indicated)  
Completion
  Obligation   Obligation
 
Broadcast Network and Internet and Interactive Services
                                           
Dianguang
    100 %     RMB6.8
plus $3.0
      $13.7 (3)   Completed on
July 21, 2008
    N/A       N/A  
Yarun
    100 %     nil       $21.9 (3)   Pending(4)     N/A       N/A  
WinClick
    100 %     nil       RMB1.0
plus $9.7
(3)   Pending(5)     N/A       N/A  
Breeze
    100 %     RMB0.5 plus
$2.4
      $0.2     Completed on
October 30, 2007
    N/A       N/A  
Outdoor Advertising Network
                                           
Yanhuang
    51 %     RMB51.4       RMB10.6     Completed on
September 25, 2008
    49% (6)     $15.2 (3)
Hongmen
    60 %     RMB23.5       RMB1.6     Completed on
May 15, 2008
    40% (7)     RMB1.6
plus $0.3
 
FLOG
    10.71 %     RMB5.0       nil     Completed on
January 29, 2008
    89.29% (8)     N/A  
Public Relations and Event Marketing
                                           
Alliance Online
    100 %     RMB0.6
plus $0.1
      $0.6 (3)   Completed on
February 15, 2008
    N/A       N/A  
 
 
(1) Includes initial consideration and paid earn-out and other consideration. Initial consideration is typically required to be paid in cash.
 
(2) We have the discretion to pay certain remaining consideration in our common shares or cash. See “Recent Acquisitions.”
 
(3) This represents the aggregate amount of remaining consideration currently estimated to be paid over a multi-year post-closing period and is payable by installments. See “Recent Acquisitions — Earn-Out and Other Consideration” for the basis and assumptions of such estimate.
 
(4) We expect to complete the acquisition of 100% equity interest in Yarun following this offering.
 
(5) We expect to complete the acquisition of 100% equity interest in WinClick following this offering.
 
(6) We have agreed to purchase the remaining 49% equity interest in Yanhuang, subject to the satisfaction of certain conditions. We expect to complete this purchase following this offering.
 
(7) We have agreed to purchase the remaining 40% equity interest in Hongmen, subject to the satisfaction of certain conditions. We expect to complete this purchase following this offering.
 
(8) We have a call option to purchase the remaining 89.29% equity interest in FLOG. We do not currently intend to exercise this call option.
 
General Information
 
Our principal executive office is located at 8th Floor, CITIC Building, Tower B, 19 Jianguomenwai Street, Chaoyang District, Beijing 100004, People’s Republic of China, and our telephone number is (+86-10) 8526-3128. Our website address is http://www.redgatemedia.com. The information on our website is not a part of this prospectus.


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THE OFFERING
 
Unless otherwise indicated, information in this prospectus assumes that the underwriters will not exercise their over-allotment option to purchase additional ADSs. See “Underwriting” beginning on page 173.
 
Price per ADS We estimate that the initial public offering price will be between $6 and $8 per ADS.
 
ADSs Offered 5,500,000 ADSs.
 
ADSs Outstanding Immediately after this Offering 5,500,000 ADSs (or 6,325,000 ADSs if the underwriters exercise their over-allotment option in full).
 
Common Shares Outstanding Immediately after this Offering 28,725,943 shares (or 30,375,943 shares if the underwriters exercise their over-allotment option in full).
 
Over-Allotment Option We have granted the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 825,000 additional ADSs from us at the initial public offering price, less underwriting discounts and commissions and the non-accountable expense allowance, to cover over-allotments, if any.
 
The ADSs Each ADS represents two common shares. The ADSs may be evidenced by American depositary receipts, or ADRs.
 
•  The depositary will be the holder of the common shares underlying your ADSs and you will have rights as provided in the deposit agreement.
 
•  Although we do not expect to pay dividends in the near future, in the event we declare dividends on our common shares, the depositary will pay you the cash dividends and other distributions it receives on our common shares, after deducting its fees and expenses.
 
•  You may turn in your ADSs to the depositary in exchange for common shares underlying your ADSs. The depositary will charge you fees for such exchanges.
 
•  We may amend or terminate the deposit agreement without your consent. If an amendment becomes effective and you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.
 
You should read carefully the section in this prospectus entitled “Description of American Depositary Shares” to better understand the terms of the ADSs. You should also read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.
 
Use of Proceeds We estimate that we will receive net proceeds of approximately $29.5 million (or $34.9 million if the underwriters exercise their over-allotment option in full), assuming an initial public offering price of $7 per ADS, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, from this offering, after deducting underwriting discounts and commissions, the non-accountable expense allowance and estimated


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offering expenses payable by us. We intend to use our net proceeds from this offering for the following purposes:
 
•  approximately $22.3 million to fund future earn-out payments and other consideration due in relation to our recent acquisitions; and
 
•  the balance to fund working capital and for other general corporate purposes, including acquisition of media resources, repayment of outstanding indebtedness and future acquisitions.
 
See “Use of Proceeds.”
 
Risk Factors See “Risk Factors” and other information included in this prospectus for a discussion of the risks you should consider carefully before deciding to invest in our ADSs.
 
Listing We have applied to list our ADSs on the NASDAQ Global Market.
 
NASDAQ Global Market Symbol RGM
 
Lock-up We, our directors and executive officers and all of our existing shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, common shares or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting.”
 
Custodian Citibank, N.A., Hong Kong Branch
 
Depositary Citibank, N.A.


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SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, the disclosures set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in our consolidated financial statements and related notes included elsewhere in this prospectus.
 
The summary consolidated statements of operations data for 2006, 2007, 2008 and the nine months ended September 30, 2009 and the summary consolidated balance sheets data as of December 31, 2007 and 2008 and September 30, 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full year.
 
The summary consolidated statements of operations data for the nine months ended September 30, 2008 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair statement of the financial information set forth in those statements.
 
The pro forma as adjusted balance sheet information as of September 30, 2009 assumes (i) the conversion of (x) all outstanding preference shares (including those to be issued upon the conversion of the full principal amount repayable under the convertible promissory note issued to Kuwait China Investment Company KSC, or KCIC, in November 2009, or the KCIC convertible note, into our preference shares immediately prior to this offering) other than the 855,832 Class G preference shares previously issued to KCIC to secure the KCIC convertible note to be repurchased and cancelled by us immediately prior to this offering, (y) a certain loan extended to our company by certain of our shareholders, their family members and third parties in 2004, or the 2004 shareholder loan, and (z) an amount of $500,000, representing the first annual interest amount payable under the Uni-Asia convertible note, into common shares upon completion of or immediately prior to this offering, respectively, and (ii) the issuance and sale of 11,000,000 common shares in the form of ADSs by us in this offering and our receipt of the estimated net proceeds from this offering, each based on an assumed initial offering price of $7 per ADS (which is the midpoint of the estimated public offering price range), after deducting underwriting discounts and commissions, the non-accountable expense allowance and estimated offering expenses payable by us.
 
Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)        
    (In U.S. dollars, except for number of shares)  
 
Consolidated Statements of Operations Data:
                                       
Revenues
                                       
Total revenues
  $ 2,364,431     $ 4,301,677     $ 11,143,059     $ 5,279,292     $ 19,109,122  
Less: Business tax and related surcharges
    (43,709 )     (72,187 )     (363,876 )     (164,929 )     (762,043 )
                                         
Total net revenues
    2,320,722       4,229,490       10,779,183       5,114,363       18,347,079  
                                         
Total operating costs and expenses
    5,445,494       7,595,825       14,689,017       7,620,792       17,083,990  
                                         
(Loss)/income from operations
    (3,124,772 )     (3,366,335 )     (3,909,834 )     (2,506,429 )     1,263,089  
                                         
Change in fair value of embedded derivatives
    1,521,009       (65,628 )     358,475       350,060       (16,823 )
Impairment loss on marketable securities
                (2,731,856 )     (2,718,085 )      
Interest income
    125,116       88,002       114,757       83,043       20,242  
Interest expense
                (78,729 )     (27,997 )     (174,156 )
Net other (expense)/income
    (38,907 )     (26,445 )     (158,754 )     (249,868 )     290,764  
                                         


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          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)        
    (In U.S. dollars, except for number of shares)  
 
(Loss)/income before income taxes, investment in associates and non-controlling interests
    (1,517,554 )     (3,370,406 )     (6,405,941 )     (5,069,276 )     1,383,116  
Income tax benefit/(expense)
          3,109       (285,772 )     (137,915 )     (1,298,423 )
                                         
(Loss)/income before investments in associates and non-controlling interests
    (1,517,554 )     (3,367,297 )     (6,691,713 )     (5,207,191 )     84,693  
(Loss)/income from investments in associates
    (3,659,022 )     97,596       (767,093 )     (735,544 )      
                                         
Net (loss)/income
    (5,176,576 )     (3,269,701 )     (7,458,806 )     (5,942,735 )     84,693  
Net (income)/loss attributable to non-controlling interest
                15,826       54,801       (168,920 )
                                         
Net loss attributable to common shareholders
  $ (5,176,576 )   $ (3,269,701 )   $ (7,442,980 )   $ (5,887,934 )   $ (84,227 )
                                         
Net loss per share:
                                       
Basic
  $ (0.92 )   $ (0.58 )   $ (1.32 )   $ (1.04 )   $ (0.01 )
Diluted
  $ (0.92 )   $ (0.58 )   $ (1.34 )   $ (1.07 )   $ (0.01 )
Weighted average number of shares outstanding:
                                       
Basic
    5,641,694       5,641,694       5,641,694       5,641,694       5,641,694  
Diluted
    5,641,694       5,641,694       5,830,359       5,830,359       5,641,694  
 
                                         
        Nine Months Ended
    Year Ended December 31,   September 30,
    2006   2007   2008   2008   2009
    (In U.S. dollars)
 
EBITDA(1)
  $ (5,220,691 )   $ (3,257,769 )   $ (5,802,186 )   $ (5,208,489 )   $ 2,843,452  
 
 
(1) To supplement our consolidated statements of operations for 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009 prepared in accordance with U.S. GAAP, our management used EBITDA, a non-GAAP financial measure defined as net loss attributable to common shares pursuant to U.S. GAAP adjusted for interest income net of interest expense, income tax benefit/(expense) and depreciation and amortization, to evaluate our operating performance and other purposes for the reasons described below. However, due to the limitations of using EBITDA as described further below, the presentation of EBITDA is not intended to be read or considered in isolation from, as a substitute for, or as superior to, the financial information prepared and presented in accordance with U.S. GAAP. EBITDA is presented to enhance an understanding of our results of operations and are not intended to represent cash flow.
 
We consider EBITDA to be an important indicator of our operating performance, the strength of our core business and a valuable measure to evaluate our historical operating trend as well as the results of operations of our competitors, because: (i) items excluded in calculating EBITDA have little or no bearing on our day-to-day operating performance; and (ii) our advertising business is not considered a capital intensive business, and therefore EBITDA, which excludes depreciation and amortization, is widely used by our competitors in the same industry as a useful non-GAAP financial measure to evaluate operating performance. However, using EBITDA as a measure to evaluate our business has a number of limitations, including:
 
  • EBITDA excludes certain recurring cash charges, such as interest income net of interest expense and income tax benefit/(expense) that generally represent charges or gains which may significantly affect our liquidity position, such as funds available to be used in our operating, investing or financing activities;
 
  • EBITDA we present may not be comparable to similarly titled financial measures of other companies as other companies may exclude different items from the items we exclude; and
 
  • depreciation and amortization, though not directly affecting our current cash position, represent the condition and/or reduction in the value of our equipment and reflects the estimated remaining useful lives of intangible assets; these items may be indicative of future needs for capital expenditures or acquisition of intangible assets, or relevant trends causing asset value changes.
 
For the reasons indicated above, our management uses EBITDA to evaluate our operating performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors and to establish operational goals and forecasts that are used in allocating resources as well as determining our internal budgets. EBITDA is reported to our board of directors and executive officers and is used to make strategic and operating decisions and assess performance.
 
Our management finds these supplemental EBITDA to be useful, and believes EBITDA is useful to investors in enabling them to perform additional analyses of our past, present and future operating performance and as a supplemental means to evaluate our core operating results. We understand that analysts and investors often rely on EBITDA to assess a media and advertising company’s operating performance, and thus may consider EBITDA in analyzing our performance going forward. In addition, as our management uses EBITDA to evaluate our operating performance and strategic and operating decisions, we believe EBITDA provides greater transparency to the information our

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management uses, and enables investors to understand our operating performance. However, readers are reminded that EBITDA is merely a supplement to, and not a replacement for, U.S. GAAP financial measures. It should be read in conjunction with our U.S. GAAP financial measures. Furthermore, it should be noted that EBITDA used by our management may be different from EBITDA provided by other companies.
 
The following table sets forth, for 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009, reconciliation of U.S. GAAP net loss attributable to common shareholders to EBITDA:
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
EBITDA:   2006     2007     2008     2008     2009  
    (In U.S. dollars)  
 
Net loss attributable to common shareholders
  $ (5,176,576 )   $ (3,269,701 )   $ (7,442,980 )   $ (5,887,934 )   $ (84,227 )
Interest income net of interest expense
    (125,116 )     (88,002 )     (36,028 )     (55,046 )     153,914  
Income tax (benefit)/expense
          (3,109 )     285,772       137,915       1,298,423  
Depreciation and amortization
    81,001       103,043       1,391,050       596,576       1,475,342  
                                         
EBITDA
  $ (5,220,691 )   $ (3,257,769 )   $ (5,802,186 )   $ (5,208,489 )   $ 2,843,452  
                                         
 
                                 
            As of September 30,
    As of December 31,       Pro Forma
    2007   2008   2009   as Adjusted(1)
    (In U.S. dollars)
 
Consolidated Balance Sheet Data:
                               
Cash and cash equivalents
  $ 6,789,686     $ 8,925,707     $ 7,504,245     $ 44,217,087  
Acquired intangible assets
    196,762       3,532,829       2,387,293       2,387,293  
Goodwill
    380,007       15,867,619       15,705,577       15,705,577  
Total assets
    14,734,152       45,678,241       47,426,693       82,602,431  
Total liabilities
    3,546,725       27,831,149       29,633,212       28,022,162  
Convertible preference shares
    18,290,064       27,090,064       27,093,868        
Non-controlling interests
          3,668,854       3,893,472       3,893,472  
Total shareholders’ equity/(deficit)
    (7,102,637 )     (9,242,972 )     (9,300,387 )     54,584,072  
 
 
(1) A $1.00 increase (decrease) in the assumed initial public offering price of $7 per ADS would increase (decrease) each of cash and cash equivalents, total assets and total shareholders’ equity/(deficit) by $5.1 million, after deducting the estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated offering expenses payable by us and assuming no exercise of the over-allotment option and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus.


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SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
 
The following summary unaudited pro forma condensed consolidated financial data are qualified by reference to, and should be read in conjunction with, our unaudited pro forma condensed consolidated financial information and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus. The summary unaudited pro forma condensed consolidated statement of operations and consolidated balance sheet data have been derived from our unaudited pro forma condensed consolidated financial information included elsewhere in this prospectus.
 
Our unaudited pro forma condensed consolidated financial information has been derived from our audited consolidated financial statements and the respective historical audited financial statements of Yanhuang, Dianguang and Yarun, all of which are prepared in accordance with U.S. GAAP, and have been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent registered public accounting firm. Those financial statements and the reports of PricewaterhouseCoopers Zhong Tian CPAs Limited Company on those financial statements are also included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial information includes a discussion of the basis of presentation and adjustments made in the preparation of such information.
 
Our unaudited pro forma condensed consolidated financial information for the year ended December 31, 2008 is presented in order to give pro forma effect to our completed acquisitions of Dianguang and the initial 51% equity interest in Yanhuang and pending acquisitions of Yarun and the remaining 49% equity interest in Yanhuang as if these acquisitions had been consummated on January 1, 2008 and our unaudited pro forma condensed consolidated financial information for the nine months ended and as of September 30, 2009 is presented in order to give pro forma effect to our pending acquisitions of Yarun and the remaining 49% equity interest in Yanhuang as if these acquisitions had been consummated on January 1, 2009. For a description of those acquisitions, see “Recent Acquisitions.”
 
Our unaudited pro forma condensed consolidated financial information does not include adjustments related to the pending acquisitions of WinClick and the remaining 40% equity interest in Hongmen. Our unaudited pro forma condensed balance sheet does not give effect to the conversion of (i) any outstanding preference shares, (ii) the 2004 shareholder loan, or (iii) the first annual interest amount payable under the Uni-Asia convertible note into common shares upon the completion of or immediately prior to this offering, respectively.


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    For the Year Ended December 31, 2008  
          Completed Acquisitions                                            
                      Pro Forma
          Subtotal
                                           
                      Adjustments
          after
    Pending Acquisitions     Pro Forma
             
          Yanhuang
          for the
          Adjusting
                      Subtotal for
    Adjustments
             
          for the
    Dianguang
    Initial 51%
          for
                      Yarun and
    for the
             
    Consolidated
    Period
    for the
    Equity Interest
          Acquisitions
          Pro Forma
          Yarun
    Remaining
             
    Redgate
    from
    Period from
    in Yanhuang
          of Yanhuang
          Adjustments
          Related
    49% Equity
             
    Media
    Jan. 1 to
    Jan. 1 to
    and
          and
          for
          Pro Forma
    Interest
             
    Group     Sept. 25     Jul. 21     Dianguang     Note     Dianguang     Yarun     Yarun     Note     Adjustments     in Yanhuang     Note     Total  
    (In U.S. dollars, except for number of shares)  
 
                                                                                                         
Unaudited Pro Forma Condensed
                                                                                                       
                                                                                                         
Consolidated Statement of Operations:
                                                                                                       
                                                                                                         
Revenues
                                                                                                       
                                                                                                         
Advertising placement services
  $ 8,916,132     $ 9,422,341     $ 5,288,316     $             $ 23,626,789     $ 15,191,674     $             $ 15,191,674     $             $ 38,818,463  
                                                                                                         
Advertising production services
    425,269       162,550                           587,819                                               587,819  
                                                                                                         
Public relations and events services
    1,211,425                                 1,211,425                                               1,211,425  
                                                                                                         
Other services
    590,233                                 590,233                                               590,233  
                                                                                                         
                                                                                                         
Total revenues
    11,143,059       9,584,891       5,288,316                     26,016,266       15,191,674                     15,191,674                     41,207,940  
                                                                                                         
Less: Business tax and related surcharges
    (363,876 )     (314,588 )     (246,929 )                   (925,393 )     (339,996 )                   (339,996 )                   (1,265,389 )
                                                                                                         
                                                                                                         
Total net revenues
    10,779,183       9,270,303       5,041,387                     25,090,873       14,851,678                     14,851,678                     39,942,551  
                                                                                                         
                                                                                                         
Operating costs and expenses
                                                                                                       
                                                                                                         
Advertising placement and production service cost
    7,807,620       6,212,495       2,675,313                     16,695,428       11,518,206                     11,518,206                     28,213,634  
                                                                                                         
Salary and employee benefits
    3,138,806       162,526       76,065                     3,377,397       319,215                     319,215                     3,696,612  
                                                                                                         
Selling and marketing
    280,593       15,586                           296,179                                               296,179  
                                                                                                         
General and administrative
    2,372,346       324,398       81,031                     2,777,775       446,087       (185,685 )     (3 )     260,402                     3,038,177  
                                                                                                         
Intangible assets amortization
    1,089,652                   978,991       (1 )     2,068,643             1,231,956       (4 )     1,231,956                     3,300,599  
                                                                                                         
                                                                                                         
Total operating costs and expenses
    14,689,017       6,715,005       2,832,409       978,991               25,215,422       12,283,508       1,046,271               13,329,779                     38,545,201  
                                                                                                         
(Loss)/income from operations
    (3,909,834 )     2,555,298       2,208,978       (978,991 )             (124,549 )     2,568,170       (1,046,271 )             1,521,899                     1,397,350  
                                                                                                         
Change in fair value of embedded derivatives
    358,475                                 358,475                                               358,475  
                                                                                                         
Impairment loss on marketable securities
    (2,731,856 )                               (2,731,856 )                                             (2,731,856 )
                                                                                                         
Interest income
    114,757       16,270       1,704                     132,731       2,118                     2,118                     134,849  
                                                                                                         
Interest expense
    (78,729 )           (126,075 )                   (204,804 )     (174,343 )                   (174,343 )                   (379,147 )
                                                                                                         
Other income/(expense), net
    (158,754 )     53,238                           (105,516 )     (696 )                   (696 )                   (106,212 )
                                                                                                         
                                                                                                         
(Loss)/income before income taxes, investment in associates and non-controlling interests
    (6,405,941 )     2,624,806       2,084,607       (978,991 )             (2,675,519 )     2,395,249       (1,046,271 )             1,348,978                     (1,326,541 )
                                                                                                         
Income tax expense
    (285,772 )     (712,026 )     (528,808 )     244,748       (1 )     (1,281,858 )     (629,915 )     307,989       (4 )     (321,926 )                   (1,603,784 )
                                                                                                         
Income/(loss) from investment in associates
    (767,093 )                               (767,093 )                                             (767,093 )
                                                                                                         
                                                                                                         
Net (loss)/income
    (7,458,806 )     1,912,780       1,555,799       (734,243 )             (4,724,470 )     1,765,334       (738,282 )             1,027,052                     (3,697,418 )
                                                                                                         
Net loss/(income) attributable to non-controlling interests
    15,826       1,713             (642,647 )             (625,108 )                               874,263       (2 )     249,155  
                                                                                                         


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    For the Year Ended December 31, 2008  
          Completed Acquisitions                                            
                      Pro Forma
          Subtotal
                                           
                      Adjustments
          after
    Pending Acquisitions     Pro Forma
             
          Yanhuang
          for the
          Adjusting
                      Subtotal for
    Adjustments
             
          for the
    Dianguang
    Initial 51%
          for
                      Yarun and
    for the
             
    Consolidated
    Period
    for the
    Equity Interest
          Acquisitions
          Pro Forma
          Yarun
    Remaining
             
    Redgate
    from
    Period from
    in Yanhuang
          of Yanhuang
          Adjustments
          Related
    49% Equity
             
    Media
    Jan. 1 to
    Jan. 1 to
    and
          and
          for
          Pro Forma
    Interest
             
    Group     Sept. 25     Jul. 21     Dianguang     Note     Dianguang     Yarun     Yarun     Note     Adjustments     in Yanhuang     Note     Total  
    (In U.S. dollars, except for number of shares)  
 
                                                                                                         
Net (loss)/income attributable to common shareholders
  $ (7,442,980 )   $ 1,914,493     $ 1,555,799     $ (1,376,890 )           $ (5,349,578 )   $ 1,765,334     $ (738,282 )           $ 1,027,052     $ 874,263             $ (3,448,263 )
                                                                                                         
                                                                                                         
Net loss per share, basic
  $ (1.32 )                                                                                           $ (0.61 )(5)
                                                                                                         
Net loss per share, diluted
  $ (1.34 )                                                                                           $ (0.64 )(5)
                                                                                                         
Shares used in calculating basic net loss per share
    5,641,694                                                                                               5,641,694 (5)
                                                                                                         
Shares used in calculating diluted net loss per share
    5,830,359                                                                                               5,925,440 (5)
 
 
(1) Based on the purchase price allocation, intangible assets of $2,990,107 and $1,077,905 were recognized as if the acquisitions of Yanhuang and Dianguang had been completed on January 1, 2008. Adjustments of $978,991 reflect additional amortization of acquired intangible assets of Yanhuang and Dianguang for 2008 as if they were acquired on January 1, 2008. The related tax benefit of $244,748 associated with the amortization of intangible assets was also recorded for 2008 based on the applicable tax rate.
 
(2) This adjustment reflects elimination of the non-controlling interest in Yanhuang for the period from September 25, 2008 to December 31, 2008, assuming 100% equity interest in Yanhuang had been acquired on January 1, 2008.
 
(3) This adjustment reflects acquisition costs incurred by our company in connection with our acquisition of Yarun in 2008. They are excluded from the pro forma statement of operations because they are non-recurring costs directly attributable to the transaction. No such costs were incurred in 2009.
 
(4) Based on the purchase price allocation, intangible assets of $3,108,947 were recognized as if the acquisition of Yarun had been completed on January 1, 2008. Adjustment of $1,231,956 reflected additional amortization of acquired intangible assets of Yarun for 2008. The related tax benefit of $307,989 associated from the amortization of intangible assets was also recorded for 2008 based on the applicable tax rate.
 
(5) The unaudited pro forma condensed consolidated financial information assumes that for the acquisitions of Dianguang and Yarun as well as the 51% equity interest in Yanhuang, the acquisition consideration payable will be settled in cash rather than our common shares. However, it is our intention to issue common shares, to the extent it is possible, to settle the consideration payable upon the completion of this offering. The issuance of common shares in settlement of the acquisition consideration payable could change the basic and diluted loss per share.

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    For the Nine Months Ended September 30, 2009  
                                        Subtotal for
       
                                        Yarun and
       
    Consolidated
    Pro Forma
                Pro Forma
          Related
       
    Redgate Media
    Adjustments
                Adjustments
          Pro Forma
       
    Group     for Yanhuang     Note     Yarun     for Yarun     Note     Adjustments     Total  
    (In U.S. dollars, except for number of shares)  
 
Unaudited Pro Forma Condensed Consolidated Statement of Operations:
                                                               
Revenues
                                                               
Advertising placement services
  $ 17,776,625                   $ 12,005,465     $ (200,888 )     (1 )   $ 11,804,577     $ 29,581,202  
Advertising production services
    119,327                                               119,327  
Public relations and events services
    1,152,918                                               1,152,918  
Other services
    60,252                     32,042                     32,042       92,294  
                                                                 
Total revenues
    19,109,122                     12,037,507       (200,888 )             11,836,619       30,945,741  
Less: Business tax and related surcharges
    (762,043 )                   (353,797 )                   (353,797 )     (1,115,840 )
                                                                 
Total net revenues
    18,347,079                     11,683,710       (200,888 )             11,482,822       29,829,901  
                                                                 
Operating costs and expenses
                                                               
Advertising placement and production service cost
    11,572,962                     8,279,756       (200,888 )     (1 )     8,078,868       19,651,830  
Salary and employee benefits
    2,321,779                     271,099                     271,099       2,592,878  
Selling and marketing
    164,775                                               164,775  
General and administrative
    1,882,819                     1,060,602                     1,060,602       2,943,421  
Intangible assets amortization
    1,141,655                           923,967       (2 )     923,967       2,065,622  
                                                                 
Total operating costs and expenses
    17,083,990                     9,611,457       723,079               10,334,536       27,418,526  
Income/(loss) from operations
    1,263,089                     2,072,253       (923,967 )             1,148,286       2,411,375  
Change in fair value of embedded derivatives
    (16,823 )                                             (16,823 )
Interest income
    20,242                     759                     759       21,001  
Interest expense
    (174,156 )                   (78,356 )                   (78,356 )     (252,512 )
Other income/(expense), net
    290,764                                               290,764  
                                                                 
(Loss)/Income before income taxes, investment in associates and non-controlling interests
    1,383,116                     1,994,656       (923,967 )             1,070,689       2,453,805  
Income tax expense
    (1,298,423 )                   (514,166 )     230,992       (2 )     (283,174 )     (1,581,597 )
Income/(loss) from investment in associates
                                                   
                                                                 
Net Income
    84,693                     1,480,490       (692,975 )             787,515       872,208  
Net loss/(income) attributable to the non-controlling interests
    (168,920 )   $ 579,125       (4 )                               410,205  
                                                                 
Net income/(loss) attributed to common shareholders
  $ (84,227 )   $ 579,125             $ 1,480,490     $ (692,975 )           $ 787,515     $ 1,282,413  
                                                                 
Net (loss)/earnings per share, basic
  $ (0.01 )                                                   $ 0.23 (3)
Net (loss)/earnings per share, diluted
  $ (0.01 )                                                   $ 0.06 (3)
Shares used in calculating basic net (loss)/earnings per share
    5,641,694                                                       5,641,694 (3)
Shares used in calculating diluted net (loss)/earnings per share
    5,641,694                                                       14,468,164 (3)
 
 
(1)  This adjustment represented the elimination of intercompany transactions between our company and Yarun.
 
(2)  Based on the purchase price allocation, intangible assets of $3,108,947 were recognized as if the acquisition of Yarun had been completed on January 1, 2009. Adjustment of $923,967 reflected additional amortization of acquired intangible assets of Yarun for the nine months ended September 30, 2009. The related tax benefit of $230,992 associated with the amortization of intangible assets was recorded for the nine months ended September 30, 2009 based on the applicable tax rate.
 
(3)  The unaudited pro forma condensed consolidated financial information assumes that for the acquisition of Yarun, the acquisition consideration payable will be settled in cash rather than our common shares. However, it is our intention to issue common shares, to the extent it is possible, to settle the consideration payable upon the completion of this offering. The issuance of common shares in settlement of the consideration payable could change the basic and diluted earnings per share.
 
(4)  This adjustment represented the elimination of the non-controlling interest in Yanhuang for the period from January 1, 2009 to September 30, 2009, assuming the remaining 49% equity interest in Yanhuang had been acquired on January 1, 2009.


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    As of September 30, 2009  
                                        Subtotal for
       
          Pro Forma
                            Yarun and
       
    Consolidated
    Adjustments
                Pro Forma
          Yarun Related
       
    Redgate Media
    for
                Adjustments
          Pro Forma
       
    Group     Yanhuang     Note     Yarun     for Yarun     Note     Adjustments     Total  
    (In U.S. dollars)  
 
Unaudited Pro Forma Condensed Balance Sheet:
                                                               
Assets
                                                               
Current assets:
                                                               
Cash and cash equivalents
  $ 7,504,245                   $ 495,804     $             $ 495,804     $ 8,000,049  
Restricted cash
    872,456                                               872,456  
Marketable securities
    1,256,331                                               1,256,331  
Accounts receivable, net
    9,116,350                     8,653,677       (53,003 )     (1)       8,600,674       17,717,024  
Prepaid advertising placement service cost
    3,312,799                     606,382                     606,382       3,919,181  
Amounts due from related parties
    1,617,318                                               1,617,318  
Deferred tax assets
    32,243                     293,160                     293,160       325,403  
Other current assets
    2,133,851                     104,956                     104,956       2,238,807  
                                                                 
Total current assets
    25,845,593                     10,153,979       (53,003 )             10,100,976       35,946,569  
Property and equipment
    1,911,467                     17,233                     17,233       1,928,700  
Acquired intangible assets
    2,387,293                           3,108,947       (2)(3)       3,108,947       5,496,240  
Embedded derivative assets
    1,537,104                                               1,537,104  
Goodwill
    15,705,577                           7,194,246       (3)(8)       7,194,246       22,899,823  
Other non-current assets
    39,659                                               39,659  
                                                                 
Total Assets
  $ 47,426,693                   $ 10,171,212     $ 10,250,190             $ 20,421,402     $ 67,848,095  
                                                                 
Liabilities and shareholders’ equity
                                                               
Current liabilities:
                                                               
Promissory notes
  $ 817,500     $             $     $             $     $ 817,500  
Short-term borrowings
    292,869                                               292,869  
Accounts payable
    1,531,762                     1,649,528       (53,003 )     (1)       1,596,525       3,128,287  
Customer advances
    2,273,171                     759,661                     759,661       3,032,832  
Accrued expenses and other current liabilities
    2,949,333                     419,623                     419,623       3,368,956  
Amounts due to related parties
    43,930                     538,175                     538,175       582,105  
Acquisition consideration payable
    9,263,920       13,005,000       (10 )           13,699,663       (4)(5)(7)(8)       13,699,663       35,968,583  
Profit distribution to predecessor owners
    1,342,771                                               1,342,771  
Tax payable
    3,971,169                     2,630,518                     2,630,518       6,601,687  
                                                                 
Total current liabilities
    22,486,425       13,005,000               5,997,505       13,646,660               19,644,165       55,135,590  
                                                               
Deferred tax liabilities
    596,823                           777,237       (5)       777,237       1,374,060  
Shareholder loan
    1,549,964                                                 1,549,964  
Notes payable
    5,000,000                                               5,000,000  
                                                                 
Total Liabilities
    29,633,212       13,005,000               5,997,505       14,423,897             20,421,402       63,059,614  
                                                                 
Commitments
                                                   
Convertible preferred shares
    27,093,868                                               27,093,868  
Shareholders’ equity
                                                           
Ordinary shares (Paid-in capital)
    14,104                     371,627       (371,627 )     (6)(7)             14,104  
Additional paid-in capital
    2,037,721       (9,739,963 )     (10 )                               (7,702,242 )
Statutory reserves
    135,582                     210,496       (210,496 )     (6)             135,582  
(Accumulated deficit)/Retained earnings
    (17,015,200 )                   3,430,712       (3,430,712 )     (6)             (17,015,200 )
Accumulated other comprehensive income/(loss)
    1,633,934                     160,872       (160,872 )     (6)             1,633,934  
                                                                 
Total Redgate Media Group Shareholders’ Equity
    (13,193,859 )     (9,739,963 )             4,173,707       (4,173,707 )                   (22,933,822 )
Non-controlling interests
    3,893,472       (3,265,037 )     (9 )                               628,435  
                                                                 
Total Shareholders’ Equity
    (9,300,387 )     (13,005,000 )             4,173,770       (4,173,770 )                   (22,305,387 )
                                                                 
Total Liabilities and Shareholders’ Equity
  $ 47,426,693                   $ 10,171,212     $ 10,250,190             $ 20,421,402     $ 67,848,095  
                                                                 
 
 
The pro forma balance sheet has been prepared to reflect the pending acquisition of Yarun by us for an estimated aggregate price of $13,699,663, including cash payment of $439,300 and estimated contingent consideration of $13,260,363 and the pending purchase of the remaining 49% equity interest in Yanhuang for an estimated aggregate price of $13,005,000, including cash payment of $353,586 and estimated contingent consideration of $12,651,414, in each case measured at fair value for the purpose of applying the acquisition method under U.S. GAAP.
 
 (1)  This adjustment reflected the elimination of intercompany transaction balance between our company and Yarun.


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 (2)  Based on the purchase price allocation, intangible assets of $3,108,947 were recognized as if the acquisition of Yarun had been completed on September 30, 2009. Adjustment of $923,967 reflected additional amortization of acquired intangible assets of Yarun for the nine months ended September 30, 2009. The related tax benefit of $230,992 associated with the amortization of intangible assets was recorded for the nine months ended September 30, 2009 based on the applicable tax rate.
 
 (3)  The net assets of Yarun at estimated fair value on the acquisition date. The allocation of purchase price was as follows:
 
         
    As of
 
    September 30,
 
    2009  
    (in U.S. dollars)  
 
Net tangible assets acquired
  $ 4,173,707  
Identifiable intangible assets
    3,108,947  
Goodwill
    7,194,246  
Deferred tax liabilities
    (777,237 )
         
Total
  $ 13,699,663  
         
 
 (4)  Purchase consideration of $13,699,663, which represents the total estimated consideration to be paid for the acquisition of Yarun, measured at fair value for the purpose of applying the acquisition method under U.S. GAAP. Changes in fair value of the contingent consideration may contain elements of both changes in assumptions used in the determination of fair value and changes due to passage of time. Such changes are not reflected in the pro forma financial information presented in this prospectus.
 
 (5)  The identifiable intangible assets acquired and the respected average useful life over which the assets will be amortized are shown below:
 
                 
          Weighted-Average
 
    Amount     Useful Life in Years  
    (in U.S. dollars)        
 
Customer relationships
  $ 862,352       5.3  
Supplier contracts
    2,246,595       2.1  
                 
Total
  $ 3,108,947          
                 
 
 (6)  This adjustment represented the elimination of the common shareholders’ equity accounts of Yarun.
 
 (7)  The unaudited pro forma condensed consolidated financial information assumes that for the acquisitions of Dianguang and Yarun as well as the 51% equity interest in Yanhuang, the acquisition consideration payable will be settled in cash rather than our common shares. However, it is our intention to issue common shares, to the extent it is possible, to settle the consideration payable upon the completion of this offering. This would reduce the acquisition consideration payable with a corresponding increase in shareholders’ equity.
 
 (8)  Prior to January 1, 2009, we accounted for the acquisitions pursuant to the applicable guidance from Statement of Financial Accounting Standards No. 141 “Business Combinations.” Therefore, we have not recorded the unresolved contingent consideration for the acquisitions of Dianguang, Breeze and Alliance Online on our consolidated financial statements or the unaudited pro forma condensed consolidated balance sheet as of September 30, 2009. The estimated amount for the aggregate contingent consideration payable is $14.9 million for the acquisitions of Dianguang, Breeze and Alliance Online, and such amount will be reflected in goodwill when the contingency is resolved.
 
 (9)  This adjustment represents the elimination of the non-controlling interests in Yanhuang as at September 30, 2009 assuming the remaining 49% equity interest in Yanhuang had been acquired on September 30, 2009.
 
(10)  Purchase consideration of $13,005,000, which represents the total estimated consideration to be paid for the purchase of the remaining 49% equity interest in Yanhuang, measured at fair value for the purpose of applying the acquisition method under U.S. GAAP. Changes in fair value of the contingent consideration may contain elements of both changes in the assumptions used in determination of fair value and changes due to passage of time. Such changes are not reflected in the pro forma financial information presented in this prospectus.


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RISK FACTORS
 
You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before deciding to invest in our ADSs. The trading price of our ADSs could decline due to any of these risks and uncertainties, and you may lose all or part of your investment.
 
Risks Relating to Our Business
 
     If this offering is significantly delayed or terminated, and we otherwise fail to obtain sufficient financing from alternative sources, we may not have adequate liquidity to pay earn-out and other consideration in connection with our recent acquisitions when it becomes due, and our ability to continue as a going concern would be materially and adversely affected as a result.
 
We are obligated to pay a potentially significant amount of earn-out and other consideration in relation to our recent acquisitions. The amount of the earn-out consideration typically depends, among other factors, on the annual audited net profits of an acquired entity in a three-year post-closing period starting from 2007, 2008, 2009 or 2010 and certain pre-determined or adjustable numerical multiples, and is payable in annual installments. With respect to the earn-out payment in 2011 in respect of Dianguang, such numerical multiples will be determined with reference to our price-to-earnings multiple for this offering. Although the exact aggregate amount of such earn-out consideration is not fully ascertainable as of the date of this prospectus, we determined that our acquisition payable was $9.3 million as of September 30, 2009 (including earn-out consideration with respect to the relevant acquired entities’ financial results for 2008) and have also estimated that the aggregate earn-out consideration payable in 2010, 2011, 2012 and 2013 would be $14.2 million, $25.4 million, $10.8 million and $4.9 million, respectively. See “Recent Acquisitions — Earn-Out and Other Consideration” for a discussion of the basis and assumptions of these estimates. Although we have the option to pay a portion of the earn-out consideration in our common shares in lieu of cash, we may elect or have to make cash payments in respect of the entire earn-out consideration for various reasons, including failure to obtain the necessary government approvals for payment by shares. See “—We may not be able to obtain all necessary approvals that will allow us to pay the remaining consideration with our common shares in connection with our recent acquisitions, and thus may have to pay in cash, which may materially strain our liquidity.” In addition, we have agreed to pay additional cash consideration in U.S. dollars equivalent to RMB33.0 million ($4.8 million) with respect to WinClick in 2010 and RMB1.6 million ($0.2 million) plus the U.S. dollar equivalent of RMB2.2 million ($0.3 million) in 2010 for the remaining 40% equity interest in Hongmen. See “Recent Acquisitions.”
 
We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated expenses payable by us in connection with this offering, will be approximately $29.5 million, or approximately $34.9 million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $7 per ADS (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus). Our management believes that those offering proceeds, together with our current cash and cash equivalents and cash flow from operations, will be sufficient to meet our anticipated cash needs to finance our operations within the next 12 months and the payment of earn-out and other consideration for the recent acquisitions through 2013, assuming we pay earn-out consideration in our common shares to the full extent permitted under the acquisitions. However, given our accumulated deficit of $17.0 million as of September 30, 2009 and net cash outflow amounting to $1.4 million for the nine months ended September 30, 2009, if this offering is significantly delayed or terminated, and we otherwise fail to obtain sufficient financing from alternative sources, we may not have adequate liquidity to pay the earn-out and other consideration when it becomes due. As a result, our ability to continue as a going concern would be materially and adversely affected. In this regard, the report of the independent registered public accounting firm of our company, included elsewhere in this prospectus, contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern, without regard to the proceeds from this offering.
 
Although we have historically been successful in raising funds through private placements or debt financing or revising the scheduled payments for acquisition consideration to work with our liquidity position to enable us to meet our liabilities as and when they fall due, there is no assurance we will be able to do so in the future.
 
If we are unable to continue as a going concern, you could lose all or part of your investment in our company.


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     Our estimates of the amounts of earn-out consideration in connection with our recent acquisitions are based on a number of assumptions and are subject to significant uncertainties and contingencies that are beyond our control. As a result, actual earn-out payments may vary materially from these estimates.
 
Based on our estimate of the net profits of Breeze, Dianguang, Alliance Online, Yanhuang, Yarun and WinClick in 2009, 2010, 2011 and/or 2012, and where needed, assuming all the numerical multiples that are not ascertainable as of the date of this prospectus to be six, seven, nine or ten, as the case may be, our management estimated that the aggregate earn-out consideration payable in 2010, 2011, 2012 and 2013 would be $14.2 million, $25.4 million, $10.8 million and $4.9 million, respectively. Our management estimated the total number of earn-out shares to be issued in lieu of cash payments to be 8,552,504, assuming the average trading price of our shares during specified times after this offering is $3.50 per common share, or $7 per ADS, the midpoint of the estimated range of our initial public offering price, and the amount of the remaining earn-out consideration to be paid in cash to be $25.5 million.
 
Our estimates of the net profits of the relevant entities in 2009 are based on (i) the audited consolidated financial statements for the nine months ended September 30, 2009 of our company, (ii) the unaudited management accounts for the three months ended December 31, 2009 of our company and (iii) the respective unaudited management accounts of Breeze, Dianguang, Alliance Online and Yanhuang for the year ended December 31, 2009. The estimate of the net profits of the relevant entities (other than WinClick) in 2009 has been prepared on the basis of accounting policies consistent in all material respects with those currently adopted by our company as summarized in our audited consolidated financial statements, included elsewhere in this prospectus. In order to forecast the net profits of the relevant entities in 2010 through 2012, our management relied on a series of assumptions and projections relating to an entity’s future operations, including those set forth in “Recent Acquisitions — Earn-Out and Other Consideration.” Many of these assumptions are subject to significant uncertainty. Information contained in the unaudited management accounts may be subject to audit adjustments or other changes. Some of the assumptions, while presented with numerical specificity, are inherently subject to significant uncertainties and contingencies that are beyond our control. For example, revenues or cost of sales of an entity may grow at a rate which is higher or lower than the projected rate due to market conditions and other factors not within our control, and our share price is expected to fluctuate over time and the average trading price of our shares during specified times after this offering may differ significantly from the midpoint of the estimated price range for this offering. As a result, actual earn-out payments may vary materially from these estimates.
 
     We may not be able to successfully integrate, and achieve the benefits we expect from, our recent and future acquisitions of businesses or assets due to a number of factors, some of which are beyond our control; and these acquisitions may expose us to significant business risks and materially adversely affect our future financial condition, results of operations and growth prospects.
 
Strategic acquisitions have been a key part of our growth strategy. The majority of our business divisions are comprised of businesses we acquired in the past few years with an aim to establish an integrated cross-media platform through integrating strategically acquired businesses in diverse media areas. Accordingly, we have made acquisitions that were critical in expanding our media resources, client base, market access and talent pool. However, any particular acquisition may not produce the intended benefits due to a number of factors, some of which are beyond our control.
 
These factors include, among other things:
 
  •  difficulties in integrating acquisitions with our existing operations and personnel, including unifying their operating and accounting policies and procedures as well as their information systems, streamlining overlapping operations, consolidating subsidiaries and branch networks and allocating human resources;
 
  •  unforeseen operating difficulties and expenditures arising from the process of integration with the acquired entities;
 
  •  contractual and other limitations on our ability to operate some of the entities acquired or to be acquired, including replacing certain key management personnel, during specified periods post-acquisition;


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  •  significant attention required from our management that would otherwise be available for the ongoing development of our business;
 
  •  the diversion of financial or other resources from our existing businesses; and
 
  •  potential loss of, or harm to, relationships with the clients of the acquired entities or our existing clients.
 
A successful integration of those acquisitions is crucial to achieving our goal of establishing an integrated cross-media platform. Moreover, under almost all of the contractual arrangements in connection with our recent acquisitions, we incentivize the sellers, whom we often retain as the management of the acquired entities, with earn-out payments that are typically tied to the performance of the respective acquired entities during a period of up to several years after acquisition. See “Recent Acquisitions.” As such, these personnel may not always act in our best interests in the long run and may not make as much effort as desirable to cross-sell on our cross-media platform. Furthermore, a number of our acquired companies are held as subsidiaries of our consolidated variable interest entity, which provides us with less control over these acquired companies than if they were direct subsidiaries, and may cause difficulty in the integration process. See “— Risks Relating to Our Structure — We rely on contractual arrangements with Wanli, our consolidated variable interest entity, and its shareholders for a significant portion of our China operations, which may not be as effective in providing operational control as direct ownership.” If we encounter difficulty in integrating our recent acquisitions, we could be exposed to significant business risks and our future financial condition, results of operations and growth prospects could be materially adversely affected.
 
We anticipate that we will continue to acquire businesses or assets that are complementary to our core business. We cannot assure you, however, that we will be able to identify and secure suitable acquisition opportunities. In addition, our ability to effectively integrate any future acquisition on terms that are favorable to us may be limited by the number of attractive acquisition targets available, internal demands on our resources and, to the extent necessary, our ability to obtain financing on satisfactory terms for larger acquisitions, as well as our ability to obtain any required shareholder or government approvals. Moreover, even if an acquisition target is identified, the third parties with whom we seek to cooperate may not select us as a potential partner or we may not be able to enter into arrangements on commercially acceptable terms with respect to such an acquisition. Even if we have entered into definitive agreements to consummate an acquisition, the acquisition may not be completed for an extended period of time, or at all, for various reasons, including failure to satisfy closing conditions or breach by a party. The negotiation and completion of potential acquisitions, whether or not ultimately consummated, could also require significant amounts of management’s time and resources and potentially disrupt our existing business.
 
     We cannot assure you that our pending acquisitions of Yarun, WinClick and the remaining minority equity interests in each of Hongmen and Yanhuang will be consummated as contemplated.
 
Our acquisitions of Yarun and WinClick and the remaining minority equity interests in Hongmen and Yanhuang are pending completion. The consummation of each of these acquisitions is subject to a number of conditions set forth in the relevant transaction documents. See “Recent Acquisitions” for respective conditions precedent to the completion of these acquisitions. Many of those conditions are not within our control and thus there is no assurance that all of those conditions will be satisfied. In addition, although we may waive any condition to our obligation to close in order to consummate the acquisitions, we may decide not to do so. For example, we terminated a proposed acquisition in 2009 based on our due diligence findings. If any of these acquisitions is not consummated as contemplated, we would not achieve the benefits we expect from such acquisition and our prospects may be materially and adversely affected.
 
     There may be unidentified risks relating to our recent acquisitions.
 
Although we have conducted due diligence with respect to our recent completed and pending acquisitions, we may not identify all material risks associated with these acquisitions due to inherent limitations of due diligence, including, among other things, unforeseen contingent risks or latent liabilities relating to the entities acquired or to be acquired that may not become apparent until in the future. Any such unidentified risk could have a material adverse impact on our business, financial condition and results of operations after the completion of the acquisitions. Even if we identify any such risk and terminate the relevant acquisition agreements prior to the completion, our reputation may be harmed and our prospects may be materially and adversely affected.


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     We face intense competition and other challenges in the advertising market in China, and if we do not compete against existing and new competitors and address these challenges successfully, we may lose market share, and our business, financial condition, results of operations and prospects could be materially and adversely affected.
 
We face significant competition in the advertising market in China. For each of our advertising channels, we compete for advertisers primarily on the basis of network or audience coverage, popularity and quality of programs broadcasted, location, the range of advertising services that we offer, the effectiveness of our media formats, price and brand recognition. We expect competition in the advertising industry in China in general, and the outdoor, radio and television segments, in particular, to intensify in the future.
 
The market for outdoor advertising in general, including advertising in residential and commercial locations, requires that we continuously identify and secure valuable media resources and develop new features and enhancements for our media formats. If we fail to define, develop or introduce new resources and features on a timely and cost-effective basis, advertiser demand for our services may decrease and we may not be able to compete effectively, which would have a material and adverse effect on our business, revenues, profitability and prospects.
 
Our broadcast network business competes with a wide range of competitors, including radio or television advertising agencies, radio program producers and radio stations. We compete with other agencies for valuable media resources, such as advertising time slots on high-quality television or radio channels or programs. We may also compete with them for advertising clients. Our broadcast network business also faces competition and other challenges from new technologies and media platforms, such as the Internet, broadband wireless and Internet television, and new consumer products, such as portable digital audio players and personal digital video recorders. These new technologies and media platforms compete with our radio business and television advertising business for audience share and advertising revenue, and in the case of new consumer products, allow the audience to avoid traditional advertisements. We are unable to predict the effect such technologies and related services and products will have on our radio business and television advertising business, but there exist certain risks, including, among others, that the capital expenditures necessary to adapt our products and services to such technologies could be substantial and other companies employing such technologies could compete with our businesses.
 
We are seeking to expand our presence on the Internet and other new media platforms. For example, we have entered into agreements to acquire WinClick, a company that operates a wireless-based affiliate marketing platform in China, pending completion. However, the market for Internet and new media platforms is rapidly evolving and is becoming increasingly competitive. We cannot predict whether, or how fast, this market will grow. Moreover, if we fail to expand our Internet and new media presence or adapt to the rapid change in the Internet and new media markets and technology, our business, competitiveness and results of operations could be materially and adversely affected.
 
Our successful expansion into these media platforms depends on a number of factors, including:
 
  •  the completion of our acquisition of WinClick;
 
  •  sufficient demand for these services from our existing and potential audience, and sufficient advertising revenues from customers, to offset the substantial investment we will make in order to provide them;
 
  •  our ability to compete effectively with other providers of these products and services;
 
  •  our ability to adapt and develop our products and services in line with changing market conditions and customer needs; and
 
  •  our ability to form, acquire or cooperate with Internet content and service providers and obtain the appropriate licenses to conduct this business.
 
The absence or failure of any one or more of these factors may materially and adversely affect our business, results of operations, financial condition and prospects.
 
Increased competition could reduce our operating margins and profitability and result in a loss of market share. Some of our existing and potential competitors may have competitive advantages, such as significantly greater


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brand recognition and financial, marketing or other resources, and may be able to better implement similar or competing business models. Many of our competitors have a longer operating history, a broader range of products and service offerings, greater capital resources, a more extensive client base, stronger media relationships and wider international or local brand recognition. Moreover, significant competition will provide advertisers with a wider range of media and advertising service alternatives, which could lead to lower prices and decreased revenues, gross margins and profits. We cannot assure you that we will be able to successfully compete against new or existing competitors, and any failure to compete will have a material adverse effect on our market share as well as our business, financial condition, results of operations and prospects.
 
     If we fail to attract a sufficient number of advertisers to advertise across our integrated cross-media platform, our business prospects may be adversely impacted.
 
We intend to create an integrated cross-media platform on which advertisers wishing to reach affluent audiences and viewers can advertise simultaneously on multiple media channels. However, such advertisers may choose not to make full use of our media channels, or at all, or choose to use a competitor’s media channels or services, for various reasons, such as deciding that our targeted demographics do not match their desired consumer base or that our audiences and viewers do not constitute a critical mass of consumers for their products or services. Under these circumstances, our future operating results and business prospects could be adversely affected.
 
In addition, some of our competitors have more established brands in the media industry, with a longer history and a larger customer base. The promotion of our brands to attract advertisers to utilize our integrated cross-media platform will depend largely on our success in maintaining a sizable and loyal audience and viewership, providing high-quality content and organizing effective marketing programs across our integrated cross-media platform. While many of the media resources currently utilized by us have a high level of brand recognition, we may not be able to maintain our existing brands or develop a new brand for our integrated cross-media platform on a cost-effective basis, which may have an adverse impact on our operating results.
 
     We may not be able to obtain all necessary approvals that will allow us to pay the remaining consideration with our common shares in connection with our recent acquisitions, and thus may have to pay in cash, which may materially strain our liquidity.
 
We are required to pay certain remaining consideration in connection with some of our recent acquisitions. We typically have an option to pay such consideration in cash or our common shares. For certain acquisitions in which we have not yet acquired 100% of the equity ownership of the acquired entities, we have agreed to purchase the remaining equity interest using cash or our common shares. If we decide to pay such consideration using our common shares, these acquisitions may be considered “share swap” transactions under applicable PRC laws and be subject to approvals by various PRC governmental authorities, including the Ministry of Commerce, or the MOFCOM, and the State Administration of Foreign Exchange, or the SAFE. We cannot assure you that we will obtain all necessary approvals to effect the payments in our common shares in connection with our recent acquisitions, in which case, we may have to make these payments in cash.
 
We may not have sufficient cash on hand to fund these payments and may not be able to raise adequate funding in time and on terms acceptable to us, if at all, to fund these payments. As a result, our liquidity position, financial condition and results of operations may be materially and adversely affected.
 
     Our limited operating history may not provide an adequate basis to judge the viability of our business, the effectiveness of our management and our future profitability and prospects, and our successive acquisitions make evaluating our business prospects difficult.
 
While we commenced our operations in 2003, our radio business was formed through our acquisition of Daren in November 2005 and all our other businesses were formed through acquisitions that took place in or after October 2007. Our limited operating history, particularly with respect to our outdoor advertising and television advertising businesses, may not provide a meaningful basis for you to evaluate our business, financial condition, results of operations and prospects.


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Furthermore, our successive acquisitions and rapid expansion make comparisons of our historical data difficult. For example, although we have sustained losses in the past, including in 2006 through the nine months ended September 30, 2009, we have experienced growth in recent financial periods primarily due to our successive acquisitions. Such growth may not be sustainable or indicative of our future growth potential.
 
In addition, we face numerous risks, uncertainties and difficulties typically encountered by companies at early stages of development, as a result of which we may not be able to, among others:
 
  •  successfully manage the expansion of our operations, including the integration of companies we acquired or may acquire in the future, and raise sufficient capital to sustain and expand our businesses and to complete pending or new acquisitions;
 
  •  increase brand awareness of our cross-media platform;
 
  •  successfully expand into new advertising channels or adopt new media formats;
 
  •  retain existing advertising clients and attract new ones; or
 
  •  adapt to competitive market conditions.
 
If we fail to address any of these or other risks, uncertainties and difficulties, our business may be materially adversely affected.
 
     The pro forma consolidated financial information is not necessarily reflective of what our actual financial results would have been had the businesses acquired been under common management during the periods presented in the pro forma financial information, and our actual financial results for future periods may differ significantly from the pro forma financial results.
 
The unaudited pro forma consolidated financial information presented in this prospectus was prepared in accordance with the relevant rules and regulations promulgated by the SEC. Such information includes all adjustments that our management believes are necessary for a fair presentation of the pro forma operating results in the historical periods. In preparing the unaudited pro forma consolidated financial information, our management has made certain assumptions, such as the anticipated allocation of purchase price and amortization of related intangible assets. In addition, it is impossible to quantify and reflect the impact of the combinations on results of operations in periods prior to the combinations actually occurring. Furthermore, one of the acquisitions to which the unaudited pro forma financial information gives pro forma effect is pending completion. Because of these uncertainties, the unaudited pro forma condensed consolidated financial statements are not necessarily indicative of the results that would have been reported had the events for which pro forma effect has been given actually occurred on the dates specified, nor are they necessarily indicative of our future results of operations.
 
     We have not achieved profitability and may continue to sustain losses.
 
We incurred net losses attributable to common shareholders of $5.2 million, $3.3 million, $7.4 million, $5.9 million and $0.1 million in 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009, respectively. Our initial loss in 2006 resulted principally from loss from operations and loss from associates. In 2007, our loss was primarily due to loss from operations. In 2008, our loss primarily resulted from loss from operations and impairment loss on marketable securities. In the nine months ended September 30, 2009, our loss was mainly due to income tax expenses. We may not be able to achieve or maintain profitability in the near term, or at all. Our ability to achieve and maintain profitability depends, in part, on the integration of acquired businesses, the growth rate of the advertising market in China, the continued acceptance of our advertising solutions, the pricing trends of advertising services and the competitiveness of our solutions, as well as our ability to provide new advertising solutions to meet the demands of our clients. In addition, our ability to achieve or maintain profitability could also be adversely affected by significant increases in operating and other costs and expenses. For example, as a result of the grant of new share options and the reduction in the exercise prices of share options previously granted on December 31, 2009, our estimated compensation expenses for share options to be recognized over the next few years increased by $8.7 million on December 31, 2009. If we fail to increase our revenues at our anticipated rates or


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our operating costs and expenses increase without a commensurate increase in our revenues, our business, financial condition and results of operations will be negatively affected.
 
     If we fail to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our expansion strategies or meet the demands of our advertising clients and our business and prospects may suffer.
 
We have recently experienced a period of rapid growth and expansion that has placed, and will continue to place, substantial demands on our management personnel, systems and resources. We expect to continue our expansion to address growth in demand for our advertising services, including demands of our advertising clients for a broader and more diverse set of service offerings, and to capture new market opportunities. In particular, managing our growth will require our ability to, among other things:
 
  •  achieve cross-selling on our integrated cross-media platform;
 
  •  maintain continued constructive relationships with television stations, radio stations, other media providers and Internet and value-added telecommunications service providers;
 
  •  maintain and develop relationships with property owners, managers and administrators and other location providers;
 
  •  maintain and develop relationships with third-party suppliers of desirable content;
 
  •  broaden our service offerings and increase sales of higher margin service offerings;
 
  •  continue identifying and obtaining concession rights to or leasing for new and attractive advertising locations or media formats on commercially acceptable terms;
 
  •  control operating expenses and increase operational efficiency;
 
  •  significantly expand our capital expenditures to pay for the installation or leasing of new media formats;
 
  •  obtain related governmental approvals, which typically include approvals from branches of the State Administration for Industry and Commerce, or the SAIC;
 
  •  strengthen financial and management controls and enhance our information technology system; and
 
  •  hire and train new personnel, including sales and marketing personnel.
 
If we fail to manage our growth successfully, our business and prospects would be materially and adversely affected.
 
     Our quarterly operating results may fluctuate significantly from period to period in the future.
 
Our quarterly operating results may fluctuate significantly from period to period depending on numerous factors, including the seasonality of consumer and advertiser spending and corresponding advertising trends in China. Moreover, the seasonality of consumer and advertiser spending may affect our advertising networks differently. Other factors that may affect our quarterly results include:
 
  •  the loss of exclusive advertising agency arrangements with television stations;
 
  •  the loss of key advertising clients;
 
  •  changes in pricing policies by us or our competitors;
 
  •  variations in the advertising spending cycles of our advertising clients;
 
  •  the timing and market acceptance of new solutions offered by us or our competitors;
 
  •  changes in the industry operating environment;
 
  •  changes in relevant government policies or regulations or their enforcement; and
 
  •  a downturn in general economic conditions in China or internationally.


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Many of these factors are beyond our control, making our quarterly results difficult to predict, or fluctuate, which could cause the trading price of our ADSs to decline below investor expectations. 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 relative to our operating results from other quarters. You should not rely on our financial results for prior periods as an indication of our future performance.
 
     We derive substantially all of our revenues from advertising, and the advertising market is volatile and sensitive to changes in economic conditions and advertising trends.
 
Most of our business divisions, including our outdoor advertising network, radio network and television advertising platform, derive substantially all of their revenues from the provision of advertising and related services. Advertising spending is volatile and sensitive to changes in the economy. Our advertising clients may reduce the amount they spend on our media channels or agency services for a number of reasons, including:
 
  •  a downturn of economic conditions in China or elsewhere in the world;
 
  •  a decline in the economic conditions of the areas covered by our advertising networks;
 
  •  a downturn in our clients’ industries or businesses;
 
  •  a decision to shift advertising spending to other media and platforms;
 
  •  a deterioration in the ratings of our radio programs and the programs of the television channels for which we act as exclusive advertising agent; or
 
  •  a decline in advertising spending in general.
 
A decrease in demand for advertising in China in general and for our advertising services in particular would materially and adversely affect our business, financial condition, results of operations and prospects.
 
     We have been, and may continue to be, dependent on a limited number of clients for a significant portion of our revenues, and a loss of our significant clients may materially and adversely affect our results of operations.
 
A small number of clients have historically accounted for a significant portion of our revenues. In 2006, one client accounted for 25.2% of our total revenues. In 2007, another client accounted for 19.0% of our total revenues. In 2007, 2008 and the nine months ended September 30, 2009, our five largest clients collectively accounted for approximately 48.4%, 25.8% and 33.6% of our total revenues, respectively. We may continue to be dependent on a small number of our clients for a substantial portion of our revenues in the future.
 
Advertisers generally are able to reduce advertising and marketing spending or cancel advertising campaigns at any time for any reason. If we lose one or more of our largest advertising clients, if one or more of them reduce their spending on our advertising services, or if we fail to maintain our relationships with advertising agencies through which we sell advertising services to our advertising clients, to the extent these clients are not replaced by new client accounts or an increase in business from existing clients, our revenues could significantly decline and our business, financial condition and results of operations could be materially and adversely affected. Moreover, we do not enter into long-term agreements with most of our clients and cannot assure you that we will be able to continue selling our advertising services to them. In addition, our dependence on a small number of clients makes us vulnerable to delays in payments from these clients. We are required under our exclusive advertising agency arrangements with television stations to make pre-determined monthly payments to the television stations regardless of whether we receive payments from our advertising clients. If one or more of our major clients are delinquent in their payments to us for a significant period of time, our financial condition may be materially harmed.
 
In addition, substantially all of our five largest advertising clients in each of 2007, 2008 and the nine months ended September 30, 2009 were represented by their respective advertising agencies in purchasing and placing advertisements with us. The advertising agencies generally exercise considerable influence over the way the advertising budgets of their advertising clients are spent and in the selection of various media for the delivery of


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advertisements. Our ability to maintain and manage relationships with these advertising agencies, which are vitally important to our ability to source business from their advertiser clients, is subject to various uncertainties. These uncertainties include changes in relationship personnel at such advertising agencies, which are often beyond our control.
 
     A majority of our revenues is currently concentrated in Beijing and Shanghai. If either or both of these two cities experience an event negatively affecting its advertising industry, our business and results of operations could be materially and adversely affected.
 
A majority of our revenues are currently concentrated in Beijing and Shanghai, two of China’s major cities. In 2008 and the nine months ended September 30, 2009, more than 77.5% and 91.9%, respectively, of our revenues were derived from these two cities. We expect that we will continue to generate significant revenue from our business in these two cities. Therefore, any event negatively affecting the advertising market in any one of these cities, such as a serious economic downturn, severe weather conditions and other natural disasters, contagious disease outbreaks or changes in government policy materially limiting our advertising media, could materially and adversely affect our business and results of operations.
 
     If advertisers or consumers do not accept, or lose interest in, our outdoor advertising network, we may be unable to generate sufficient cash flow, which would have a material adverse effect on our business, financial condition, results of operations and prospects.
 
The market in China for our outdoor advertising networks is relatively new and its potential is uncertain. Our success in outdoor advertising depends on the acceptance of our advertising network by our advertising clients and their continuing interest in our network as a component of their advertising strategies. Our success in outdoor advertising also depends on consumers being receptive to our advertising network. Advertisers may choose not to use our advertising services if they believe that consumers are not receptive to our advertising network or that our advertising network is not as effective as other competing forms of media networks. Likewise, consumers may find our residential light-box network to be intrusive. This could cause property owners or administrators to prohibit us, or further restrict us, from operating our advertising network on their properties, which may materially and adversely affect our business and prospects.
 
Furthermore, advertisers’ willingness to purchase our advertising services depends in part on the viewing public’s response to the advertisements. However, it is difficult to track the viewing public’s response to the advertisements placed on our outdoor advertising network. If we fail to adequately track the viewing public’s response, particularly with respect to tracking the demographics of the viewers most receptive to those advertisements, we will not be able to provide sufficient feedback and data to existing and potential advertising clients to help us generate demand and determine pricing. Without improved market research, advertising clients may reduce their use of our outdoor advertising network. If a substantial number of our advertising clients lose interest in our outdoor advertising network for these or other reasons, we will be unable to generate sufficient revenues and cash flow to operate our outdoor advertising business, and our business, financial condition, results of operations and prospects could be materially and adversely affected.
 
     If we are unable to retain or obtain desirable placement locations for our media formats or desirable displays on commercially acceptable terms or at all, or if the supply of desirable locations or displays diminishes, we may have difficulty maintaining or expanding our outdoor advertising network, and our operating margins and earnings could decrease significantly.
 
Our ability to generate revenues for our outdoor advertising business depends upon our ability to provide a broad advertising network covering residential, commercial and other locations in China that are attractive to advertisers. This, in turn, requires that we develop and maintain business relationships with the property owners, managers or administrators of the locations covered by our residential light-box network and the owners or operators of the leased billboards and other displays comprising our commercial billboard and display network. A majority of our display placement agreements with property owners, managers or administrators have five-year terms. The billboard/display leasing agreements with billboard or display owners or operators generally range from several months to three years. Some of our display placement agreements generally give us the right to renew on


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terms no less favorable than those offered by competing bidders. However, we may not be able to maintain our relationships with property owners, managers or administrators or billboard/display owners or operators on commercially acceptable terms, if at all. For example, some of the billboard/display leasing agreements allow the billboard/display owners or operators to terminate the relevant agreements early, without compensation to us, if there are changes in government planning policies regarding outdoor advertising facilities or other specified reasons. We also operate our residential light-box network in Shanghai pursuant to an approval from the local government authority that does not have a specified term and that may terminate at any time at the government’s discretion. If we fail to maintain these business relationships with the property owners, managers or administrators of the locations covered by our outdoor advertising network, or if a significant number of our display placement agreements, billboard/display leasing agreements or governmental approvals are terminated or not renewed for any reason, advertisers may find our outdoor advertising services unattractive and may not wish to purchase our services, which would materially and adversely affect our business and prospects.
 
Our outdoor media costs currently include concession fees that we pay to residential property owners, managers or administrators under our display placement agreements, leasing fees under our billboard/display leasing agreements, maintenance and monitoring fees and other associated costs, and comprise a significant portion of our cost of revenues. In the future, we may need to increase the amount of fees that we pay to obtain new locations and leases, renew existing locations and billboard/display leases, and secure favorable exclusivity and renewal terms. In addition, property owners, managers or administrators may charge increasingly higher concession fees, or demand other compensation arrangements, such as revenue or profit sharing. Any such increase in outdoor media costs may result in a significant decrease in our operating margins and earnings.
 
     If we fail to obtain, maintain or renew certain governmental approvals or registrations for our outdoor advertising operations, we may not be able to continue to operate all or a portion of our outdoor advertising business or expand this business, which could materially and adversely affect our business and prospects.
 
Under the Provisions on the Registration Administration of Outdoor Advertisements, all outdoor advertisements must be registered with the local branches of the SAIC above county level and outdoor advertising registration certificates be obtained prior to their publication. In addition, certain of the cities where we and the entities acquired by us operate outdoor advertising business, including Shanghai, Beijing and Guangzhou, have local regulations for outdoor advertising operations, including approval requirements for placement of outdoor advertising displays and restrictions or prohibitions on outdoor advertisements in certain areas or through certain facilities. See “Regulation — Regulations on the Advertising Industry — Outdoor Advertising.” Furthermore, local governments may, from time to time, adopt measures to suspend or tighten the approvals of, registrations for, or impose further restrictions on, outdoor advertising operations for political, public policy, administrative or other consideration. For instance, on April 22, 2008, the Shanghai City Appearance and Environmental Sanitation Bureau issued an emergency notice suspending all approvals for the placement of outdoor advertising displays in Shanghai, including any renewals of approvals, and requiring the immediate cessation of the construction of all outdoor displays. While our then-existing outdoor displays in Shanghai were largely unaffected, this regulation may pose potential problems for the development of our outdoor advertising business in that city.
 
We may not always be able to obtain, maintain and renew the relevant approvals or registrations, including the approval for placement of outdoor advertising displays and outdoor advertising registration certificates that are required to operate our outdoor advertising business. For example, due to the April 2008 emergency notice referred to above, we are currently unable to register some of our outdoor displays and the associated advertisements with the local branches of the SAIC in Shanghai. In addition, some of the advertisements placed on our commercial billboard and display network have not been registered with the relevant local branches of the SAIC. If we fail to obtain the requisite registration, the relevant local SAICs may impose administrative sanctions on us, such as fines and confiscation of our advertising income. As a result of such sanctions, we may also have to discontinue the operation of the affected outdoor displays and all unregistered outdoor advertisements.


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     Neither we nor Yarun have long-term agreements with the television stations for which we or Yarun act as exclusive advertising agent on specific channels or programs. Failure to renew those agreements upon expiration could materially and adversely affect our or Yarun’s business, results of operations, financial condition and prospects.
 
Television advertising services are a significant part of our business. Our television advertising services currently are focused on acting as the exclusive agent to sell all the advertising time slots around two television programs. Yarun, the acquisition of which is pending, has entered into agreements with three television stations or their agents to obtain the exclusive agency rights to sell advertising time slots for two entire television channels and the right to jointly sell advertising time slots for three programs on another television channel. The terms of our and Yarun’s advertising agency agreements with television stations or their agents range from one to three years. These agreements may not always be renewed upon expiration. For example, a television station may decide not to renew an agreement due to its intention to award the agreement to an advertising agent competing with us or Yarun or due to changes in its internal practice or policy of using external exclusive advertising agents. We or Yarun may also elect not to renew the relevant agreements if the terms and conditions for renewal are not commercially attractive or desirable. If any of these agreements is not renewed upon expiration and is not replaced by similar new agreement(s) or increase in revenues under existing agreements, our or Yarun’s revenues from the television advertising business could significantly decline and our or Yarun’s business, results of operations, financial condition and prospects could be materially and adversely affected. The acquisition of Yarun may not be ultimately consummated and, if consummated, is expected to be completed following this offering. See “Recent Acquisitions — Broadcast Network and Internet and Interactive Services — Yarun.”
 
     Our broadcast and Internet and interactive services could be materially and adversely affected if the target audience and viewers do not continue to accept our radio or the programs of the television channels for which we or Yarun act as an exclusive advertising agent.
 
Our radio and Internet and interactive businesses and the television channels for which we or Yarun, the acquisition of which is pending, act as an exclusive advertising agent target affluent consumers in urban areas in China. The popularity of the radio and interactive programs offered by us or the television programs offered by our radio business and the relevant television channels is one of the reasons that we and Yarun are able to sell advertisements around these programs. As such targeted audience and viewers are highly desirable to us and Yarun as well as our competitors, attracting and retaining a loyal following for the media offerings of our radio business and the relevant television channels pose ongoing challenges for us and Yarun. The taste and preferences of such targeted demographics may change frequently and dramatically. In addition, we and Yarun may not have control over the availability or scheduling of the relevant television programs, and such programs may be shortened, cancelled or rescheduled to time slots that are less attractive to advertisers. If the quality, or the perceived quality, of the media offerings of our radio and Internet and interactive services and the relevant television channels declines and we or the relevant television channels fail to continue to attract those targeted audience and viewers due to change in the taste or preferences of the targeted demographics, change in time slots of the programs or otherwise, our or Yarun’s operating results may be adversely affected. The acquisition of Yarun may not be ultimately consummated and, if consummated, is expected to be completed following this offering. See “Recent Acquisitions — Broadcast Network and Internet and Interactive Services — Yarun.”
 
     Some businesses of our company and the entities to be acquired by us rely on key business relationships, and if key business partners fail to perform, terminate or materially alter any of their contractual arrangements with us or these entities for any reason, these businesses could be disrupted and our reputation may be harmed.
 
Some businesses of our company and the entities to be acquired by us rely on key business relationships. For example, we rely on a business partner in securing the rights to place outdoor displays in residential communities and university campuses in Shanghai. In addition, WinClick generates a significant portion of its revenues from fees for mobile value-added services, or MVASs, paid by mobile phone users. All MVASs marketed through WinClick’s affiliate marketing platform are placed via the mobile network of China Mobile Communications Corporation and its subsidiaries, or, collectively, China Mobile. WinClick bills and collects fees relating to such MVASs through China Mobile.


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If those key business partners fail to perform or decide to terminate any of their agreements with us or the entities to be acquired by us for any reason (including, for example, a breach of contract or the lack of proper regulatory approvals), increase their service fees or other charges, limit our ability to or prevent us from using its network or services, impose monetary penalties, refuse to extend or renew their agreement or to enter into a similar agreement, or otherwise materially alter the contractual arrangements, the ability of these businesses to carry on operations and cross-sell advertising services among our different media platforms may be impaired. Depending on the circumstances, the consequences could be far-reaching and detrimental to our business operations, reputation and future growth potential. For example, China Mobile recently suspended cooperation with one of WinClick’s affiliates for violations of China Mobile’s content policies. Furthermore, in response to a recent PRC government campaign against unhealthy content being carried on mobile networks, China Mobile has suspended billing and collection services relating to certain wireless application protocol, or WAP, -based MVASs for MVAS providers, including many of WinClick’s advertisers. WinClick’s business has been materially adversely affected as a result of these actions. It currently remains unknown whether and when China Mobile will resume the billing and collection services for those WAP-based MVASs. See “Business — Our Cross-Media Platform — Internet and Interactive Services — WinClick’s Wireless-Based Affiliate Marketing Platform.”
 
     We may be subject to liabilities for advertisements produced by us or displayed on our media channels.
 
PRC advertising laws and regulations require advertisers, advertising operators and advertising distributors, including businesses such as ours, to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable law. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving severe violations, the PRC government may revoke a violator’s license for advertising business operations and a criminal penalty may be imposed.
 
We are obligated under PRC laws and regulations to monitor the advertising content that is shown, displayed or printed on or distributed through any of our media channels for compliance with applicable law. In our broadcast network businesses, we are typically responsible for compliance with applicable laws, rules and regulations with respect to advertising content that we provide to the television or radio stations. Furthermore, for advertising contents related to specific types of products and services, such as alcohol, tobacco, cosmetics, pharmaceuticals and medical facilities, we are required to confirm that our advertising client has obtained requisite government approvals, including the advertiser’s operating qualifications, proof of quality inspection of the advertised products, government pre-approval of the contents of the advertisement and filing with the local authorities.
 
Civil claims may be filed against us for fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and content of the advertisements displayed on our advertising network. While we typically have contractual rights to be indemnified by the relevant advertisers for our losses and damages resulting from such claims, enforcement of such rights could be costly and indemnification recovered may not be sufficient to compensate for our losses. In addition, if such claims are filed against us, our reputation may also be harmed.
 
     The PRC government may prevent us or the entities to be acquired from producing or distributing, and we or they may be liable for, content that it believes is inappropriate.
 
The media sector in China is highly regulated and closely monitored by various government agencies in China, in particular the State Administration of Radio, Film and Television, or the SARFT. China has enacted laws and regulations governing the production and distribution of news, information or other broadcasting content. In the past, the PRC government has stopped the production or distribution of information or content that it believes violates PRC law and the media entities in breach of these laws have been severely reprimanded. The SARFT would prohibit information and content from being distributed through the media, if the SARFT were to find the information or content inappropriate. Inappropriate content includes, among others, information that threatens the unity, sovereignty and territorial integrity of China, endangers national security, incites violence and uprising, propagates obscenity or undermines public morality. In addition, the SARFT has published regulations that subject media operators to potential liability for content distributed through their broadcast or print media.


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It may be difficult to determine the type of content that may result in liability. PRC government censorship is carried out on a case-by-case basis, often without consistency among the cases and without explanation. In addition, the PRC government may launch campaigns and issue new policies with respect to control and censorship of the media sector, which may lead to more stringent interpretation or enforcement of regulations. For example, the Ministry of Industry and Information Technology, or MIIT, initiated a campaign in late 2009 against transmission of unhealthy content through mobile networks and has adopted certain measures, including, among other things, requesting all the mobile network operators in China to inspect MVAS providers and MVAS marketing channels, censor advertisements and other content and develop systems to filter “harmful” content.
 
If the content created or distributed by our company or the entities to be acquired by us is deemed to have violated any content restriction, we or such entities would not be able to continue to create or distribute the content and could be subject to penalties, including confiscation of income, fines, suspension of business and revocation of licenses for operating media services, which would materially and adversely affect our or their business, financial condition and results of operations.
 
     We may be exposed to intellectual property infringement and other claims by third parties that, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.
 
The success of our radio business and our Internet and interactive services depends, in part, on our ability to use copyrighted works without infringing third-party intellectual property rights. As we expand our service offerings, and as litigation becomes more common in China, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of which have substantial resources, may have or may obtain intellectual property protection that will prevent, limit or interfere with our ability to offer additional service offerings in China. Moreover, the defense of intellectual property suits, including copyright infringement suits, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:
 
  •  pay damage awards;
 
  •  seek licenses from third parties;
 
  •  pay ongoing royalties;
 
  •  redesign our service offerings; or
 
  •  be subjected to injunctions,
 
each of which could effectively prevent us from pursuing some or all of our radio business and Internet and interactive services, and result in our clients or potential clients deferring, limiting or discontinuing their purchases of our service offerings, which could have a material adverse effect on our financial condition and results of operations.
 
     Our failure to protect our intellectual property rights could have a negative impact on our business, competitive position and prospects.
 
We believe our brand, trade names, trademarks and other intellectual property are important to our success. The success of our business depends in part upon our continued ability to use our brand, trade names and trademarks to increase brand awareness and to further develop our brand. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill. We are also susceptible to competitors’ emulating our business model and methods. Preventing the unauthorized use of our intellectual property is difficult, time-consuming and expensive, and may divert significant management and staff resources from our business and operations. Misappropriation of our content, trademarks and other intellectual property rights could also divert significant business to our competitors. Any litigation or proceeding or other efforts to protect our intellectual property rights could result in substantial costs and diversion of our resources and could


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seriously harm our business and operating results. Furthermore, the degree of future protection of our intellectual property rights is uncertain and may not adequately protect our rights or permit us to gain or keep our competitive advantage. To our knowledge, the relevant authorities in China have historically not protected intellectual property rights to the same extent as the United States. If we are unable to adequately protect our brand, trade names, trademarks and other intellectual property rights, our business, competitive position and prospects may be materially and adversely affected.
 
     We have no business liability, interruption, litigation or casualty insurance coverage, which may result in our incurring substantial costs and the diversion of resources.
 
Insurance companies in China offer limited business insurance protection and do not, to our knowledge, offer general business liability insurance. While business interruption insurance is available to a limited extent in China, we have determined that the cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to subscribe to such insurance. Furthermore, we do not maintain any third-party liability insurance coverage or any insurance coverage for damage arising from accidents that occur during the course of our operations, including the collapse of outdoor displays or other media formats that we operate. As a result, we may have to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our financial condition and results of operations.
 
     We may become a passive foreign investment company, which could result in adverse United States federal income tax consequences to U.S. investors.
 
Based upon the past and projected composition of our income and valuation of our assets, including any goodwill, we do not expect to be a passive foreign investment company, or PFIC, for 2010 or in the near future, although there can be no assurance in this regard. If, however, we were a PFIC, such characterization could result in adverse United States federal income tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, our U.S. investors will become subject to increased tax liabilities under United States federal income tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for United States federal income tax purposes if either: (i) 75% or more of our gross income in a taxable year is passive income, or (ii) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which includes cash) is at least 50%. The calculation of the value of our assets will be based, in part, on the then-market value of our ADSs, which is subject to change. We cannot assure you that we will not be a PFIC for 2010 or any future taxable year. As the determination of PFIC status requires extensive factual investigation, including ascertaining the fair market value of our assets on a quarterly basis and the character of each item of income we earn, this determination, although ultimately legal in nature, is beyond the scope of legal counsel’s role and, accordingly, our U.S. counsel expresses no opinion with respect to our PFIC status.
 
     We and our independent registered public accounting firm, in the course of auditing our financial statements, noted one material weakness and one significant deficiency in our internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results in accordance with U.S. GAAP may be materially and adversely affected. In addition, investor confidence in us and the market price of our ADSs may decline significantly if we or our independent registered public accounting firm conclude that our internal control over financial reporting is not effective.
 
Prior to this offering, we have been a private company with a short operating history and limited accounting personnel and other resources with which to address our internal control and procedures over financial reporting. In the course of auditing our consolidated financial statements for the three years ended December 31, 2008 and nine months ended September 30, 2009, we and our independent registered public accounting firm identified one material weakness and one significant deficiency in our internal control over financial reporting, as defined in AU 325, Communicating Internal Control Related Matters Identified in an Audit, of the AICPA Professional


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Standards. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of our company’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
 
The material weakness identified relates to the lack of sufficient accounting personnel with appropriate understanding of U.S. GAAP accounting issues and the SEC reporting requirements. The significant deficiency relates to the lack of standard chart of accounts and written accounting manual and closing procedures to facilitate preparation of financial statements under U.S. GAAP for financial reporting purposes. The material weakness resulted in audit adjustments and corrections to our financial statements.
 
We plan to take initiatives to improve our internal control over financial reporting and disclosure controls, including (i) establishing an audit committee to oversee the accounting and financial reporting processes as well as external and internal audits of our company, (ii) establishing an internal audit function, (iii) hiring additional qualified professionals with relevant U.S. GAAP accounting experience for our finance and accounting department at both headquarters and subsidiaries levels, (iv) providing additional accounting and financial reporting training for our existing personnel, (v) standardizing our accounting systems by introducing additional programs and procedures, (vi) formalizing and standardizing policies and procedures in relation to period-end-closing and financial reporting at both headquarters and subsidiaries levels and (vii) increasing the level of interaction among our management, audit committee and other external advisors. However, the implementation of these initiatives may not fully address the material weakness and significant deficiency in our internal control over financial reporting. In addition, the process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate in satisfying our reporting obligations. Our failure to cure the material weakness and significant deficiency or our failure to discover and address any other weaknesses or deficiencies may result in inaccuracies in our financial statements in accordance with U.S. GAAP or delay in preparing our financial statements. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Ineffective internal control over financial reporting could also expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which our ADSs are listed, regulatory investigations or civil or criminal sanctions.
 
Upon the completion of this offering, we will become a public company in the United States that is, or will be, subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The SEC, as required under Section 404 of the Sarbanes-Oxley Act, or Section 404, has adopted rules requiring public companies to include a report of management on the effectiveness of these companies’ internal control over financial reporting in their annual reports. In addition, an independent registered public accounting firm must report on the effectiveness of public companies’ internal control over financial reporting. These requirements will first apply to us beginning with our annual report on Form 20-F for the fiscal year ending December 31, 2010. Our management may conclude that our internal control over financial reporting is not effective due to our failure to cure the identified material weakness and significant deficiency or otherwise. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may not conclude that our internal control over financial reporting is effective or may issue a report that is qualified if it is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, during the course of the evaluation, documentation and testing of our internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the SEC for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, our independent registered public accounting firm may determine that our internal control over financial reporting is not effective or it may decline to attest to the effectiveness of our internal control over financial reporting.


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     We may be required to record a significant charge to earnings if our goodwill or acquired intangible assets are determined to be impaired.
 
We are required under U.S. GAAP to review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and intangible assets with indefinite lives are required to be tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or acquired intangible assets may not be recoverable include, but are not limited to, a decline in stock price and market capitalization and slower growth rates in our industry. Should the carrying value of our goodwill or acquired intangible assets be determined to be impaired, their carrying value would be written down. We have recorded significant goodwill and intangible assets relating to our recent acquisitions. As of September 30, 2009, our goodwill and acquired intangible assets were $15.7 million and $2.4 million, respectively. We may record additional goodwill as the amount of the remaining consideration to be paid in connection with our recent acquisitions becomes ascertainable. Because we cannot ensure the future profitability of the acquired entities, we may be required to record a significant charge to earnings in our financial statements during the period in which our goodwill or acquired intangible assets is determined to be impaired, which would adversely affect our operating results.
 
     Our business depends substantially on the continuing efforts of our key personnel, including senior management and other key employees and skilled staff, and our business may be severely disrupted if we lose their services.
 
Our future success heavily depends upon the continued services of our senior management. In particular, we rely on the expertise and experience of Peter B. Brack, our co-founder, Chairman and Chief Executive Officer, Ying Zhu, our co-founder, President, General Manager and director, Robert W.H.S. Yung, our co-founder, Chief Marketing Officer and director, Thomas H.K. Mak, our Chief Financial Officer and Qingchun Wang, our Chief Operating Officer. We rely on their industry expertise, their experience in our business operations and sales and marketing, and their working relationships with our employees, our other major shareholders, our clients and relevant regulatory authorities. We face competition for personnel from other advertising and media companies and other organizations. Competition for these individuals could cause us to offer higher compensation and other benefits in order to attract and retain them, which could materially and adversely affect our results of operations. We may be unable to attract or retain the personnel required to achieve our business objectives, and failure to do so could severely disrupt our business and prospects. In addition, the process of hiring qualified personnel is often lengthy. If our recruitment and retention efforts are unsuccessful in the future, it may be more difficult for us to execute our business strategies.
 
Though we maintain key-person life insurance for certain members of our senior management, proceeds available from such insurance coverage may not be able to fully compensate us for the loss of their services. If one or more of our senior management or other skilled personnel are unable or unwilling to continue in their present positions, we may not be able to locate suitable or qualified replacements. As a result, our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit and train new personnel. Each of our executive officers has entered into an employment agreement with us, which contains confidentiality and non-competition provisions. If any disputes arise between our executive officers and us, these agreements may be unenforceable in China, where these executive officers reside and hold most of their assets, in light of the uncertainties in China’s legal system. See “— Risks Relating to the People’s Republic of China — Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.”
 
     If we grant additional share options, restricted shares or other share-based compensation in the future, our operating results could be materially and adversely affected.
 
As of February 28, 2010, we had outstanding share options to purchase 2,133,004 of our common shares under our employee share option scheme. In addition, we may issue additional share options in the future to our employees under our founders share option scheme or 2010 Stock Incentive Plan. See “Management — Share Option Schemes.” We account for share-based compensation in accordance with the new share-based payments guidance under U.S. GAAP which requires a company to recognize, as an expense, the fair value of share options


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and other share-based compensation based on the fair value of equity-classified awards on the date of the grant, with the compensation expense recognized generally over the period in which the recipient is required to provide service in exchange for the equity award. For example, as a result of the grant of new share options and the reduction in the exercise prices of share options previously granted on December 31, 2009, our estimated compensation expenses for share options to be recognized over the next few years increased by $8.7 million on December 31, 2009. If we grant additional options, restricted shares and other equity incentives to our employees or other personnel in the future, we could incur significant compensation expenses that could materially reduce our net income, and your investment in our ADSs could be significantly diluted.
 
Risks Relating to Our Structure
 
     If the PRC government finds that the agreements that establish the structure for operating a significant portion of our China businesses do not comply with PRC governmental restrictions on foreign investment in the media industry, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
 
Substantially all of our operations are conducted through both operating subsidiaries in China, and through our contractual arrangements with one of our consolidated variable interest entities, Wanli, and its shareholders in China. PRC regulations currently prohibit or restrict foreign ownership of media, advertising and Internet-based service companies. For a description of these regulations, see “Regulation — Regulations on Foreign Investment in the Media, Advertising and Telecommunications Industries.” We have entered into contractual arrangements with our consolidated variable interest entities and their shareholders, all PRC citizens, which enable us to, among other things, exercise effective control over our consolidated variable interest entities and their subsidiaries. See “Our Corporate Structure — Contractual Arrangements.” In the opinion of our PRC legal counsel, Fangda Partners, the business operations of our operating subsidiaries in China and our consolidated variable interest entities comply in all material respects with existing PRC laws and regulations. Moreover, the contractual arrangements are, to the extent governed by PRC law, valid, binding and enforceable, and do not violate PRC laws and regulations currently in effect, except for those risks associated with pledge registrations as specified in “— The shareholders of Wanli, our consolidated variable interest entity, may breach or refuse to renew our agreements with them or may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.”
 
However, if any of us, our subsidiaries, our consolidated variable interest entities and their respective subsidiaries are found to be in violation of any existing or future PRC laws or regulations (for example, if we are deemed to be holding equity interest in Wanli in which direct foreign ownership is prohibited) the relevant PRC regulatory authorities, including the SARFT, the SAIC, which is the primary regulator of the advertising industry in China, or the MOFCOM, which is the primary regulator of foreign investment in China, and the National Development and Reform Commission, or the NDRC, would have broad discretion in dealing with these violations, including:
 
  •  revoking the business and operating licenses of our PRC operating subsidiaries or consolidated variable interest entities;
 
  •  confiscating relevant income and imposing fines and other penalties;
 
  •  discontinuing or restricting our PRC operating subsidiaries’ or Wanli’s operations;
 
  •  requiring us or our PRC operating subsidiaries or Wanli to restructure the relevant ownership structure or operations;
 
  •  restricting or prohibiting our use of the proceeds of this offering to finance our businesses and operations in China; or
 
  •  imposing conditions or requirements with which we or our PRC operating subsidiaries or Wanli may not be able to comply.
 
The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.


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In many cases, existing regulations with regard to investments from foreign investors and domestic private capital in the media industry lack detailed explanations and operational procedures, and are subject to interpretation, which may change over time. Most of these regulations have not been interpreted by the relevant authorities in circumstances similar to our corporate structure. Accordingly, we cannot be certain how the regulations will be applied to our business, either currently or in the future. Moreover, new regulations may be adopted and the interpretation of existing regulations may change, any of which could result in a material and adverse effect on our ability to conduct our business.
 
     We rely on contractual arrangements with Wanli, our consolidated variable interest entity, and its shareholders for a significant portion of our China operations, which may not be as effective in providing operational control as direct ownership.
 
We rely on contractual arrangements with Wanli, our consolidated variable interest entity, and its shareholders for certain of our operations in China. For a description of these contractual arrangements, see “Our Corporate Structure — Contractual Arrangements.” These contractual arrangements may not be as effective in providing us with control over Wanli and its subsidiaries as direct ownership. If we had direct ownership of these entities, we would be able to exercise our rights as a shareholder to effect changes in the boards of directors of these entities, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, if Wanli or its shareholders fails to perform its or their respective obligations under these contractual arrangements, we may not be able to enforce the relevant contracts if the contracts are ruled in violation of the PRC laws, even if the contracts are otherwise legal and valid. We may have to incur substantial costs and resources to enforce these contracts and seek legal remedies under PRC law, including specific performance or injunctive relief, and claiming damages, and we may not succeed in these efforts. Accordingly, it may be difficult for us to change our corporate structure or to bring claims against any of Wanli and its shareholders if they do not perform their obligations under their contracts with us.
 
These contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in China is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our operating entities, and our ability to conduct our business may be negatively affected.
 
     The shareholders of Wanli, our consolidated variable interest entity, may breach or refuse to renew our agreements with them or may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
 
The shareholders of Wanli may breach or cause Wanli to breach or refuse to renew the existing contractual arrangements that give us effective control. Conflicts may arise between their dual roles as a shareholder and a contracting party under the contractual arrangements. We cannot assure you that when conflicts of interest arise, they will act in the best interests of our company or that conflicts of interests will be resolved in our favor. We have made long-term loans in an aggregate principal amount of RMB18 million ($2.6 million) to these shareholders. We extended these loans to help them fund the initial capitalization and additional capitalization of Wanli. The security on the loans is limited to their pledge of the shares of Wanli. Under the Property Rights Law of the PRC promulgated on March 16, 2007, or the Property Rights Law, which came into effect on October 1, 2007, a pledge of equity interest can only be valid after such pledge is registered at the relevant local branches of the SAIC. We are in the process of applying for such pledge registrations. However, our share pledges may be deemed ineffective before we register them under the Property Rights Law. We rely on the shareholders of Wanli to abide by the contract laws of China and honor their contracts with us. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of Wanli, we would have to rely on legal proceedings, which could result in significant disruptions to our business and the outcome of which often involves substantial uncertainty.


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     Contractual arrangements entered into among our subsidiaries, our consolidated variable interest entity and its shareholders may be subject to audit or challenge by the PRC tax authorities, and a finding that any of our subsidiaries or consolidated variable interest entity owes additional taxes could materially and adversely impact our financial condition and results of operations.
 
Under applicable PRC laws, rules and regulations, arrangements and transactions among related parties may be subject to audits or challenges by the PRC tax authorities. We are not able to determine whether any of our transactions with our consolidated variable interest entities and their shareholders will be regarded by the PRC tax authorities as arm’s length transactions. To our knowledge, the PRC tax authorities have not issued a ruling or interpretation on how to determine an arm’s length transaction in this context. The relevant tax authorities may determine that our contractual relationships with our consolidated variable interest entities and their shareholders were not entered into on an arm’s length basis. If the PRC tax authorities determine that any of the transactions entered into among our subsidiaries, our consolidated variable interest entities, and their shareholders are not on an arm’s length basis, or result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, the PRC tax authorities may adjust the income, expenses, profits and losses of such affiliated consolidated entities, which could in turn increase our tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties for under-paid taxes. Our net income may be adversely and materially affected if the tax liabilities of any of our subsidiaries and Wanli increase or if it is found to be subject to late payment fees or other penalties.
 
Risks Relating to the People’s Republic of China
 
     Adverse changes in economic policies of the PRC government could have a material adverse effect on the overall economic growth of the PRC, which could reduce the demand for our products and services and materially and adversely affect our business.
 
Substantially all of our assets are located in and substantially 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 China generally, including the overall economic growth in China.
 
The PRC economy differs from the economies of most developed countries in many respects, including the amount 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 in the 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 China 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 have a negative effect on us. For example, our operating results and financial condition may be adversely affected by changes in tax regulations that are applicable to us.
 
     An economic slowdown in China may reduce the demand for our services and have a material adverse effect on our financial condition, results of operations and business prospects.
 
We conduct most of our business and generate substantially all of our revenues in China. As a result, economic, political and legal developments in China have a significant effect on our financial condition and results of operations, as well as our future prospects. In recent years, the PRC has been one of the world’s fastest growing economies in terms of gross domestic product, or GDP, growth. However, the global financial crisis that unfolded in 2008 and has continued during 2009 has led to China’s economic growth slowing substantially. In particular,


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China’s GDP growth rate in the first quarter of 2009 dropped to 6.1%, the lowest since 1992. The adverse impact of the global financial crisis on the PRC economy may continue or be exacerbated in the future. We have seen the business operations of some of our subsidiaries impacted as China’s economic growth slows down. For instance, we generally experienced longer collection cycles for our accounts receivable during this period. Any further slowdown in the economic growth of China could lead to further reduced business activities, reduced advertising spending, and reduced demand for our services, which could materially and adversely affect our business, as well as our financial condition and results of 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 1979, 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 China. Each of our PRC operating subsidiaries, Redgate Interactive Advertising (Beijing) Co., Ltd., or Redgate Interactive, and Redgate Media (Beijing) Co., Ltd., or Redgate Beijing, is a foreign-invested enterprise and is subject to laws and regulations applicable to foreign investment in China as well as laws and regulations applicable to foreign-invested enterprises. These laws and regulations change frequently, 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 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 adversely affect our business and operations.
 
     Any requirement to obtain prior CSRC approval could delay this offering and 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, and could also create uncertainties for this offering.
 
On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, or the SASAC, the State Administration of Taxation, or the SAT, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. 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.
 
The application of the M&A Rules with respect to this offering remains unclear. Our PRC counsel, Fangda Partners, has advised us that, based on their understanding of the current PRC laws, regulations and rules and the procedures announced on September 21, 2006, since we are not established or controlled by PRC entities or citizens and hence should not be considered as an offshore special purpose vehicle under the M&A Rules, we are not required by the M&A Rules to apply to the CSRC for approval of the listing and trading of our ADSs on a U.S. stock exchange, unless we are clearly required to do so by any rules promulgated in the future. See “Regulation — Regulation of Overseas Listings.”


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     PRC regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activities, and a failure by our prospective shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our prospective PRC resident shareholders to liability under PRC law.
 
The SAFE promulgated the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or the SAFE Notice 75, on November 1, 2005, which was further supplemented by two implementation notices issued by the SAFE on November 24, 2005 and May 29, 2007, respectively. The SAFE Notice 75 requires PRC residents and PRC corporate entities to register with and obtain approvals from relevant PRC government authorities in connection with their direct or indirect offshore investment activities. As of November 30, 2009, we were not aware of any PRC resident shareholders of our company. However, these regulations may apply to our prospective shareholders who are PRC residents in connection with our prior and any future acquisitions.
 
The SAFE Notice 75 required registration of direct or indirect investments previously made by PRC residents in offshore companies prior to the implementation of the SAFE Notice. 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. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.
 
We have already notified those PRC residents who may receive our shares after this offering pursuant to the acquisition agreements in connection with our recent acquisitions to make the necessary applications and filings, as required under this regulation. However, as these regulations are still relatively new and there is uncertainty concerning the reconciliation of the new regulation with other approval requirements, it is unclear how the regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. The failure or inability of our future PRC resident shareholders to obtain any required approvals or 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 adversely affected.
 
On March 28, 2007, the SAFE released detailed registration procedures for employee stock ownership plans or share option plans to be established by overseas listed companies and for individual plan participants. Any failure to comply with the relevant registration procedures may affect the effectiveness of our employee share option scheme and 2010 Stock Incentive Plan and subject the scheme participants or us to penalties under the PRC foreign exchange regime. These penalties may subject us to fines and legal sanctions or prevent us from making dividend payments, as a result of which our business operations and ability to distribute profits to you could be materially and adversely affected.
 
     We rely principally on dividends and other distributions on equity paid by our operating subsidiaries to fund cash and financing requirements, and limitations on the ability of our operating subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.
 
We are a holding company, and we rely principally on dividends and other distributions on equity paid by our operating subsidiaries, Redgate Interactive and Redgate Beijing, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. If Redgate Interactive and Redgate Beijing incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by Redgate Interactive and Redgate Beijing only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations.
 
Under PRC laws and regulations, each of Redgate Interactive and Redgate Beijing is required to set aside 10% of its after-tax profits each year to fund a statutory surplus reserve until the accumulated amount of such reserve has


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exceeded 50% of its registered capital. Such reserve is not distributable as dividends. As a result of these PRC laws and regulations, each of Redgate Interactive and Redgate Beijing is restricted in its ability to transfer a portion of its net assets to us in the form of dividends. Furthermore, if our subsidiaries and consolidated variable interest entities in China incur debt on their own behalf in the future, the loan agreements governing that debt may restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our subsidiaries’ ability to pay dividends and other distributions to us. Any limitation on the ability of our subsidiaries and affiliated consolidated entity to pay dividends to us could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
 
     Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
 
Substantially all of our revenues have been denominated in Renminbi since 2008. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, Redgate Interactive and Redgate Beijing may purchase foreign exchange for settlement of “current account transactions,” including payment of dividends to us, without the approval of the SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenues will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside of the PRC denominated in foreign currencies or pay dividends in foreign currencies to our shareholders, including holders of our ADSs. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities. This could affect the ability of Redgate Interactive and Redgate Beijing to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us.
 
     PRC regulation of loans and investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering as intended, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
 
As an offshore holding company, we may make loans or additional capital contributions to Redgate Interactive and Redgate Beijing, our wholly-owned subsidiaries in China, or make loans to Wanli, our consolidated variable interest entity, and its subsidiaries, in order to utilize the proceeds of this offering in the manner described in “Use of Proceeds.” Any loans to these PRC entities are subject to PRC regulations and may require registrations or approvals. For example:
 
  •  loans by us to any of Redgate Interactive or Redgate Beijing, as foreign-invested enterprises, cannot exceed statutory limits and must be registered with the SAFE or its branches; and
 
  •  loans by us to any of our consolidated variable interest entity, Wanli, and its subsidiaries, as domestic PRC enterprises, must be approved by the relevant governmental authorities and registered with the SAFE or its branches.
 
We may also decide to finance such operating subsidiaries by means of capital contributions, and such contributions must be approved by the MOFCOM or its local counterparts. We may not be able to obtain the relevant government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to such operating subsidiaries. If we fail to do so, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
 
On August 29, 2008, the SAFE promulgated a circular, or SAFE Circular 142, regulating the conversion by a foreign-invested company of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. The SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested company may only be used for purposes within the business scope approved


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by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, the SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested company. The use of such Renminbi capital may not be altered without the SAFE’s approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of the SAFE Circular 142 could result in severe monetary or other penalties. As a result, the SAFE Circular 142 may limit our ability to transfer the net proceeds from this offering to our subsidiaries, our variable interest entities, and their respective subsidiaries in China, which may adversely affect our business expansion, and we may not be able to convert the net proceeds into Renminbi to invest in or acquire any other PRC companies, or establish other variable interest entities in China.
 
     Fluctuations in exchange rates could result in foreign currency exchange losses.
 
Since July 2005, the Renminbi is no longer pegged solely to the U.S. dollar. Instead, the Renminbi is reported to be pegged against a basket of currencies, determined by the People’s Bank of China, against which it can rise or fall by as much as 0.3% each day. This permitted floating range was raised to 0.5% in May 2007. In 2006, 2007, 2008 and 2009, the Renminbi appreciated against the U.S. dollar by approximately 3.4%, 7.0%, 6.9% and 0.1%, respectively. As a majority of our cash and cash equivalents are denominated in Renminbi and the net proceeds from this offering will be denominated in U.S. dollars, fluctuations in exchange rates between U.S. dollars and Renminbi will affect the relative purchasing power of these proceeds and our balance sheet and earnings per share in U.S. dollars following this offering. Since our reporting currency is the U.S. dollar while the functional currency of our operating entities in China is the Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar may also cause our financial results reported in U.S. dollar terms to deviate from our actual financial condition and results of operations. The appreciation of the Renminbi against the U.S. dollar contributed to the increase in our net revenues reported in U.S. dollar terms in 2006, 2007 and 2008. 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 after this offering, 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.
 
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions 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.
 
For additional information relating to the fluctuations in the value of the Renminbi against the U.S. dollar, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange Risk.”
 
     We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law and we may therefore be subject to PRC income tax on our global income.
 
Under the PRC Enterprise Income Tax Law and its implementation rules, both of which came into effect on January 1, 2008, enterprises established under the laws of foreign countries or regions whose “de facto management bodies” are located within the PRC territory are considered resident enterprises and will generally be subject to the enterprise income tax at the rate of 25% on its global income. “De facto management body” refers to a managing body that exercises, in substance, overall management and control over the production and business, personnel, accounting and assets of an enterprise. The SAT issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled


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by PRC individuals or foreigners, like our company, the determining criteria set forth in Circular 82 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow would be adversely affected as a result of our global income being taxed under the PRC Enterprise Income Tax Law.
 
     Dividends payable by us to our non-PRC shareholders and ADS holders, and gains on the sales of our common shares or ADSs, may be subject to withholding taxes under PRC tax laws, which may materially reduce the value of your investment.
 
Prior to January 1, 2008, dividends payable to non-PRC investors were exempted from withholding tax. The PRC Enterprise Income Tax Law and its implementation rules provide that PRC enterprise income tax at the rate of 10% will generally be applicable to dividends derived from sources within the PRC and received by non-PRC enterprise shareholders. Similarly, gains derived from the transfer of shares by such shareholders are also subject to PRC enterprise income tax if such gains are regarded as income derived from sources within the PRC. We are a Cayman Islands holding company and substantially all of our income may come from dividends we receive from our subsidiaries, primarily those located in China. It is unclear whether the dividends we pay with respect to our ADSs, or the gains our non-PRC shareholders or ADS holders may realize from the transfer of our common shares or ADSs, would be treated as PRC-sourced income and be subject to PRC tax. If we are required under the PRC Enterprise Tax Law to withhold PRC enterprise income tax on our dividends payable to our non-PRC shareholders and ADS holders, or if non-PRC foreign shareholders and ADS holders are required to pay PRC income tax on the transfer of their common shares or ADSs, the value of your investment may be materially reduced.
 
     Dividends we receive from our operating subsidiaries located in China may be subject to PRC withholding tax.
 
Under the PRC Enterprise Income Tax Law and its implementation rules, enterprise income tax at the rate of 10% will generally be applicable to dividends paid by PRC resident enterprises to non-PRC resident enterprise shareholders, unless the tax rate is reduced by a tax treaty between China and the relevant jurisdiction. We are a Cayman Islands holding company and substantially all of our income may come from dividends we receive from our subsidiaries located in the British Virgin Islands and Hong Kong. Our subsidiaries in Hong Kong derive substantially all of their income from their subsidiaries located in China. If our subsidiaries in Hong Kong are considered non-PRC resident enterprises, dividends they receive from the operating subsidiaries in China will generally be subject to a 5% withholding tax under the PRC Enterprise Income Tax Law and its implementation rules, which will reduce the amount of dividends, if any, we may pay to our shareholders and ADS holders.
 
     Natural disasters and health and public security hazards in China may severely disrupt our business and operations and may have a material adverse effect on our financial condition and results of operations.
 
In May 2008, a major earthquake registering 8.0 on the Richter scale struck Sichuan Province and certain other parts of China, devastating much of the affected areas and causing tens of thousands of deaths and widespread injuries. In addition, in early 2008, parts of Mainland China, in particular its southern, central and eastern regions, experienced what was reportedly the most severe winter weather in the country in half a century, which resulted in significant and extensive damages to factories, power lines, homes, automobiles, crops and other properties, blackouts, transportation and communications disruptions and other losses in the affected areas. Moreover, certain countries and regions, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, over the past six years and, more recently in 2009, the outbreak of influenza A (H1N1). We are unable to predict the effect, if any, that any future natural disasters and health and public security hazards may have on our business. Any future natural disasters and health and public security hazards may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, such natural disasters and health and public security hazards may severely restrict the level of economic activity in affected areas, which may in turn materially and adversely affect


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our business and prospects. As a result, any natural disasters or health hazards in China may have a material adverse effect on our financial condition and results of operations.
 
     The Implementation of the PRC Labor Contract Law may increase our operating expenses and adversely affect our business and results of operations.
 
On June 29, 2007, the National People’s Congress of the PRC enacted the Labor Contract Law, which came into effect on January 1, 2008. The Labor Contract Law formalizes workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions and provides for specific standards and procedures for the termination of an employment contract. In addition, the Labor Contract Law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases, including in cases of the expiration of a fixed-term employment contract. As there has been little guidance as to how the Labor Contract Law will be interpreted and enforced by the relevant PRC authorities, there remains substantial uncertainty as to its potential impact on our business and results of operations. The implementation of the Labor Contract Law may increase our operating expenses, in particular our personnel expenses, as the continued success of our business depends significantly on our ability to attract and retain qualified personnel. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations.
 
Risks Relating to the ADSs
 
     An active trading market for our ADSs and shares may not develop and their trading prices may fluctuate significantly.
 
Prior to this offering, there has been no public market for our ADSs or our common shares underlying the ADSs. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs may be materially and adversely affected. We have applied to have our ADSs listed on a U.S. stock exchange. A liquid public market for our ADSs may not develop. The initial public offering price for our ADSs has been determined by negotiation between us and the underwriters based upon several factors, and the price at which our ADSs trade after this offering may decline below the initial public offering price. As a result, investors in our ADSs may experience a decrease in the value of their ADSs regardless of our operating performance or prospects.
 
     The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to you.
 
The trading prices of our ADSs are likely to be volatile and could fluctuate widely in response to factors beyond our control. In particular, the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. A number of PRC companies have listed their securities, or are in the process of preparing for listing their securities, on the United States stock markets. Some of these companies have experienced significant volatility, including significant price declines after their initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards PRC companies listed in the United States and consequently may impact the trading performance of our ADSs. These broad market and industry factors may significantly affect the market price and volatility 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 specific business reasons. In particular, factors such as variations in our revenues, earnings and cash flow, announcements of new investments and cooperation arrangements or acquisitions could cause the market price for our ADSs to change substantially. Any of these factors may result in large and sudden changes in the volume and trading price of our ADSs. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, have a material adverse effect on our financial condition and results of operations.


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     The sale or availability for sale of substantial amounts of our ADSs could adversely affect their trading price and could materially impair our future ability to raise capital through offerings of our ADSs.
 
Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our future ability to raise capital through offerings of our ADSs.
 
In connection with this offering, we, our directors and officers and all of our shareholders have agreed, among other things, not to sell any common shares or ADSs for 180 days after the date of this prospectus without the written consent of the representatives of the underwriters. However, the representatives of the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority (formerly known as the National Association of Securities Dealers, Inc.), or FINRA. 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. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.
 
     As the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will incur immediate and substantial dilution.
 
If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by existing shareholders for their common shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $4.46 per ADS (assuming no exercise of outstanding options to acquire common shares), representing the difference between our pro forma net tangible book value per ADS as of September 30, 2009, after giving effect to this offering and the assumed initial public offering price of $7 per ADS (which is the midpoint of the estimated initial public offering price range). See “Dilution.” In addition, you will experience further dilution to the extent that our common shares are issued upon the exercise of share options, to pay any earn-out consideration in connection with our recent acquisitions in lieu of cash and upon the conversion into our shares of the entire, or a portion of, outstanding amounts under certain loan and convertible notes owed or issued to certain shareholders of our company and third parties. All of the common shares issuable upon the exercise of currently outstanding share options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.
 
     Your interest in our company, ADSs or common shares will be diluted as a result of our recent acquisitions, share option schemes and other share issuances.
 
In recent years, we acquired, or entered into agreements to acquire, a number of businesses. We have the option or obligation to pay a substantial part of earn-out consideration in respect of these acquisitions in our common shares in lieu of cash. If we elect to pay the earn-out consideration in our common shares to the extent permitted, a substantial number of our common shares may be issued after this offering. Assuming we elect to issue common shares in lieu of cash payments to the full extent permitted under these acquisitions, our management estimated the aggregate number of common shares to be issued as a result and those we are obligated to issue with respect to these acquisitions would be 8,552,504. See “Recent Acquisitions — Earn-Out and Other Consideration” for a discussion of the basis and assumptions for this estimate.
 
In addition, we have granted share options to purchase 2,133,004 of our common shares under our employee share option scheme as of February 28, 2010, none of which has been exercised. Assuming full exercise of all these share options and assuming no exercise of the underwriters’ over-allotment option, such 2,133,004 common shares will represent approximately 6.9% of our issued share capital immediately following the completion of this offering. Furthermore, we may issue additional share options in the future to our employees under our founders share option scheme or 2010 Stock Option Plan. For a description of these schemes, see “Management — Share Option Schemes.”
 
The future issuance of our common shares to the sellers of the acquired businesses as payment of a portion of the consideration for the acquisitions, the exercise of the options under our share option schemes, the exercise of our outstanding warrants and other share issuances, including those upon the conversion into our shares of the entire, or a portion of, outstanding amounts under certain loan and convertible notes owed or issued to certain shareholders of our company and third parties, would result in a reduction in the percentage of ownership of the existing holders of


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common shares and of ADSs, and therefore would result in a dilution in the earnings per common share and per ADS.
 
     You may face difficulties in protecting your interest, and your ability to protect your rights through the United States federal courts may be limited, because we are incorporated under Cayman Islands law.
 
Our corporate affairs are governed by our Amended and Restated Memorandum and Articles of Association, the Cayman Islands Companies Act and the common law of the Cayman Islands. The rights of shareholders to take action against the directors and actions by minority shareholders are to a large extent governed by the common law of the Cayman Islands. Cayman Islands law in this area may not be as established and may differ from provisions under statutes or judicial precedent in existence in the United States. As a result, our public shareholders may face different consideration in protecting their interests in actions against our management or directors than would shareholders of a corporation incorporated in a jurisdiction of the United States.
 
The rights of shareholders and the responsibilities of management and members of the board of directors under Cayman Islands law, such as in the areas of fiduciary duties, are different from those applicable to a company incorporated in a jurisdiction of the United States. For example, the Cayman Islands courts are unlikely:
 
  •  to recognize or enforce against us judgments of courts of the United States based on the civil liability provisions of United States federal securities laws; and
 
  •  in original actions brought in the Cayman Islands, to impose liabilities against us based on the civil liability provisions of United States federal securities laws that are penal in nature.
 
As a result, our public shareholders may have more difficulty in protecting their interests in connection with actions taken by our management or members of our board of directors than they would as public shareholders of a company incorporated in the United States.
 
     Certain judgments obtained against us by our shareholders may not be enforceable.
 
We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, a majority 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 China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”
 
     Your voting rights as a holder of our ADSs are limited by the terms of the deposit agreement.
 
You may exercise your voting rights with respect to the common shares underlying your ADSs only in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from you in the manner set forth in the deposit agreement, the depositary for our ADSs will endeavor to vote your underlying common shares as follows: (i) in the event voting takes place at a shareholders’ meeting by show of hands, the depositary will instruct the custodian to vote in accordance with the voting instructions received from a majority of holders of ADSs who provided voting instructions and (ii) in the event voting takes place at a shareholder meeting by poll, the depositary will instruct the custodian to vote the securities represented by your ADSs in accordance with the written instructions received from the holders of the ADSs. Under our Amended and Restated Memorandum and Articles of Association, the minimum notice period required for convening a general meeting is 15 days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your common shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the


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depositary to vote your shares and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your common shares are not voted as you requested.
 
     You may not receive distributions on our common shares or 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 you the cash dividends or other distributions it or the custodian for our ADSs receives on our common shares or other deposited securities after deducting its fees, expenses, government charges and taxes. You will receive these distributions in proportion to the number of our common shares that your ADSs represent. However, the depositary is not responsible if 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 pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs, common shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our common shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may have a material and adverse effect on the value of your 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 is reasonably practicable and 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 parties, 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 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 books 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 any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
 
     We have not determined a specific use for a portion of our net proceeds from this offering and we may use these proceeds in ways with which you may not agree.
 
We have not determined a specific use for a portion of our net proceeds from this offering. Our management will have considerable discretion in the application of the proceeds received by us. You will not have the opportunity, as part of your investment decision process, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds from this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase our


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ADS price. The net proceeds from this offering may also be placed in investments that do not produce income or that lose value.
 
     The depositary for our ADSs will give us a discretionary proxy to vote our common 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 our ADSs, the depositary will give us a discretionary proxy to vote our common shares underlying your ADSs at shareholders’ meetings if you do not vote, unless:
 
  •  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
 
  •  voting at the meeting is made on a show of hands.
 
The effect of this discretionary proxy is that you cannot prevent our common shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence our management. Holders of our common shares are not subject to this discretionary proxy.


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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements 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 prospectus are forward-looking statements. These forward-looking statements can be identified by words or phrases such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “may,” “likely to,” “should,” “will” and similar expressions. These forward-looking statements include, without limitation, statements relating to:
 
  •  our goals and strategies;
 
  •  our ability to complete pending acquisitions, to successfully integrate acquired businesses, or to cross-sell our service offerings across this platform;
 
  •  the estimated ranges of earn-out consideration payable by us in respect of our recent acquisitions;
 
  •  the future growth of the media and advertising industries in China, including factors driving that growth;
 
  •  our expectations regarding demand for our media and advertising services and content;
 
  •  our ability to manage and expand our media and advertising service offerings and content production, our sales and distribution network and other aspects of our operations;
 
  •  our ability to retain our key clients who contribute to a significant portion of our revenues;
 
  •  our potential need for additional short- to long-term funding and the availability of such funding;
 
  •  expected changes in our revenues and certain cost and expense items;
 
  •  our ability to effectively protect our intellectual property rights and to avoid infringing on the intellectual property rights of others;
 
  •  competition in the media and advertising industries;
 
  •  government policies, regulations and enforcement campaigns relating to the media and advertising industries and other areas relevant to our business activities;
 
  •  general economic and business conditions in China and elsewhere;
 
  •  our future business development and economic performance; and
 
  •  our use of the proceeds from this offering.
 
These forward-looking statements involve various risks and uncertainties. These forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual results may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the important risks and factors generally set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and other sections of this prospectus, in addition to the following:
 
  •  general economic and business conditions in China and elsewhere;
 
  •  governmental, statutory, regulatory or administrative initiatives affecting us;
 
  •  trends in the media and advertising industries in China and elsewhere;
 
  •  future profitability of our operations;
 
  •  exchange rate fluctuations between the Renminbi and other currencies; and
 
  •  the availability of qualified management and technical personnel.
 
Although we will become a public company after this offering and have ongoing disclosure obligations under United States federal securities laws, we do not intend to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise. Because of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus might not occur in the way we expect, or at all. You should not place undue reliance on any forward-looking information.


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USE OF PROCEEDS
 
We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated expenses payable by us in connection with this offering, will be approximately $29.5 million, or approximately $34.9 million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $7 per ADS (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus). A $1.00 increase (decrease) in the assumed initial public offering price of $7 per ADS would increase (decrease) the net proceeds to us from this offering by $5.1 million, (i) after deducting estimated underwriting discounts, the non-accountable expense allowance and commissions and estimated offering expenses payable by us and (ii) assuming no exercise of the underwriters’ over-allotment option and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus. The non-accountable expense allowance of 1% of the gross proceeds of this offering will not be paid on any ADSs that the underwriters elect to purchase pursuant to the over-allotment option.
 
We currently intend to use these net proceeds in the following manner:
 
  •  approximately $22.3 million to fund future earn-out payments and other consideration due in relation to our recent acquisitions; and
 
  •  the balance to fund working capital and for other general corporate purposes, including acquisition of media resources, repayment of outstanding indebtedness and future acquisitions.
 
The foregoing represents our current intentions to use and allocate the net proceeds of this offering based upon our present plans and business conditions. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.
 
To the extent that the net proceeds of this offering are not immediately applied for the above purposes, we intend to deposit the proceeds into interest-bearing bank accounts or invest the proceeds in short-term investment grade debt securities.


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DIVIDEND POLICY
 
We have not paid any dividends since our inception. Our board of directors will determine the payment of any future dividends. The declaration and payment of dividends will depend upon, among other things, our future operations and earnings, capital requirements and surplus, our financial condition, contractual restrictions, general business conditions and other factors as our board of directors may deem relevant. See “Description of Share Capital — Dividends.” We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common shares, or indirectly on our ADSs, in the foreseeable future.
 
In addition, our ability to pay dividends depends substantially on the payment of dividends to us by our operating subsidiaries in China, Redgate Interactive and Redgate Beijing, and their respective subsidiaries. Each of such operating subsidiaries may pay dividends only out of its accumulated distributable profits, if any, determined in accordance with its articles of association and the accounting standards and regulations in China. Moreover, pursuant to relevant PRC laws and regulations applicable to our subsidiaries in China, each of such operating subsidiaries is required to provide 10% of its after-tax profits to a statutory common reserve fund. When the aggregate balance in the statutory common reserve fund, also referred to as a “statutory surplus reserve,” is 50% or more of the subsidiaries’ registered capital, our subsidiaries need not make any further allocations to the fund. Allocations to these statutory reserves can only be used for specific purposes and are not distributable to us in the form of loans, advances or cash dividends. The specific purposes for which statutory common reserve funds can be used include provision of a source of reserve funds to make up deficits in periods in which an operating subsidiary has net losses, expansion of production and operations, or for conversion into additional working capital in periods in which it does not have a deficit. Furthermore, if any of the operating subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the payment of dividends by our subsidiary could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends and otherwise fund and conduct our business. See “Risk Factors — Risks Relating to the People’s Republic of China — We rely principally on dividends and other distributions on equity paid by our operating subsidiaries to fund cash and financing requirements, and limitations on the ability of our operating subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.”
 
Holders of ADSs will be entitled to receive dividends, subject to the terms of the deposit agreement, less the fees and expenses payable under the deposit agreement. Cash dividends will be paid by the depositary to holders of ADSs in U.S. dollars. Other distributions, if any, will be paid by the depositary to holders of our ADSs in any means it deems legal, fair and practical. See “Description of American Depositary Shares — Dividends and Other Distributions.”


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DILUTION
 
If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per common share is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares. Your interest could be further diluted, or adjusted dilution, to the extent we issue our common shares upon the exercise of our share options or to pay in lieu of cash any earn-out consideration in respect of our recent acquisitions that will be payable following the completion of this offering through 2013.
 
As of September 30, 2009, our net tangible book deficit was approximately $0.3 million, or $0.05 per common share outstanding at that date and $0.1 per ADS. Net tangible book value is determined by subtracting the value of our intangible assets and total liabilities from our total assets as of September 30, 2009. Our pro forma net tangible book value prior to this offering was $7.0 million, or $0.39 per common share, and $0.78 per ADS. Pro forma net tangible book value prior to this offering is determined by adjusting our net tangible book deficit as of September 30, 2009 to give pro forma effect to (i) our sale of Class G preference shares in a private placement in December 2009 and January 2010 and (ii) the conversion of (x) all outstanding preference shares (including those to be issued upon the conversion of the full principal amount repayable under the KCIC convertible note into our preference shares immediately prior to this offering and all the Class F preference shares) other than all the Class G preference shares previously issued to KCIC to secure the KCIC convertible note to be repurchased and cancelled by us immediately prior to this offering, (y) the 2004 shareholder loan and (z) an amount of $500,000, representing the first annual interest amount payable under the Uni-Asia convertible note, into common shares upon the completion of or immediately prior to this offering, respectively, or (i) and (ii) collectively, the pro forma adjustments. Dilution is determined by subtracting pro forma net tangible book value per common share after this offering from the assumed initial public offering price per common share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated offering expenses payable by us.
 
Without taking into account any other changes in net tangible book deficit after September 30, 2009, other than to give effect to the pro forma adjustments and our sale of the 5,550,000 ADSs offered in this offering at the assumed initial public offering price of $7 per ADS, with estimated net proceeds of $29.5 million after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2009 would have been $36.5 million, or $1.27 per outstanding common share, including common shares underlying our outstanding ADSs, and $2.54 per ADS. This represents an immediate increase in net tangible book value of $0.88 per common share, or $1.76 per ADS, to existing shareholders and an immediate dilution in net tangible book value of $2.23 per common share, or $4.46 per ADS, to new investors in this offering.
 
The following table illustrates this per common share dilution:
 
         
Assumed initial public offering price per common share
    $3.50  
Net tangible book deficit per common share as of September 30, 2009
    $0.05  
Pro forma net tangible book value per share prior to this offering(1)
    $0.39  
Increase in net tangible book value per common share attributable to this offering
    $0.88  
         
Pro forma net tangible book value per common share after this offering
    $1.27  
         
Dilution in net tangible book value per common share to new investors in this offering
    $2.23  
         
Dilution in net tangible book value per ADS to new investors in this offering
    $4.46  
         
 
 
(1) The pro forma adjustments occurred or will occur prior to the completion of this offering except for the conversion of the 2004 shareholder loan into our common shares, which will occur upon the completion of this offering.
 
Adjusted dilution is determined by adjusting dilution to give pro forma effect to the potential issuance of (i) an estimate of 8,552,504 common shares in respect of our recent acquisitions and (ii) up to 2,133,004 common shares


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underlying our outstanding share options. See “Recent Acquisition — Earn-Out and Other Consideration” for a discussion of the basis and assumptions of the earn-out share estimate.
 
Without taking into account any other changes in net tangible book value after September 30, 2009, other than to give effect to the pro forma adjustments and our sale of ADSs offered in this offering at the assumed initial public offering price of $7 per ADS, with estimated net proceeds of $29.5 million after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of September 30, 2009 would have been $36.5 million, or $0.93 per outstanding common share, including estimated earn-out shares and common shares underlying our outstanding ADSs and share options, and $1.86 per ADS. This represents immediate dilution in adjusted net tangible book value of $2.57 per common share, or $5.14 per ADS, to new investors in this offering.
 
The following table illustrates this per common share adjusted dilution:
 
         
Assumed initial public offering price per common share
  $ 3.50  
Adjusted pro forma net tangible book value per common share prior to this offering(1)
  $ 0.25  
Increase in adjusted net tangible book value per common share attributable to this offering
  $ 0.68  
         
Adjusted pro forma net tangible book value per common share after this offering
  $ 0.93  
         
Adjusted dilution in net tangible book value per common share to new investors in this offering
  $ 2.57  
         
Adjusted dilution in net tangible book value per ADS to new investors in this offering
  $ 5.14  
         
 
 
(1) The pro forma adjustments occurred or will occur prior to the completion of this offering except for the conversion of the 2004 shareholder loan into our common shares, which will occur upon the completion of this offering.
 
The following table summarizes: (i) on a pro forma basis, the number of common shares purchased from us by the existing shareholders as of September 30, 2009 (assuming the pro forma adjustments had occurred as of that date), the total consideration paid to us and the average price per common share/ADS paid by the existing shareholders and by new investors purchasing common shares evidenced by ADSs in this offering at the assumed initial public offering price of $7 per ADS; and (ii) on an adjusted pro forma basis, the pro forma numbers and amounts set forth in (i) as adjusted to take into consideration (x) the estimated earn-out shares that may or are required to be issued to the selling shareholders of the acquired entities and the estimated amount of cash consideration otherwise payable to them, and (y) common shares issuable upon exercise of our outstanding share options and the exercise price to be paid:
 
                                                                                 
                                                    Average
       
    Common Shares Purchased     Total Consideration     Price per
    Average
 
                Adjusted
    Adjusted
                Adjusted
    Adjusted
    Common
    Price per
 
    Number     Percent     Number     Percent     Amount     Percent     Amount     Percent     Share     ADS  
 
Existing shareholders
    17,725,943       61.7 %     17,725,943       45.0 %     36,360,886       48.6 %   $ 36,360,886       34.7 %   $ 2.05     $ 4.10  
New investors
    11,000,000       38.3       11,000,000       27.9       38,500,000       51.4       38,500,000       36.7       3.50       7.00  
Holders of share options
                2,133,004       5.4                   5,333       0.0       0.0025       0.005  
Selling shareholders of acquired entities
                8,552,504       21.7                   29,933,764       28.6       3.50       7.00  
                                                                                 
Total
    28,725,943       100.0 %     39,441,451       100.0 %   $ 74,860,886       100.0 %     104,799,983       100.0 %                
                                                                                 
 
If the underwriters exercise in full their over-allotment option: (i) our existing shareholders will own approximately 58.4% and our new investors will own approximately 41.6% of the total number of our common shares outstanding after this offering; and (ii) on an adjusted basis, our existing shareholders, the selling shareholders of the acquired entities, holders of share options and our new investors would own approximately 43.2%, 20.8%, 5.2% and 30.8%, respectively, of the adjusted total number of our common shares outstanding after this offering.


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A $1.00 increase (decrease) in the assumed initial public offering price of $7 per ADS would increase (decrease) (i) our pro forma net tangible book value after giving effect to this offering by $5.1 million, the pro forma net tangible book value per common share and per ADS after giving effect to this offering by $0.18 per common share and $0.36 per ADS and the dilution in net tangible book value per common share and per ADS to new investors in this offering by $0.32 per common share and $0.64 per ADS and (ii) the adjusted pro forma net tangible book value by $5.1 million, the adjusted pro forma net tangible book value per common share and per ADS by $0.13 per common share and $0.26 per ADS and the adjusted dilution in net tangible book value per common share and per ADS to new investors in this offering by $0.37 per common share and $0.74 per ADS, in each case, assuming no exercise of the underwriters’ over-allotment option and no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.


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CAPITALIZATION
 
The following table sets forth our capitalization as of September 30, 2009:
 
  •  on an actual basis;
 
  •  on a pro forma basis, to reflect the conversion of (i) all outstanding preference shares into our common shares other than Class F and Class G preference shares and (ii) the 2004 shareholder loan and an amount of $500,000, representing the first annual interest amount payable under the Uni-Asia convertible note, into our common shares; and
 
  •  on a pro forma as adjusted basis, to reflect (i) the conversion of all Class F and Class G preference shares (including those to be issued upon the conversion of the full principal amount repayable under the KCIC convertible note into our preference shares) into our common shares and (ii) this offering, assuming an initial public offering price of $7 per ADS, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated offering expenses payable by us.
 
You should read this table together with our consolidated financial statements, including the related notes, appearing elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The information in the following table does not include the common shares issuable upon exercise of any options outstanding as of September 30, 2009.
 
                         
    As of September 30, 2009  
                Pro Forma
 
    Actual     Pro Forma     as Adjusted  
    (In U.S. dollars)  
 
Shareholder loan
  $ 1,549,964     $     $  
                         
Convertible preference shares ($0.0025 par value; 10,727,920 multiple classes of shares authorized, 10,048,467 issued and outstanding (aggregate liquidation value of $37,090,064, no shares issued and outstanding on a pro forma basis and no shares issued and outstanding on a pro forma as adjusted basis)
    27,093,868              
                         
Shareholders’ (deficit)/equity:
                       
Common shares ($0.0025 par value; 368,219,600 shares authorized and 5,641,694 shares issued and outstanding, 14,736,593 shares issued and outstanding on a pro forma basis and 28,725,943 shares issued and outstanding on a pro forma as adjusted basis)
    14,104       36,841       71,814  
Additional paid-in capital
    2,037,721       31,158,816       67,840,488  
Statutory reserves
    135,582       135,582       135,582  
Accumulated deficit
    (17,015,200 )     (18,991,218 )     (18,991,218 )
Accumulated other comprehensive income
    1,633,934       1,633,934       1,633,934  
Non-controlling interests
    3,893,472       3,893,472       3,893,472  
                         
Total shareholders’ (deficit)/equity(1)
    (9,300,387 )     17,867,427       54,584,072  
                         
Total capitalization(1)
  $ 19,343,445     $ 17,867,427     $ 54,584,072  
                         
 
 
(1) A $1.00 increase (decrease) in the assumed initial public offering price of $7 per ADS would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $5.1 million, after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance and estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus.


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EXCHANGE RATE INFORMATION
 
Our business is primarily conducted in China and substantially all of our revenues are denominated in Renminbi. We present our historical consolidated financial statements in U.S. dollars. In addition, solely for the convenience of the reader, certain pricing information is presented in U.S. dollars and certain contractual amounts that are in Renminbi include a U.S. dollar equivalent. Except as otherwise specified, this pricing information and those contractual amounts are translated at $1.00 to RMB6.8263, the noon buying rate in The City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York on March 8, 2010. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. For a detailed explanation of the risk of currency rate fluctuations, please see “Risk Factors — Risks Relating to the People’s Republic of China — Fluctuations in exchange rates could result in foreign currency exchange losses.” The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. Examples of such government regulations and restrictions are set forth in “Risk Factors — Risks Relating to the People’s Republic of China — Restrictions on currency exchange may limit our ability to utilize our revenues effectively” and “Risk Factors — Risks Relating to the People’s Republic of China — PRC regulation of loans and investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering as intended, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”
 
On March 8, 2010, the noon buying rate in The City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York was RMB6.8263 to $1.00. The following table sets forth additional information concerning exchange rates between Renminbi and U.S. dollars for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we use in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.
 
                                 
    RMB per $1.00 Noon Buying Rate
Period
  Period End   Average(1)   Low   High
 
2005
    8.0702       8.1826       8.2765       8.0702  
2006
    7.8041       7.9579       8.0702       7.8041  
2007
    7.2946       7.6072       7.8127       7.2946  
2008
    6.8225       6.9193       7.2946       6.7800  
2009
    6.8259       6.8295       6.8395       6.8180  
September
    6.8262       6.8277       6.8303       6.8247  
October
    6.8264       6.8267       6.8292       6.8248  
November
    6.8271       6.8271       6.8300       6.8255  
December
    6.8259       6.8275       6.8299       6.8244  
2010
                               
January
    6.8268       6.8269       6.8295       6.8258  
February
    6.8258       6.8285       6.8330       6.8258  
March (through March 8)
    6.8263       6.8261       6.8265       6.8258  
 
 
Source: Federal Reserve Bank of New York
 
(1) Annual averages are calculated using month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.


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OUR CORPORATE STRUCTURE
 
Corporate History
 
We were incorporated on January 8, 2003 in the Cayman Islands. We were initially known as “Redgate Media Inc.” and changed to our current name “Redgate Media Group” in January 2009. Since our inception, we have grown our business significantly, largely through a series of acquisitions, and we may continue to make acquisitions. In October 2003, we acquired 100% equity interest in Media2U, a Hong Kong company, whose principal assets were exclusive PRC licensing and advertising rights in respect of the Chinese editions of international lifestyle magazines. In April 2004, we subscribed for 40% equity interest in Winmax, a wholly-owned subsidiary of Media Chinese International, then known as Ming Pao Enterprise Corporation Limited, in exchange for cash and our entire equity interest in Media2U. Winmax held One Media Group as a wholly-owned subsidiary, which subsequently conducted an initial public offering and listed its shares on the Hong Kong Stock Exchange. Subsequent to certain shareholding adjustments based on Media2U’s financial performance target and the dissolution of Winmax, we currently own approximately 11.07% interest in One Media Group through our subsidiary RGM Ventures. See Note 8 to our audited consolidated financial statements included elsewhere in his prospectus. Since November 2005, we have acquired a number of companies that form our various business divisions and entered into agreements to acquire one additional company pending completion. These acquisitions are:
 
Broadcast Network
 
Television Advertising Platform.  Our television advertising platform was formed through our acquisition of 100% of the equity interest in Dianguang in July 2008. On June 12, 2009, we entered into agreements to acquire 100% of the equity interest in Yarun, which acquisition is pending and expected to be completed following this offering.
 
Radio Network.  Our radio network was formed through two acquisitions by Wanli, our consolidated variable interest entity. Wanli acquired 70% of the equity interest in Daren in November 2005 and additional 10% in April 2008, as well as 100% of the equity interest in Breeze in October 2007. We control Daren and Breeze through contractual arrangements with Wanli and its shareholders without directly or indirectly owning any equity interest in Daren or Breeze. See “— Contractual Arrangements.”
 
Outdoor Advertising Network
 
Our outdoor advertising network was formed through the acquisition of an aggregate of 60% of the equity interest by Wanli and us in Hongmen in May 2008 and our acquisition of 51% of the equity interest in Yanhuang in September 2008. We control Hongmen through our direct interest in Hongmen and our contractual arrangements with Wanli. See “— Corporate Structure” and “— Contractual Arrangements.” We have agreed to purchase the remaining 40% of the equity interest in Hongmen and the remaining 49% of the equity interest in Yanhuang.
 
In addition, we acquired 10.71% of the equity interest in FLOG in January 2008.
 
Internet and Interactive Services
 
Daren and Breeze are also engaged in the operations that comprise our Internet and interactive services. On December 31, 2009, we entered into agreements to acquire 100% of the equity interest in WinClick, which acquisition is pending and expected to be completed following this offering.
 
Public Relations and Event Marketing
 
Wanli acquired 100% of the equity interest in Alliance Online in February 2008. We control Alliance Online through contractual arrangements with Wanli and its shareholders without directly or indirectly owning any equity interest in Alliance Online. See “— Contractual Arrangements.”
 
For additional information regarding our recent acquisitions, see “Recent Acquisitions.”


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In February 2010, we executed a 40-for-1 share split of our common shares and each class of our preference shares.
 
Corporate Structure
 
The following diagram illustrates our main corporate and operating structure as of the date of this prospectus, assuming that the acquisitions of Yarun and WinClick had been completed prior to the date of this prospectus:
 
(DIAGRAM)
 
 
(1) Include loan agreements, equity interest pledge agreements and option deeds.
 
(2) These contracting shareholders are Mr. Yue Jin, husband of Ms. Ying Zhu, our co-founder, President, General Manager and director, and Ms. Fujun Chen, mother-in-law of Ms. Zhu. Both Mr. Jin and Ms. Chen are PRC citizens.
 
(3) Our acquisition of 100% equity interest in Yarun has not been consummated and, if consummated, is expected to be completed after this offering.
 
(4) We have agreed to purchase the remaining 49% equity interest in Yanhuang and expect to complete the purchase after this offering. Yanhuang operates a portion of its business through four wholly- or majority-owned subsidiaries.
 
(5) We have an option to acquire the remaining 89.29% equity interest in FLOG. We do not currently intend to exercise this call option. See “Recent Acquisitions — Outdoor Advertising Network — Our Acquisition of a Minority Stake in FLOG.”
 
(6) We have agreed to purchase the remaining 40% equity interest of Hongmen and expect to complete the purchase after this offering.
 
(7) Our acquisition of 100% equity interest in WinClick has not been consummated and, if consummated, is expected to be completed after this offering.
 
Contractual Arrangements
 
Due to PRC regulatory restrictions on foreign investment in certain business activities in some of the industries in which some of our business divisions operate or expect to operate after the completion of our acquisition of WinClick, including the production of radio programs and provision of mobile value-added advertising services, we are not permitted to have any equity interest or 100% ownership in companies engaging in such restricted business activities. See “Regulation — Regulations on Foreign Investment in the Media, Advertising and


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Telecommunications Industries.” Therefore, we conduct a substantial portion of our operations in China through contractual arrangements with Wanli, one of our consolidated variable interest entities, and its shareholders. See “Regulation — Regulations on Foreign Investment in the Media, Advertising and Telecommunications Industries.” Wanli, in turn, carries out the relevant operations that relate to these restricted industries in China through its subsidiaries including Breeze, Daren, Hongmen and Alliance Online. Redgate Online currently has no active business operations.
 
Daren holds the requisite licenses and permits to conduct our radio network and Internet and interactive services businesses in China. See “Business — Our Cross-Media Platform — Broadcast Network — Radio Network” and “Business — Our Cross-Media Platform — Internet and Interactive Services.” Hongmen operates a residential light-box network in Shanghai. See “Business — Our Cross-Media Platform — Outdoor Advertising Network.” Alliance Online operates our public relations and event marketing services. See “Business — Our Cross-Media Platform — Public Relations and Event Marketing.” We depend on these subsidiaries of Wanli to operate a substantial portion of our businesses. We have entered into contractual arrangements with Wanli and its shareholders, all of whom are PRC citizens, which enable us to exercise effective control over Wanli and, indirectly, its subsidiaries and to have an exclusive option to purchase all of the equity interest in Wanli. We have also entered into a set of similar contractual arrangements with the shareholders of Redgate Online, though Redgate Online currently does not own any operating assets.
 
Agreements that enable us to exercise effective control over Wanli and its subsidiaries
 
To obtain effective control over Wanli, Redgate Beijing, our wholly-owned subsidiary, extended loans to two PRC citizens, namely Yue Jin, and Fujun Chen, or, collectively, the contracting shareholders, for the purposes of acquiring 100% of the equity interest in Wanli and becoming shareholders of Wanli in their own names. Redgate Media (Hong Kong) Limited, or Redgate Media (Hong Kong), and Redgate Beijing have entered into agreements as described below with each contracting shareholder relating to each shareholder’s interest in Wanli. The contracting shareholders have effective control over Wanli as a result of their shareholding and, consequently, we have effective control over Wanli through our agreements with such shareholders.
 
Loan Agreements.  Redgate Beijing extended two loans in respective principal amount of RMB1 million ($146,492) and RMB17 million ($2.5 million) to the contracting shareholders pursuant to certain loan agreements entered into among Redgate Media (Hong Kong) and the contracting shareholders, or the 2005 loan agreements. Redgate Beijing, Redgate Media (Hong Kong) and the contracting shareholders entered into an agreement in September 2009 to confirm Redgate Beijing is the lender under the 2005 loan agreements. The contracting shareholders used the loans solely for the purpose of acquiring 100% of the equity interest in Wanli. The loans are due on demand.
 
Equity Interest Pledge Agreements.  Pursuant to an equity interest pledge agreement among Redgate Beijing, Redgate Media (Hong Kong) and the contracting shareholders, as amended, the contracting shareholders have pledged all of their equity interest in Wanli to Redgate Beijing to secure the performance of their obligations under the loan agreements described above and the option deeds described below. We are in the process of applying for the equity interest pledge registrations at the local administration of industry and commerce, See “Risk Factors — Risks Relating to Our Structure — The shareholders of Wanli, our consolidated variable interest entity, may breach or refuse to renew our agreements with them or may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.”


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Agreements that give us the exclusive option to purchase all of the equity interest in Wanli
 
Redgate Beijing and Redgate Media (Hong Kong) have entered into deeds of agreement with the contracting shareholders and Wanli, which entitle Redgate Beijing to purchase, directly or through a designated purchaser, from the contracting shareholders, in its sole discretion, part or all of the contracting shareholders’ equity interest in Wanli as and when permitted by PRC law. The purchase price to be paid by Redgate Beijing will be RMB1.00 or such higher amount as required by PRC law. Redgate Beijing has the right to exercise the purchase right at any time by providing the shareholders with ten-business-day prior written notice. The contracting shareholders have agreed to execute a binding equity transfer contract with Redgate Beijing upon the conclusion of the ten-business-day notice period, and to execute all other necessary contracts and obtain all necessary governmental approvals and consents and perform all other necessary acts to effect the transfer of the legal and beneficial interest in Wanli to Redgate Beijing or its designated purchaser.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.
 
The selected consolidated statements of operations data for 2006, 2007, 2008 and the nine months ended September 30, 2009, and the selected consolidated balance sheets data as of December 31, 2007 and 2008 and September 30, 2009, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements are prepared in accordance with U.S. GAAP, and have been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent registered public accounting firm. The report of PricewaterhouseCoopers CPAs Limited Company on those consolidated financial statements is also included elsewhere in this prospectus. Results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full year.
 
The selected consolidated statements of operations data for the nine months ended September 30, 2008 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements.
 
The selected consolidated balance sheet data as of December 31, 2006 have been derived from our unaudited consolidated financial statements that are not included in this prospectus. Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.
 
Selected consolidated financial information as of, and for the years ended, December 31, 2004 and 2005, has been omitted because such information cannot be provided without unreasonable effort or expense.
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)        
    (In U.S. dollars, except for number of shares)  
 
Consolidated Statements of Operations Data:
                                       
Revenues
                                       
Total revenues
  $ 2,364,431     $ 4,301,677     $ 11,143,059     $ 5,279,292     $ 19,109,122  
Less: Business tax and related surcharges
    (43,709 )     (72,187 )     (363,876 )     (164,929 )     (762,043 )
                                         
Total net revenues
    2,320,722       4,229,490       10,779,183       5,114,363       18,347,079  
                                         
Total operating costs and expenses
    5,445,494       7,595,825       14,689,017       7,620,792       17,083,990  
                                         
(Loss)/income from operations
    (3,124,772 )     (3,366,335 )     (3,909,834 )     (2,506,429 )     1,263,089  
                                         
Change in fair value of embedded derivatives
    1,521,009       (65,628 )     358,475       350,060       (16,823 )
Impairment loss on marketable securities
                (2,731,856 )     (2,718,085 )      
Interest income
    125,116       88,002       114,757       83,043       20,242  
Interest expense
                (78,729 )     (27,997 )     (174,156 )
Net other (expense)/income
    (38,907 )     (26,445 )     (158,754 )     (249,868 )     290,764  
                                         


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          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)        
    (In U.S. dollars, except for number of shares)  
 
(Loss)/income before income taxes, investment in associates and non-controlling interests
    (1,517,554 )     (3,370,406 )     (6,405,941 )     (5,069,276 )     1,383,116  
Income tax benefit/(expense)
          3,109       (285,772 )     (137,915 )     (1,298,423 )
                                         
(Loss)/income before investments in associates and non-controlling interests
    (1,517,554 )     (3,367,297 )     (6,691,713 )     (5,207,191 )     84,693  
(Loss)/income from investments in associates
    (3,659,022 )     97,596       (767,093 )     (735,544 )      
                                         
Net (loss)/income
    (5,176,576 )     (3,269,701 )     (7,458,806 )     (5,942,735 )     84,693  
Net (income)/loss attributable to non-controlling interest
                15,826       54,801       (168,920 )
                                         
Net loss attributable to common shareholders
  $ (5,176,576 )   $ (3,269,701 )   $ (7,442,980 )   $ (5,887,934 )   $ (84,277 )
                                         
Net loss per share:
                                       
Basic
  $ (0.92 )   $ (0.58 )   $ (1.32 )   $ (1.04 )   $ (0.01 )
Diluted
  $ (0.92 )   $ (0.58 )   $ (1.34 )   $ (1.07 )   $ (0.01 )
Weighted average number of shares outstanding:
                                       
Basic
    5,641,694       5,641,694       5,641,694       5,641,694       5,641,694  
Diluted
    5,641,694       5,641,694       5,830,359       5,830,359       5,641,694  
EBITDA(1)
  $ (5,220,691 )   $ (3,257,769 )   $ (5,802,186 )   $ (5,208,489 )   $ 2,843,452  
 
 
(1) See note (1) to “Summary Consolidated Financial Data — EBITDA.” EBITDA is not part of our consolidated statements of operations data.
 
                                         
    As of December 31,   As of September 30,
    2006   2007   2008   2009   Pro Forma(1)
    (In U.S. dollars)
    (Unaudited)                
 
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 2,529,291     $ 6,789,686     $ 8,925,707     $ 7,504,245     $ 7,504,245  
Acquired intangible assets
          196,762       3,532,829       2,387,293       2,387,293  
Goodwill
          380,007       15,867,619       15,705,577       15,705,577  
Total assets
    8,997,070       14,734,152       45,678,241       47,426,693       45,889,589  
Total liabilities
    2,201,302       3,546,725       27,831,149       29,633,212       28,022,162  
Convertible preference shares
    10,790,064       18,290,064       27,090,064       27,093,868        
Non-controlling interests
                3,668,854       3,893,472       3,893,472  
Total shareholders’ equity/(deficit)
    8,997,070       (7,102,637 )     (9,242,972 )     (9,300,387 )     17,867,427  
 
 
(1) The pro forma consolidated balance sheet data as of September 30, 2009 assume the conversion of (i) all outstanding preference shares into our common shares other than Class G preference shares and (ii) the 2004 shareholder loan and an amount of $500,000, representing the first annual interest amount payable under the Uni-Asia convertible note, into our common shares.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements, unaudited pro forma condensed consolidated financial information and the respective audited financial statements of certain entities acquired or to be acquired by us, namely, Yanhuang, Dianguang and Yarun, together with the respective notes thereto, included elsewhere in this prospectus. Our audited consolidated financial statements and the respective audited financial statements of those three entities have been prepared in accordance with U.S. GAAP. The unaudited pro forma condensed consolidated financial information has been derived from our audited consolidated financial statements and the respective audited financial statements of the three entities. This discussion and analysis contain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
We primarily provide advertising and advertising agency services through an integrated cross-media platform that enables advertisers to conduct multiple-channel marketing campaigns targeting higher-income demographics. Our comprehensive portfolio of assets in television, radio, outdoor and Internet media reaches over 226 million people in key metropolitan markets, such as Beijing and Shanghai, as well as more than 160 other cities or counties throughout China. The wide coverage and diversity of our advertising channels allow leading international and domestic brand names flexibility and efficiency in executing effective marketing campaigns.
 
Our cross-media platform consists of our broadcast network, outdoor advertising network and Internet and interactive services. In addition, our cross-media platform is enhanced by our ability to support clients’ advertising campaigns with our production studio, which is licensed to produce both radio and television content, and our public relations and event marketing services. We generate revenues primarily from (i) selling advertising time slots for television programs for which we act as the exclusive advertising agent; (ii) selling radio advertising time, radio programs and radio media planning and buying services; (iii) selling advertising space on our outdoor advertising network; (iv) sharing service charges generated through our Internet and interactive services; and (v) providing public relations and event marketing services.
 
We generated total net revenues of $2.3 million, $4.2 million, $10.8 million, $5.1 million and $18.3 million in 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009, respectively. We incurred net losses attributable to common shareholders of $5.2 million, $3.3 million, $7.4 million, $5.9 million and $0.1 million, respectively, in 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009. We have made a number of acquisitions since October 2007. Assuming the completed acquisitions of Yanhuang and Dianguang and the pending acquisition of Yarun had all been consummated on January 1, 2008, our total net revenues in 2008 and the nine months ended September 30, 2009 would have been $39.9 million and $29.8 million, and we would have had a net loss attributable to common shareholders of $3.4 million in 2008 and net income attributable to common shareholders of $1.3 million in the nine months ended September 30, 2009, in each case, on a pro forma basis.
 
We believe the most significant factors affecting our business and results of operations are:
 
  •  Overall Demand for Our Services.  Advertising revenues accounted for, and are expected to continue to account for, substantially all of our revenues, and our success depends on maintaining our current client base while attracting new advertising clients. Advertisers may choose not to make full use of our advertising media channels, or choose to use those of our competitors, for various reasons, including finding that our targeted demographics do not consist of their desired customer base. In addition, advertising spending in China is volatile and sensitive to changes in the economy. Advertising spending has increased significantly in the past decade largely due to the rapid growth of China’s economy. However, any adverse economic change in China or the occurrence of a significant negative event in Beijing or Shanghai, the two cities in which we generated and expect to continue to generate a majority of our revenues, could cause slower growth of, or even decrease in, overall advertising spending, including our clients’ advertising spending, which in turn may harm our business and results of operations;


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  •  Our Ability to Integrate Our Acquisitions.  Our future results of operations will depend significantly upon our ability to successfully integrate our recent acquisitions into our cross-media platform comprising multiple advertising media channels that not only can grow individually, but also are fully integrated to offer “one-stop shop” advertising solutions that are attractive to advertisers. The integration process involves many challenges, including, among others, quickly familiarizing ourselves with the operation of the newly acquired advertising media channels, such as outdoor and television advertising and interactive services, effectively incentivizing and coordinating cross-selling efforts among different business divisions, retaining clients and experienced management and employees of acquired businesses and maintaining good relationships with providers of advertising media resources, such as television stations, billboard owners or operators and value-added telecommunications services providers. Failure to properly manage and address any of those challenges could significantly impair our ability to integrate the acquisitions, which in turn may adversely affect our business and results of operations;
 
  •  Our Ability to Obtain and Retain High-Quality Advertising Media Resources.  Except for our residential light-box network in Shanghai, we do not own any advertising media. A significant portion of our business relies on advertising media resources that we obtain and operate through contractual arrangements with owners or operators of the relevant advertising media. For example, similar to many other advertising agency companies in China, we purchase advertising time slots from television stations and radio stations and resell them to our advertising clients in our television advertising business and our radio media planning and buying business. In addition, we sell advertising space on large-format billboards and other displays leased from third parties. Furthermore, the quality and attractiveness of such advertising media resources, such as ratings and coverage of the relevant television or radio programs and the locations of billboards and other displays, will largely determine whether we are able to successfully sell the advertising time or space to advertisers at desirable prices, or at all;
 
  •  The Pricing of Advertising Media Resources.  The prices that we charge our advertising clients for the advertising media resources owned or operated by us directly affect our advertising placement services revenues. The pricing of our advertising media resources is affected by many factors, including, among others, competition, ratings of television or radio programs associated with the advertising media resources, the coverage of the advertising media channel, locations of the outdoor displays and advertising media costs. For example, intensified competition or deterioration in program ratings may cause downward pressure on pricing;
 
  •  Advertising Media Costs.  Advertising media costs represented, and are expected to continue to represent, the largest component of our advertising placement and production cost, accounting for approximately 79.2%, 61.5% and 63.0% of our total net revenues in 2007, 2008 and the nine months ended September 30, 2009, respectively. Due to the competition for high-quality advertising media resources, our ability to negotiate the prices of desired advertising media resources is often limited. If we are unable to fully pass increased advertising media costs on to advertising clients, our profit margins could be significantly reduced and our financial condition and results of operations may be materially and adversely affected; and
 
  •  Potential Impairment of Our Goodwill and Intangible Assets Associated with Our Acquisitions.  We have expanded our business significantly through acquisitions. We assess the carrying value of our goodwill and intangible assets with indefinite lives on an annual basis and when factors indicate that an impairment may have occurred. We incurred an impairment loss on goodwill of $0.3 million in 2006 based on our evaluation of the fair value of our investment in Daren. Since October 2007, we have made a number of acquisitions and have agreed to acquire another entity. We expect to have a substantial amount of goodwill and intangible assets as a result of these acquisitions. As of December 31, 2008 and September 30, 2009, our goodwill was $15.9 million and $15.7 million, respectively, and our acquired intangible assets were $3.5 million and $2.4 million, respectively. We may record additional goodwill as the amount of the remaining consideration to be paid in connection with our recent acquisitions becomes ascertainable and the completion of the pending acquisitions of Yarun and WinClick. Our management estimated that the remaining earn-out consideration payable in 2010, 2011, 2012 and 2013 would be $14.2 million, $25.4 million, $10.8 million and $4.9 million, respectively. See “Recent Acquisitions — Earn-Out and Other Consideration” for a discussion of the basis and assumptions of these estimates. Our company did not


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  record any impairment loss on goodwill in 2007, 2008 or the nine months ended September 30, 2009. However, we may incur impairment losses on goodwill or intangible assets on these recent acquisitions in the future, although we cannot predict whether and when this will occur. Circumstances that could trigger an impairment test between annual tests include, but are not limited to, a significant adverse change in the business climate or legal factors, an adverse action or assessment by a regulator, unanticipated competition and loss of key personnel. In addition, we have agreed to pay additional cash consideration in U.S. dollars equivalent to RMB33.0 million ($4.8 million) with respect to WinClick in 2010 and RMB1.6 million ($0.2 million) plus the U.S. dollar equivalent of RMB2.2 million ($0.3 million) in 2010 for the remaining 40% equity interest in Hongmen. See “Recent Acquisitions.”
 
We have a limited operating history upon which you can evaluate our business. Our recent rapid revenue growth, which is largely due to acquisitions, should not be taken as indicative of the rate of our revenue growth, if any, that can be expected in the future. For a discussion of important factors that may affect our business, financial condition and results of operations, see “Risk Factors.”
 
In 2006 and 2007, our business, primarily comprised of our radio network, was managed as a single operating segment in China. Our management reviewed our consolidated results of operations prepared in accordance with U.S. GAAP when making decisions about allocating our resources and assessing our performance, and our internal reporting did not distinguish between markets or segments. Beginning with 2008 and subsequent to the completion of our acquisitions of Alliance Online, Hongmen, Dianguang and Yanhuang, we have been managing our business based on four segments: (i) television advertising platform, (ii) radio network, consisting of both our radio network business and Internet and interactive services, (iii) outdoor advertising network, and (iv) public relations and event marketing business.
 
Revenues
 
We derive a substantial majority of our revenues from the provision of advertising and advertising agency services to our clients, most of whom are represented by advertising agencies. Our advertising and advertising agency services involve a variety of advertising media channels, including television, radio, outdoor and Internet.
 
Our radio business was formed through our acquisition of Daren in November 2005, while all other businesses were formed through acquisitions that took place in or after October 2007. As a result, our radio business accounted for substantially all of our revenues for 2006 and 2007. Following our acquisition of Breeze on October 30, 2007, which primarily engages in the production of interactive radio programs, our results of operations for 2007 also reflected Breeze’s results of operations for the months of November and December 2007. Following our acquisitions of Alliance Online, Hongmen, Dianguang and Yanhuang in February, May, July and September 2008, respectively, our results of operations for 2008 also reflected those of such four acquired entities starting from the respective acquisition closing dates. We control Daren, Breeze and Alliance Online through contractual arrangements with Wanli and its shareholders without directly or indirectly owning any equity interest in these entities. In addition, we control Hongmen through our direct interest and these contractual arrangements with Wanli. See “Our Corporate Structure — Corporate Structure” and “Our Corporate Structure — Contractual Arrangements.”
 
We currently group our revenues into the following four categories:
 
Advertising Placement Services Revenues.  In 2006 and 2007, we derived advertising placement services revenues primarily from (i) providing radio media planning and buying services and (ii) selling advertising time bundled with our radio programs. In 2008, following our acquisitions of Hongmen, Dianguang and Yanhuang, we started to derive a significant portion of our advertising placement services revenues from selling advertising time slots around one television program and advertising space on our outdoor advertising network. Our advertising placement services revenues accounted for 96.1%, 93.0%, 80.0%, 68.9% and 93.0% of our total revenues in 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009, respectively.
 
Advertising Production Services Revenues.  Our revenues from advertising production services in 2006 and 2007 were primarily derived from (i) selling radio programs to radio stations and (ii) providing radio station consultancy services. Following our acquisition of Yanhuang in September 2008, we also started to derive revenues from production of outdoor advertisements for clients. Our revenues from advertising production services


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accounted for 3.9%, 4.5%, 3.8%, 6.0% and 0.6% of our total revenues in 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009, respectively.
 
Public Relations Services Revenues.  Following our acquisition of Alliance Online in February 2008, we started to generate revenues from providing public relations and event marketing services. Public relations services revenues accounted for 10.9%, 18.5% and 6.0% of our total revenues in 2008 and the nine months ended September 30, 2008 and 2009, respectively.
 
Revenues from Other Services.  Starting from November 1, 2007, we began to generate revenues from value-added telecommunications service providers in connection with Breeze’s cooperation with them in operating interactive radio programs. In 2008, we also derived revenues from a one-time project with respect to promoting and selling certain mobile phone-based communication applications called EQO. We scaled back certain interactive radio programs in 2009. Revenues from other services accounted for 2.5%, 5.3%, 6.6% and 0.4% of our total revenues in 2007, 2008 and the nine months ended September 30, 2008 and 2009, respectively.
 
In any given period, a number of factors may impact our revenues. For a detailed discussion of the factors that may cause our revenues to fluctuate, see “Risk Factors — Risks Relating to Our Business — Our quarterly operating results may fluctuate significantly from period to period in the future.”
 
Our net revenues exclude PRC business tax and related surcharges, which currently are levied at a rate ranging from 8.40% to 9.45% on our advertising placement services revenues after deduction of certain operating costs, and from 5.25% to 5.70% for our advertising production services revenues.
 
In terms of revenue contribution, our clients for 2006 and 2007 consisted primarily of clients that purchased our radio media planning and buying services. Our clients for 2008 and the nine months ended September 30, 2009 consisted primarily of clients that purchased our various advertising and related services on our cross-media platform. The largest client in 2006 and 2007 accounted for 25.2% and 19.0%, respectively, of our total revenues. Our five largest clients for 2007 and 2008 and the nine months ended September 30, 2009 collectively accounted for 48.4%, 25.8% and 33.6% of our total revenues, respectively. We may continue to be dependent on a small number of clients for a substantial portion of our revenues in the future.
 
Operating Costs and Expenses
 
Our operating costs and expenses generally consist of (i) advertising placement and production costs, (ii) salary and employee benefits expenses, (iii) selling and marketing expenses, (iv) general and administrative expenses, (v) amortization of intangible assets and (vi) impairment loss on goodwill.
 
Advertising Placement and Production Costs.  In 2006 and 2007, advertising placement and production costs primarily included costs for purchasing advertising time from radio stations in connection with our radio media planning and buying services and, to a lesser extent, costs related to the production of our radio programs. In 2008 and the nine months ended September 30, 2009, it also included costs for obtaining exclusive television advertising agency rights in connection with our television advertising business, and concession fees paid to location providers and leasing fees paid to owners or operators of billboards or other displays in connection with our outdoor advertising network. As a percentage of our total net revenues, advertising placement and production service costs decreased from 92.7% in 2007 to 72.4% in 2008 and to 63.1% in the nine months ended September 30, 2009, reflecting that we commenced operating outdoor and television advertising businesses in May and July 2008, respectively, that have higher profit margins than our radio media planning and buying services.
 
Salary and Employee Benefits Expenses.  Salary and employee benefits expenses consist primarily of compensation and benefits for our officers and other employees, including compensation and benefits for our general management, sales and marketing staff and finance and administrative staff. Salary and employee benefits expenses as a percentage of our total net revenues were 51.6%, 33.2%, 29.1%, 42.3% and 12.7% in 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009, respectively. We expect our salary and employee benefits expenses to increase in absolute terms in the near future due to the significant growth in the number of our employees as a result of the expansion of our operations, largely attributable to our recent acquisitions.


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Salary and employee benefits expenses also include share-based compensation expenses. We account for share-based compensation expenses based on the fair value of share option grants at the date of grant. We adopted our current employee share option scheme in December 2004, as amended on December 31, 2009, and, as of February 28, 2010, options to purchase 2,133,004 common shares had been granted and were outstanding under our employee share option scheme. We incurred $2,018, $2,034, $6,586, $4,818 and $4,520 in share-based compensation expenses in 2006, 2007, 2008 and the nine months ended September 30, 2008 and 2009, respectively, and expect to additionally incur approximately $8.7 million in share-based compensation expenses in respect of these options over the next few years. For additional information regarding our share-based compensation expenses, see Notes 20 and 26 to our audited consolidated financial statements included elsewhere in this prospectus.
 
Selling and Marketing Expenses.  Selling and marketing expenses consist primarily of expenses for promotional, advertising, travel and entertainment activities, and do not include compensation and benefits for our sales and marketing staff. Selling and marketing expenses as a percentage of our total net revenues were 18.7%, 14.2