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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 20-F/A (Amendment No. 1)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003.Commission file number: 000-30134
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 (CHINADOTCOM CORPORATION LOGO)  Cayman Islands
(Jurisdiction of incorporation or organization) 34/F Citicorp Centre
18 Whitfield Road
Causeway Bay
Hong Kong
telephone: (852) 2893-8200
facsimile: (852) 2893-5245
e-mail: investor-relations@hk.china.com
(Address of principal executive offices) Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: Class A common shares Indicate the number of outstanding shares of each of the Issuers class of
capital or common stock as of the close of the period covered by this Annual
Report: Class of shares
    
    Number outstanding as of March 15, 2004Class A common shares
Preferred Shares
    
    103,930,895
Nil
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 o Item 18 x




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NOTE TO SHAREHOLDERS In connection with our proposed acquisition of Ross Systems, Inc., we have
filed the proxy statement/prospectus we propose to use in connection with the
transaction with the United States Securities and Exchange Commission. As part
of the typical SEC review process for such documents, we have received comments
from the SEC, including comments relating to our financial statements. In
particular, we have received comments from the SEC inquiring about the
appropriate amortization period for our URLs and the appropriate method to
recognize revenue in our mobile services and applications business. Currently,
we use a 20 year amortization period for our URLs, and we recognize revenue in
our mobile services and applications business on a net basis, which means
that we do not include as revenues in our mobile services and applications
business amounts paid to China Mobile and China Unicom as part of our revenue
sharing arrangements with them, as opposed to on a gross basis in which we
would include as revenues the amount paid to China Mobile and China Unicom.
We believe that our accounting treatment for these arrangements is appropriate.
However, depending upon the outcome of such review, we may need to amend our
Annual Report on Form 20-F and/or our 2003 financial statements in response to
these comments from the SEC or other comments received from the SEC. If as a
result of these comments we are required to adopt a shorter amortization period
for our URLs, there may be a material adverse impact on net income in 2003 and
prior periods. For additional discussion concerning our URLs, see Item 3.D Risk Factors
- Risks Relating to chinadotcom  Risks relating to our overall business  We
are subject to various risks, including intellectual property claims and claims
of unreasonable purchase price paid, related to our purchase of URLs from CIC,
which could materially and adversely impact our business prospects and
financial condition. For additional discussion concerning our revenue
recognition policies in our mobile services and applications business, see Item
5  Operating and Financial Review and Prospects  Critical Accounting
Policies and Estimates  Revenue recognition  Mobile services and
applications.




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TABLE OF CONTENTS  
 PageItem 1.
    
    Identity Of Directors, Senior Management And Advisors
    
    
    3Item 2.
    
    Offer Statistics And Expected Timetable
    
    
    3Item 3.
    
    Key Information
    
    
    4Item 4.
    
    Information On The Company
    
    
    49Item 5.
    
    Operating And Financial Review And Prospects
    
    
    72Item 6.
    
    Directors, Senior Management And Employees
    
    
    99Item 7.
    
    Major Shareholders And Related Party Transactions
    
    
    106Item 8.
    
    Financial Information
    
    
    110Item 9.
    
    The Offer And Listing
    
    
    110Item 10.
    
    Additional Information
    
    
    111Item 11.
    
    Quantitative And Qualitative Disclosures About Market Risk
    
    
    124Item 12.
    
    Description Of Securities Other Than Equity Securities
    
    
    127Item 13.
    
    Defaults, Dividend Arrears And Delinquencies
    
    
    128Item 14.
    
    Material Modifications To The Rights Of Security Holders And Use Of Proceeds
    
    
    128Item 15.
    
    Controls and Procedures
    
    
    128Item 16.
    
    [Reserved]
    
    
    128Item 16A.
    
    Audit Committee Financial Expert
    
    
    128Item 16B.
    
    Code of Ethics
    
    
    128Item 16C.
    
    Principal Accountant Fees and Services
    
    
    128Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    129Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    130Item 17.
    
    Financial Statements
    
    
    131Item 18.
    
    Financial Statements
    
    
    131Item 19.
    
    Exhibits
    
    
    131EX-12.1 CERTIFICATION OF CEOEX-12.2 CERTIFICATION OF CFO




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GENERAL INTRODUCTION In this Annual Report, except as otherwise specified, all references to
we, us, our, the Company or chinadotcom refer to chinadotcom
corporation and its consolidated subsidiaries and their respective operations.
Unless otherwise specified, all information contained in this Annual Report,
including share and per share data, reflects the two-for-one share splits
approved by our shareholders as of each of December 6, 1999 and April 28, 2000,
respectively, and effective as of the close of trading on the Nasdaq National
Market on December 13, 1999 and May 8, 2000, respectively. In this annual
report, any reference to US GAAP means the generally accepted accounting
principles of the United States and, unless indicated otherwise, any reference
to U.S.$, US$, or $ is to United States dollars. Presentation of Financial Information chinadotcom was incorporated as China Information Infrastructure Limited
under the laws of the Cayman Islands in June 1997 as a wholly-owned subsidiary
of China Internet Corporation Limited, or CIC, a company incorporated under the
laws of Bermuda. In June 1999, CIC distributed its total interest in
chinadotcom to CICs shareholders in a reorganization. The transaction involved
the distribution of a total of 46,975,972 of our Class A common shares to CICs
shareholders on a one-for-one basis with respect to each issued and outstanding
share of CICs capital stock at the time of the distribution. Upon completion
of its reorganization, CIC ceased to have any ownership interest in
chinadotcom. As part of this corporate reorganization, CIC also transferred
certain subsidiaries, portals and related assets comprising the integrated
portal business, which began in early 1996, to chinadotcom. The transfer was
accounted for as a reorganization of entities under common control in a manner
similar to a pooling of interests. In April 2000, our shareholders voted to
change our name to chinadotcom corporation. The summary consolidated financial data for fiscal year 1999 in this
Annual Report has been prepared as if the corporate reorganization of
chinadotcom referred to above had occurred retroactively. Accordingly, the
results of operations and related net assets and liabilities of the operations
transferred by CIC to chinadotcom as a part of CICs reorganization have been
included in the summary consolidated financial data for fiscal year 1999.
chinadotcom believes that the methods used in the allocation of expenses are
reasonable and the statements of operations include all revenues and costs
directly and indirectly attributable to the Company. The amounts related to
chinadotcom have been determined by segregating amounts related to the
operation of chinadotcom from those related to the operations retained by CIC.
The determination of these amounts was made by reference to individual records
for costs specifically relating to chinadotcom or by allocation based on number
of personnel, time spent by personnel or similar references. Management
believes the allocated costs are representative of the costs that would have
been incurred if chinadotcom had operated on a stand-alone basis. On each of December 13, 1999 and May 8, 2000, chinadotcom effected a
two-for-one share split. Upon the occurrence of each of these share splits,
each issued and outstanding Class A common share of chinadotcom was split into
two Class A common shares of half the previous par value per share. The current
par value of our Class A common share is US$0.00025 per share. Unless indicated
otherwise, the consolidated financial statements and related notes in this
Annual Report have been prepared, and the consolidated financial and share
information in this Annual Report, including share and per share data, have
been presented, as if the two share splits had occurred retroactively. The consolidated financial statements have been prepared in accordance
with US GAAP. Forward-Looking Statements Included in this Annual Report are forward-looking statements, which can
be identified by the use of forward-looking terminology including may,
will, expect, anticipate, estimate, plan, continue, 1




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believe or other similar words. We have made forward-looking statements
concerning the following, among others:  
    
    our goals and strategies;
    
    our acquisition and expansion strategy;
    
    expectations regarding market growth, development and structural
changes;
    
    expectations and targets for our results of operations;
    
    our operations and business prospects;
    
    the importance and expected growth of software, Internet and mobile phone
applications;
    
    the pace of change in the software, Internet and mobile phone applications
marketplaces;
    
    the demand for software, Internet and value-added mobile services; and
    
    advertising revenues. These statements are forward-looking and reflect managements current
expectations only. They are subject to a number of risks and uncertainties,
including but not limited to, the following:  
    
    our ability to realize strategic objectives by taking advantage of
market opportunities in our geographic markets;
    
    any changes in the regulatory policies of the Ministry of
Information Industry in the PRC, or MII, and other relevant
government authorities relating to, among other matters, the grant
and approval of licenses and the restrictions on Internet content;
    
    our ability to integrate operations or new acquisitions in
accordance with business strategy;
    
    our ability to make changes in business strategy, development plans
and product offerings to respond to the needs of current, new and
potential customers, suppliers and strategic partners;
    
    the effects of restructurings on our ability to successfully support
our operations and to secure and retain customers;
    
    our ability to acquire additional companies and technologies and
manage an increasingly broad range of businesses;
    
    risks associated with the development and licensing of software
generally, including potential delays in software development and
technical difficulties that may be encountered in the development or
use of our software;
    
    increased global competition;
    
    our ability to manage regulatory and litigation risks;
    
    our ability to rationalize operations in a cost effective manner;
    
    the risk that our various contractual relationships with China
Mobile or China Unicom will terminate or be altered in a way that
adversely affects our value-added mobile services and applications
business; 2




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
    
    our reliance on our contractual arrangements with our affiliated Chinese entities;
    
    the future growth of the mobile telecommunications and Internet industries in the PRC;
    
    the development of new technologies and applications or
services affecting our current and future business;
    
    changes in political, economic, legal and social conditions in
the PRC, including the PRC governments specific policies with
respect to foreign investment in the telecommunications industry,
economic growth, inflation, foreign exchange and the availability of
credit;
    
    general risks of the software, mobile services, marketing and
internet sectors; and
    
    the uncertain economic and political climate in Asia, the United
States and throughout the rest of the world, and the potential that
such climate may deteriorate further, including the recent adverse
effects on general economic conditions in Asia as a result of the
outbreak of severe acute respiratory syndrome, or SARS. We do not intend to update or otherwise revise the forward-looking
statements in this annual report, 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
annual report might not occur in the way we expect, or at all. Accordingly, you
should not place undue reliance on any forward-looking information. You should
read these statements in conjunction with the risk factors disclosed in Item
3.D - Key Information  Risk Factors. 
 ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable. 
 ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 3




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ITEM 3. KEY INFORMATION A. Selected Financial Data The following selected consolidated financial data of chinadotcom and our
subsidiaries should be read in conjunction with the consolidated balance sheets
as of December 31, 2002 and 2003 and the related consolidated statements of
operations, cash flows and shareholders equity for the years ended December
31, 2001, 2002 and 2003 and the notes thereto, or together referred to as the
Consolidated Financial Statements, included as Item 18  Financial
Statements, and the information included in Item 5  Operating and Financial
Review and Prospects. The Consolidated Financial Statements have been prepared
and presented in accordance with US GAAP. The following selected consolidated
financial data of chinadotcom and our subsidiaries as of and for the years
ended December 31, 1999 and 2000, and the consolidated balance sheet as of
December 31, 1999, 2000 and 2001 are derived from our audited financial data,
after adjustment for the restatement of discontinued operations and segment
reporting, which are not included in this Annual Report. Unless otherwise indicated, share and per share data is expressed as if
our two-for-one share splits that were effected on each of December 13, 1999
and May 8, 2000 had occurred retroactively. The selected consolidated financial
data for fiscal year 1999 present financial results of chinadotcom and our
subsidiaries as if our 1999 reorganization had been completed retroactively. The financial data reflect the financial condition and results of operations of
chinadotcom and our subsidiaries for such periods and do not necessarily
reflect our financial condition as if we had been a stand-alone entity for all
periods. (see Item 4  Information on the Company) Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands of U.S. dollars except share and per share data)Income Statement Data:(1)Revenues:Software and consulting servicesSales of IT products
    
    
    
    
    
    
    
    
    
    
    743
    
    
    
    1,339
    
    
    
    8,000Consulting services
    
    
    7,914
    
    
    
    45,791
    
    
    
    15,900
    
    
    
    14,166
    
    
    
    42,699Mobile services and applications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,876Advertising and marketing activities
    
    
    6,126
    
    
    
    37,645
    
    
    
    18,087
    
    
    
    26,682
    
    
    
    19,558Other income
    
    
    1,306
    
    
    
    1,004
    
    
    
    4,507
    
    
    
    1,821
    
    
    
    2,29915,346
    
    
    
    84,440
    
    
    
    39,237
    
    
    
    44,008
    
    
    
    89,432Cost of revenues:Software and consulting servicesSales of IT products
    
    
    
    
    
    
    
    
    
    
    (472
    )
    
    
    (668
    )
    
    
    (6,123
    )Consulting services
    
    
    (4,046
    )
    
    
    (28,972
    )
    
    
    (11,451
    )
    
    
    (6,255
    )
    
    
    (25,697
    )Mobile services and applications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,247
    )Advertising and marketing activities
    
    
    (3,905
    )
    
    
    (24,524
    )
    
    
    (11,625
    )
    
    
    (19,999
    )
    
    
    (12,966
    )Other income
    
    
    (606
    )
    
    
    (1,123
    )
    
    
    (1,892
    )
    
    
    (845
    )
    
    
    (1,084
    )Gross margin
    
    
    6,789
    
    
    
    29,821
    
    
    
    13,797
    
    
    
    16,241
    
    
    
    41,315Selling, general and administrative expenses
    
    
    (26,557
    )
    
    
    (92,226
    )
    
    
    (73,297
    )
    
    
    (27,161
    )
    
    
    (34,325
    )Depreciation and amortization expenses
    
    
    (6,079
    )
    
    
    (29,863
    )
    
    
    (19,180
    )
    
    
    (9,882
    )
    
    
    (7,182
    )
 4




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Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands of U.S. dollars except share and per share data)Impairment of goodwill and intangible assets
    
    
    
    
    
    
    (31,712
    )
    
    
    (21,908
    )
    
    
    
    
    
    
    Operating loss
    
    
    (25,847
    )
    
    
    (123,980
    )
    
    
    (100,588
    )
    
    
    (20,802
    )
    
    
    (192
    )Interest income
    
    
    3,826
    
    
    
    29,750
    
    
    
    26,689
    
    
    
    23,713
    
    
    
    13,440Interest expense
    
    
    
    
    
    
    (851
    )
    
    
    (1,272
    )
    
    
    (2,463
    )
    
    
    (1,070
    )Gain/(loss) arising from share issuance of a
subsidiary
    
    
    
    
    
    
    140,031
    
    
    
    (55
    )
    
    
    
    
    
    
    Gain/(loss) on disposal of available-for-sale
securities
    
    
    6,282
    
    
    
    1,685
    
    
    
    4,411
    
    
    
    (163
    )
    
    
    4,599Gain/(loss) on disposal of subsidiaries and cost
investments
    
    
    
    
    
    
    13,981
    
    
    
    (1,915
    )
    
    
    (66
    )
    
    
    469Other non-operating gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    508
    
    
    
    961Other non-operating losses
    
    
    (42
    )
    
    
    (2,065
    )
    
    
    (922
    )
    
    
    (288
    )
    
    
    (153
    )Impairment of cost investments and
available-for-sale securities
    
    
    
    
    
    
    (84,696
    )
    
    
    (12,260
    )
    
    
    (5,351
    )
    
    
    Share of income/(losses) in equity investees(2)
    
    
    (65
    )
    
    
    (9,423
    )
    
    
    (2,592
    )
    
    
    682
    
    
    
    (115
    )Income/(loss) before income taxes
    
    
    (15,846
    )
    
    
    (35,568
    )
    
    
    (88,504
    )
    
    
    (4,230
    )
    
    
    17,939Income tax benefits/(income taxes)
    
    
    
    
    
    
    (582
    )
    
    
    (186
    )
    
    
    (113
    )
    
    
    689Income/(loss) before minority interests
    
    
    (15,846
    )
    
    
    (36,150
    )
    
    
    (88,690
    )
    
    
    (4,343
    )
    
    
    18,628Minority interests in losses/(income) of
consolidated subsidiaries
    
    
    12
    
    
    
    546
    
    
    
    3,162
    
    
    
    248
    
    
    
    (2,204
    )Income/(loss) from continuing operations
    
    
    (15,834
    )
    
    
    (35,604
    )
    
    
    (85,528
    )
    
    
    (4,095
    )
    
    
    16,424Discontinued operationsLoss from operations of discontinued subsidiaries
    
    
    (2,883
    )
    
    
    (24,198
    )
    
    
    (38,857
    )
    
    
    (14,681
    )
    
    
    (3,027
    )Gain on disposal/dissolution of discontinued
subsidiaries, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    545
    
    
    
    2,127Net income/(loss)
    
    
    (18,717
    )
    
    
    (59,802
    )
    
    
    (124,385
    )
    
    
    (18,231
    )
    
    
    15,524Basic earnings/(loss) per share
    
    
    (0.26
    )
    
    
    (0.61
    )
    
    
    (1.21
    )
    
    
    (0.18
    )
    
    
    0.15Diluted earnings/(loss) per share(3)
    
    
    (0.26
    )
    
    
    (0.61
    )
    
    
    (1.21
    )
    
    
    (0.18
    )
    
    
    0.15Weighted average number of sharesBasic
    
    
    71,879,704
    
    
    
    98,091,541
    
    
    
    102,589,760
    
    
    
    102,269,735
    
    
    
    100,532,594Diluted
    
    
    71,879,704
    
    
    
    98,091,541
    
    
    
    102,589,760
    
    
    
    102,269,735
    
    
    
    103,199,421
 As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands of U.S. dollars except share and per share data)Balance Sheet Data:Cash and cash equivalents
    
    
    12,913
    
    
    
    47,483
    
    
    
    20,820
    
    
    
    33,153
    
    
    
    55,508Restricted cash
    
    
    
    
    
    
    4,134
    
    
    
    1,274
    
    
    
    109
    
    
    
    238Available-for-sale debt securities(4)
    
    
    111,612
    
    
    
    242,324
    
    
    
    346,980
    
    
    
    320,056
    
    
    
    282,145Restricted debt securities
    
    
    
    
    
    
    148,622
    
    
    
    134,960
    
    
    
    151,123
    
    
    
    31,109
 5




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As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands of U.S. dollars except share and per share data)Available-for-sale equity securities
    
    
    5,419
    
    
    
    10,368
    
    
    
    2,064
    
    
    
    2,050
    
    
    
    590Bank loans(5)
    
    
    
    
    
    
    3,934
    
    
    
    118,455
    
    
    
    127,384
    
    
    
    26,826Working capital (6)
    
    
    124,209
    
    
    
    450,391
    
    
    
    359,412
    
    
    
    340,476
    
    
    
    270,451Total assets
    
    
    183,123
    
    
    
    622,920
    
    
    
    596,494
    
    
    
    580,957
    
    
    
    546,054Total shareholders equity
    
    
    163,822
    
    
    
    512,024
    
    
    
    389,861
    
    
    
    377,700
    
    
    
    390,446Book value per common share
    
    
    1.87
    
    
    
    5.03
    
    
    
    3.80
    
    
    
    3.73
    
    
    
    3.84
  (1)
    
    In 2003, chinadotcom adopted new reporting segmentation, changing
from the previous segmentation of e-business solutions, advertising,
and sales of IT products, to the current segmentation of software and
consulting services, mobile services and applications and advertising
and marketing activities. In addition, chinadotcom discontinued the
operations of certain subsidiaries in the software and consulting
services and the advertising and marketing activities segments. In
accordance with SFAS 144, Accounting for the Impairment of Disposal of
Long-Lived Assets, the operating results on the discontinued operating
units were retroactively reclassified as a loss from operations of
discontinued subsidiaries on the consolidated statements of operations.
As a result of SFAS 144, the results of the continuing operations of
1999, 2000, 2001 and 2002 were reclassified to conform to the 2003
presentation.(2)
    
    The term equity investees refers to chinadotcoms 20% to 50%
owned investments other than subsidiaries.(3)
    
    For the years 1999 to 2002, the computation of diluted
earnings/(loss) per share did not assume the conversion of any issued
stock options or the warrants of the company because their inclusion
would have been antidilutive.(4)
    
    Available-for-sale debt securities includes short-term and
long-term debt securities available-for-sale.(5)
    
    Bank loans include short-term and long-term bank loans.(6)
    
    Working capital represents current assets less current liabilities. B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors Risks Relating to chinadotcom Risks relating to our overall business Because we have a limited operating history and our business model and strategy
are evolving, we lack experience in our new markets and cannot assure you that
we will be successful in meeting the needs of customers in these markets. We have a limited operating history beginning in June 1997 as a pan-Asian
integrated Internet company with our business model centered around our
e-business solutions and advertising businesses, including e-marketing
services, portal services and other media. Our business model has evolved to
focus on providing enterprise software and related support services, outsourced
software development and support services, advertising, SMS for mobile devices
and portal services. With this new focus, our goal is to be a leading
integrated enterprise solutions company offering technology, marketing and
media services for companies and end users throughout Greater China (comprised
of Taiwan, Hong Kong and the PRC) and the Asia-Pacific region, North America
and the United Kingdom. You will not be able to evaluate our prospects solely by reviewing our
past businesses, but should consider our prospects in light of the changes in
our business focus. Each of our targeted markets is rapidly changing, and we
cannot assure you that we can successfully address the challenges in our new
lines of business or adapt our business model and strategy to meet the needs of
customers in these markets. If we fail to modify our business model or strategy
to adapt to these markets, our business could suffer. 6




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We have until recently a history of losses and cannot provide any assurance
that we can achieve or sustain profitability. Since inception, we have incurred net losses in each of our last four
fiscal years until fiscal year 2003, in which we recorded net income. We have
generated net income and incurred net losses in the last five fiscal years as
follows: 1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands of U.S. dollars)Net income/(loss)
    
    
    (18,717
    )
    
    
    (59,802
    )
    
    
    (124,385
    )
    
    
    (18,231
    )
    
    
    15,524
 While we have recorded net income in the fourth quarter of 2002 and fiscal
year 2003, we have continued to post losses from operations during these
periods. Our operating losses may increase in the future and we may never
achieve operating profitability or sustain net profitability. We may continue
to incur operating losses and post net losses in the future due to several
factors, including:  
    
    additional acquisition activities related to the growth and
development of our enterprise software, outsourced software
development, SMS for mobile devices and portal businesses and
services;
    
    a high level of planned operating expenditures;
    
    increased sales and marketing costs;
    
    increased investment activities;
    
    further decreases in the value of our prior investments, including
prior Internet-related acquisitions and our publicly traded,
unlisted and other marketable securities;
    
    greater levels of product development expenses;
    
    even greater competition; and
    
    our general business and growth objectives. In addition, while we experienced sequential quarterly increases in
revenues in 2003, we cannot be certain that revenue growth will continue in the
future. We may see a reversal of the recent growth in quarterly revenues due to
several factors, including:  
    
    a slowdown in the Asian, U.S. and other economic markets;
    
    the ongoing low level of expenditures in the software, Internet and
media markets;
    
    the potential or actual loss of key clients and key personnel,
including those from our software development and outsourcing,
mobile service and e-marketing services businesses;
    
    our inability to identify or acquire suitable target companies to
implement our business model and strategy and grow our business;
    
    our decision to exit the low-margin online network advertising
business in South Korea which will cause revenues from our
advertising and e-marketing businesses to decline;
    
    our disposal of certain subsidiaries and investments; 7




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
    
    our decision to discontinue certain products and services; and
    
    the recent adverse effect on general economic conditions in Asia as
a result of concerns about SARS and the avian influenza virus. These factors could also adversely affect our ability to sustain
profitability. We cannot assure you that we will generate sufficient revenue to
sustain profitability or that we can sustain or increase profitability on a
quarterly or annual basis in the future. If revenue does not meet our
expectations, or if operating expenses exceed what we anticipate or cannot be
reduced accordingly, our business, results of operations and financial
condition will be materially and adversely affected. Our strategy of expansion through acquisitions or investments, including the
proposed acquisition of Ross, and the recent acquisitions of Pivotal and IMI,
has been and will continue to be costly and may not be effective, and we may
realize losses on our investments. As a key component of our business and growth strategy, we have acquired
and invested in, and intend to continue to acquire and invest in, companies and
assets that we believe will enhance our business model, revenue base,
operations and profitability, particularly relating to our strategy in
enterprise software, outsourced software development and mobile services.
Recent significant acquisitions were IMI and Pivotal and Ross is a significant
proposed acquisition. Our acquisitions and investments have resulted in, and
will continue to result in, the use of significant amounts of cash, dilutive
issuances of our common shares and amortization expenses related to certain
intangible assets, each of which could materially and adversely affect our
business, results of operations and financial condition. During 2003, we were dependent upon our acquisitions for our increase in
revenues, and we cannot assure you that we will be successful in increasing our
revenues through organic growth of our businesses. During 2003, we acquired several businesses material to our 2003 results
for which we commenced consolidation at an interim period during the year:  
    
    In February 2003, we acquired Praxa Limited, or Praxa, a
leading Australian information technology outsourcing and
professional services organization. We commenced consolidating the
results of Praxa in February 2003, and Praxa contributed US$22.3
million of revenues during 2003, representing approximately 24.9% of
our revenues.
    
    In April 2003, we acquired Newpalm (China) Information
Technology Co., Ltd., or Newpalm, a leading SMS provider based in
Beijing, China to deliver value added mobile services and products in
China. We commenced consolidating the results of Newpalm in April
2003, and Newpalm contributed US$16.9 million of revenues during
2003, representing approximately 18.9% of our revenues.
    
    In September 2003, we acquired a 51% stake in
Industri-Matematik International Corp., or IMI, an international
provider of software to the supply chain management sector
principally across Europe and the United States. We commenced
consolidating the results of IMI in September 2003, and IMI
contributed US$11.2 million of revenues during 2003, representing
approximately 12.5% of our revenues. The acquisitions of Praxa, Newpalm and IMI contributed a total of
approximately US$50.4 million of revenues during 2003, representing
approximately 56.4% of our total revenues. Between 2002 and 2003, our revenues
increased by US$45.4 million from US$44.0 million in 2002 to US$89.4 million in
2003. Excluding the impact of these acquired businesses, total revenues would
have decreased by US$5.0 million during 2003 as 8




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compared to 2002. As a result, during 2003, we were dependent upon our
acquisitions for our increase in revenues. While we will seek to grow our businesses, including the businesses we
have acquired, organically in the future, we cannot assure you that we will be
successful in increasing revenues through organic growth. Our ability to
achieve organic growth in our businesses is subject to numerous risks and
uncertainties, including the following:  -
    
    We may face difficulties in integrating, assimilating and managing
the operations, technologies, intellectual property, products and
personnel of our acquired businesses individually and cumulatively;-
    
    We may be required to make additional new investments, increase sales
and marketing efforts, provide additional training, and develop new
products in order to generate organic growth, none of which may
ultimately prove successful in generating such growth;-
    
    We may not be successful in introducing products and services we
acquire to new markets. For example, one of our strategies in our
software and consulting services business is to target the emerging
market in Greater China for applications software. However, although we
acquired Pivotal Corporation, or Pivotal, in February 2004, an
international customer relationship management, or CRM, company with
over 1,700 customers worldwide, Pivotal does not have a single
installation of its products in mainland China; and-
    
    While with the completion of our recent acquisition of Pivotal, we
have added an additional 1,700 customers to our customer base which
totals approximately 2,200 worldwide, and we expect to add approximately
1,000 additional customers from our pending acquisition of Ross, we may
not be successful in our strategy of leveraging upon cross-selling
opportunities with respect to our expanded customer base. Our inability to achieve organic growth in our businesses will have a
material adverse effect on our business, results of operations and financial
condition. Our acquisitions may divert managements attention, and will require controls,
procedures and policies that may increase the costs of our acquisitions and
reduce employee morale. Executing on our acquisitions may divert managements attention from our
operations both during the period of negotiation through closing and thereafter
to integrate acquired businesses. In addition, to realize the benefits of our
acquisitions, we need to implement operational, managerial and financial
controls, procedures and policies within businesses we acquire, which may
divert managements attention further, increase transaction costs, and reduce
employee morale. As a result, our acquisitions involve significant risks,
including:  
    
    incurring transaction costs that may outweigh the benefits of the acquisitions;
    
    financing for future acquisitions may not be available to us on favorable terms or at all;
    
    adequately managing the currency, interest rate and equity
price fluctuations relating to our acquisitions and investments;
    
    retaining key employees and managing employee morale;
    
    facing potential claims filed by terminated employees and contractors; and
    
    adapting to local market conditions and business practices. 9




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Any one of these challenges could strain our management resources. We have been expanding our business through acquisitions and may lose our
entire investment if we do not successfully integrate the businesses we
acquire. We have been expanding our operations rapidly, both in size and scope,
through acquisitions, and need to integrate, manage and protect our interests
in the businesses we acquire. We may experience difficulties in integrating,
assimilating and managing the operations, technologies, intellectual property,
products and personnel of our acquired businesses individually and
cumulatively, and may need to reorganize or restructure our operations to
achieve our operating goals. This may include creating or retaining separate
units or entities within each of our operating segments. Our failure to
integrate and manage our acquired businesses successfully could delay the
contribution to profit that we anticipate from these acquisitions, and could
have a material adverse effect on our business, results of operations and
financial condition. Our continued international acquisitions and investments may expose us to
additional regulatory and political risks, and could negatively impact our
business prospects. Our expansion throughout international markets exposes us to the following
risks, any of which could negatively impact our business prospects:  
    
    adverse changes in regulatory requirements, including export restrictions or controls;
    
    potentially adverse tax and regulatory consequences;
    
    differences in accounting practices;
    
    different cultures which may be relatively less accepting of our business;
    
    difficulties in staffing and managing operations;
    
    greater legal uncertainty;
    
    tariffs and other trade barriers;
    
    changes in the general economic and investment climate
affecting valuations and perception of our business sectors;
    
    political instability and fluctuations in currency exchange rates; and
    
    different seasonal trends in business activities. A decrease in the value of our investments may lead to impairment of our
goodwill and other intangible assets and have a material adverse impact on our
financial condition. As economic, market and other conditions continue to fluctuate, we have
recorded in the past and may record in the future impairment losses for
decreases in value of our investments and have incurred in the past and may
record in the future unrealized losses in the fair value of our marketable
securities. For each of the fiscal years ended December 31, 2001 and 2002, we
recognized an impairment loss in an aggregate amount of US$8.1 million and
US$0.3 million, respectively, for the decrease in fair value of our unlisted
equity investments in which we hold interests of less than 20%, and incurred an
unrealized aggregate loss of US$4.2 million and 10




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US$5.1 million respectively, for the decrease in fair value of our
marketable securities. For fiscal 2003, we recognized no impairment loss. On
January 1, 2002, we began to apply Statement of Financial Accounting Standards,
or SFAS, No. 142, which requires that goodwill and intangible assets with
indefinite useful lives be reviewed annually for impairment, or more frequently
if indications of impairment arise. We performed the transitional impairment
test for goodwill on June 30, 2002, and the annual impairment test on December
31, 2002 and 2003, and no impairment charge was recorded during 2002 and 2003.
However, we cannot assure you that we will not have to record losses due to
impairment of our goodwill and intangible assets in the future. A decrease in
the value of our investments may lead to impairment of our goodwill and other
intangible assets and have a material adverse impact on our financial
condition. For a further discussion on our investment risk, see Item 11 
Quantitative and Qualitative Disclosures About Market Risk. We have significant fixed operating expenses, which may be difficult to adjust
in response to unanticipated fluctuations in revenues, and therefore could have
a material adverse effect on our operations. A significant part of our operating expenses, particularly personnel,
rent, depreciation and amortization, are fixed in advance of any particular
quarter. As a result, an unanticipated decrease in the number or average size
of, or an unanticipated delay in the scheduling for, our engagements may cause
significant variations in operating results in any particular quarter and could
have a material adverse effect on operations for that quarter. In addition, an unanticipated termination of a project or decrease in size
or scope of a major engagement, or the completion of several major client
engagements in any given quarter could require us to retain underutilized
employees and could have a material adverse effect on our business, results of
operations and financial condition. From 2001 to 2003, our accounts receivable balances remained outstanding longer
than would be expected if our credit policies were consistently enforced. While
we have recently improved the collections process for accounts receivable, our
financial condition and results of operations would be adversely impacted if
our judgments regarding the collectibility of accounts receivable proved to be
incorrect. Generally, we offer customers in each of our business segments the
following credit terms:  
    
    For sales of IT products, 30 to 60 days credit from date of
delivery of software or cash on delivery;
    
    For sales of consulting services, 30 to 60 days credit after
completion of milestones set forth in the agreement;
    
    For sales in the mobile services and applications segment (a
business segment introduced in 2003), 90 days credit from the date
of the issuance of invoices which usually takes place one month
following the month of actual sales; and
    
    For sales in the advertising and marketing activities segment,
cash on delivery, 14 days after completion of campaign or 30
days credit. In the software and consulting services segment, during 2001 and 2002,
34.3% and 40.6% of accounts receivables were outstanding greater than 60 days,
respectively, aggregating US$4.7 million and US$2.8 million, respectively.
Days sales outstanding in this segment were 301 and 162 days, respectively,
during 2001 and 2002. During 2003, accounts receivables outstanding greater
than 60 days declined to 9.3% of accounts receivable and aggregated US$1.0
million. Days sales outstanding was reduced to 78 days during 2003. 11




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In the advertising and marketing activities segment, during 2001 and 2002,
50.5% and 52.8% of accounts receivables were outstanding greater than 30 days,
respectively, aggregating US$5.6 million and US$5.7 million, respectively.
Days sales outstanding in this segment were 224 and 148 days, respectively,
during 2001 and 2002. During 2003, accounts receivables outstanding greater
than 30 days declined to 43.8% of accounts receivable and aggregated only
US$0.7 million. Days sales outstanding was reduced to 30 days during 2003. In the mobile services and applications segment (a business segment
introduced in 2003), during 2003, 20.3% of accounts receivables were
outstanding greater than 90 days aggregating US$1.3 million. Days sales
outstanding in this segment were 138 days during 2003. As a result, during 2001 and 2002, our accounts receivables balances were
outstanding longer than would be expected if our stated credit policies were
consistently enforced. We attribute the inconsistency to several factors,
including the following:  
    
    The general economic downturn commencing in 2000 and continuing
through 2002 which impacted in particular the internet industry and
internet companies, and caused many of such companies who were our
customers to experience cashflow problems and delay payments to
suppliers;
    
    Turnover in a clients organization whereby the new
persons-in-charge did not acknowledge the original project contracts
signed with us or accept the work authorized by their predecessors;
    
    A change of control in the customers organization during the
project period whereby all payments were withheld and time of payment
became uncertain;
    
    Miscommunication within a clients organization, such as
between the user department and the finance department, which
resulted in partial or non-payment;
    
    A common business practice in China where customers delay
payments beyond their due dates; and
    
    A common business practice in China where if a company is
perceived to be failing or discontinuing its businesses, then
debtors to the company would not settle their outstanding payments,
irrespective of any contractual obligations because of a view by the
debtor that the company would not have the resources or capacity to
be able to collect or effectively enforce collection. Improvements during 2003 in the aggregate accounts receivable balances
overdue, accounts receivables balances overdue as a percentage of aggregate
accounts receivables, and days sales outstanding was attributable to several
factors, including the following:  
    
    Acquisition of businesses, such as IMI, that have shorter and better-managed credit terms; and
    
    Improvements in our collection processes. We have concluded, despite such inconsistencies, that the recorded
accounts receivable balances are collectible based on our credit procedures,
including assessing customers credit risk, establishing credit limits,
performing credit checks when warranted, and signing contracts with all
customers to establish a legal obligation to pay. In addition, we comply with
the revenue recognition criteria relating to collectibility for mobile
applications and advertising and marketing activities in SAB 101, for sale of
IT products in SOP 97-2 paragraph 8, and for consulting services in SOP 81-1
paragraph 23. While we have improved the collectibility of our accounts receivable and
believe that our cash and cash equivalents balance of US$343 million as of
December 31, 2003 should allow us to continue operations despite 12




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any continued delays in collecting our accounts receivable, our financial
condition and results of operations would be adversely affected in the event
that our judgments regarding the collectibility of our accounts receivable
proves to be incorrect. Because we rely on local management for many of our localized enterprise
software and value added mobile services businesses, our business may be
adversely affected if we cannot effectively manage local officers or prevent
them from acting in a manner contrary to our interests or failing to act at our
direction. In connection with our strategy to develop our enterprise software
business, outsourced software development and service business, and mobile and
portal businesses, we may have and may continue to acquire interests in
companies in local markets where we have limited experience with operating
assets and businesses in such jurisdictions, including enterprise software
companies in the United States, Europe and Canada, outsourced software
developers in the Peoples Republic of China, or PRC, and India, and developers
of value-added mobile services in Hong Kong and the PRC. As a result, we may
need to rely on our local management with limited oversight. If we cannot
effectively manage our local officers and management, or prevent them from
acting in a manner contrary to our interests or failing to act at our
direction, these problems could have a material adverse effect on our business,
financial condition, results of operations and share price. Because some of our directors and officers act in similar capacities for CIC or
Xinhua News Agency, or Xinhua,, they may not be able to devote sufficient
attention to us or may have conflicts of interest with us. One of our seven directors also serves as a director of CIC. Our Vice
Chairman and Chief Executive Officer also serves as an officer for CIC and
beneficially owns a significant percentage of the equity of both chinadotcom
and CIC. Affiliated companies of Xinhua, a significant shareholder, also own a
significant percentage of CIC. Another of our directors is an executive officer
of Xinhua. Because these individuals are or will be required to devote
attention to CIC or Xinhua, they may be unable to devote a sufficient amount of
attention to us. Furthermore, additional conflicts of interest may arise to the
extent that future changes in our business model and strategy cause it to
compete with CIC, Xinhua and their respective affiliates in similar industries
and markets in Greater China and elsewhere in Asia. In June 1999, we entered
into an agreement with CIC which limits the ability of those of our directors
or officers who are also CIC directors or officers to take advantage of
corporate opportunities presented to them as directors or officers of
chinadotcom. There is no assurance that this agreement can be enforced
effectively if it is violated against our interest. Our shareholders may include some of our suppliers, customers and debtors, the
interests of which may be in conflict with ours, and whose actions may affect
our business negatively. Our shares may be held by institutional investors, strategic shareholders,
suppliers, customers, investees, guarantors and debtors. The deterioration of
our relationships with any of these shareholders for any reason could cause
them to dispose of their chinadotcom shares and could negatively affect our
financial condition, business prospects and share price. In addition, despite non-compete and confidentiality arrangements and
other fiduciary obligations that may apply to our shareholders or directors, we
cannot assure you that any such persons would not use information obtained as a
result of association with us to compete against us, directly or indirectly. If
such information is used to compete against us, our business, financial
condition and share price could be materially and adversely affected. We are subject to risks related to our purchase of URLs from CIC, which could
materially and adversely impact our business strategy and the value of these
assets in the event the value paid for the URLs was not reasonable, third
parties bring claims for intellectual property infringement, third party
creditors of CIC bring claims of unfair preference in the event CIC is
liquidated, or we are required to record an impairment in the value of the
URLs. 13




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In February 2002 we completed the payment related to the purchase of three
Uniform Resource Locators, or URLs, www.china.com, www.hongkong.com and
www.taiwan.com, and related intellectual property rights for US$16.8 million
from CIC pursuant to an agreement reached with CIC in October 2001. While we believe that the URLs are material to our business strategy and
operations, our acquisition of the URLs involves significant risks, including
the following:  
    
    While we relied upon valuations as determined by
internationally recognized third party professionals, as well as
commercial negotiations with CIC, we cannot guarantee that the
purchase price we paid for the URLs is fair, reasonable or market
value or that such fair, reasonable and market value price is readily
or objectively determinable.
    
    Under existing intellectual property laws in various countries
(such as the United States and Hong Kong), a mark that has location
or geographical significance such as the URLs cannot be registered as
a trademark. As a result, the purchase of the URLs may not be
effective in resolving our trademark ownership concerns and we may
continue to be vulnerable to intellectual property ownership and use
risks, such as challenges by third parties of infringement.
    
    We believe that the URLs will serve an important business
purpose for us for a period of 20 years, and as such we have chosen
to amortize them on a straight-line basis over a period of 20 years.
However, given the unique nature of the URLs and our short operating
history, we cannot be assured that this time period will accurately
correlate with the actual useful life of the URLs and we may need to
amortize the URLs for a period longer than we can use them.
    
    We cannot provide any assurances that we will not have to
record impairment of the value of the URLs to comply with US GAAP. Any of these risks could materially and adversely affect our reputation,
our mobile services and advertising businesses and business prospects. If we are unable to take advantage of opportunities to market and sell the
products and services of our newly-acquired, 51%-owned subsidiary, IMI, to our
customers, distribution channels and business partners in Asia, the value of
our investment in IMI will be significantly diminished. In September 2003, we acquired a 51% interest in Cayman First Tier, the
holding company of IMI, an international provider of software to the supply
chain management sector, in exchange for US$25.0 million to
subscribe for new shares in Cayman First Tier and up to an
aggregate of US$25.0 million in revolving loan facilities provided to Cayman
First Tier. Symphony Technology Group, a Palo Alto, California based venture
capital company holds the remaining 49% in Cayman First Tier. Cayman First
Tiers assets consist of holding through intermediate holding companies, 100%
of the shares of IMI. IMIs assets include software solutions which it has
developed for retailers, wholesalers and consumer goods manufacturers,
particularly in the grocery, specialty goods, and pharmaceutical and
over-the-counter drugs industries. A significant anticipated benefit of the IMI acquisition is expanding
IMIs business in the Asia Pacific region by leveraging our local expertise and
distribution channels. IMI expects to take advantage of our existing customer
bases and sales network in order to promote and sell IMIs products and
services to our traditional customers and business partners because IMIs
products and services target the supply chain management needs of large
enterprises, including customer fulfillment and warehouse management, which is
a market in which we did not previously offer a specialized enterprise software
product. We believe IMIs software will be attractive to many of our customers
and partners in the manufacturing, distribution, and retail sectors, and IMI
can adapt its software to integrate with the existing enterprise software
products, primarily in the areas of financials, manufacturing, distribution and
payroll, which we may have previously sold to our customer base. 14




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The products and services of IMI are highly technical, principally
servicing the supply chain management needs of large enterprises, a market in
which we have limited experience, and our salespersons may not be successful in
marketing IMIs products and services. In the event that our traditional
customers and business partners are not receptive to IMIs products and
services, we may not realize some of the expected benefits of our investment in
IMI, and the value of our investment will be significantly diminished. In
addition, while we also believe any need to adapt IMIs products to work with a
customers existing enterprise software products can be accomplished in a more
cost-effective and time efficient manner utilizing our outsourced software
development capabilities, we cannot assure you that we will be able to realize
the benefits of this anticipated synergy. We have an obligation to purchase the shares of IMI from IMIs minority
shareholder upon the occurrence of certain events which may result in the use
of a significant amount of our cash or issuance of a significant number of our
shares. Symphony, which holds the remaining 49% interest in the holding company of
IMI, has an option to compel us to purchase all of its 49% interest in IMI at
any time during the twelve months following the occurrence of unpermitted
changes in the composition of IMIs executive committee, a decision of IMIs
executive committee being overruled by the IMI board, or modifications to the
rights, powers or responsibilities of IMIs executive committee without the
approval of the directors appointed by Symphony. The purchase price for Symphonys interest in IMI is based on the
financial performance of IMI, and is set at a fixed multiple of IMIs annual
revenues. The multiple, while subject to review, is selected based upon a
formula using IMIs revenue growth and EBITDA as a percentage of revenue. The
fixed multiple varies from 0.25, in the event revenues for IMI are decreasing
by greater than 10% per year and EBITDA as a percentage of revenues for IMI is
less than 5%, to 6.0, in the event revenues for IMI are increasing by greater
than 20% per year and EBITDA as a percentage of revenues for IMI is greater
than 20%. The form of payment of the purchase price will be determined by the
parties, and may consist of cash, chinadotcom common shares, a combination of
cash and chinadotcom common shares, or other form of payment. An exercise by Symphony of its option to compel us to purchase its entire
49% interest in IMI may result in the use of a significant amount of our cash
or issuance of a significant number of our shares, which may have a material
adverse effect on our capital resources and stock price due to actual or
perceived dilution. If we cannot or choose not to enforce the terms under which we have agreed to
loan up to US$25 million to Cayman First Tier, we may face additional risks in
collecting any amounts advanced to Cayman First Tier. In addition to a US$25 million investment into Cayman First Tier, the
holding company parent of IMI, as consideration for our majority 51% stake in
Cayman First Tier, we provided additional consideration in the form of two loan
facilities under which we have agreed to loan up to an aggregate of US$25
million. The two loan facilities, one with Cayman First, as borrower, and the
second with Symphony Enterprise Solutions, S.ar.L., which is a wholly-owned
subsidiary of Cayman First Tier (and unrelated to Symphony Technology Group,
except through Symphonys 49% interest in Cayman First Tier), as borrower, have
substantially similar terms. Copies of the loan facilities provided by us have
been filed with the Commission under cover of our Current Report on Form 6-K
filed on September 15, 2003. Proceeds of advances may be used for the following purposes:  
    
    to acquire assets of, or equity interests in, companies that
are in the business of providing software for warehousing management,
logistics and distribution management, and supply chain execution;
    
    to provide working capital for any businesses so acquired; 15




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
    
    to make loans and capital contributions to subsidiaries; or
    
    to repay a then existing loan agreement among affiliates of IMI and Foothill Capital Corporation. If Cayman First Tier does not use the proceeds of any loan advance for one
of the approved purposes, it may not have sufficient funds to pursue
acquisitions, or to improve the business of the companies it acquires which may
delay or impair the ability to integrate these businesses with our other
operations, which could have a material adverse effect on our business,
financial condition and results of operations. Under the loan facilities, each of the borrowers agrees that, upon our
request, it will deliver to us guarantees and security agreements guaranteeing
and/or securing payment of the borrowers obligations under the loan
facilities, which could include liens on the assets of the borrower and the
assets and securities of subsidiaries which are acquired. We cannot assure you
that any guarantees or security we receive to guarantee and/or secure payment
of the borrowers obligations under the loan facilities will be adequate or
sufficient to secure the full amount of the borrowers obligations in the event
the borrowers are unable to make payment under the loan facilities. In addition, the lines of credit contain other covenants typical for such
facilities, including limitations on liens, limitations on debt and
restrictions on sale of assets. In addition, at any time when we are no longer
entitled to appoint a majority of the board of directors of IMI, the borrower
is required to comply with financial covenants including maintaining minimum
tangible asset value, specified EBITDA and minimum consolidated cash levels. We
cannot assure you that if it is no longer entitled to appoint a majority of the
board of directors of Cayman First Tier, and the borrower is required to comply
with the foregoing financial covenants, that such financial covenants will be
adequate or appropriate to protect its loan, or that the borrower will be able
to comply with the requirements of the financial covenants. As of March 31, 2004, US$7 million had been drawn under the line of credit
between us and Cayman First Tier, and no amounts had been drawn under the line
of credit between us and Symphony Enterprise Solutions, S.ar.L. (an entity
unrelated to Symphony Technology Group, except through Symphonys 49% interest
in Cayman First Tier). Amounts drawn under the line of credit between us and
Cayman First Tier had been used to repay amounts understanding under a Loan and
Security Agreement, or Loan Agreement, among affiliates of IMI and Foothill
Capital Corporation, or Foothill, as lender, so that the Foothill Loan
Agreement could be terminated. In January 2003, prior to our acquisition of a
majority 51% stake in Cayman First Tier, affiliates of IMI had entered into the
Foothill Loan Agreement. The affiliates of IMI party to the Foothill Loan
Agreement as borrowers were IMI Global Holdings Ireland Limited, IMI Holdings
Ireland Limited, IMI North American Holdings Limited and Industri-Matematik,
Limited, each of which is currently a wholly-owned subsidiary of Cayman First
Tier. As of September 8, 2003, immediately prior to our acquisition of a 51%
stake in Cayman First Tier, approximately US$6.5 million was outstanding under
the Foothill Loan Agreement. The Foothill Loan Agreement contained covenants
typical for such facilities, including covenants not to cause a change of
control and create indebtedness with limited exceptions. The consummation of
our acquisition of a majority 51% stake in Cayman First Tier conflicted with,
and resulted in a default under, the Foothill Loan Agreement. Prior to our
consummation of the acquisition, we discussed with Symphony their proposed
transaction with Foothill, and agreed with Foothill that the Foothill Loan
Agreement would be repaid reasonably soon after our consummation of the
acquisition, and the Foothill Loan Agreement would be terminated. As a result,
IMI did not seek to return to compliance with the covenants under the Foothill
Loan Agreement after our consummation of the acquisition. On November 3, 2003,
Cayman First Tier repaid all amounts outstanding under the Foothill Loan
Agreement, and the agreement was terminated. As of March 31, 2004, Cayman First Tier was in compliance with its debt
covenants under the lines of credit provided by us, although no assurances can
be given that Cayman First Tier will be in compliance with its debt covenants
under the lines of credit in future periods. The US$7 million drawn under the
line of credit between us and Cayman First Tier has been secured by a first
priority pledge by Symphony in favor of us of all 16




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of Symphonys right, title and interest in Symphonys 49% interest in
Cayman First Tier. As described in the following risk factor, Symphonys 49%
interest in Cayman First Tier is also used as security in connection with a
US$25 million non-recourse loan from Cayman First Tier to Symphony. The
security interest granted in connection with the line of credit is senior to
the security interest to secure the non-recourse loan. Other than the US$7
million drawn under the line of credit to pay the Foothill Loan Agreement and
the US$25 million non-recourse loan from Cayman First Tier to Symphony,
Symphonys 49% interest in Cayman First Tier is not used as security for any
other debt or loan. In the event the value of Symphonys 49% interest in the
joint venture with us in Cayman First Tier declines, we may be unable to
recover the full amount owed to it under the line of credit, which may have a
material adverse effect on our financial statements. If we are unable to take advantage of opportunities to market and sell the
products and services of our newly-acquired subsidiary, Pivotal, to our
customers, distribution channels and business partners in Asia, we may not
realize some of the expected benefits of the acquisition. A significant anticipated benefit of the acquisition of Pivotal is
expanding Pivotals business in the Asia-Pacific region by leveraging our local
expertise and distribution channels. In particular, we believe we can
cross-sell and market Pivotals CRM applications and implementation services
(an area in which CDC Softwares existing product offerings have limited
functionality), in growth markets for such software in Asia where CDC Software
has an established China presence. In the event that we cannot adapt the
Pivotal products to the needs of the local markets or if our traditional
customers and business partners are not receptive to Pivotals products and
services, we may not realize some of the expected benefits of the acquisition
of Pivotal, which may adversely affect our business and financial condition. Risks relating to our software and consulting services business As we pursue our strategy of developing our enterprise software business, we
are exposed to a variety of risks in this market that may affect our ability to
generate revenues from the sale of enterprise application software and related
support services. As we pursue our strategy of developing our enterprise software business,
we anticipate that we will generate additional revenues in the future from the
sale of various enterprise software application packages and related services.
Accordingly, any factor that adversely affects fees derived from the sale of
such systems would have a material adverse affect on our business, results of
operations and performance. For example, the market for enterprise software
application products was negatively impacted in 1999 and the first half of 2000
by Year 2000 concerns. Similarly, in 2001 and continuing through most of 2003,
the market for enterprise software application products continued to be
negatively impacted by challenging economic conditions in the United States.
Other such factors may include:  
    
    competition from other products;
    
    flaws in our products;
    
    incompatibility with third party hardware or software products;
    
    negative publicity or valuation of our products and services; and
    
    obsolescence of the hardware platforms or software environments on which our products run. The market for enterprise software application products and services is highly
competitive. We have entered this market recently, and if we fail to compete
effectively, our failure could, have a material adverse effect on our business,
financial condition and results of operations. 17




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The business information systems industry in general and the enterprise
software industry in particular are very competitive and subject to rapid
technological change. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition, larger technical staffs and a larger
installed customer base than we do. A number of companies offer products that
are similar to our products and that target the same markets. In addition, many
of these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the development, promotion and sale of their products than we can.
Furthermore, because there are relatively low barriers to entry in the software
industry, we expect additional competition from other established and emerging
companies. Such competitors may develop products and services that compete with
our products and services or may acquire companies, businesses and product
lines that compete with us. It is also possible that competitors may create
alliances and rapidly acquire significant market share. Accordingly, we cannot
assure you that our current or potential competitors will not develop or
acquire products or services comparable or superior to those that we develop,
combine or merge to form significant competitors or adapt more quickly than we
can to new technologies, evolving industry trends and changing customer
requirements. Competition could cause price reductions, reduced margins or loss
of market share, any of which could materially and adversely affect our
strategy in this market, and affect our business, operating results and
financial condition. We are focused on building our intellectual property asset base,
establishing partnerships with software vendors and broadening the overall
software product offerings in the areas of enterprise solutions and
integration. We are pursuing this strategy through acquisitions, strategic
partnerships, joint ventures, consolidation of software assets and
restructurings, or combinations of the foregoing approaches. We cannot assure
you that we will be able to successfully implement this strategy or that the
strategy will prove successful. The overall market for our consulting services business remained relatively
weak during the first half of 2003. While there did appear to be some increase
in activity in the second half of the year, demand may remain weak for some
time because of the current economic climate, which could lead to cancellations
or delays in business and technology consulting initiatives adversely affecting
our business and growth prospects. The market for consulting services has changed rapidly over the last
several years. Since the second half of 2000, many companies have experienced
financial difficulties or uncertainty, and canceled or delayed spending on
technology initiatives as a result. These companies typically are not
demonstrating the same urgency regarding technology initiatives that existed
during the economic expansion that stalled in 2000. If large companies continue
to cancel or delay their business and technology consulting initiatives because
of the current economic climate, or for other reasons, our business, results of
operations and financial condition and results of operations may be materially
and adversely affected. A substantial amount of our consulting revenues are billed on a fixed price
basis which may be subject to cost overruns if we do not accurately estimate
the costs of these engagements or if clients change the scope of a project. A substantial percentage of our consulting engagements consists of
individual, non-recurring, short-term projects billed on a fixed price basis as
distinguished from a method of billing on a time and materials basis. At times
this requires us to commit unanticipated additional resources to complete
consulting engagements, which may result, and has in the past resulted, in
losses on certain engagements. Our failure to obtain new consulting business
in any given quarter or estimate accurately the resources and time required for
a consulting engagement, to manage client expectations effectively regarding
the scope of the services to be delivered for the estimated fees or to complete
fixed price engagements within budget, on time and to clients satisfaction
(particularly if a client changes the scope of the project) could 18




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expose us to risks associated with cost overruns and penalties, any of
which could have a material adverse effect on our business, results of
operations and financial condition. Our clients could unexpectedly terminate their contracts for our services which
could result in a loss of expected revenues and additional expenses for
redeployment of staff and resources. The standard terms for many of our consulting services contracts include a
down payment of 30% of the fee at the commencement of the contract with the
balance of the payments subject to the achievement of specific milestones and
deliverables. We generally do not require collateral for accounts receivable.
The final payment is not due until completion of successful user acceptance
testing. However, most of our consulting services contracts can be cancelled by
the client with limited advance notice and without significant penalty.
Termination by any client of a contract for our services could result in a loss
of expected revenues, additional expenses for redeployment of staff and
resources that were allocated to the terminated engagement, and underutilized
employees and resources. The unexpected cancellation or significant reduction
in the scope of any of our large projects could have a material adverse effect
on our business, results of operations and financial condition. Our service contracts may expose us to potential litigation and liabilities. Our consulting services and advertising businesses involve services
agreements with customers, some of which do not have disclaimers or limitations
on liability for special, consequential and incidental damages, or do not have
caps or have relatively high caps on the amounts its customers can recover for
damages. Some of our subsidiaries do not carry professional indemnity or other
insurance covering our exposure to any liability for any claims or breaches
under the customer contracts. While there are no current claims or litigation
in connection with the service contracts, there can be no assurance that future
claims will not arise. Any claim under customer contracts could subject us to
litigation and give rise to substantial liability for damages, including
special, consequential or incidental, that could materially and adversely
affect our business and financial condition. Failure by our third party suppliers to provide us with software and hardware
components will affect our ability to operate our business. We depend on third party suppliers of software and hardware components.
For our various business units, we rely on components that are sourced from key
suppliers, including Best Software, Inc., Cisco Systems, Inc., International
Business Machines Corporation, LSI Logic Corporation, Microsoft Corporation,
Network Appliance, Inc., Oracle Corporation, Siebel Systems Inc., Sun
Microsystems Corporation and Vignette Corporation. Any failure or delay on the
part of our suppliers may prevent us from receiving the components, products
and support we need to conduct our operations. Our inability to develop
alternative sources for the software and hardware we need to operate our
business may materially and adversely affect our operating efficiency and
results of operations. Timing differences between when we are obligated to pay our vendors for our
purchase of software products from them and the time we are paid by our
customers for the software products we resell to them exposes us to credit
risks, which may adversely affect our business and results of operations. In connection with our sale of software products and enterprise software,
we may purchase such products from vendors and then resell to customers.
Typically, the payment terms for the third party software are 60 days from the
date of invoice, but in some cases payment may be required upon delivery. If
the customers do not pay the full amount invoiced by us, which may occur if a
customer files for bankruptcy among other circumstances, we may not collect
sufficient funds from customers to cover the original cost of the third party
software that we have already purchased. In addition, if we cannot collect
funds from our customers in a timely manner, which may occur if a customer is
experiencing cashflow issues among other circumstances, we may not 19




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generate sufficient cashflows to cover the original purchase price of
third-party products. These credit risks may adversely affect our business and
results of operations. Our failure to successfully to introduce, market and sell new products and
technologies, enhance and improve existing products in a timely manner, and
properly position or price our products, as well as undetected errors or delays
in new products or new versions of a product or the failure of anticipated
market growth could individually and/or collectively have a material adverse
effect on our business, results of operations or financial position. Our IT and enterprise software products compete in a market characterized
by rapid technological advances in hardware and software development, evolving
standards in computer hardware and software technology and frequent new product
introductions and enhancements. We continually seek to expand and refresh our
product offerings to include newer features or products, and enter into
agreements allowing integration of third-party technology into our products.
The introduction of new products or updated versions of continuing products has
inherent risks, including, but not limited to:  
    
    product quality, including the possibility of software defects,
which could result in claims against us or the inability to sell our
software products;
    
    the fit of the new products and features with the customers
needs, which could result in the customer seeking the product
elsewhere;
    
    the successful adaptation of third-party technology into our
products, which may result in the failure of our product to perform
at its maximum potential;
    
    educating our sales, marketing and consulting personnel to work
with the new products and features, which may strain our resources;
    
    competition from earlier and more established entrants that may
have more significant resources than us;
    
    market acceptance of initial product releases;
    
    marketing effectiveness; and
    
    the accuracy of assumptions about the nature of customer
demand, whereas actual demand could be limited or non-existent. Additionally, as newer products are deployed, our service and maintenance
organizations, along with our partners, will have to rapidly increase their
ability to install and service these products, and we must rapidly improve our
products ease-of-implementation and ease-of-use. Our failure to successfully
increase these capacities and make these improvements could result in
significantly lower customer satisfaction, which could lead to lower license
revenue. Failure to upgrade older products will adversely affect our software revenue. As we or our competition introduce newer products, the markets demand for
our older products declines. Declining demand reduces revenue from additional
licenses and reduces maintenance revenue from past purchasers of our software.
We must continually upgrade our older products in order for our customers to
continue to see value in our maintenance services. If we are unable to provide
continued improvements in functionality or move customers with our older
products to our newer products, declining maintenance and new license revenue
from older products could have a material adverse effect on our enterprise
software business. 20




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If we are unable to develop new and enhanced products that achieve widespread
market acceptance, we may be unable to recover product development costs, and
our earnings and revenue may decline. Our future success depends on our ability to address the rapidly changing
needs of customers by developing and introducing new products, product updates
and services on a timely basis. We must also extend the operation of our
products to new platforms and keep pace with technological developments and
emerging industry standards. We commit substantial resources to developing new
software products and services. If the markets for these new products do not
develop as anticipated, or demand for our products and services in these
markets does not materialize or materializes later than we expect, we will have
expended substantial resources and capital without realizing sufficient
revenue, and our enterprise software business and operating results could be
adversely affected. Our enterprise software revenues and operating results fluctuate significantly
from quarter to quarter which may cause volatility in our share price. Many factors have caused and may in the future cause our enterprise
software revenue and operating results to fluctuate significantly. Some of
these factors are:  
    
    the timing of significant orders, delivery and implementation of products;
    
    the gain or loss of any significant customer;
    
    the number, timing and significance of new product
announcements and releases by us or our competitors;
    
    our ability to acquire or develop (independently or through
strategic relationships with third parties), introduce and market new
and enhanced versions of our products on a timely basis;
    
    possible delays in the shipment of new products and purchasing
delays of current products as our customers anticipate new product
releases;
    
    order cancellations and shipment rescheduling or delays;
    
    patterns of capital spending and changes in budgeting cycles by our customers;
    
    market acceptance of new and enhanced versions of our products;
    
    changes in the pricing and the mix of products and services we sell;
    
    seasonal variations in our sales cycle;
    
    the level of product and price competition;
    
    changes in operating expenses;
    
    exchange rate fluctuations;
    
    the timing of any acquisitions and related costs; and
    
    changes in personnel and related costs. In addition, we expect that a substantial portion of our enterprise software
revenues will continue to be derived from renewals of maintenance contracts
from customers of our software applications. These maintenance contracts
typically expire on an annual basis, and the timing of cash collections from
related revenues varies 21




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from quarter to quarter. In addition, our new license revenue and results of
operations may fluctuate significantly on a quarterly and annual basis in the
future, as a result of a number of factors, many of which are beyond our
control. A sale of a new license generally requires a customer to make a
purchase decision that involves a significant commitment of capital. As a
result, the sales cycle associated with the new license revenue will vary
substantially and will be subject to a number of factors, including customers
budgetary constraints, timing of budget cycles and concerns about our pricing
or introduction of new products by us or our competitors. Risks relating to our mobile services and applications and portal businesses We depend on the two mobile network operators in China for delivery of our
mobile services and applications, and the termination or alteration of our
various contracts with either of them or their provincial or local affiliates
could materially and adversely impact our business. We offer our mobile services and applications to consumers through the two
mobile network operators in China, China Mobile and China Unicom, which service
nearly all of Chinas approximately 282.3 million mobile subscribers, as
estimated by Chinas MII. Such dominant market position limits our negotiating
leverage with these network operators. If our various contracts with either
network operator are terminated or adversely altered, it may be impossible to
find appropriate replacement operators with the requisite licenses and permits,
infrastructure and customer base to offer our services, and our business would
be significantly impaired. For the year ended December 31, 2003, we derived
approximately 18.9% of our total revenues from sales made through the network
operators and are, therefore, particularly dependent on them. Delivery of our mobile services and applications is governed by contracts
between us and the national, provincial or local affiliates of China Mobile and
China Unicom. Each of these contracts is nonexclusive and has a limited term
(generally one or two years). We usually renew these contracts or enter into
new ones when the prior contracts expire, but on occasion the renewal or new
contract can be delayed by periods of one month or more. The terms of these
contracts vary, but the network operators are generally entitled to terminate
them in advance for a variety of reasons or, in some cases, for no reason in
their discretion. For example, several of our contracts with the network
operators can be terminated if:  
    
    we fail to achieve performance standards established by the
applicable network operator from time to time;
    
    we breach our obligations under the contracts, which include,
in many cases, the obligation not to deliver content that violates
the network operators policies and applicable law;
    
    the network operator receives high levels of customer
complaints about our mobile applications or services; or
    
    the network operator sends us written notice that it wishes to
terminate the contract at the end of the applicable notice period. We may also be compelled to alter our arrangements with these mobile
network operators in ways which materially and adversely affect our business.
China Mobile and China Unicom have unilaterally changed their policies as
applied to third party service providers in the past, and may do so again in
the future. For example, China Mobile banned all cooperative arrangements known
as SMS Website Unions in July 2003, effectively precluding large service
providers from aggregating unregistered websites and utilizing China Mobiles
billing platform to gather fees for these services. In August 2003, China
Mobile further banned service providers from using its network to charge
customers for services which were deemed by it to be not purely wireless
services. Although we were not engaged in these activities and, therefore,
these particular policy changes did not impact our business, we may not be able
to respond adequately to negative developments in our contractual 22




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relationships with China Mobile and China Unicom in the future because we
are not able to predict any unilateral policy changes. China Mobile and China Unicom have imposed penalties on chinadotcom for
technical breaches and irregularities in the provision of services to users.
If penalties are imposed in the future, chinadotcoms business and financial
results could be materially adversely affected. In the first quarter of 2004, China Mobile and China Unicom imposed
penalties, in the form of fines, on chinadotcom for certain technical breaches
and irregularities in chinadotcoms provision of services to certain of their
mobile users. While chinadotcom has taken steps to prevent a reoccurrence of
these technical breaches and irregularities, there can be no assurance that
additional technical breaches and irregularities will not occur resulting in
further penalties and/or fines imposed by China Mobile and China Unicom. Such
penalties and/or fines could have a material adverse effect on chinadotcoms
operation and financial result. Our business could be adversely affected if China Mobile or China Unicom or
both begin providing their own mobile applications and services. Our mobile business may be adversely affected if China Mobile or China
Unicom or both decide to terminate our existing revenue-sharing relationship
and begin providing their own mobile services and applications to subscribers.
In that case, we would not only face enhanced competition, but could be
partially or fully denied access to their networks. If China Mobile or China Unicom blocks our access to their mobile networks or
their billing and collection systems, our mobile business could be
discontinued. We rely exclusively on China Mobile and China Unicom, and their respective
provincial and local affiliates, for access to our subscribers over their
mobile networks and for revenues collected through their billing and collection
systems. Currently, there are no other mobile network operators in China. If
China Mobile, China Unicom or any of their affiliates blocks our access to
their mobile networks or limits our services, we may be unable to find a
reliable and cost-effective replacement in a timely manner upon acceptable
terms, if at all. If one or more of these events occurs, our mobile services
and applications business would not be viable and we may need to discontinue
such business. If China Mobile or China Unicom fails to bill their customers or to provide
billing confirmations for our mobile services and applications, our mobile
services and applications revenues could be significantly reduced. We depend upon China Mobile and China Unicom to maintain accurate records
of the fees paid by users and their willingness to pay us. Specifically, the
network operators provide us with monthly statements that do not provide
itemized information indicating for which mobile services and applications the
network operator has collected fees. As a result, monthly statements that we
have received from the network operators cannot be reconciled to our internal
records on a segmented basis. In addition, access to the network operators
internal billing and collection records is subject to the discretion of such
operators; we have only limited means to verify the information provided to us
independently. Our mobile services and applications revenues could be
significantly reduced if these network operators miscalculate the revenues
generated from our mobile services and applications and our portion of those
revenues. Our mobile services and applications revenues are affected by billing and
transmission failures which are often beyond our control. We do not collect fees for delivery of our mobile services and
applications from China Mobile and China Unicom in a number of instances,
including if: 23




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
    
    the delivery of our mobile services and applications to a
subscriber is prevented because his or her mobile phone is turned off
for an extended period of time, the customers prepaid phone card has
no value or the subscriber has ceased to be a customer of the
applicable network operator;
    
    China Mobile or China Unicom experiences technical problems
with its network which prevent the delivery of our mobile services
and applications to the subscriber;
    
    we experience technical problems with our technology platform
that prevents delivery of our mobile services and applications; or
    
    the subscriber refuses to pay for our mobile services and
applications due to quality or other problems. These situations are known in the mobile services and applications
industry as billing and transmission failures. We do not expect to recover
revenues that are lost due to billing and transmission failures. The failure
rate can vary among network operators, and by province, and also have
fluctuated significantly in the past. For example, for the year ended December
31, 2003, the average monthly transmission failure rate ranged from 10% to 30%.
We do not have any agreements with the mobile operators that provide that if
such differences are greater than a fixed percentage, we have the right to
adjust the differences. The mobile operators have absolute discretion in the
adjustment of any difference. Any significant billing and transmission
failures therefore will significantly lower our recorded revenues. Because China Mobile and China Unicom do not provide information showing
revenues and transmission information on a service-by-service basis, we can
only estimate our actual revenues by service type. China Mobiles and China Unicoms monthly statements to service providers
regarding mobile services and applications delivered through their networks
currently do not contain revenues and billing and transmission failure
information on a service-by-service basis. Although we maintain our own records
reporting the mobile services and applications provided, we can only estimate
the actual revenues by service type because we are unable to confirm which
services were transmitted but resulted in billing and transmission failures. As
a result, we are unable to calculate and monitor service-by-service revenues,
margins and other financial information, such as average revenue per user by
service and total revenues per user by service, with precision to allow us to
accurately determine which of our mobile services and applications are or may
be profitable. China Mobile and China Unicom may impose higher service or network fees if we
are unable to satisfy customer usage and other performance criteria, thereby
reducing our mobile services and applications revenues. Fees for our mobile services and applications are charged on a monthly
subscription or per use basis. Based on our contractual arrangements, we rely
upon China Mobile and China Unicom for both billing of, and collection from,
subscribers of fees for our mobile services and applications. China Mobile and China Unicom generally charge us service fees of 15% and
12% of the revenues generated by our mobile services and applications,
respectively. To the extent that the number of messages sent by us over China
Mobiles network exceeds the number of messages our subscribers send to us, we
must pay per message channel fees, which decrease in several provinces as the
volume of customer usage of our mobile services and applications increases. The
number of messages sent by us will exceed those sent by our subscribers, for
example, if the subscriber sends us a single message to order a game but we
must send that subscriber several messages to confirm his or her order and
deliver the game itself. Any increase in China Mobiles or China Unicoms
network fees and service charges could reduce our gross margins. 24




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China Mobile and China Unicom may not authorize our mobile services and
applications to be offered on their networks if we fail to achieve minimum
customer usage, revenues and other criteria, thereby adversely affecting our
mobile services and applications revenues. Our business could be adversely affected if we fail to achieve minimum
customer usage, revenues and other criteria imposed or revised by China Mobile
and China Unicom at their discretion from time to time. China Mobile and China
Unicom, through their provincial and local offices, have historically preferred
to work only with a small group of the best-performing mobile services and
applications providers, based upon the uniqueness of the service offered by
each provider, total number of subscribers, usage and revenues generated in the
applicable province or municipality, the rate of customer complaints, and
marketing expenditures in the applicable province or municipality. For example, China Mobile has recently been increasing its promotion of
STK cards, which are semiconductor chips for mobile phones that have the
services of various third-party service providers preselected by the network
operators provincial or municipal offices embedded on the chip. Generally, the
services of a limited number of service providers are embedded on the STK card,
with the selection based on the quantitative criteria referenced above. While
several of our mobile services and applications have been selected by ten of
the provincial and municipal China Mobile offices (out of a total of 31 that
offer STK cards) for inclusion on their STK cards, the remaining provinces and
municipalities have either not launched STK cards or have not selected us for
inclusion on their STK cards. In the future, we may fail to meet the then-current performance criteria
that network operators in these or other provinces or municipalities set from
time to time. In any such case, our mobile services and applications could be
excluded from those cards or from their entire networks at a national,
provincial or municipal level, or we could be precluded from introducing new
services, which would adversely affect our revenues and growth prospects. Our mobile services and applications and their pricing are subject to approval
by China Mobile and China Unicom, and if requested approvals are not granted in
a timely manner, our mobile services and applications business could be
adversely affected. We must obtain approval from China Mobile and China Unicom with respect to
each mobile service or application that we propose to offer to their
subscribers and the pricing for such mobile service or application. In
addition, any changes in our existing mobile services and applications as well
as the pricing of such services and applications must be approved in advance by
these network operators. No assurance can be given that such approvals will be
granted in a timely manner or at all. Moreover, under some of our contracts
with the network operators, we cannot change prices more than once every six
months or charge prices outside a fixed range. Failure to obtain, or a delay
in, obtaining such approvals could place us at a competitive disadvantage in
the market and adversely affect our mobile services and applications business. We rely heavily on certain regions in China for a significant share of our
mobile services and applications revenues. An economic downturn or any loss of
our contracts with mobile operators in these provinces could have a material
adverse effect on our results of operations. A significant portion of our revenues from mobile services and
applications are derived from Shanghai and the provinces of Shandong, Jiangsu,
Guangdong and Zhejiang in China. Customers in these regions accounted for 55.8%
of our total mobile services and applications revenues for the year ended
December 31, 2003. As such, our results of operations are susceptible to
changes in the economies of these regions. An economic downturn in any one of
these regions, or our failure to renew our contracts with either China Mobile
or China Unicom in any one of these regions, could reduce our mobile services
and applications revenues. 25




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If other new mobile operators gain a significant share of the mobile market in
China, we will need to establish new arrangements with those mobile operators
and if we fail to do so, our mobile services and applications business may
suffer. The success of our mobile data business depends on our relationship with
Chinas mobile operators. Currently, China Mobile and China Unicom are the only
companies permitted to provide mobile services in China. If the PRC government
further opens the mobile market in China to allow greater competition, we may
need to establish new arrangements with new market entrants in order to
continue to provide our mobile services. We may not succeed in establishing
such new arrangements, and our failure to do so may limit access to our mobile
services, thereby causing our business to suffer. If we fail to keep pace with changes in mobile technology, our competitive
position and ability to generate revenues could be adversely affected. Our current value-added mobile services focus on SMS, but mobile
technology is changing rapidly to support multi-media messaging services,
mobile e-commerce, music and image downloads, and other complex services. We
are developing new mobile related products and services, and the success of our
new products and services is subject to risks and uncertainties. For example,
technical, operational or distribution problems could delay or prevent the
introduction of our new products or services. We can provide no assurance that
our new products and services will achieve widespread market acceptance or
generate meaningful revenue. If we fail to introduce new products and services
that offer the latest mobile technology, our competitive position and our
ability to generate new revenues could be compromised. Our portal business depends substantially on third party content providers and
may be adversely affected if we are unable to maintain existing arrangements
with these content providers. We rely on third parties to create traffic and provide content for our
portal network to make it more attractive to advertisers and consumers. Our
content providers include Xinhua, a major shareholder of chinadotcom, as well
as commercial content providers and our registered community members. If Xinhua
or these third parties fail to provide us with high quality content, our portal
network could lose viewers, subscribers and advertisers and our revenue from
these sources would decrease. Our existing relationships with Xinhua and other
commercial content providers are not exclusive and may not result in sustained
business partnerships or successful service offerings or sustained traffic on
our portal network or future revenues. Our mobile and portal business could be materially adversely affected if the
current ownership structure of our Chinese companies that hold the ICP licenses
is challenged by the PRC authorities. The PRC government has imposed foreign ownership restrictions and
prohibitions on Internet content and telecommunications operations. PRC laws
and regulations require all Internet portal and mobile portal operators to
obtain an Internet content provider, or ICP, license before they may operate
the portals in China. Under current PRC regulations, ICP license holders must
be PRC nationals or domestic PRC companies. As a result, we cannot be the legal
owner of such ICP licenses, which are necessary to operate our mobile and
portal businesses in China. Currently, Newpalms ICP licenses are held by two
PRC companies, Beijing New Palm Technology Co., Ltd. and Beijing Wisecom
Technology Co., Ltd. However, the two PRC individuals that own 100% of the
shares of these companies have entered into certain trust deed arrangements
with our indirect subsidiary, hongkong.com Limited. Under these arrangements,
the two PRC individuals are trustees or nominees of hongkong.com Limited and
may only act at its direction. Similar deed of trust arrangements have been
entered into between certain PRC individuals and our indirect subsidiary,
chinadotcom Portals Limited, in connection with the ICP license for the
www.china.com portal. Due to the uncertainties relating to the interpretation and application of
telecommunications and Internet legislation in China, the PRC authorities
could, at any time, assert that any part of our existing or future business, 26




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or the ownership of the PRC companies and their ICP licenses through the
trust deed arrangements, violate PRC laws or regulations. If we are found to be
in violation of any PRC law or regulation, the relevant authorities would have
broad discretion in imposing penalties, which could include one or more of the
following:  
    
    levying of fines;
    
    compulsory disgorgement of income for both current and past periods;
    
    revocation of our ICP or business license;
    
    closure or suspension of our China operations; and
    
    compulsory restructuring of our China operations or licensing arrangements. Any of these actions may disrupt our services in China, may harm our
reputation and could have a material adverse effect on our portal and mobile
operations in China. In particular, if any of these ICP licenses are revoked or
terminated, our Internet content and mobile operations in China that are
dependent on such licenses will be discontinued, which will have a material
adverse effect on our results of operation and financial condition. Our business could be materially adversely affected if we cannot provide
effective operational control of our mobile and portal business due to the
current ownership structure of our Chinese companies. We rely upon certain PRC individuals as the legal owners of the PRC
companies that hold the ICP licenses, which are necessary to operate our
Internet and mobile businesses in China. Although our indirect subsidiaries are
the beneficial owners of these PRC companies and such PRC individuals may be
our directors or employees, the rights provided in these trust arrangements are
contractual in nature and do not guarantee the necessary operational control.
If our trustees fail to perform their obligations, the contractual remedies
available in jurisdictions outside China may not provide us with effective
control over these PRC companies due to the uncertainty of enforcing foreign
judgments or arbitral awards in China. The loss of effective control over our
China operations and licensing would significantly harm our portal and mobile
businesses in China. If we are held liable for claims based on information originating from our
portal network or communicated through our SMS products, we may incur
significant costs contesting such claims or paying damages. We may face liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the nature and content of
information originating from our portal network or communicated through our SMS
products. Such information could include content and material posted by our
registered community members on our message boards, online communities, voting
systems, e-mail or chat rooms. By providing technology for hypertext links to
third-party websites, we may be held liable for copyright or trademark
violations by those third-party sites. Third parties could assert claims
against us for losses incurred in reliance on erroneous information distributed
by us. Users of our web-based e-mail or SMS could seek damages for:  
    
    unsolicited e-mail or SMS messages;
    
    lost or misplaced messages;
    
    illegal or fraudulent use of e-mail or SMS messages; or
    
    interruptions or delays in service. 27




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We do not carry liability insurance to cover potential claims of this
type. We may incur significant costs in investigating and contesting these
claims. Any judgment, fine, damage awards or liability imposed on us could
significantly increase our costs. Moreover, our reputation may suffer as a
result of these claims, which could reduce traffic on our portal network or
reduce our revenues. If the PRC government considers our existing licensing structures to be
insufficient in meeting compliance requirements with applicable licensing
restrictions, or if we fail to comply with changes to these requirements or
restrictions, our portal and mobile applications businesses could be materially
adversely affected. The PRC government regulates access to the Internet by imposing strict
licensing requirements on Internet service providers, or ISPs. Generally, the
provision of different types of infrastructure telecommunication services and
value-added telecommunication services is subject to different licensing
regimes in the PRC. In April 2003, a new regulation was promulgated by MII in
connection with the categorization of each kind of telecommunication business. While we believe that our current operation complies with all existing PRC
laws, rules and regulations, there are substantial uncertainties regarding the
interpretation of current Internet laws and regulations. It is possible the PRC
government may take a view contrary to ours because there are no well
established precedents or clear judicial interpretations to support our
interpretations and views of the laws, rules and regulations. Issues, risks and
uncertainties relating to PRC government regulation of Chinas Internet sector
include:  
    
    recently enacted regulations applying to Internet-related
services and telecom-related activities. While many aspects of these
regulations remain unclear, they purport to limit and require
licensing of various aspects of the provision of Internet information
services. If these regulations are interpreted to preclude our
current ownership structure or business model, our portal and mobile
applications businesses could be severely impaired; and
    
    the activities of ICPs are subject to regulation by various PRC
government authorities depending on the specific activities conducted
by the ICP as stated by the MII. Various government authorities have
enacted several new laws and regulations that govern these
activities. The areas of regulation currently contemplated include:  
    
    online advertising;
    
    online news reporting;
    
    online publishing;
    
    online securities trading;
    
    online gaming;
    
    online broadcasting;
    
    bulletin board service; and
    
    the provision of industry-specific information
(e.g., pharmaceutical products) over the Internet, etc. Other aspects of our online operations may be subject to regulation in the
future. In addition to the regulations promulgated by the PRC national government,
some local governments, such as the Beijing local government, have also
promulgated local rules applicable to Internet companies 28




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operating within their respective jurisdictions. These local rules may
also create additional barriers in relation to the operation of our business. If we fail to establish and maintain relationships with content providers and
mobile network operators, we may not attract or retain users. We rely on a number of third party relationships to attract traffic and
provide content to make our portals more attractive to advertisers and
consumers. Most of these arrangements are not exclusive and are short-term or
may be terminated at the convenience of the other party. We cannot assure you
that our existing relationships will result in sustained business partnerships,
successful service offerings, significant traffic or significant revenues. In
addition, much of the third party content provided to our portal is also
available from other sources or may be provided to other companies. If our
competitors present the same or similar content in a superior manner, it would
adversely affect our visitor traffic. The dividends and other distributions on equity we may receive from our
subsidiaries or other payments we may receive from Beijing Newpalm or Beijing
Wisecom are subject to restrictions under PRC law or agreements that these
entities may enter into with third parties. We are a holding company. Our subsidiaries hongkong.com Corporation, or
hongkong.com, hongkong.com Limited and Newpalm entered into contractual
arrangements with Beijing Newpalm and Beijing Wisecom. We conduct our mobile
services and applications business activities and receive substantially all of
our revenues from this business in the form of service fees through Beijing
Newpalm and Beijing Wisecom. We rely on dividends and other distributions on
equity paid by our subsidiaries and service fees from Beijing Newpalm and
Beijing Wisecom for our cash requirements in excess of any cash raised from
investors and retained by us. If any of our subsidiaries incurs debt in the
future, the instruments governing the debt may restrict their ability to pay
dividends or make other distributions to us. In addition, PRC law requires that
payment of dividends by our subsidiaries that are incorporated in China can
only be made out of their net income, if any, determined in accordance with PRC
accounting standards and regulations. Under PRC law, those subsidiaries are
also required to set aside a portion, up to 10% of their after-tax net income
each year to fund certain reserve funds, and these reserves are not
distributable as dividends. Any limitation on the payment of dividends by our
PRC subsidiaries could have a material adverse effect on our ability to grow,
fund investments, make acquisitions, pay dividends, and otherwise operate our
mobile services and applications business. For a more detailed discussion regarding our arrangements with Beijing
Newpalm and Beijing Wisecom, see Item 4.C  Information on the Company 
Organizational Structure  Our PRC Corporate Structure. Risks relating to our advertising and marketing business We are seeking to re-orient our advertising strategy, and have significantly
reduced operations in online advertising and e-marketing services and cannot
assure you that we will be successful in generating revenues or margins from
our reoriented advertising strategy sufficient to replace revenues and margins
from our reduced online advertising and e-marketing services businesses. We are seeking to re-orient our advertising strategy away from online
advertising and e-marketing services with low margins performed for a fixed fee
which rely upon short-term advertising campaigns dependent upon high volume to
higher margin database marketing related services used to develop targeted
campaigns for clients. In our experience, margins from online advertising and
e-marketing services range from 20% to 30% versus margins in database marketing
related services which range from 50% to 70%. We cannot assure you that we
will be successful in generating sufficient revenues or margins from our
database marketing related services to replace revenues and margins from our
reduced online advertising and e-marketing services business. 29




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Our strategy to target higher margin database marketing related services
through our subsidiary, Mezzo Business Databases Pty Limited, or Mezzo
Business, which generated only a small portion of our advertising revenues in
2003, is subject to numerous risks, may not be successful, and could therefore
limit the amount of advertising revenues we can generate. Our re-oriented advertising strategy is to target higher margin database
marketing related services utilizing data mining techniques. Data mining
involves the process of analyzing significant amounts of data retained in a
database to uncover underlying patterns that may indicate trends or
relationships, and has become a more important part of CRM, as a method to
better understand customer behavior and preferences. The uncovered
relationship can then be utilized by a client to develop a targeted customer
campaign. Database marketing related services generated only a small portion
of our advertising revenues in 2003, and is subject to numerous risks,
including the following:  
    
    we may not be able to successfully market services in this
business segment outside of Australia where most of the businesses
providing these services are currently located;
    
    we may not be able to attract larger clients with
correspondingly larger marketing budgets due to the limited size and
scope of our currently operational base in Australia;
    
    we may not be able to compete against other companies in this
business segment which may have or develop better quality data sets
and related products and services than ours;
    
    we may not be able to successfully migrate, if necessary, our
current data sets, products and services to other technology formats
in the future;
    
    we may not be able to effectively manage Mezzo Business if the
founder and current general manager leave the business at the
conclusion of the earn-out period on June 30, 2004; and
    
    we may suffer reductions in revenues and profits in the future
as a result of any changes in privacy related legislation that could
reduce the distribution potential of our databases. Our re-oriented advertising strategy depends upon Mezzo Businesss ability to
maintain up-to-date databases. If Mezzo Business fails to maintain its
databases, its services will be less attractive to customers, and our prospects
relating to our advertising business will be adversely affected. Our re-oriented advertising strategy depends upon the ability of Mezzo
Business, to maintain up-to-date data sets. If Mezzo Business fails to
maintain its databases, its services will be less attractive to customers. The
ability of Mezzo Business to maintain its databases can be affected by
governmental actions in Australia, as well as actions by third parties to
protect their proprietary rights, although Mezzo Business is not aware of any
current prohibitions which would prohibit its ability to maintain its
databases. For example:  
    
    The Australian government has moved to restrict the use of
publicly available telephone data in the Integrated Public Number
Database for both consumers and business. While Mezzo Business
believes that such governmental action will not impact its results of
operations because such data has not historically been used as a data
source, restrictions on the use of such data eliminates a potentially
cost effective manner to increase the accuracy of telephone contact
data in the datasets of Mezzo Business; and
    
    A number of other database marketing organizations in Australia
which compete with Mezzo Business rely on digitized versions of the
Yellow Pages business telephone directory to generate and maintain
their databases. Telstra, which owns the copyright to the Australian
Yellow Pages, has recently moved to restrict the publishing and sale
of Yellow Pages data by taking legal action against the major
publisher of that material in Australia. Mezzo Business does not
believe that 30




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actions by Telstra will impact its business because Mezzo Business does
not rely on Yellow Pages material to produce its datasets. Privacy concerns may limit or prevent us from selling demographically targeted
online advertising in the future. To the extent we collect data derived from user activity on our online
advertising network, we cannot be certain that any trade secret, copyright or
other protection will be available for this data or that third parties will not
assert their rights to the data. We are required to also keep information
regarding Web publishers confidential under our contracts with Web publishers.
In addition, various technologies seeking to protect privacy, including the
following, have affected or may affect our advertising business:  
    
    any limitation on our ability to use cookies, which are bits of
information keyed to a specific server, file pathway or directory
location that are stored on a users hard drive and passed to a Web
sites server through the users browser software, could impair our
future targeting capabilities; and
    
    web-browsing software with enhanced privacy preference
settings, allowing users to define settings to reject third party
cookies automatically, may lower the total pool of users from whom
any cookie-based third party ad serving solutions can collect and
target ad delivery based on demographic data or data mining
techniques. In Hong Kong, a company will contravene the Personal Data Ordinance,
privacy legislation in force in Hong Kong, if it collects information on its
users, analyzes the information for a profile of the users interests and sells
or transmits the profiles to third parties for direct marketing purposes
without the users consent. As part of our future advertisement delivery
system, we will be integrating information including a users online response
rate to advertisements, name, address, age or e-mail address with third party
databases to generate a comprehensive demographic profile of the Internet user.
The transfer of this information, which provides an individuals profile, may
contravene the Personal Data Ordinance unless the individual expressly consents
to the use of this information. Our future inability to obtain demographic
profiles from Internet users that do not consent to this use or any
contravention of relevant privacy legislation in our data collection or use or
storage may have a material and adverse effect on our business. Risks relating to treasury management In an attempt to increase our treasury yield, we have invested in debt
securities which expose us to interest rate and credit risks which could cause
us to lose our interest payments or invested principal. In order to increase the yield from our invested cash pending our use in
the conduct of our business, we have increased our leverage and invested in
debt securities that expose us to market risks such as credit default and
interest rate risk. We manage our interest rate risk by maintaining a portfolio of trading and
held-to-maturity investments which we believe to have high credit quality and
relatively short average maturities. These instruments may include, but are not
limited to, money-market instruments, bank time deposour, and variable rate and
fixed rate obligations of corporations, government, and government sponsored
enterprises such as the Federal National Mortgage Association, or Fannie Mae,
in accordance with an investment policy approved by our Board of Directors.
These instruments are denominated in U.S. dollars. The fair market value of our
debt security investments, as of March 31, 2004, was US$232.4 million. We also hold cash balances in accounts with commercial banks in the United
States and foreign countries. These cash balances represent operating balances
only and are invested in short-term time deposits of the local bank. 31




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Many of our investments carry interest rate risk. When interest rates
fall, the income from our investments in variable-rate securities declines.
When interest rates rise, the fair market value of our investments in
fixed-rate securities declines. Due in part to these factors, our future
investment income may fall short of expectations or we may suffer losses in
principal if forced to sell securities, which have declined in market value due
to changes in interest rates. We attempt to mitigate risk by holding fixed-rate
securities to maturity, but, if our liquidity needs force us to sell fixed-rate
securities prior to maturity, we may experience a loss of principal. We are also exposed to the risk of default by the issuers of our debt
securities. We attempt to mitigate credit default risk by purchasing only
investment grade securities as categorized by Moodys Investor Service and
Standard and Poors. The following chart breaks down our debt securities
portfolio into four primary risk categories based on the Standard and Poors
credit ratings as of December 31, 2003. Rating (Standard & Poors)
    
    AAA
    
    AA
    
    A
    
    BBB
    
    TotalAmounts of debt securities outstanding as of December 31, 2003
(in US$ millions)Moodys Investors Service
    
    
    293.9
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    19.4
    
    
    
    313.3Standard & Poors
    
    
    293.9
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    19.4
    
    
    
    313.3
 As of December 31, 2003, our entire treasury portfolio of US$350.4
million, was effectively reflected in our consolidated financial statements at
current market prices. At the end of each quarter, if the end of quarter price
is below the original investment cost, the difference is charged to
accumulated other comprehensive income under the shareholders equity section
of our consolidated balance sheet. If the fair market value of any of our debt
investments remains below our investment cost and is considered other than
temporary, this decline would then be reflected as an expense under
impairment of cost investments and available-for-sale securities in our
consolidated income statement. An such adjustment could have a material adverse
effect on our business, financial condition, results of operations and share
price. In addition, sharp price movements or volatility shocks may reduce the
liquidity of our treasury portfolio and in some circumstances our debt
instruments may have no tradeable market. This could prevent us from altering
or closing our security positions without incurring substantial losses. Certain
of our investments would be subject to the additional risks of trading in
foreign debt securities, which may not be regulated as rigorously as similar
investments in the United States. Any losses from our investments in treasury
instrument could have a material adverse effect on our business, financial
condition, results of operations and share price. Our entry into repurchase facilities with Fortis Bank and DBS Bank exposes us
to interest rate, market and credit risks when we borrow funds from these
facilities to make other investments. We have entered into repurchase facilities with Fortis Bank nv-sa an AA-
rated bank (as rated by Standard & Poors) and DBS Bank, an A+ rated bank (as
rated by Standard & Poors). The Fortis Bank facility allows us to draw up to
US$250.0 million for a one-year term. The DBS Bank facility allows us to draw
up to US$150.0 million for a three year term. Each drawdown will be agreed upon
with the corresponding bank before execution. Both facilities were established
to provide us with a source of capital to give us the flexibility to finance
working capital requirements and acquisitions, as well as our treasury
management program, without having to liquidate our investment portfolio on
short notice. Under the repurchase facilities, a drawdown requires us to sell debt
securities from our portfolio to the bank at an agreed to price, and the bank
agrees to sell back to us the same securities at the same purchase price at a
later date. In effect, the bank retains title to our securities as collateral
during the life of the drawdown; however, the bank has agreed to pay us any
income associated with the debt securities sold. In return, we have agreed to
pay interest to the bank at a base-rate of Libor plus a fixed 0.20% or 0.35%.
This base rate is set on every 3 month, 6 month or 1 year anniversary of the
execution of the draw down, as we and the bank may mutually agree. 32




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Use of the repurchase facilities with Fortis Bank and DBS Bank creates the
following three primary risks:  
    
    The risk associated with increased leverage which includes our
obligation to pay back the borrowed funds in a timely manner which
may require us to liquidate a portion of our treasury portfolio at a
loss to repay the borrowing.
    
    By setting aside debt securities as collateral under either
repurchase facility, we incur the risk that if the banks themselves
were to undergo an insolvency event, we could lose all or part of our
debt securities set aside at such time with the bank.
    
    The interest that we pay under the repurchase facilities is
dependent upon Libor, and therefore, our future interest expenses
with respect to any amounts drawn under the repurchase facilities may
exceed our expectations due to changes in interest rates. For
example, if Libor rises extremely rapidly over the next few years,
our interest expenses will rise commensurately. Further, because we have purchased, as of December 31, 2003, under the
repurchase facilities approximately US$10.1 million of debt securities with
drawdowns under our repurchase facilities, we are subject to risk associated
with investment leverage. Since the base rate (Libor) of our drawdowns are
reset periodically, in rising interest rate environments, we run the risk that
our borrowing rate might exceed any interest income that we receive from the
debt securities purchased with the proceeds of draw downs from the repurchase
facilities. Any such negative interest rate differential, or negative carry,
could lead to material adverse effect on our financial results. We rely upon our internal control systems to manage our treasury operations,
and our treasury portfolio and returns on our treasury portfolio may be
adversely affected if we incur greater risk than otherwise appropriate or
downgrades occur in our portfolio. Any failure by us to maintain adequate treasury management control
systems, could have a material adverse effect on our business, results of
operations and financial condition. While we continually assess and improve our
treasury management systems and policies, there is no assurance that our system
of controls and policies will effectively prevent the incurrence of greater
risk than is otherwise appropriate. Downgrades in our portfolio of investment
grade debt securities may have a material adverse effect on our business,
results of operations and financial condition. We may decide to outsource all
or a portion of the investment management of our portfolio of debt securities
to third party professional bond portfolio managers. We generally have not outsourced management of our debt investment portfolio to
professional portfolio managers. A professional portfolio manager may be able
to generate a higher return on our debt investments than our internal treasury
staff. We generally have not outsourced a significant portion of our debt
investment portfolio to professional portfolio managers. Professional managers
may have broader experience and might enjoy greater resources than those
available to our internal treasury personnel. We may have achieved a higher
return on investments if we had outsourced management of our debt investment
portfolio. Our portfolio of securities managed by a third party professional
manager includes only US$20.0 million invested with the Centauri Fund
(currently rated BBB by Standard & Poors and Baa2 by Moodys Investors
Service) which is a bond fund. Accordingly, we are exposed to external
management risk for this investment, and we rely on the professional skills of
the fund manager to deliver our target interest income. The investment in the
Centauri Fund is highly illiquid and could be difficult to realize prior to
first available redemption in 2006. 33




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Risks relating to our network, intellectual property and personnel Our computer network is vulnerable to hacking, viruses, spamming and other
disruptions which may cause us to lose key clients, expose us to liability for
our clients losses, or prevent us from securing future business. Inappropriate use of our Internet services or errors or omissions in
processing instructions or data available in our computer system or databases
could jeopardize the security of confidential information stored in our
computer system, which may cause us to lose key clients, expose us to liability
for our clients losses and prevent us from securing future business, any of
which could have a material adverse effect on our business, financial
condition, results of operations and share price. Inappropriate use of the Internet includes attempting to gain unauthorized
access to information or systems (commonly known as cracking or hacking) and
repeated transmission of unsolicited e-mail messages (commonly known as e-mail
bombing or spamming). Our current policies, procedures and configurations for
managing our systems, including our computer servers, may not be adequate to
protect our facilities and the integrity of our user and customer information.
Although we implement security measures to protect our facilities and the
integrity of our user and customer information, such measures could be
ineffective or circumvented. Spam As is typical for many businesses offering online based products and
services such as emails, we experience spam attacks on a regular basis. Our
systems use filters which identify common words and sentence structures
typically used in spamming to block spam attacks. Our network administrators
constantly review spam activities as a part of system maintenance, and also
consult with outside authorities to learn about the latest techniques spammers
use to attack systems which is often used to update our filters. In addition,
the email products we offer have their own filtering capabilities which allow
users to further refine the emails which should be blocked. We encourage users
to notify us of any suspect email activity, and we will terminate user accounts
which are detected as engaging in spamming activities. However, our systems
continue to experience spam attacks regularly, and there is no assurance that
the spam attacks will not become more frequent and materially disrupt our
operations. Viruses While our computer systems have occasionally experienced problems as a
result of viruses, we have not experienced extended system outages as a result
of viruses. To protect our systems from viruses, we have installed in on our
networks commercially available antivirus software produced for enterprise
networks. We update on a daily basis our library of viruses to be scanned for,
and perform anti-virus updating activities upon computers when they log on to
our network. In addition, upon receipt of specific information that a new
virus is causing difficulties across the computer networks of a number of other
companies, our system administrators will send out virus alerts to its users to
inform them about the virus activities, including, when applicable, advice not
to open emails with specified tag lines or headers. Nonetheless, our efforts to
protect our systems from viruses may not be adequate and there is no assurance
that we will not experience extended system outages due to viruses in the
future. Hacking Our computer networks have been the target of sporadic hacking activities
over the years, although most hacking activities have been targeted against the
gateways our computer systems use to access the Internet which are operated by
third parties, rather than directly against our systems. We have set up
firewalls using commercially available software to shield our systems from
hacker attacks. In addition, we use commercially available software which
monitors traffic across our network looking for abnormal activities and traffic
which may signal a hacker attack, and also use restricted access lists to
restrict unauthorized traffic on our routers to 34




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limit hacker attacks. However, we may continue to be the target of hacking
activities, and there is no assurance that the firewalls and software we have
implemented will adequately protect our systems from such hacking activities. Alleviating problems caused by computer viruses or other inappropriate
uses or security breaches may require interruptions, delays or cessation in our
services, in addition to the outages that occur in our systems from time to
time for various reasons, including power interruptions, errors in
instructions, equipment inadequacy, capacity and other technical problems. We
do not carry errors and omissions or other insurance covering losses or
liabilities caused by computer viruses, security breaches or spamming attacks.
Compromises or breaches in the security or integrity of our facilities or
customer or user information, or inappropriate use of our Internet services,
could subject us to litigation and could adversely affect our customer base,
business, share price, results of operation and financial condition. We rely on software and hardware systems that are susceptible to failure, and
in the event of service operations or other related problems, our operating
efficiency and results of operations may be adversely affected. Any system failure or inadequacy that interrupts our services or increases
the response time of our services could reduce user satisfaction, future
traffic and our attractiveness to advertisers and consumers. There can be no
assurance that our technologies, services and products will not experience
interruptions or other related problems, which could affect our operating
efficiency and results of operations. In addition, if our SMS subscriptions, web page views and overall internet
traffic increases, there can be no assurance that we will be able to increase
the scale of our systems proportionately. There also can be no assurance that
our ad serving capabilities will be adequate for our business needs. We also
depend on Web browsers, ISPs, and other Web site operators in Greater China and
elsewhere that have experienced significant system failures and electrical
outages in the past. Our users have experienced difficulties due to system
failures that were unrelated to our systems and services. We have limited backup systems and redundancy and we have experienced
system failures and electrical outages that have disrupted our operations. We
do not have a disaster recovery plan in the event of damage from fire, natural
disasters, power loss, telecommunications failures, break-ins and similar
events. We may experience a complete system shut-down if any of these events
were to occur. To improve performance and to prevent disruption of our
services, we may have to make substantial investments to deploy additional
servers or one or more copies of our Web sites to mirror our online resources.
Because we carry property insurance with low coverage limits, our coverage may
not be adequate to compensate us for our losses. If we do not increase our
capacity and our redundancy, these constraints could have a material adverse
effect on our business, results of operations and financial condition. We may be unable to protect or enforce our own intellectual property rights
adequately and may be involved in future litigation over our use of technology
rights. We have increasingly developed and acquired intellectual property, including:  
    
    the purchase of the URLs;
    
    the purchase of OpusOne Technologies International Inc., or
OpusOne Technologies, which has developed several proprietary
enterprise software related applications for use in human resources,
payroll administration, attendance tracking and financial accounting;
    
    the recent purchase of IMI which provides supply chain
management solutions for complex retail, wholesale, consumer goods,
and distribution operations; 35




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
    
    the recent purchase of Pivotal, which provides a complete set
of highly flexible CRM applications; and
    
    the recent purchase of Executive Suite, a business intelligence
and analytics software product. Accordingly, we regard the protection of our trademarks, service marks,
copyrights, patents, domain names, trade dress and trade secrets as important
to our success. We protect our intellectual property rights by relying on a
combination of trademark, service mark, copyright, patent, trade dress and
trade secret laws and through the domain name dispute resolution system. We
also rely on contractual restrictions to protect our proprietary rights in
products, services and methodologies. We enter into confidentiality agreements and assignments of intellectual
property with our employees, consultants, resellers and sub-agents, and control
access to and distribution of our documentation, source code and other licensed
information. In spite of these precautions, it may be possible for such persons
to breach such precautions or controls or a third party to copy or otherwise
obtain and use our licensed services or technology without authorization, or to
develop and apply similar technology independently. In addition, effective
copyright, trademark, service mark and trade secret protection is very
expensive to maintain, and may be unavailable or limited. The global nature of
the markets in which we operate also makes it practically impossible to control
the ultimate destination of our goods and products. Protection may not be
available in every country in which our intellectual property and technology is
used. Furthermore, we must also protect our trademarks, patents and domain
names in an increasing number of jurisdictions, a process that is expensive and
may not be successful in every location. Policing the unauthorized use of our
licensed technology is difficult as are the steps necessary to prevent the
misappropriation or infringement of our licensed technology. In addition,
further litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others, which could result in substantial cost to us,
divert our resources and have a material adverse effect on our business,
results of operations and financial condition. We currently own, license, resell and distribute via sub-agents
intellectual property and technology from third parties. As we continue to
develop intellectual property and introduce new products and services that
require new technology, we anticipate that we may need to obtain licenses for
additional third party technology. We cannot provide assurance that these
existing and additional technology licenses will be or will continue to be
available to us on commercially reasonable terms, if at all. In addition, it is
possible that in the course of using new technology, we or our sub-agents may
inadvertently breach the technology rights of third parties and face liability
for our breach. Our inability to obtain these technology licenses or avoid
breaching third party technology rights could require us to obtain substitute
technologies of lower quality or performance standards or at greater cost which
could delay or compromise the introduction of new products and services, and
could materially and adversely affect our business and financial condition. We are subject to possible infringement claims, which could be time consuming
and costly to defend, divert managements attention and resources or cause
product shipment delays. We expect that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in our various
industry segments grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming and costly to defend, divert managements attention and resources,
cause product shipment delays or require chinadotcom to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us, if at all, and may require the
payment of substantial amounts of money. In the event of a successful product
infringement claim against us or our failure or inability to license 36




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the infringed or similar technology, our business, operating results and
financial condition could be materially adversely affected. We are exposed to product liability claims, which could be time consuming and
costly to defend, divert managements attention and could have a material
adverse effect on our business, operating results and financial condition. Our enterprise software license agreements with our customers typically
contain provisions designed to limit its exposure to potential product
liability claims. Any such claims, with or without merit, could be time
consuming and costly to defend and divert managements attention and resources.
Some of our subsidiaries carry insurance to protect against certain of these
claims. It is possible, however, that the limitation of liability provisions
contained in our license agreements may not be effective as a result of U.S. or
foreign laws or ordinances enacted in the future or because of judicial
decisions, and that liability insurance may not be available, or that coverage
for specific claims may be denied. Although we have not experienced any
material product liability claims to date, our sale and support of products may
entail the risk of such claims. A successful product liability claim brought
against us could have a material adverse effect on our business, operating
results and financial condition. Defects in our enterprise software products could increase our costs, adversely
affect our reputation, diminish demand for our products and hurt our operating
results. As a result of their complexity, our enterprise software products may
contain undetected errors or viruses. Errors in new products or product
enhancements might not be detected until after initiating commercial shipments,
which could result in additional costs, delays, possible damage to our
reputation and could cause diminished demand for our products. This could lead
to customer dissatisfaction and reduce the opportunity to renew maintenance or
sell new licenses. We rely on key personnel. In the event we lose the services of key employees,
it may be costly and time consuming for us to locate other personnel with the
required skills and experience. Our success depends on the continued efforts of our board members, our
senior management and our technical, marketing and sales personnel. These
persons may terminate their association or employment with us, or they may be
terminated by us, at any time. We do not maintain life insurance policies for
our key personnel. Loss of the services of key members of senior management or
experienced personnel in our key revenue producing businesses, or our inability
to attract or retain additional qualified board members, senior managers or
personnel in a timely manner, or health, family or other personal problems of
key personnel could have a material adverse effect on our business, financial
condition, results of operations and share price. The process of hiring employees with the combination of skills and
attributes required to implement our business strategy can be extremely
competitive and time-consuming. We compete for a limited number of qualified
individuals with more established companies with greater resources that offer
more attractive compensation or employment conditions. As a result, we may be
unable to retain or integrate existing personnel or identify and hire
additional qualified personnel. Furthermore, our success depends upon our
ability to retain or replace the members, particularly the independent members,
of our board of directors. We have relied on stock options to compensate our employees. In the event
employees do not consider their options as valuable compensation, we may need
to provide additional compensation at additional expense. We have granted stock options to many of our employees in lieu of
additional salary. Some of our employees may not consider their options to be
valuable compensation, and we may need to provide additional compensation, in
the form of additional salary, bonuses or equity, in an effort to retain those
existing employees. Our inability to retain our employees, particularly our
senior officers, and key sales, technical, marketing and 37




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other service personnel in our key revenue producing businesses could have
a material adverse effect on our business, financial condition, results of
operations and share price. Risks Relating to our Class A Common Shares Our share price could be adversely affected if our major strategic shareholders
materially change their holdings in our shares, particularly if the share
holdings are not disposed of in an orderly manner. As of April 1, 2004, Xinhua, through a wholly-owned subsidiary, owned
7,362,734 of our common shares, or approximately 7.3% of our total outstanding
share capital. As of April 1, 2004, Asia Pacific Online Limited, or APOL,
owned 18,789,528 of our common shares or approximately 18.1% of our total
outstanding share capital which includes shares to be acquired within 60 days.
APOL is owned by the spouse of Mr. Peter Yip, chinadotcoms chief executive
officer, and by a trust established for the benefit of Mr. Yips children.
There is no guarantee that Xinhua or APOL will continue to hold our shares
going forward for any length of time. If either Xinhua or APOL disposes, or if
our investors expect either Xinhua or APOL to dispose of, a substantial portion
of its holdings in chinadotcom at any time, it could adversely affect our share
price. For more information regarding the shareholdings of Xinhua and APOL, see
Item 7.A  Major Shareholders and Related Party Transactions. A small group of our existing shareholders controls a significant percentage of
our common shares, and their interests may differ from other shareholders. APOL has beneficial ownership of approximately 18.1% of our common shares.
In addition, based solely upon information derived from publicly available
information as of April 1, 2004, each of Xinhua, Capital Group International,
Inc. and Jayhawk Capital Management, L.L.C. has beneficial ownership of
approximately 7.3%, 4.0% and 1.8% of our common shares, respectively. Accordingly, these shareholders, particularly if they act together, will
have significant influence in determining the outcome of any corporate
transaction or other matter submitted to shareholders for approval, including:  
    
    mergers, consolidations and other business combinations which
under the law of the Cayman Islands requires the approval of at least
75% of the shares voting at the meeting;
    
    election or non-election of directors which under the law of
the Cayman Islands requires the approval of a simple majority of the shares voting at the meeting;
    
    removal of directors which under the law of the Cayman Islands
requires the approval of at least 66 2/3% of the shares voting at the
meeting; and
    
    amendments to chinadotcoms memorandum and articles of
association which under the laws of the Cayman Islands requires the
approval of at least 66 2/3% of the shares voting at the meeting. As a result, these shareholders, if they act together, may be able to
effectively prevent a merger, consolidation or other business combination,
elect or not elect directors, prevent removal of a director and prevent
amendments to our memorandum and articles of association. For more information regarding the shareholdings of Xinhua and APOL, see Item
7.A  Major Shareholders and Related Party Transactions. 38




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Our share price has been, and may continue to be, extremely volatile, which may
not be attractive to investors. The trading price of our common shares has been, and is likely to continue
to be, extremely volatile. During the period from July 12, 1999, the date we
completed our initial public offering, or IPO, to December 31, 2002, the
closing price of our shares ranged from US$1.86 to US$73.4375, adjusted for our
two stock splits. From January 1, 2003 to April 30, 2004, the closing price of
our shares ranged from a low of US$2.73 per share on March 11, 2003 to a high
of US$14.46 per share on July 14, 2003. There is no assurance that our share
price will not fall below its historic or yearly low. The trading price of our Class A common shares is subject to significant
volatility in response to, among other factors:  
    
    investor perceptions of our business, the market performance of
our peer companies in the Greater China portal and mobile application
business, and enterprise software businesses in general;
    
    our significant acquisitions, partnerships, joint ventures or capital commitments;
    
    trends and developments in all the markets in which we compete;
    
    variations in our operating results;
    
    our new product or service offerings;
    
    changes in our financial estimates by financial or industry analysts;
    
    technological innovations;
    
    litigation;
    
    changes in pricing made by us, our competitors or providers of alternative services;
    
    the depth and liquidity of the market for our shares; and
    
    general economic and other factors. In addition, the trading price of our common shares has experienced
extreme price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to our operating performance. Broad market,
political and industry factors may also decrease the price of our common
shares, regardless of our operating performance. Securities class-action
litigation and regulatory investigations often have been instituted against
companies following steep declines in the market price of their securities. In addition, the market price of our common shares may decline as a result
of our recent acquisitions of IMI and Pivotal, and our proposed acquisition of
Ross, for a number of reasons, including if:  
    
    we do not achieve the perceived benefits of the acquisitions as
rapidly or to the extent anticipated by our shareholders or financial
or industry analysts;
    
    the effect of the acquisitions on our financial results is not
consistent with the expectations of our shareholders or financial or
industry analysts; or
    
    significant shareholders following the acquisitions decide to
dispose of their shares because the results of the acquisitions are
not consistent with their expectations. 39




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We are currently the subject of a class action lawsuit with respect to our IPO
allocations which, if finally judicially determined against us, could cause us
to be liable for significant judgment awards. A class action lawsuit was filed in the United States District Court,
Southern District of New York on behalf of purchasers of our securities between
July 12, 1999 (the date of our IPO) and December 6, 2000, inclusive. The
complaint charges us and the underwriters in our IPO with violations of
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
complaint alleges that the prospectus used in our IPO was materially false and
misleading because it failed to disclose, among other things, that (i) the
underwriters had solicited and received excessive and undisclosed commissions
from certain investors, in exchange for which the underwriters allocated to
those investors material portions of the restricted numbers of our shares
issued in connection with the IPO; and (ii) the underwriters had entered into
agreements with customers whereby the underwriters agreed to allocate our
shares to those customers, in exchange for which the customers agreed to
purchase additional shares in the aftermarket at pre-determined prices. On June 26, 2003, the plaintiffs in the consolidated IPO class action
lawsuits currently pending against us and over 300 other issuers who went
public between 1998 and 2000, announced a proposed settlement with us and the
other issuer defendants. The proposed settlement provides that the insurers of
all settling issuers will guarantee that the plaintiffs recover US$1 billion
from non-settling defendants, including the investment banks that acted as
underwriters in those offerings. In the event that the plaintiffs do not
recover US$1 billion, the insurers for the settling issuers will make up the
difference. Under the proposed settlement, the maximum amount that could be
charged to our insurance policy in the event that the plaintiffs recovered
nothing from the investment banks would be approximately US$3.9 million. We
believe that we have sufficient insurance coverage to cover the maximum amount
that we may be responsible for under the proposed settlement. The independent
members of our board of directors approved the proposed settlement at a meeting
held in June 2003. It is possible, however, that the parties may not reach
agreement on the final settlement documents or that the federal district court
may not approve the settlement in whole or in part, in which event litigation
could continue, and we could be liable for significant judgment awards against
us if a final judgment is rendered against us. No provision has been made for
any expenses that might arise as a result of the class action lawsuits. There can also be no assurance that we will not be subjected to additional
litigation of a similar form or type in the future. These class action
lawsuits and any future litigation or investigations, if initiated against us
would result in substantial costs and a diversion of its managements attention
and resources and could have a material adverse affect on our business, results
of operation, financial condition and share price. We may incur significant costs to avoid being considered an investment company
under the Investment Company Act of 1940. We may incur significant costs and management time to avoid investment
company status under the Investment Company Act of 1940. Based upon an analysis
of our assets as at December 31, 2003 and income for the year 2003 and the
manner in which we intend to operate our business, we do not believe we will be
considered an investment company. The determination of whether we will be an
investment company will be based primarily upon the composition and value of
our assets, which are subject to change, particularly when market conditions
are volatile. As a result, we could inadvertently become an investment company
in the future. It is not feasible for us to be regulated as an investment
company because application of Investment Company Act regulations are
inconsistent with our strategy of actively managing, operating and promoting
collaboration among our businesses and network of strategic partners. 40




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We are classified as a passive foreign investment company, or PFIC which will
subject our U.S. investors to adverse tax rules. Based upon an analysis of our assets as at December 31, 2003 and income
for the year 2003, during 2003, we were a PFIC for United States federal income
tax purposes. We have substantial passive assets in the form of cash and cash
equivalents and treasury instruments, and can provide no assurance that we will
not continue to be classified as a PFIC for 2004 or any future tax year. The
determination of whether we would continue to be a PFIC would be principally
based upon:  
    
    the composition of our assets, including goodwill, the amount
of which will depend, in part, on our total net assets and the market
value of our Class A common shares, which is subject to change; and
    
    the amount and nature of our income from time to time. We have limited control over these variables. To the extent we do have
control over these variables, we may take steps to reduce the material and
adverse effect that our PFIC classification may have on our share price. Since we are a PFIC, U.S. investors will be subject to adverse United
States federal income tax consequences. For further discussion regarding our
status as a PFIC, see Item 10.E Additional Information  Taxation  Tax
Consequences of U.S. Holders  Passive Foreign Investment Company Status. U.S.
investors are strongly urged to consult their own tax advisors regarding the
application of the PFIC rules to their particular circumstances. Substantial amounts of our common shares are eligible for future sale, which
could adversely affect the market price of our shares. Sales of substantial amounts of our Class A common shares in the public
market could adversely affect the market price for our shares. As of March 15,
2004, we had 103,930,895 Class A common shares issued and outstanding,
substantially all of which may be sold pursuant to an effective registration
statement under the Securities Act or an applicable exemption from registration
thereunder, including Rule 144, which permits resales of securities subject to
limitations depending on the holding period of such securities. In addition, as we continue to issue and register shares to fulfill our
contractual and acquisition-related obligations, and as our employees and other
grantees have been or are granted additional options and warrants to purchase
our shares, additional shares will be available-for-sale in the public market.
We have also granted options to certain of our shareholders, directors and
officers to purchase our shares, the vesting of which options may be
accelerated upon an occurrence of a change-of-control event. As a result,
additional shares may be available-for-sale in the public market. The
availability or perceived availability of additional shares could have a
dilutive and negative impact on the market price of our shares. In the future, we also may issue additional shares, convertible notes or
warrants to purchase our shares, in connection with acquisitions and our
efforts to expand our business. Shareholders could face further dilution from
our future share issuances. Anti-takeover provisions in our charter documents may adversely affect the
rights of holders of our common shares Our memorandum and articles of association include provisions that could
limit the ability of others to acquire control of chinadotcom, modify our
structure or cause us to engage in change-of-control transactions. These
provisions could have the effect of depriving shareholders of an opportunity to
sell their shares at a 41




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premium over prevailing market prices by discouraging third parties from
seeking to obtain control of chinadotcom in a tender offer or similar
transaction. For example, our board of directors is divided into three classes, each
having a term of three years, with the term of one class expiring each year.
This provision would delay the replacement of a majority of our directors and
would make changes to the board of directors more difficult than if such
provision was not in place. In addition, our board of directors has the
authority, without further action by our shareholders, to issue up to 5,000,000
preferred shares in one or more series and to fix their designations, powers,
preferences, privileges, and relative participating, optional or special rights
and the qualifications, limitations or restrictions, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights associated with
our Class A common shares. Preferred shares could be issued quickly with terms
calculated to delay or prevent a change in control or make removal of
management more difficult. If our board of directors issues preferred shares,
the price of our Class A common shares may fall and the voting and other rights
of the holders of our Class A common shares may be adversely affected. Our shareholders may face difficulties in protecting their interests because we
are incorporated under Cayman Islands law. Our corporate affairs are governed by our memorandum and articles of
association, by the Companies Law and the common law of the Cayman Islands. The
rights of shareholders to take action against our directors, actions by
minority shareholders and the fiduciary responsibilities of our directors under
Cayman Islands law are to a large extent governed by the common law of the
Cayman Islands. The common law in the Cayman Islands is derived in part from
comparatively limited judicial precedent in the Cayman Islands and from English
common law, the decisions of whose courts are of persuasive authority but are
not binding on a court in the Cayman Islands. Cayman Islands law in this area
may conflict with jurisdictions in the United States. As a result, our public
shareholders, may face more difficulties in protecting their interests in the
face of actions against the management, directors or our controlling
shareholders than would shareholders of a corporation incorporated in a
jurisdiction in the United States. For instance a class action lawsuit may not
be available to our shareholders as a vehicle for litigating securities matters
against us in the Cayman Islands. In addition, shareholder derivative actions
may generally not be brought by a minority shareholder in the Cayman Islands. If you are not a registered shareholder and do not hold greater than 10,000
shares, you may not receive our proxy materials or other corporate
communications. chinadotcom is a Cayman Islands company and as such, we only need to
distribute our proxy materials to our registered shareholders. Our proxy
materials are delivered to all of our registered shareholders. We offer
electronic delivery of proxy materials to our registered shareholders, and we
mail proxy materials to each registered owner who has not opted to receive
materials electronically. You are a registered shareholder if you have an
account with our transfer agent, The Bank of New York, and if you hold a stock
certificate evidencing your ownership of our common shares. You are a
beneficial shareholder if a brokerage firm, bank trustee or other agent holds
your common shares. However, your name would not appear anywhere on our
records, but rather the name of the broker, bank or other nominee appears on
our records as retained by our transfer agent, The Bank of New York. Although
we only need to distribute our proxy materials to registered shareholders under
Cayman Islands law, we also distribute proxy materials to beneficial
shareholders who hold greater than 10,000 of our shares. In an effort to
maintain cost effectiveness, we have, and will continue to, mail the proxy
materials to those beneficial shareholders who hold greater than 10,000 of our
shares. If you are not a registered shareholder and do not hold greater than
10,000 of our shares, you may not receive our proxy materials or other
corporate communications. Therefore, if you are a beneficial shareholder and
want to ensure that you do receive proxy materials, you are urged to become a
registered owner. If you have questions on how to do so, we encourage you to
contact your broker or bank to find out how to do so and you may also contact
us. 42




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There is uncertainty as to our shareholders ability to enforce civil
liabilities in Australia, the Cayman Islands, Hong Kong, South Korea, the PRC
and Singapore. We are a Cayman Islands company and a substantial majority of our assets
are located outside the United States. A substantial portion of our current
operations is conducted in Australia, Hong Kong, South Korea, the PRC and
Singapore. In addition, a majority of our directors and officers are nationals
and/or residents of countries other than the United States. All or a
substantial portion of the assets of these persons are located outside the
United States. As a result, it may be difficult for you to effect service of
process within the United States upon these persons. In addition, there is
uncertainty as to whether the courts of Australia, the Cayman Islands, Hong
Kong, South Korea, the PRC, Singapore and other jurisdictions would recognize
or enforce judgments of United States courts obtained against us or such
persons predicated upon the civil liability provisions of the securities laws
of the United States or any state thereof, or be competent to hear original
actions brought in Australia, the Cayman Islands, Hong Kong, South Korea, the
PRC, Singapore or other jurisdictions against us or such persons predicated
upon the securities laws of the United States or any of its states. Risks Relating to the Greater China and Asian Software, Consulting, Mobile
Applications and Marketing Industries The industries in which we operate are intensely competitive and volatile,
which could cause us to experience lower valuations, greater difficulty in
obtaining funding, reduced liquidity, risks of consolidation and litigation. The Greater China and Asian technology and internet markets, encompassing
software, e-business consulting, mobile applications, internet portal and
marketing, are characterized by intense competition. These markets in North
America, Asia and elsewhere have experienced marked downturns resulting in,
among other things, lower valuations, greater difficulty in obtaining funding,
increased consolidation, reduced liquidity, litigation and other structural
problems. As a result, our competitors may be able to better position
themselves to compete as they further consolidate, change or mature. In addition, many of our existing competitors, as well as a number of
potential new competitors, have longer operating histories in each of our
target markets, greater name recognition, larger customer bases and greater
financial, technical and marketing resources when compared to us. Any of our
present or future competitors may provide products and services that provide
significant performance, price, creative or other advantages over those offered
by us. We can provide no assurance that we will be able to compete successfully
against our current or future competitors, particularly as markets continue to
consolidate, change or mature. Software competition.Our competition in the market for a broad range of
sophisticated enterprise software applications, including procurement,
collaborative planning, financial, manufacturing, distribution, supply chain
management, customer relationship management and human resource management is
varied and includes a combination of international and local software
providers. Our major competitors include:  
    
    enterprise solutions software companies targeting mid-market
companies, including Exact Corporation, Microsoft Corporation, Scala
Business Solutions NV, Systems Union Group Inc. and local providers
such as FlexSystem Holdings Ltd., Kingdee International Software
Group Company Limited and UFSoft;
    
    human resources and payroll solution providers, including
PeopleSoft, Inc., SAP AG, and various local providers in Greater
China, including Cityray Technology (China) Ltd. and UFSoft;
    
    process manufacturing enterprise resource planning providers,
including Peoplesoft and QAD, Inc.; 43




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
    
    large information technology consulting and outsourcing service
providers including Accenture Ltd., Cambridge Technology Partners
Inc., Electronic Data Systems Corporation, Infosys Technologies and
Wipro Ltd;
    
    customer relationship management providers including Onyx,
Sales Logics, Salesforce.com and Siebel Systems, Inc.;
    
    providers of business intelligence solutions including Business
Objects SA, Cognos, Inc. and Hyperion, Inc.; and
    
    providers of supply chain management solutions, including Aspen
Technologies, i2 Technologies, Inc., Manhattan Associates,
Manugistics Group, Inc. and MAPICS, Inc. Many of these companies are well funded with long operating histories of
profitable performance. They possess a number of tangible strengths and
advantages, including high quality client lists and high numbers of highly
qualified staff, complemented by extensive operating infrastructures. The
principal competitive factors in the market for enterprise software application
software include product reputation, product functionality, performance,
quality of customer support, size of installed base, financial stability,
hardware and software platforms supported, price, and timeliness of
installation. Software consulting services competition.Our competition for strategic
expertise, online marketing, technical solution delivery, and general business
consultancy problem solving skills include:  
    
    computer hardware and service vendors including Hewlett-Packard
Company and International Business Machines;
    
    Internet integrators and Web site design and development
companies including Delirium Cybertouch Corporation, Digitas, Inc.,
Dimension Data Holdings Limited and Sapient Corporation;
    
    large information technology consulting service providers
including Accenture Ltd., Cambridge Technology Partners Inc. and
Electronic Data Systems Corporation; and
    
    local service providers in an individual market. Many of these companies are well funded with long operating histories of
profitable performance. They possess a number of tangible strengths and
advantages including extensive client lists and large numbers of skilled staff,
complemented by well-established operating infrastructures. Our revenue streams
have been volatile and despite the extended market downturn, the competitive
threat has still not evaporated and it remains challenging in most markets.
This has resulted in continued price pressure and an intensive level of
competition in these markets. Outsourced software development and support services competition. In
February 2003, we acquired Praxa which is seeking to develop a China and
India-based outsourcing platform which can offer clients outsourced software
application development and support services. As our business evolves to place
greater emphasis on outsourced software development and support services, we
will face competition from many of the large Asia Pacific-based outsourcing
firms such as Infosys Technologies Ltd and Wipro Ltd. While these competitors
have traditionally focused on servicing the U.S. markets, due to lower demand
in the United States they have entered the English-speaking markets in Asia
(such as Australia, Singapore and Hong Kong) where we are developing our
business. Mobile applications and services competition.We are not the only company
providing value-added SMS and generating subscription revenues in China. We
anticipate that we will face increasing competition for subscribers, mobile
applications and content from companies such as: (1) Sina Corporation; (2)
Sohu.com Inc.; 44




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(3) NetEase.com Inc.; (4) Tom Online Inc.; (5) Tencent.com Technology
Limited; (6) Linktone Ltd.; and (7) Mtone Wireless Corporation, as well as a
number of smaller companies that serve Chinas SMS market. We expect
competitors are also seeking to develop or have already developed mobile
applications that are more sophisticated than SMS. Many of our current
competitors have more experience and longer operating histories in our target
markets than us, as well as greater name recognition, larger customer bases and
greater financial, technical and marketing resources. We may not be able to
compete successfully against our competitors. In addition, mobile operators,
including China Mobile or China Unicom, may seek to develop and launch services
that compete with our own. Moreover, these competitors may be more successful
in developing and implementing higher-margin value-added mobile services. Our
failure to remain competitive may cause us to lose our market share in the
mobile services and applications business and our profitability may suffer. Advertising and marketing competition.With respect to our strategy of
moving towards higher margin database marketing related services, we anticipate
that we will compete with companies that have developed high quality data sets
and related products and services, such as Axciom and The Dun & Bradstreet
Corporation. With respect to our online advertising strategy, we compete with a
variety of Internet advertising networks, including BMC Software, Inc. and
DoubleClick, Inc., for the sale of advertisements to our network of advertising
affiliates. In our overall advertising business, we also compete with content
aggregators, companies engaged in advertising sales networks, advertising
agencies and traditional advertising media including print, radio and
television. Portal competition.Our competition for user traffic, ease of use and
functionality include Chinese and/or English language based Web search and
retrieval companies, including AltaVista Co., Apple Daily, ChinaByte,
FindWhat.com, Google, Inc., HotBot, HotWired Ventures, Lycos, Inc.,
Mingpao.com, MSN, Netease.com, Inc., Netvigator.com, Overture Services, Inc.,
Shanghai Online, Sina Corporation, Sohu.com, Inc., Tom Online Inc. and Yahoo!,
Inc. We may also encounter increased competition from ISPs, Web site operators
and providers of Web browser software, including Microsoft Corporation or
Netscape Communications Corporation, that incorporate search and retrieval
features in their products. Our competitors may develop Web search, retrieval
services, freemail and community services that are equal or superior to those
we offer our users and may achieve greater market acceptance than our offerings
in the area of performance, ease of use and functionality. Merger and acquisition competition.The significant slowdown in capital
markets activity over the past three years has resulted in an increased trend
of mergers and acquisitions as a means for companies to expand and realize
value. Across the Asia-Pacific region, many of our competitors have greater
financial and other resources and brand name recognition when compared to us.
These competitors may limit our ability to effect strategic acquisitions or
combinations, particularly as our markets consolidate further through local and
regional mergers and acquisitions. If we cannot merge or combine with or
acquire strategically significant companies on reasonable terms, our ability to
compete in our markets may be compromised. Our growth within the broad PRC Internet market depends on the availability of
an adequate telecommunications infrastructure in the PRC by the PRC government.
In the event of any disruption or failure, we may have no means of accessing
alternative networks or services which would adversely affect our business. Unlike Taiwan and Hong Kong, where the telecommunications infrastructure
is comparable to U.S. standards and where private companies compete as ISPs,
the telecommunications infrastructure in the PRC is not as well developed. In
addition, access to the Internet in the PRC is accomplished primarily by means
of the governments backbone of separate national interconnecting networks that
connect with the international gateway to the Internet. This gateway is owned
and operated by the PRC government and is the only means for the domestic PRC
Internet network to connect to the international Internet network. Although
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exist in the PRC, almost all access to the Internet is accomplished
through ChinaNet, the PRCs primary commercial network, which is owned and
operated by the PRC government. We rely on this backbone and China Telecom to
provide data communications capacity primarily through local telecommunications
lines. As a result, we will continue to depend on the PRC government to
establish and maintain a reliable Internet infrastructure to reach a broader
base of Internet users in the PRC. We will have no means of accessing
alternative networks and services in the PRC, on a timely basis or at all, in
the event of any disruption or failure. There can be no assurance that the
Internet infrastructure in Greater China will support the demands associated
with continued growth. If the necessary infrastructure standards or protocols
or complementary products, services or facilities are not developed by the PRC
government, our business could be materially and adversely affected. Political, Economic and Regulatory Risks Increased Sino-U.S. political tension may make our company less attractive to
investors and clients and our Web sites more vulnerable to hacking and other
disruptions. The relationship between the United States and the PRC is subject to
sudden fluctuation and periodic tension. For example, relations may be
compromised if the U.S. becomes a more vocal advocate of Taiwan or proceeds to
sell certain military weapons and technology to Taiwan. Any weakening of
relations between the U.S. and the PRC could have a material adverse effect on
our business and could attract hacking or result in other disruptions to our
Web sites. Anti-U.S. or anti-PRC sentiment could make our company and our
shares less attractive since we are listed in the United States. In addition,
changes in political conditions in the PRC and changes in the state of
Sino-U.S. relations are difficult to predict and could adversely affect our
operations or cause the Greater China market to become less attractive to
investors and clients because of our relationship with Xinhua and because we
operate in the PRC. The economic climate in Asia is volatile and vulnerable, which has affected and
may continue to affect, our business through declining spending levels by
customers, deferred or uncollectible accounts receivable, and restricted
ability to access lines of credit. Over the last decade, many countries in Asia experienced significant
economic downturns and related difficulties. As a result of the decline in the
value of the regions currencies, many Asian governments and companies had
difficulties servicing foreign currency-denominated debt and many corporate
borrowers defaulted on their payments. As the economic crisis spread across the
region, governments raised interest rates to defend their weakening currencies,
which adversely impacted domestic growth rates. In addition, liquidity was
substantially reduced as foreign investors curtailed investments in the region
and domestic banks restricted additional lending activity. The currency
fluctuations, as well as higher interest rates and other factors, have
materially and adversely affected the economies of a number of countries in
Asia, many of which are still recovering or have yet to recover. Economic developments in countries outside Asia could also materially and
adversely affect the Asian markets and our business, results of operations and
financial condition. For example, the recent volatility of the U.S. stock
market and the interest rate environment, the downturn in the high-tech sector,
and the slowdown of the U.S. economy have had a negative impact on Asian
markets. A further reduction in exports and a further decrease in direct
foreign investment could reduce demand for our services, especially in those
countries heavily dependent on technology export sales from where we derive
significant revenue. The economic crisis and its effect on the Asian economies has had and may
continue to have an adverse impact on our business in the following respects:  
    
    spending by companies in Asia for enterprise software products
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
    
    spending levels by both Asian and international companies for
advertising in the Asian markets may continue to decline;
    
    payments on our accounts receivable may be deferred and may
become more difficult to collect or become uncollectable; and
    
    our ability to access lines of credit or other financing may be
restricted. Any recurrence of SARS or another widespread public health problem, could
adversely affect our business and results of operations. A renewed outbreak of SARS or another widespread public health problem in
China could have a negative effect on our China operations. Our China
operations may be impacted by a number of health-related factors, including the
following:  
    
    quarantines or closures of some of our offices which would severely disrupt our operations,
    
    the sickness or death of key officers and employees, and
    
    a general slowdown in the Chinese economy. Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect our business and results of operations. There are economic risks associated with doing business in the countries in
which we primarily operate which could adversely affect our business. PRC. A significant part of our current revenues are, and a significant
part of our future revenues are expected to be, derived from the PRC market. The PRC economy differs from the economies of most developed countries in
many respects, including:  
    
    amount of government involvement;
    
    level of development;
    
    growth rate;
    
    control of foreign exchange; and
    
    allocation of resources. While the PRC economy has experienced significant growth in the past
twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. Some of these
measures benefit the overall PRC economy, but may also have a negative effect
on us. For example, our financial condition and results of operations may be
adversely affected by government control over capital investments or changes in
tax regulations that are applicable to us. The PRC economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years, the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound 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
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development by imposing industrial policies. It also exercises significant
control over PRC 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. Hong Kong. A significant part of our facilities and operations are
currently located in Hong Kong. Hong Kong is a Special Administrative Region of
the PRC with its own government and legislature. Although Hong Kong enjoys a
high degree of autonomy from the PRC under the principle of one country, two
systems, we can give no assurance that Hong Kong will continue to enjoy
autonomy from the PRC. PRC regulation of content distributed on the Internet may adversely affect our
business. The PRC has enacted regulations governing Internet access and the
distribution of news and other information. The MII has published implementing
regulations that subject online information providers to potential liability
for content included on their portals and the actions of subscribers and others
using their systems, including liability for violation of the PRC laws
prohibiting the distribution of content deemed to be socially destabilizing.
Because many PRC laws, regulations and legal requirements with regard to the
Internet are relatively new and untested, their interpretation and enforcement
of what is deemed to be socially destabilizing by PRC authorities may involve
significant uncertainty. Under the PRCs regulations on telecommunications and Internet information
services, Internet information service providers are prohibited from producing,
duplicating, releasing or distributing any information which falls within one
or more of the nine stipulated categories of undesirable content. These
categories cover any information which:  
    
    contravenes the basic principles enshrined in the PRC Constitution;
    
    endangers the security or unity of the State;
    
    undermines the States religious policies;
    
    undermines public order or social stability; or
    
    contains obscene, pornographic, violent or other illegal
content or information otherwise prohibited by law. In addition, the PRC legal system is a civil law system based on written
statutes. Unlike common law systems, it is a system in which decided legal
cases have little precedential value. As a result, it is difficult to determine
the type of content that may result in liability. We cannot predict the effect
of further developments in the PRC legal system, particularly with regard to
the Internet and the dissemination of news content, including the creation of
new laws, changes to existing laws or the interpretation or enforcement
thereof, or the pre-emption of local rules and regulations by national laws. Violations or perceived violations of PRC laws arising from information
displayed, retrieved from or linked to our portals could result in significant
penalties, including a temporary or permanent cessation of our business in the
PRC. PRC government agencies have announced restrictions on the transmission of
state secrets through the Internet. State secrets have been broadly interpreted
by PRC governmental authorities in the past. We may be liable under these
pronouncements for content and materials posted or transmitted by users on our
message boards, virtual communities, chat rooms or e-mails. If the PRC
government were to take any action to limit or eliminate the distribution of
information through our portal network or to limit or regulate any current or
future applications available to users on our portal network, this action could
have a material adverse effect on our business, financial condition and results
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A change in currency exchange rates could increase our costs relative to our
revenues thereby potentially adversely affecting our financial condition,
results of operations and increasing market risk. Substantially all of our revenues, expenses and liabilities are
denominated in renminbi, Hong Kong dollars, South Korean won, U.S. dollars,
Euros, Canadian dollars, Swedish Kronas and Australian dollars. We also
generate revenues, expenses and liabilities in other currencies such as
Singapore dollars, British pounds and New Taiwan dollars. However, our
quarterly and annual financial results are reported in U.S. dollars. In the
future, we may also conduct business in additional foreign countries and
generate revenues, expenses and liabilities in other foreign currencies. As a
result, we are subject to the effects of exchange rate fluctuations with
respect to any of these currencies and the related interest rate fluctuations.
We have not entered into agreements or purchase instruments to hedge our
exchange rate risks although we may do so in the future. Restrictions on currency exchange in the PRC may limit our ability to utilize
our revenues effectively to fund business activities outside the PRC, which
could result in increased costs for capital. Although PRC government policies were introduced in 1996 to allow greater
convertibility of the renminbi, significant restrictions still remain. We can
provide no assurance that the PRC regulatory authorities will not impose
greater restrictions on the convertibility of the renminbi. Because a
significant amount of our future revenues may be in the form of renminbi, any
future restrictions on currency exchanges may limit our ability to utilize
revenue generated in renminbi to fund our business activities outside the PRC. 
 ITEM 4. INFORMATION ON THE COMPANY A. History and Development of the Company We were incorporated in June 1997 as China Information Infrastructure
Limited, a company limited by shares under the Companies Law of the Cayman
Islands. Our principal executive offices are located at 34/F Citicorp Centre,
18 Whitfield Road, Causeway Bay, Hong Kong. Our contact telephone number in
Hong Kong is (852) 2893-8200 and in the United States is (212) 661-2160. We
have a website that you may access at http://www.corp.china.com/. Information
contained on our website does not constitute part of this Annual Report. We were organized as a wholly-owned subsidiary of CIC Holding Limited, or
CIC, which was incorporated in July 1996. CIC established chinadotcom to
operate CICs Internet portal and related businesses. Subsequent to the
incorporation of chinadotcom, the board of directors of CIC authorized the
transfer of all material contracts that were relevant to the business
operations of chinadotcom from CIC and CIC-HK to chinadotcom, as well as CICs
equity and beneficial interests in the following subsidiaries:  
    
    The Connection Group (BVI) Limited, also known as The Web
Connection and rebranded Ion Global (BVI) Ltd. in April 2001, is a
British Virgin Islands company that serves as the holding company for
our e-business Solutions subsidiaries;
    
    CIC (Shanghai) Company Limited, a PRC company that engages in
Web-based advertising sales in the PRC and serves as the holding
company for our other operations in the PRC; and
    
    China.com Corporation Limited, a Hong Kong company. The aggregate value of the assets transferred to chinadotcom was recorded
at a historical cost of US$12.7 million. In June 1999, CIC distributed its entire interest in chinadotcom to CICs
shareholders. The transaction involved the distribution of a total of
46,975,972 Class A common shares to CICs shareholders on a one-for-one 49




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basis with respect to each issued and outstanding share of CICs capital
stock at the time of the distribution. Upon completion of that transaction, CIC
ceased to have any ownership interest in chinadotcom. APOL and a wholly-owned
subsidiary of Xinhua provided a mutual right of first refusal to buy the other
partys shares of chinadotcom owned as of that time in the event either party
sought to dispose of its chinadotcom shareholdings. Additionally, APOL received
rights to place shares of chinadotcom owned by the Xinhua subsidiary to
prospective buyers on behalf of the Xinhua subsidiary in exchange for a
commission. New World Infrastructure Limited also provided a right of first
refusal to a wholly-owned subsidiary of Xinhua to buy its shares of chinadotcom
in the event New World Infrastructure Limited sought to dispose of its
shareholdings in chinadotcom. In July 1999, we completed our IPO of the equivalent of 19,320,000 Class A
common shares on the Nasdaq National Market at the equivalent of a public
offering price of US$5.00 per share on a stock split adjusted basis. All of the
shares registered were sold and net proceeds from the IPO totaled US$85.6
million. On December 6, 1999, our shareholders approved a two-for-one share split
that became effective on December 13, 1999 and split the par value of our
shares to US$0.0005 per share. In January 2000, we completed a second public offering of the equivalent
of 9,952,884 Class A common shares on the Nasdaq National Market at the
equivalent of a public offering price equal to US$42.50 per share on a stock
split adjusted basis. Of the 9,952,884 Class A common shares sold, 2,325,000
shares were offered by certain of our shareholders. The selling shareholders
received an aggregate of US$94.1 million in net proceeds for their shares. All
of the shares registered were sold and net proceeds from the offering to
chinadotcom totaled US$303.9 million. In March 2000, we listed our then wholly-owned subsidiary hongkong.com on
the Growth Enterprise Market, or GEM, of the Hong Kong Stock Exchange and
received net proceeds of approximately US$168.5 million for selling
approximately 16% of hongkong.com. We currently continue to own approximately
81.3% of hongkong.com. In April 2000, our shareholders approved the change of our company name
from China.com Corporation to chinadotcom corporation. On April 28, 2000, our
shareholders approved a further two-for-one share split that became effective
as of May 8, 2000 and split the par value of our shares to US$0.00025 per
share. Our total capital expenditures amounted to US$8.3 million and US$5.5
million and US$1.6 million in fiscal 2001, 2002 and 2003, respectively. The
primary capital expenditure in each of those years was the purchase of
computers, servers and network equipment, and other items related to the
expansion of our business network across the Asia Pacific, the United States
and the United Kingdom. We have recorded an operating loss in every year since our inception in
June 1997 until fiscal 2003. In fiscal 2003, we recorded net income of US$15.5
million. We have funded our operations and capital expenditures principally
through funds raised from our shareholders, including private rounds of
financing prior to our IPO in July 1999 and a second public offering in January
2000, and interest income derived from those funds. Acquisitions We
spent approximately US$5.3 million and US$48.3 million
(comprising of US$45.4 million in cash and US$2.9 million
in Chinadotcom shares) in connection
with strategic acquisitions and investments for each of the two years ended
December 31, 2002 and 2003, respectively. The following is a summary of our
material and strategic acquisitions and investments completed since January 1,
2001 which includes those for which we paid or committed US$5.0 million or more
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Acquisition,Acquisition or partner
    
    payment orcompany
    
    partnership date
    
    Acquired or partner companys activitiesURLs from CIC
    
    Via tranches during
October 2001 and
February 2002
    
    We acquired from CIC the three URLs,
www.china.com, www.hongkong.com and
www.taiwan.com, and the related
intellectual property rights.Layabo Pty. Limited
    
    March 2002
    
    We acquired Layabo Pty. Limited (now
renamed Mezzo Business Databases Pty
Limited), an Australian database
marketing business and owner of the
trademark IncNet. With the acquisition
of Layabo Pty. Limited and the prior
acquisition of RNR International
Marketing Group (Australia) Pty Limited
in 2000, we are consolidating our
marketing business in Australia under
the MEZZO brand.OpusOne Technologies
International Inc.
    
    March 2002 and
May 2003
    
    We acquired OpusOne Technologies, the
parent of Platinum China Holdings,
Inc., a developer and service provider
of business management software
solutions for state enterprises and
multi-national corporations in Greater
China.Praxa Limited
    
    February 2003
    
    We completed the acquisition of Praxa,
a leading Australian information
technology professional services
organization with a 21-year operating
history. The acquisition was completed
for a purchase price of up to A$11.0
million (approximately US$6.4 million),
subject to clawback provisions based on
future performance.Newpalm (China)
Information Technology
Co., Ltd.
    
    April 2003
    
    We completed the acquisition of the
parent of Newpalm, a leading short
messaging service mobile software
platform developer and application
service provider in China, through our
81.3% owned subsidiary, hongkong.com.
Consideration was payable in
installments. The first installment of
US$14.0 million was paid in 2003 and
the second installment of US$41.0
million was paid in February 2004.PK Information Systems
    
    August 2003
    
    We acquired PK Information Systems, an
established IT services business in
Australia which has specialized
capabilities in the areas of .Net
application development and business
intelligence solutions, with clients
mainly in the New South Wales state
government sector.Ascent Computing Group, Inc
    
    September 2003
    
    We acquired all the assets and business
of Ascent Computing Group which
provides applications and system
outsourcing services.Industri-Matematik
International Corp.
    
    September 2003
    
    We acquired a 51% stake in the holding
company of IMI, an international
provider of software to the supply
chain management sector principally
across Europe and the United States.
The acquisition of the controlling
stake in IMI was made through the
formation of a joint venture between
chinadotcoms CDC Software unit, which
holds a 51% interest, and Symphony
Technology Group, a Palo Alto,
California-based venture capital
company which holds the remaining 49%
interest. In November 2003, Symphony
agreed to waive their right to
dividends and provide us with a
liquidation preference for a period of
two years. Accordingly, we include in
our income 100% of IMIs financial
results.
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Acquisition,Acquisition or partner
    
    payment orcompany
    
    partnership date
    
    Acquired or partner companys activitiesExecutive Suite Software
    
    October 2003
    
    We acquired the intellectual property
rights for the Executive Suite business
intelligence software from CIP-Global
ApS, a Danish software company in
liquidation. Executive Suite is a
fully integrated financial management
application based on Microsoft
technology which delivers budgeting,
planning, forecasting, consolidation,
reporting and analysis to a broad
spectrum of customers.Pivotal Corporation
    
    February 2004
    
    We acquired all the outstanding shares
of Pivotal in exchange for a
combination of cash and shares.
Pivotal is a leading international CRM
company that provides a complete set of
highly flexible CRM applications and
implementation services for mid-sized
enterprises, with over 1,700 clients
worldwide.Go2Joy
    
    April 2004
    
    In April, 2004, chinadotcom acquired
Go2Joy, a leading mobile applications
and services provider in the PRC with
established partnerships with media
companies in the PRC. Go2Joy also
offers a unique mobile payment service
through an exclusive partnership with
the official mobile payment platform
authorized by China Mobile to handle
third party collections of non-mobile
related services. In connection with
the acquisition, chinadotcom made an
initial payment of US$9.6 million in
April 2004, with remaining
consideration, not to exceed US$50.4
million, to be paid in two installments
in early 2005 and 2006.Beijing 17game Network
Technology Co., Ltd.
    
    Pending
    
    On February 12, 2004, chinadotcom,
through its 81.3% owned subsidiary,
hongkong.com, entered into a secured
convertible loan agreement with Beijing
17game Network Technology Co., Ltd., a
Beijing based online games company. The
convertible loan from hongkong.com to
17game, of up to US$3.2 million can be
drawn down by 17game in two stages. The
first draw-down of US$1.2 million
occurred upon closing the transaction.
The second draw-down of US$2.0 million
will occur upon satisfaction of certain
conditions for hongkong.coms benefit.
Upon the second draw-down, the loan
will be automatically converted into
shares of 17game, representing an
ownership interest of 28.6%.
hongkong.com will then have an option
to acquire the remaining interest based
on an earn-out formula, with total
consideration not to exceed US$50
million. Upon hongkong.com achieving
majority ownership, 17game will have an
option to put their then minority
shareholding to hongkong.com based on
the same earn-out formula.Ross Systems, Inc.
    
    Pending
    
    We entered into a merger agreement with
Ross in September 2003 which
contemplates our acquisition of all the
outstanding shares of Ross in exchange
for a combination of cash and shares.
 Divestitures Our principal divestiture in 2000 was our sale of 16% of hongkong.com in
its initial public offering on GEM, resulting in proceeds of US$168.5 million
and a one time gain of US$140.0 million. We also disposed of 20% of our then
wholly-owned subsidiary, Pacific Connection Limited in exchange for shares of
the purchaser, e2Capital (Holdings) Limited, worth US$3.7 million. Finally in
2000, we sold 99.9% of our then wholly-owned subsidiary, 24/7 Media Asia
Limited, for which we received shares of its purchaser, 24/7 Media Inc., with a
value of US$10.8 million. We did not make any principal divestitures in 2001.
In 2002, the following chinadotcom subsidiaries either ceased operations, were
liquidated or were disposed of, which resulted in a gain of approximately
US$1.0 million: 24/7 Media (Singapore) Pte Ltd, Ion Global (Taiwan) Ltd, Ion
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(Australia) Pty Ltd, Shanghai Full-Time Internet Corporation, MEZZO
Marketing (Taiwan) Ltd, Pandora Interactive Studio Pte Ltd and Travellerzone
Limited. In 2003, various of our subsidiaries either ceased operations, were
liquidated or were disposed of, which resulted in a gain of approximately
US$2.0 million. The principal divestitures among those completed in 2003 were
e2e Business Solutions Limited, Ion Global (Beijing) Limited, Ion Global
(Japan) Inc., Ion Global (Oregon), Inc. (formerly known as Tkai, Inc.),
Netville Co. Ltd., and Wealth Corporation Ltd. B. Business Overview We are a leading provider of enterprise software and solutions,
value-added mobile services and applications and marketing and advertising
services. We offer the following services for companies throughout Greater
China and Asia, North America, the United Kingdom and Europe:  
    
    software products and services, including implementation and
development of packaged software for use in enterprise resource
planning targeting mid-market manufacturers;
    
    value-added mobile services and applications, including
offering SMS to mobile subscribers in China and providing mobile
development and technology services in Korea for leading telecom
network operators, mobile handset manufacturers and mobile
application and content providers;
    
    technology services and outsourcing, including offering
economical, high-quality software development services to our
enterprise software customer base, utilizing programmers located
principally in China and India; and
    
    marketing and advertising services, including developing
targeted advertising campaigns by utilizing information gathered from
our proprietary databases. Enterprise resource planning involves the technique of supporting and
automating the processes of an organization. Enterprise software attempts to
achieve company-wide integration of business and technical information across
multiple divisions and organizational boundaries, such as finance,
manufacturing, logistics, human resources and sales, utilizing common databases
and programs that share data real time across multiple business functions. Our
enterprise software business focuses on key industry groups, including
manufacturing for export, finance and travel, and in key business areas,
including supply chain management, human resource and payroll administration
and customer relationship management. We intend to leverage our expertise in
our core business areas through alliances and partnerships to help drive
innovative client solutions. We currently have operations in more than 14
markets internationally with over 1,400 employees. In connection with our strategy to increase our high margin revenue base
in the software services and products area, we have formed a separate wholly
owned software unit, CDC Software. CDC Software is focused on building our
intellectual property asset base, establishing partnerships with software
vendors and broadening overall software product offerings in the areas of
enterprise solutions and integration. Our management may pursue CDC Softwares
strategy through acquisitions, strategic partnerships, joint ventures,
consolidation of our software assets and restructurings or combinations of the
foregoing approaches. We own 51% of IMI and recently acquired 100% of Pivotal.
IMI is an established provider of software to the supply chain management
sector principally servicing customer packaged goods manufacturers and
suppliers, retail stores and wholesale distributors across Europe and the
United States. Pivotal is an international customer relationship management
company that provides a complete set of highly flexible customer relationship
management applications and implementation services for mid-sized enterprises,
with over 1,700 customers worldwide. In addition, we have entered into a merger
agreement with Ross, which we anticipate to close in the second quarter of 2004
for total consideration of approximately US$68.1 million in the form of cash
and our Class A Common Shares. Ross is a software company that provides
enterprise software solutions to manufacturers with a focus on the food and
beverage, life sciences, chemicals, metals and natural products industries,
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Through chinadotcom Mobile Interactive Corporation, or CDC Mobile, a newly
formed wholly owned subsidiary, we provide mobile services and applications,
mobile technology consulting, and advertising and interactive media services in
Asia. Value-added mobile services have increased in popularity in China in
recent years. The most popular of these services is SMS which allows
subscribers to send short messages and access various products and services for
delivery to their mobile handsets on demand. In April 2003, CDC Mobiles 81.3%
owned subsidiary, hongkong.com, acquired Newpalm, a leading SMS provider based
in Beijing, China, to deliver our mobile services and products in China.
Newpalm has access to the large mobile subscriber base in China through the two
mobile operators, China Mobile and China Unicom. As of December 31, 2003,
Newpalm had 5.5 million subscriptions and generated revenues of US$16.9 million
for the year then ended. CDC Mobile intends to utilize its industry knowledge
and international experience providing mobile technology consulting and
development services in Korea for Korean leading telecom network operators to
enhance our mobile services and applications offerings in China. Through our wholly owned outsourcing subsidiary, CDC Outsourcing, we
provide customers in countries such as the United Kingdom, the United States
and Australia with elements of workflow, such as client and project management
services using technologies and applications sourced from our low-cost
outsourcing centers in China or India. In February 2003, CDC Outsourcing
completed the acquisition of Praxa, an Australian information technology, or
IT, outsourcing and professional services organization focusing on the
development of relationships with large organizations that have a need for
outsourced application development, management and maintenance. Praxa has an
established client base consisting mainly of large enterprises and government
agencies in Australia. We anticipate that Praxa will provide a distribution
platform for our self-developed software products, as well as for the range of
software solutions that we currently deliver across the Asia-Pacific region. In
May 2003, CDC Outsourcing announced a 51%-49% joint venture with vMoksha
Technologies, or vMoksha, an offshore IT outsourcing company headquartered in
Bangalore, India. The intention of this joint venture is to provide a broad
range of outsourcing related services to major software vendors and enterprises
in the United States, Europe and Asia. CDC Outsourcing has sales and marketing
offices in the United States, the United Kingdom and Australia, while its
offshore development is located in India and China. We provide advertising and marketing services primarily through Mezzo
Business. Mezzo Business maintains multiple databases containing information
about companies and businesses in Australia and New Zealand, such as standard
and proprietary industry codes, sales revenue turnover, number of employees and
company contact details. Mezzo Business conducts direct marketing activities
for clients using information available from its database, such as
telemarketing campaigns conducted through an in-house call center, direct
mailing campaigns, and management of customer loyalty programs and campaigns.
We also provide database marketing services through Mezzo Interactive Pty
Limited, or Mezzo Interactive. Mezzo Interactive focuses on growing our
database marketing business in the areas of traditional direct marketing and
e-mail marketing utilizing data mining techniques, which involves a process of
analyzing significant amounts of data to uncover patterns and relationships.
Data mining has become an important part of customer relationship management as
a method to better understand customer behavior and preferences. Software and consulting services Overview Revenues from our software and consulting services business increased to
US$50.7 million in 2003 from US$15.5 million in 2002. As a percentage of total
revenues, revenues from our software and consulting services increased to 57%
of total revenues in 2003 from 35% of total revenues in 2002. 54




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Sales of IT products Revenues from our sales of IT products business increased to US$8.0
million in 2003 from US$1.3 million in 2002. As a percentage of total revenues,
revenues from our sales of IT products increased to 9% of total revenues in
2003 from 3% of total revenues in 2002. Our sales of IT products business consists of the distribution, sales, and
licensing of both our own proprietary enterprise resource planning software
products and third-party enterprise resource planning software products. In
addition, we provide our customers with professional services after the sale of
an enterprise software product, including consulting services, training and
post-contract support. Enterprise application software is designed to support and automate the
processes of an organization. Enterprise application software attempts to
achieve company-wide integration of business and technical information across
multiple divisions and organizational boundaries, such as finance,
manufacturing, logistics, human resources, marketing, sales and customer
service, utilizing common databases and programs that share data real time
across multiple business functions. Enterprise application software can be
further sub-categorized into more highly specialized processes an enterprise
must engage in, including the following:  
    
    Customer relationship management (CRM).CRM involves the
technique of establishing and maintaining a long-term business
relationship with customers by integrating information from the
entire enterprise to provide detailed profiles of customers which
allows all the links in the chain to have the information necessary
to provide services.
    
    Supply chain management (SCM).Supply chain management
involves the coordination of processes involved in producing,
shipping and distributing products to ensure that the correct amount
of product is in the correct locations at the right time and at the
lowest possible cost.
    
    Business intelligence (BI).Business intelligence involves
converting large volumes of data collected and stored by businesses
into meaningful information and multi-dimensional reports and
analyses for use in decision-making. Integrated with other
components of enterprise application software, BI enhances the
development of a business environment driven by performance
management.
    
    Enterprise Resource Planning (ERP).ERP includes:  
    
    Human resource management (HRM). Human resource
management involves processes to enable an organization to improve
business results and increase workforce performance by leveraging
technology and applications to manage and mobilize a unified,
global workforce. These processes seek to more efficiently
connect people, processes and systems, and align workforce
contribution with business objectives.
    
    Financial management (FM).Financial management involves
accounting and analysis applications that allow an organization to
obtain greater visibility into financial results and control over
expenditures, and provide guidance for better financial decisions. We are building a portfolio of enterprise software products which seeks to
provide our customers with a complete range of world-class applications no
matter what their enterprise needs. We currently offer products in each of the
CRM, SCM, BI, HRM and FM enterprise software markets, and we will continue to
seek to acquire additional software and technologies to complement the
capabilities which our products offer. We are targeting mid-sized enterprises and divisions of large businesses
as our principal customer base. We believe that the mid-enterprises market is
underserved, and represents a significant opportunity for us
because we believe that these customers would find appealing the ability
to contract with a single company which can offer a complete range of
enterprise software products to meet all of their enterprise software needs. 55




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We believe our large, global customer base is one of our competitive
strengths. With the completion of our recent acquisition of Pivotal, we have
added an additional 1,700 customers to our customer base which totals
approximately 2,200 accounts worldwide, and we expect to add on additional
1,000 customers from our pending acquisition of Ross. Our software and
consulting services clients include many of the worlds leading companies such
as ASIMCO, BMW South Korea, Bosch, Carrefour, Cathay Pacific, Disney, Emirate
Airlines, Guangzhou Baiyun Airport, HSBC, Hyandai Merchant Marine, Johnson &
Johnson, KT Freetel (Korea Telecoms wireless services arm), LOreal, LG
Insurance, Mercer Consulting, Microsoft China, Nanjing Bayer, Northwest
Airlines, Philips, Raybestos, Samsung Electronics, Shangri-La Hotels, Shell,
United Carrier China, Volvo, and Wells Fargo. Clients also include governmental
agencies such as the Hong Kong Housing Authority, the Australia Post, the
Brisbane City Council, the United Kingdom Department of Trade, and Industry and
the United Kingdom Department of Land Registry. While we have clients worldwide, one of our key target markets will be the
Greater China market. We believe that we can increase the rate of our revenue
growth by targeting the emerging market in Greater China for applications
software. We believe that the potential growth of the enterprise software and
consulting services market for mid-market manufacturing is significant in
Greater China. Enterprise application software Customer Relationship Management (CRM) Software. Our CRM software
products are principally offered by Pivotal. Pivotal is an international CRM
company that provides a complete set of highly flexible CRM applications and
implementation services for mid-sized enterprises, with over 1,700 customers
worldwide. We acquired Pivotal in February 2004 for US$35.9 million in cash
and 1.85 million Class A common shares with a value of US$20.7 million using
the value for chinadotcom shares in the transaction formula (the value of these
shares was US$21.4 million using the trading price of chinadotcom shares on the
day the acquisition was consummated). Pivotals CRM suite consists of five product suites that help companies
control the sales, marketing, service and partner processes core to their
businesses.  
    
    Pivotal Sales. Pivotal Sales provides critical customer
information, opportunity management tools, and best practices sales
methodologies for the enterprise sales force. It helps to enable
global sales organizations to sell collaboratively across multiple
regions, currencies and channels. With Pivotal Sales, organizations
can share information across sales teams, accurately forecast their
business, manage pipelines, automatically generate quotes and
proposals, and easily configure products and services that meet
specific customer needs.
    
    Pivotal Marketing.Pivotal Marketing is a comprehensive
marketing automation product designed for end-to-end management of
multi-channel campaigns and marketing processes. It reduces both the
cost and time to create smart, personalized campaigns and
significantly increases the ability to deliver better leads to the
right sales resources at the right time. Pivotal Marketing also
enables companies to optionally outsource their marketing automation
solution, reducing total-cost-of-ownership by eliminating the need to
invest in communications and hardware infrastructure.
    
    Pivotal Service. Pivotal Service provides customer service
professionals with a robust solution to efficiently capture, track,
manage, escalate, and resolve customer service or support requests.
Pivotal Service automates the capture, management and resolution of
customer service and support requests across multiple channels. It
integrates with sales and marketing functions to provide service
professionals with the tools and information they need to deliver
personalized service for improved customer satisfaction. 56




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
    
    Pivotal Interactive Selling. Pivotal Interactive Selling is a
comprehensive product suite that enables companies to deliver a
personalized online buying or selling experience for customers and
sales professionals. Pivotal Interactive Selling simplifies the
buying and selling experience for sophisticated products and services
with interactive needs analysis and intelligent guided-selling
services. Through Pivotal Interactive Selling, organizations increase
sales effectiveness across all channels via comprehensive needs
analysis, product cataloging, fixed and dynamic pricing, and
configuration capabilities; and
    
    Pivotal Partner Management.Pivotal Partner Management
empowers companies to more effectively manage their partner
relationships. Pivotal Partner Management helps our customers
partners to become collaborative members of their customers extended
business team to generate sales, deliver customer value, and keep
customers satisfied, while reducing the costs associated with
managing those partners. In addition, Pivotal provides industry-specific products aimed at the
financial services (capital markets, private banking, commercial banking and
asset management), healthcare insurance, real estate/construction, and life
sciences (medical device manufacturing) markets. Supply Chain Management (SCM) Software. Our SCM software products are
principally offered by IMI. IMI is an established international provider of
software to the supply chain management sector, principally across Europe and
the United States. We acquired our interest in IMI by acquiring 51% of IMIs
holding company, Cayman First Tier, in September 2003 in
exchange for US$25.0 million to subscribe for new shares in
Cayman First Tier and up to an aggregate of US$25.0 million in revolving loan
facilities to Cayman First Tier. Symphony, a Palo Alto, California based
venture capital company, holds the remaining 49% in Cayman First Tier. IMI develops, markets, and supports client/server and Internet
architectured application software that enables manufacturers, distributors,
wholesalers, retailers, logistics service providers, and e-businesses to more
effectively manage their supply chains. Supply chain management encompasses
the execution of multiple customer-focused order fulfillment processes,
including order management, pricing and promotion, handling, sourcing,
warehouse management, transportation management, service management, CRM, and
replenishment planning and coordination. The software products are designed to
meet the complex fulfillment and customer service needs of
distribution-intensive businesses. Vertical market solutions have been
designed for retailers, wholesalers and consumer goods manufacturers.  
    
    Solutions for retailers. IMIs retail solutions help retailers
(including grocery, specialty hard goods, and direct merchant
retailers) improve ordering, fulfillment, and customer service across
sales channels. The products are designed to provide full visibility
and control of distribution center and store inventory, as well as
managing orders from vendors, warehouses, stores, customers, and
consumers. They permit distribution centers and stores to maintain
and control product inventory and goods-in-transit, and to replenish
store shelves based on expected consumer demand. The control and
visibility of inventory helps retailers reduce out-of-stocks,
increase product availability at the shelf, improve response to
customer demand and better utilize store shelf capacity.
    
    Solutions for wholesalers. IMIs wholesaler solutions focus on
the grocery, specialty goods, and pharmaceutical and over-the-counter
drugs industries. The solutions contain advanced order management,
replenishment management, warehouse management, and collaborative
management components. It is designed to give the wholesaler a
logistics platform to enable very late customer orders, allow for
multi-channel distribution within the same customer order, lower
inventory handling and storage costs through managing cross-docking
and merge-in-transit strategies
throughout the logistics network, and support collaborative purchasing
operations by providing suppliers with time-phased forecasts and
replenishment schedules over the Internet. 57




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
    
    Solutions for consumer goods manufacturers. IMIs consumer
goods manufacturer solutions target distribution-intensive supply
chain operations and complement existing enterprise resource planning
and supply chain planning systems. The products are designed to
solve the problem of multi-channel integration through a
collaborative order management solution that can fulfill global
customer orders and deliver a single point of contact to customers. Business Intelligence (BI).Our BI software product, Executive Suite, is
offered through all of the companies within CDC Software, in combination with
their respective software offerings.  
    
    Executive Suite.Executive Suite is a fully integrated
financial management BI application providing budgeting and
forecasting, statutory consolidations, reporting and analysis to a
broad spectrum of customers. Executive Suite is based on
Microsoft.NET and Microsoft SQL technology which allows access via
web-based technology. Enterprise resource planning  Human Resource Management (HRM) and
Financial Management (FM) Software. Our HRM and FM software products are
principally offered by OpusOne Technologies. OpusOne Technologies is a
developer and service provider of business management software solutions for
state enterprises and multi-national corporations in Greater China. We
acquired a majority interest in OpusOne Technologies in March 2002, and
acquired the remaining interest in OpusOne Technologies that we did not
otherwise already own in May 2003. The total consideration payable will be
based upon a set multiple of average net earnings under US GAAP for the three
years from 2003 through 2005, inclusive, and is payable in cash and chinadotcom
common shares in installments during that period. OpusOnes products include the following:  
    
    PowerHRP. PowerHRP is used in human resources and payroll
administration to provide comprehensive data management functions for
the storing, calculating, reading and tracking of employee
information. Data management functions include comprehensive employee
information management, including employee personnel information,
payroll data, attendance, leave status, training, position, benefits
and other user definable information. PowerHRP also provides process
management functions, including recruiting, training, compensation
and benefits, and employee performance functionality. Decision
support tools are also available to assist in employee succession
planning and budgeting.
    
    PowerATS.PowerATS is an attendance tracking system which
provides functionality with respect to organizing working shifts,
administering temporary changes to shifts, tracking late arrivals,
early departures, absence, overtime and leave, tracking of meal
locations, times and number of meals, and administering salary
deductions.
    
    PowerESS.PowerESS is an Internet based employee self-service
application which provides employees and managers with self-service
functions for accessing and updating various human resources related
data, such as personal information, leave applications and approvals,
training applications and approvals, time sheets and pay slip
inquiries.
    
    PowerBooks. PowerBooks is a financial accounting application
which provides core financial accounting functionality, including
general ledger, accounts receivable, accounts payable, cash
management, project accounting and purchase and sales order.
PowerBooks is capable of maintaining multiple sets of books within
one company which may be used for dual US GAAP reporting, cash and
accrual accounting, budgeting and forecasts. The product is tailored
for the
China market, and includes functionality for monthly PRC statutory
reports and tracking value added taxes. PowerBooks is designed to
provide credit management reports, including aged receivables reports,
aged payable reports, and bank reconciliations. 58




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Distribution of third-party enterprise software products CDC Software has entered into master distributorship arrangements with a
number of software companies to distribute business applications to the Greater
China market, including arrangements with Vignette to distribute content
management and portal solutions, Best Software to distribute financial
accounting and process manufacturing applications and Ross to distribute
enterprise software applications to process manufacturers. CDC Software
provides the sales, marketing, support and localized infrastructure necessary
to enter into the master distributorship and value-added reseller arrangements. Consulting services We offer support and maintenance services to our software products through
our 51%-owned subsidiary, IMI. Revenues from our consulting services increased
to US$42.7 million in 2003 from US$14.2 million in 2002. As a percentage of
total revenues, revenues from our consulting services increased to 48% of total
revenues in 2003 from 32% of total revenues in 2002. We offer eBusiness solutions consulting services primarily through our
wholly-owned subsidiary, Ion Global. Ion Global (other than Ion Global Korea
which is engaged in providing mobile solutions) is engaged in planning,
architecting, and delivering e-business consulting services for both Fortune
500 multinational corporations and blue chip pan-Asian clients. We typically
assist our clients with the adoption of web-based technologies to help them
improve their CRM, enterprise application integration, and/or supply chain
management. We focus on helping clients deploy web-based initiatives to either
lower costs, increase sales, or increase efficiency. The industries with which
we have the most experience are financial services, travel and transportation,
government and consumer goods. Our Australian subsidiaries, Praxa and PK Information Systems, or PKIS,
which we acquired in 2003, provide information technology services in Australia
with specialized capabilities in the areas of .NET application development and
business intelligence solutions. Their clients include government agencies,
local corporates as well as multinational corporations. Outsourcing services Through the joint venture between CDC Outsourcing and vMoksha, we intend
to provide outsourcing related services to major software vendors and
enterprises in the United States, Europe and the Asia-Pacific region, including
information technology and applications services. In addition, with the
acquisition of Praxa, which specializes in the provision of information
technology products and services in the form of outsourcing, application
development and support, and system integration in Australia, we expect to
increase the number of potential clients for our low-cost PRC and India-based
outsourcing platform. Mobile services and applications Overview Revenue contributed by our mobile services and applications business
constituted US$16.9 million, or approximately 19% of our total revenues, in
2003. As this segment was first introduced in 2003, there is no comparable data
for 2002. Mobile services and applications include SMS, content downloads and
interactive services, such as chatting and mobile dating. Our mobile services
and applications business is operated through Newpalm, which we acquired
through our 81.3% owned subsidiary, hongkong.com in April 2003. Consideration
was payable in installments. The first installment of US$14.0 million was paid
in 2003 and the second installment of US$41.0 million was paid in February
2004. 59




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Newpalm currently offers a comprehensive suite of mobile data
applications, including dating, chatting, entertainment, information-related
content and community services to mobile subscribers in China. Newpalms SMS
and other mobile data services have experienced significant growth in both the
number of subscriptions and revenues since it began offering these services in
mid-2002. As of December 31, 2003, Newpalm had approximately 5.5 million
subscriptions for its services, representing a growth rate of approximately
139% from 2.3 million subscriptions as of December 31, 2002. We expect
Newpalms mobile services and applications business will continue to grow and
contribute materially to our revenues and income. China has the worlds
largest mobile subscriber base while its mobile penetration rate is relatively
low when compared to developed countries. On December 12, 2003, we announced that we intend to reorganize our mobile
and portal unit as a wholly-owned subsidiary, CDC Mobile, and register an
offering of CDC Mobiles American Depositary Shares under the Securities Act of
1933, as amended. The purpose of the intended offering is to fund the
operations of CDC Mobile following its reorganization as an independent company
holding our assets and businesses that provide mobile services and
applications, advertising and interactive media and Internet services including
Newpalm. As a selling shareholder, we may also receive proceeds from the
intended offering. While the offering is expected to commence in the first
half of 2004, subject to the completion of all applicable regulatory review and
market conditions, there is no assurance that it will be successfully
completed. We anticipate that Newpalm will be included within CDC Mobile. Products and services Newpalm offers over ten different SMS products and subscription packages,
with subscription fees ranging from RMB0.10 to RMB5.00 per SMS message or from
RMB5.00 to RMB12.00 per month. Newpalm has revenue sharing arrangements with
China Mobile and China Unicom under which Newpalm receives 85% to 88% of the
subscription fee collected from a mobile subscriber, with the balance being
retained by the mobile operators. In addition to our charges, the mobile
operators separately charge their subscribers RMB0.10 or RMB0.20 for every SMS
sent. These amounts are collected by the mobile operator and not shared with
us. Some of Newpalms more popular products and services include: Mobile Dating. Newpalms mobile dating service, X-City, is a
subscription-based community service that provides a dating and chatting
platform through which subscribers may meet and socialize or arrange to meet in
person by sending and receiving short messages. X-City users can select a
particular geographic location to meet friends and set criteria, including age,
gender, hobbies and qualifications, for the friends they would like to meet.
Newpalm may offer other value-added services at no additional charge with an
X-City subscription, including news and weather information, and ringtone,
picture and logo downloads to cross-sell its other mobile services. The monthly
subscription fee for X-City is RMB5.00. In conjunction with our www.china.com
portal, Newpalm launched X-City II in September 2003, an enhanced version of
X-City that combines Newpalms mobile platform with Internet portals. X-City II
allows subscribers to conduct chat sessions with online subscribers or mobile
subscribers. In addition, subscribers are able to record and upload video clips
and/or photos onto online websites, which enhances the communication among our
online and mobile subscribers. We recently offered a new service to our X-City
II subscribers in conjunction with the first official Miss China Pageant 2003.
X-City IIs subscribers were able to view photos and video clips of the
contestants on our www.china.com website. Newpalm charges a RMB8.00 monthly
subscription fee for X-City II. Since the launch of X-City in September 2002,
we believe X-City and X-City II have grown to be one of the most popular
mobile dating communities in China. X-City and X-City II accounted for
approximately 37.3% of Newpalms total revenues in 2003. Fortune Telling. We offer a subscription and on-demand service that
provides fortune telling and tips on ones luck for the day. Users enter their
birth dates and select fortune categories, such as relationships, general
fortune or career that they would like to inquire. User fees for fortune
telling consist of a monthly subscription 60




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fee of RMB5.00 for daily fortunes or
a fee of RMB0.20 for each fortune delivered on demand. Fortune telling
accounted for approximately 19.9% of Newpalms total revenues for 2003. Jokes. We offer jokes on both a subscription and on-demand basis. Users
can subscribe to a fixed number of jokes to be delivered each day, or they can
order on a per-joke basis, which is delivered on demand. Newpalm develops its
daily jokes internally or selects jokes submitted by its users. The
subscription fee for jokes consist of a monthly fee, depending on the number of
daily jokes actually delivered or a fee of RMB0.20 for each joke ordered on
demand. Jokes accounted for approximately 20.4% of Newpalms total revenues for
2003. Mobile Games. Newpalm offers mobile games to subscribers through
partnerships with third party game developers. Users can download these games
to their handsets and play them with their handsets repeatedly. User fees for
games are RMB5.00 to 9.00 per downloaded game. Mobile games accounted for less
than 2.2% of Newpalms total revenues for 2003. Information-Related Services. Newpalm offers current information, such as
stock quotes, news and local weather conditions to its subscribers on a
subscription and on-demand basis. Most of the information distributed from
Newpalms mobile platform is aggregated from its content partners through
revenue sharing arrangements. Newpalm users generally pay a fee of RMB0.20 per
message, while selected services, such as weather information, are available on
a monthly subscription basis at RMB6.00 per month. Information-related services
accounted for approximately 17% of Newpalms total revenues for 2003. Pictures and Ringtones. We provide ringtone, picture and logo downloads
through Yahoo!s portal and through our subscribers mobile handsets. The fee
ranges from RMB1.00 to RMB2.00 per download, depending on the type of content
downloaded. Pictures and ringtones accounted for less than 1.0% of Newpalms
total revenues for 2003. Lottery. In conjunction with provincial authorities in Heilongjiang,
Jiangxi and Hubei, Newpalm, through a 50-50 joint venture arrangement with
Shenzhen Shui Cai Company, offers lottery games that can be accessed through
mobile phones. Newpalms mobile authentication and security technologies
enable mobile phone users to enter wagers and receive prizes through their
handsets. Newpalm receives a user subscription fee of RMB5.00 per month from
each subscriber and shares 5% to 10% of the lottery revenue with the joint
venture. New SMS Products and Services. Newpalm has launched a China news SMS and
multi-media messaging service, or MMS, that provides news content from our
www.china.com portal for Newpalms subscribers. Developed in conjunction with
the www.china.com portal, Newpalm recently added a celebrity news channel
available to subscribers for RMB6.00 per month. We expect to continue to expand
our existing mobile data products and services by developing and integrating
new mobile data applications that we acquire, develop internally, or source
through our operations in other markets, including Korea. Newpalm is also offering limited wireless access protocol, or WAP,
services, although we believe such services will expand in future periods as
the base of WAP-enabled handsets continues to grow. Our WAP service offerings
are similar to our SMS service offerings, except that the WAP products are
delivered through our WAP platform in color graphics to handsets typically
equipped with bigger or color screens. Sales and Marketing. We focus our sales and marketing efforts on enhancing
our relationships with China Mobile and China Unicom and launching promotions
both through our portals and the general media.
Currently we have approximately 100 marketing personnel who are located in
Beijing, Nanjing, Shandong, Guangdong and Hangzhou and maintain our
relationships with Chinas mobile operators at the national and local
provincial level. Our primary sales and marketing initiatives in mobile
services and applications include promotional activities through mobile
operators, bundled access through partnerships with mobile operators and
handset manufacturers, direct marketing through consumer portals
www.hongkong.com and www.china.com, 61




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and general medial advertising in
traditional media, including point-of-purchase promotions, newspaper and
magazine advertisements, radio and TV advertisements. Mobile Solutions Ion Global Korea, our wholly-owned subsidiary, provides technology
consultancy and development services for a number of leading Korean companies
in the telecommunication industry. Ion Global Koreas customers include network
operators, mobile handset manufacturers and mobile application and content
providers in Korea. Ion Global Korea offers a broad suite of mobile technology
consulting and development services, such as hardware embedded development
services and mobile content interface development services that cater to the
CDMA network. Ion Global Korea has expertise in designing user interfaces and
graphic user interfaces which are considered critical to the success or failure
of a new mobile application. Ion Global Korea uses its expertise to provide
technology services that allow its customers to distribute mobile content
easily across a variety of mobile handsets and networks. In addition, Ion
Global Korea has developed mobile marketing applications for its customers that
enhance two-way interaction between mobile end-users and corporate advertisers. Recent initiatives Mobile payment services and interactive media services. In April 2004, we
acquired Go2joy, a China-based mobile applications and services provider which
offers, through a joint venture, a mobile payment service which enables users
to pay for products and services using their mobile phones, and have the
payments debited directly from their bank account. Go2joy has also partnered
with other media companies in China which are seeking to develop interactive
media services for television, including services to incorporate interactive
voice recognition technology in television programs run on Chinas national
state-owned television station. In addition, Go2joy currently offers
entertainment-related content to subscribers which use its interactive voice
recognition technologies. In connection with the acquisition, we made an
initial payment of US$9.6 million in April 2004, with remaining consideration,
not to exceed US$50.4 million, to be paid in two installments in early 2005 and
2006. Interactive games. In February 2004, our 81.3% owned subsidiary,
hongkong.com, made a strategic investment in Beijing 17game Network Technology
Co., Ltd., or 17game, a Beijing based online games company which has launched
and distributed several successful online games in the China market, including
Droiyan, which is one of the most popular games in the China market according
to an online game magazine in China. 17games distribution network in China
includes Internet cafes, software distributors, bookstores and department
stores. 17game is continuing to build its portfolio of online games. 17game
has licensed Travia, a leading online fantasy role-playing game in Korea, and
expects to launch the game in the China market in the second quarter of 2004.
In addition, 17game expects to launch a new online game, Yulgang, during 2004.
Under the terms of the strategic investment, hongkong.com has the option to
acquire a controlling interest in 17game with consideration to be paid over the
next two years based upon an earn-out formula. Advertising and marketing Revenues from our advertising and marketing business decreased to US$19.6
million in 2003 from US$26.7 million in 2002. As a percentage of total
revenues, revenues from our advertising and marketing business decreased to 22%
of total revenues in 2003 from 61% of total revenues in 2002. Approximately
US$11.0 million of the US$19.6 million of advertising and marketing
activities revenues in 2003 was generated from our operations in South Korea,
which have contracted significantly and which we believe will continue to
decline principally due to the expiry in April 2003 of our exclusive service
agreement with Daum Communications, a leading South Korean portal company, from
which we had generated a significant amount of our online advertising and
e-marketing services business. 62




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Other reasons for the decline in advertising and marketing activities
revenue between 2002 and 2003 are:  
    
    our decision to close some of the non-profitable subsidiaries
engaged in the advertising and marketing business; and
    
    difficult market conditions brought on by the outbreak of SARS
in early 2003. During 2002 and 2003, because of low margins, we significantly reduced our
operations involving online banner advertisement campaigns and online direct
mailing and sponsorships programs. These operations were ceased in each of
Australia, Hong Kong, Japan, the PRC, Singapore and Taiwan, and our operations
in South Korea have contracted significantly. We are seeking to re-orient our
advertising strategy away from online advertising and e-marketing services with
low margins, to higher margin database marketing related services used to
develop targeted campaigns for clients utilizing data mining techniques. Data
mining involves the process of analyzing significant amounts of data retained
in a database to uncover underlying patterns that may indicate trends or
relationships, and has become a more important part of CRM as a method to
better understand customer behavior and preferences. The uncovered
relationship can then be utilized by a client to develop a targeted customer
campaign. Mezzo Business is at the forefront of our re-oriented advertising strategy
to target higher margin database marketing related services by maintaining
multiple databases containing information about companies and businesses in
Australia and New Zealand. Mezzo Business provides clients with access to its
databases to assist them in developing and refining marketing campaigns and
offers analytical services utilizing data mining techniques. Mezzo Business
also conducts direct marketing services, such as telemarketing campaigns,
direct mailing campaigns, and management of customer loyalty programs. While
these services constituted only a small part of our advertising revenues during
2003, we believe they will represent an increasing proportion of our revenues
from advertising and marketing services activities in future periods. For information regarding risks involved in our advertising and marketing
activities, see Item 3.D  "Key Information  Risk Factors  Risks Relating to
chinadotcom  Risks Relating to Our Advertising and Marketing Business. The online advertising revenues from the network of affiliated Web sites
and advertising revenues recorded on our portals across Greater China from our
www.china.com portal is also included in this segment. Our portal services and
other media assets deliver content, create online communities and enable
commerce across Asia, including Greater China. Other income Revenues from other income increased to US$2.3 million in 2003 from US$1.8
million in 2002. As a percentage of total revenues, revenues from other income
decreased to 3% of total revenues in 2003 from 4% of total revenues in 2002. Our other income is principally generated by our portal services. Each of
our Web sites is a portal that acts as a gateway to the Internet. We have been
developing our portal network since our inception in June 1997. Our portal
network currently provides users with Chinese versions of Greater China content
services, online
community products, and e-commerce services, and an English version for
Hong Kong. Our portals offer a unique blend of:  
    
    content delivery services such as search engines, directories
and localized information;
    
    community products such as e-mail, SMS, web-hosting,
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
    
    e-commerce products such as an online shopping mall and online
subscription based products and services. Treasury management We generated US$13.4 million of interest income in 2003, and as of
December 31, 2003 our debt securities investment portfolio amounted to US$313.3
million. The prolonged period of low interest rates in 2003 presented us with
the opportunity to continue executing our strategy of reducing our investments
in long-term debt and transitioning to shorter-term, callable debt of higher
credit quality, in anticipation of rising interest rates. We invest on the basis of recommendations from international investment
banks, as well as information and credit ratings provided by independent
ratings agencies including Moodys Investors Service and Standard & Poors.
When purchasing or selling debt securities, our policy is to obtain between
three and five competing quotes. Generally, a debt securitys credit quality
depends on the issuers ability to pay interest on the amount borrowed and to
repay principal. The lower the credit rating, the greater the risk the issuer
will default or fail to meet their payment obligations, as determined by the
rating agency. As of December 31, 2003, 93.86% of our debt securities were
invested in AAA-rated callable securities of U.S. government sponsored
enterprises or U.S. Treasuries. At present, we hold only one security that is
rated lower than AAA. In the event of a downgrade in an investment to BBB-, as
rated by Standard & Poors, or Baa3, as rated by Moodys Investors Service, we
will generally implement an orderly sale of the security in order to maintain a
relatively conservative stance in our portfolio, although on a case-by-case
basis we may decide to retain such debt securities. For a summary of the
effects of our treasury management program on our liquidity and capital
resources and our material market risks, see Item 3  Key Information  Risk
Factors  Risks relating to chinadotcom  Risks relating to treasury
management, Item 5  Operating and Financial Review and Prospects # Liquidity
and Capital Resources and Item 11  Quantitative and Qualitative Disclosures
About Market Risk. As of December 31, 2003, our entire investment in debt securities of
US$313.3 million is effectively reflected in our consolidated financial
statements at current market prices. At the end of each quarter, if the end of
the quarter market price of a debt investment is below the original investment
cost, the difference is charged to accumulated other comprehensive income
under the shareholders equity section of our consolidated balance sheet. If
the fair market value of any of our debt investments remains below its
investment cost and is considered other than temporary, this decline would
then be reflected as an expense under impairment of cost investments and
available-for-sale securities in our consolidated income statement. As of December 31, 2003, we had generated a significant portion of our
interest income from our investment in debt securities. Our interest income,
which was US$13.4 million for 2003, is a source of liquidity for our working
capital needs. Of this US$13.4 million, US$12.3 million was generated by our
investment in debt securities. Our consolidated quarterly interest income
ranged from approximately US$2.9 million to US$4.0 million during 2003. Of
this, interest income from debt securities ranged from approximately US$2.4
million to US$3.7 million. This reflects an annual interest income of US$12.3
million or a yield of 3.1% on the average balance of US$392.2 million of debt
securities between January 1 and December 31, 2003, compared to a yield of 4.8%
in 2002. The drop in yield from 4.8% in 2002 to 3.1% in 2003 was due to
declining interest rates, the elimination of our holdings of long-term Range
Accrual Notes and the ongoing implementation of a more conservative investment
strategy of buying more highly rated securities for our investment portfolio. C. Goals and Strategy We have historically operated as a pan-Asian integrated Internet company
with our business model centered around our e-business solutions and
advertising businesses, including e-marketing services, portal services and
other media. Our business model has evolved away from a pan-Asian Internet
company, and our goal is to be a leading integrated enterprise solutions and
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applications, and high value-added
advertising and marketing services company offering services throughout Greater
China and the Asia-Pacific region, Australia, North America, and the United
Kingdom. In light of the challenging environment in which our businesses operate,
we have been and intend to be flexible in fulfilling our goal. Software and consulting services Competitive strengths We believe our principal competitive strengths in our software and
consulting services business include the following: We offer a range of enterprise software products which enable businesses
to increase revenues, margins and customer loyalty.Our enterprise software
products attempt to achieve enterprise-wide integration of business and
technical information across multiple divisions and organizational boundaries,
such as finance, manufacturing, logistics, human resources and sales, utilizing
common databases and programs that share data on a real time basis across
multiple business functions. For example, our customer relationship
management, or CRM, products unify sales, marketing and customer service
employees and partners around customer processes and interactions. By
maintaining all customer information in a shared database, our CRM products
make it easy for different users to maximize their contribution to CRM by
better capturing customer profiles and building one-to-one customer
relationships. We believe our range of enterprise software products enables
businesses to increase revenues through improving customer loyalty, which
increases both customer retention and customer net value. Our customers also
realize decreased costs by streamlining processes and interactions between
employees, partners and customers. We offer enterprise software products for a
range of enterprise activities, such as human resources and payroll
administration, attendance tracking, Web based employee self service
applications, financial accounting applications, warehouse management, order
management, supply chain management and CRM. We have developed industry products for specific industry segments
(micro-verticals) in high growth markets. Many of our enterprise software
products have been tailored to be industry-specific which allow businesses to
immediately gain business benefits as the industry-specific customizations have
already been completed. For example, with respect to Pivotals products,
products have already been optimized and configured for such industries as
financial services and healthcare, as well as specific segments within
industries, including retail banking, investment banking/capital markets,
private banking, asset management, commercial banking, healthcare insurance,
real estate/construction and life sciences (medical device manufacturing).
With respect to IMIs products, IMI has tailored its order management,
warehouse management, and store replenishment software products to the grocery,
specialty goods and pharmaceutical and over-the-counter drugs industries. Our products can be implemented rapidly and can be easily customized which
helps to yield a low total cost of ownership. Businesses can use our products
without significant customization, thereby expediting the implementation
process. If they so desire, businesses can easily customize our products to
reflect their own internal processes. As a result, our products can be
cost-effectively deployed, and require few customer resources for ongoing
support, system maintenance and end-user training. Our products are also
relatively easy for end-users to learn, which results in lower ongoing training
costs. Our products can be scaled with the growing needs of our customers. Many
of our customers require that our products support their growing number of
employees, customers and partners. Our underlying architectures enable our
customers to expand our products as their businesses grow by adding servers in
a number of locations. This capability improves performance and enables our
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CDC Outsourcing is CMM-certified. CDC Outsourcing allows for elements of
workflow, such as client and project management to be provided in the
contracted country, including the United Kingdom, the United States or
Australia, with technology and applications sourced from our low-cost, industry
standard CMM-certified, or Capability Maturity Model, outsourcing centers in
China or India. Strategy Our goal is to become a leading integrated enterprise solutions company
offering a complete range of software products to meet the needs of mid-sized
enterprises, with the capability of providing high quality, low cost outsourced
software development services to develop additional products and offer support
services complementary to our product line to meet our customers needs. The
key elements of our strategy are as follows: Grow our product line through selective acquisitions. We have been
growing the breadth of enterprise software products we offer, and will seek to
acquire additional software and technologies to complement the capabilities
which our products offer. In March 2002, we acquired OpusOne Technologies
which has developed several proprietary enterprise software related
applications, including human resources and payroll administration, attendance
tracking, Web based employee self service applications, and financial
accounting applications. In September 2003, we acquired a 51% stake in the
holding company of IMI which offers warehouse management, order management and
supply chain management software. In February 2004, we completed our
acquisition of Pivotal which offers a complete set of highly flexible CRM
applications for mid-sized enterprises. We believe that mid-market customers
would find appealing the ability to contract with a single company which can
offer a complete range of enterprise software products to meet all of their
enterprise software needs, and we will continue to seek to acquire from around
the world best of breed software and technologies to complement the line of
enterprise software products which we offer. Extend existing applications and product scope. We intend to continue the
development of our applications to add new functionality. For example, in April
2003, Pivotal introduced Pivotal 5 which features assisted selling,
comprehensive marketing automation functionality, new eService capabilities,
and significant platform enhancements to improve flexibility, ease of
customization, user productivity, and web services enablement. We
also released version 6.1 and 6.2 of our OpusOne human resource
and payroll solution with significantly improved flexibility and
functionality. We developed a new HR Analyzer module that
provides business intelligence functionality to human resource and
payroll databases. In 2004, CDC Software intends to release
version 2.1.5 of Executive Suite, its fully integrated financial
and business performance management application. Version 2.1.5
is expected to enable double-byte language for the Asia
markets and other functional improvements. We believe
continued investments in our core products will increase our competitiveness in
attracting new customers and increase our cross-selling opportunities within
our existing customer base. In addition, we plan to offer new versions of our
applications that support a wider variety of international customers and their
respective business practices and languages. We also intend to continue to
develop industry products for specific industry segments (micro-verticals) in
high growth markets where we believe we can cost effectively generate leads and
enhance our product differentiation. Leverage upon cross-selling opportunities with our expanded customer base.
With the completion of our recent acquisition of Pivotal, we have added an
additional 1,700 customers to our customer-base which totals approximately
2,200 worldwide, and we expect to add approximately 1,000 additional customers
from our pending acquisition of Ross. We believe that this large, global
customer base provides a solid platform for cross-selling synergies within the
group, and we plan on offering to individual customers the capability of
purchasing from our group of related companies complementary product and
service offerings. We further believe that our ability to approach individual
customers is further enhanced with our greater global scale and global
marketing presence. Through our group of related companies, we have a presence
in North America, the
PRC, India, Japan, Singapore, France, Germany, Ireland, the United
Kingdom, Australia and New Zealand, among other places. Target the emerging market in Greater China for applications software and
leverage upon our experience and well-recognized brand name in the Asia-Pacific
region.While we have clients worldwide, one of our key target markets will be
the Greater China market. We believe that the potential growth of the
enterprise software and consulting services market for mid-market manufacturing
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because many companies are re-locating their
manufacturing operations to Greater China due to lower overhead and labor
costs, and because enterprise software products developed for the mid-market
are more appropriate for the Greater China market due to the facts that in
general, such products are easier to use, can be implemented rapidly and can be
easily customized which helps to yield a low total cost of ownership; yet, such
products can also be scaled with the growing needs of the customer. We believe
our chinadotcom brand is well-recognized throughout China, and we intend to
leverage upon our knowledge, experience and brand name in the Asia-Pacific
region to grow our business. Expand development and support capabilities, particularly through
outsourcing to China and India.Through CDC Outsourcing, we have invested in
our ability to offer high quality, low cost software development and support
capabilities in India and China. Our outsourcing capability has grown through
our 51%-49% joint venture with vMoksha technologies, an offshore IT outsourcing
company headquartered in Bangalore, India which we entered into in May 2003 and
our February 2003 acquisition of Praxa, an Australian IT outsourcing and
professional services organization. In addition, Pivotal, which we acquired in
February 2004, has a significant portion of its development resources and
capability in Bangalore. We believe that these are important investments which
will ultimately help our customers lower costs of critical functions such as
software customization and enhancements, research and development, professional
services and technical support. For example, in October 2003, we announced
that Ross intends to outsource to our development center in China the
development of an executive analytics application designed to provide users of
Ross iRenaissance enterprise application with a summary of key performance
indicators of financial metrics, sales, inventory and production information.
We will continue to expand our development and support presence in China and
India as part of our strategy to build out our product line and support our
global customer base. Mobile services and applications Competitive strengths We believe our principal competitive strengths in our mobile services and
applications business include the following: Integrated mobile and portal platforms with global exposure.We have
established an international presence enabling us to offer a broad range of
mobile products and services in China through our integrated mobile and portal
platforms. We leverage our global exposure to introduce advanced mobile
services and applications and to expand and enhance our product selections in
China. Through Ion Global Koreas mobile technologies expertise in Korea, which
is considered to have one of the most advanced CDMA networks in the world, we
can access over 500 content providers, allowing us to broaden our content
offerings for our mobile applications products in China. In addition, we have
made recent strategic investments to further enhance our capability to expand
our product offerings and develop new products internationally. Scalable, high-margin business model. Our mobile services and applications
business is highly scalable with relatively low incremental operating costs. We
have developed a cost-effective development and distribution platform. After
incurring initial research and development costs for mobile applications, we
can deliver such products to a large mobile subscriber base quickly and at a
low cost. Extensive China-wide network coverage with direct local connectivity.
Newpalms mobile services and applications are accessible to Chinas large
mobile subscriber base through Newpalms nationwide network coverage. Newpalm
offers direct local connectivity with China Mobile in 27 provinces and with
China Unicom in 24 provinces. We believe our nationwide coverage facilitates
our promotional activities and results in a higher sign-up rate for
subscribers. Our coverage also contributes to our high success rate for SMS
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Well-recognized brand names globally and in China. We believe our
chinadotcom brand is well recognized throughout China and internationally, and
we operate the popular www.china.com portal. As of April 1, 2004, Alexa, a
subsidiary of Amazon.com, ranked www.china.com as 42nd of all websites
globally, and also ranked www.china.com as 13th among all simplified Chinese
character websites, as measured by user traffic. In addition, Newpalm is a
well-recognized brand in China for SMS and value-added mobile services. Experienced management team. Our management team has extensive experience
in our businesses. For example, Newpalms management has an average of over 15
years of experience in the mobile data applications market in China and members
of Newpalms management helped Motorola establish operations in China in the
early 1990s. We believe that our managements extensive industry experience,
combined with our dedication to and reputation for technical excellence,
differentiates us from our competitors and provides us with a competitive
advantage when introducing new mobile applications and recruiting new talent. Strategy Our goal in our value-added mobile services business is to become the
dominant provider of mobile services and applications in China and to emerge as
a major player in the mobile services and applications sector internationally.
To achieve this goal, we intend to: Expand our product selection and integrate new mobile services and
applications. We are expanding our existing mobile data products and services
by developing and integrating new applications. We also intend to leverage our
existing integrated mobile applications, interactive media and marketing
platforms to identify and develop new mobile data applications with the
potential to generate significant consumer demand. We plan to use Ion Global
Korea and joint venture partnerships to introduce to our subscribers in China
and elsewhere a wide variety of online and mobile games and enhanced
value-added mobile content that complement our existing suite of mobile data
products. We plan to introduce leading mobile applications and innovative
technology from various international markets to capitalize on the long term
growth opportunities for mobile data services in China. We also intend to
access developed markets to source advanced and innovative technologies and
applications from these markets to the China market. Broaden our customer base. We have maintained strong relationships with
leading mobile telecommunications providers in China, at both the national and
local provincial levels. We intend to further develop these relationships to
expand our existing mobile data products, broaden our customer base and
increase our average revenue per unit. We also intend to work more closely with
provincial mobile operators to implement joint promotional services that target
their mobile subscribers. We intend to use a variety of traditional media,
including television, radio, newspaper and magazine advertisement, in addition
to our existing marketing channels to enhance our marketing efforts. Pursue selective strategic acquisitions and investments worldwide to
achieve greater scale. We anticipate subscriber usage of data and other
non-voice applications on mobile devices to grow significantly as Chinas
mobile network becomes more technically sophisticated through the deployment of
newer network technologies. In response to this increasing demand, we intend to
pursue strategic acquisitions and investments aimed at complementing our
existing suite of mobile data products, services and applications. We are also
actively pursuing selective investments outside China, such as investments in
mobile data applications
companies, to increase the scale of our business and strengthen our
position as a leading provider of mobile services and applications in China. Leverage our existing development capabilities in China to introduce
mobile services and applications to other markets.We intend to extend our
international presence by leveraging our existing development capabilities in
China to introduce advanced mobile services and applications to other markets.
We plan to use China as a development center for deploying domestic and
international products and services by expanding our research and development
capabilities in China. Currently, we plan to expand our research and
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center in Nanjing and conduct feasibility studies for new research
and development centers at major Chinese universities. We believe the cost
advantages associated with our development capabilities in China, and our
mobile data experience in China, will enable us to introduce new and
cost-effective mobile applications and services to the international market. Advertising and marketing services We are seeking to re-orient our advertising strategy away from online
advertising and e-marketing services, with low margins performed for a fixed
fee often relying upon short-term advertising campaigns and high volume, to
higher margin database marketing and related services used to develop targeted
campaigns for clients. In our experience, margins from online advertising and
e-marketing services range from 20% to 30%, compared to that of margins in
database marketing and related services, which range from 50% to 70%. We
intend to focus on proprietary marketing and data mining services using our
existing database marketing capabilities in Australia through Mezzo Business
and Mezzo Interactive. Our current strategy includes:  
    
    developing and enhancing our existing proprietary marketing databases;
    
    extending into recurring subscription based data services; and
    
    solidifying our existing sales channel relationships. While our new focus on database marketing is expected in generate higher
margins in this business segment, we expect the revenues generated from our
database marketing related services to be substantially lower than the revenues
from online advertising and e-marketing services. Revenues from online
advertising and e-marketing services have decreased following the expiry in
April 2003 of our exclusive service agreement with Daum Communications, a
leading South Korean portal company and the disposal of our Mezzo Korea
business at the end of 2003. Markets and Operations We operate in 14 markets across Asia-Pacific, Australia, North America and
Europe. Greater China represented 26%, 21% and 28%, of our total revenue in
2001, 2002 and 2003, respectively. The advertising and marketing activities
business had been our primary revenue contributor over the last two years;
however, as a result of our change in strategic direction, this business
segment started to decrease in importance in 2003, accounting for 46%, 61% and
22% of total revenues in 2001, 2002 and 2003, respectively. The percentage of
total revenues generated by advertising and marketing activities business
declined in 2003 principally due to our decision to close some of the
non-profitable subsidiaries engaged in the advertising and marketing business,
the expiry in April 2003 of our exclusive service agreement with Daum
Communications, a leading South Korean portal company, from which we had
generated a significant amount of our online advertising and e-marketing
services business, and the acquisition of Newpalm, which resulted in a
significant percentage of revenues being generated by the mobile services and
applications business. Software and consulting services accounted for 42%, 35%
and 57% of total revenues in 2001, 2002 and 2003, respectively. Mobile services
and applications, a new business segment introduced in the second quarter of
2003 as a result of our acquisition of Newpalm, accounted for 19% of total
revenues in 2003. Other income, accounted for 12%, 4% and 2% of total revenues
in 2001, 2002 and 2003, respectively. As a material percentage of our business is derived from Greater China,
seasonality linked to those markets, particularly the PRC, may affect our
business. For example, the PRC, which accounted for 27% of our total revenues
in the fourth quarter of 2003, has an extended holiday for the Lunar New Year
in the first quarter of each year which affects all our operations in the
mainland. 69




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D. Organizational Structure chinadotcom corporation was incorporated in June 1997. The following table sets
forth our significant subsidiaries organized by business segment as of December
31, 2003. Please note that the following table does not include our
intermediate holding companies. Corporate Structure (CORPORATE STRUCTURE) ( ) Denotes percentage ownership  *
    
    Subsidiaries held under chinadotcom Mobile Interactive Corporation
through its 81.3% owned hongkong.com, which is listed on the Growth
Enterprise of The Stock Exchange of Hong Kong Limited, or GEM**
    
    Acquired February 25, 2004 70




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Our PRC Corporate Structure To comply with PRC legal considerations, hongkong.com conducts a
significant portion of its operations through Beijing Newpalm Technology Co.,
Ltd., or Beijing Newpalm, and Beijing Wisecom Technology Co. Ltd., or Beijing
Wisecom. hongkong.com has entered into trust deed arrangements with two of its
employees, Mr. Wang and Ms. Xie, in connection with the shares of Beijing
Newpalm and Beijing Wisecom. Mr. Wang and Ms. Xie each own 50% of Beijing
Newpalm and 50% of Beijing Wisecom, respectively. Mr. Wang and Ms. Xie are
trustees of the trusts. hongkong.com Limited, a wholly owned subsidiary of
hongkong.com, is the beneficiary of the trusts. Under the trust deed arrangements, Mr. Wang and Ms. Xie act as trustees of
the shares of Beijing Newpalm and Beijing Wisecom, respectively, with
hongkong.com as beneficiary. The appointment of Mr Wang and Ms. Xie is
indefinite, unless terminated by the beneficiary. The trust deed arrangements
require the trustees to transfer and administer the shares held under trust and
distribute all dividends and interests payable on the shares held under the
trust as directed by hongkong.com as the beneficiary. In addition, the trust
deed arrangements require the trustees to vote their shares at such meeting in
such manner as the beneficiary directs in writing. The trust deeds are
governed by Hong Kong law and subject to arbitration in Hong Kong. No
additional compensation is payable to Mr. Wang and Ms. Xie. Beijing Newpalm and Beijing Wisecom hold the licenses required by the
regulatory authorities in the PRC to provide SMS and other mobile application
and services to public subscribers in the PRC. Beijing Newpalm has entered
into an agreement with China Mobile to provide these services to mobile phone
subscribers using the China Mobile network, and Beijing Wisecom has a entered
into an agreement with China Unicom to provide these services to mobile phone
subscribers using the China Unicom network. Beijing Newpalm and Beijing
Wisecom have each entered into long term exclusive services agreements with
Newpalm to outsource technical support and content from Newpalm, including
sales and marketing, billing, and administrative services, in exchange for a
fee. To facilitate the delivery of the technical support and content services,
Newpalm owns all of the physical assets, including servers, switches and
computers, and employs all of the technical, sales and administrative personnel
necessary to deliver these services. The fees currently charged by Newpalm to
Beijing Newpalm and Beijing Wisecom for its services represent approximately
85% of the gross revenue of each of Beijing Newpalm and Beijing Wisecom. As part of the trust deed arrangements, we obtained executed share
transfer documentation for the shares of Beijing Newpalm and Beijing Wisecom
held by each of Mr. Wang and Ms. Xie. We can replace either Mr. Wang or Ms.
Xie as trustee by submitting the executed transfer documentation to the Office
of Administration of Industry and Commerce, or the OAIC, in the PRC. While
OAICs approval of a share transfer is generally a routine procedure, a
transfer from a trustee to a beneficiary would be unusual because it would
represent a purported transfer for no consideration, and this may attract
additional scrutiny by the OAIC. The OAIC could also delay or withhold approval
if the former trustee alleges fraud or forgery in the transfer procedure.
Because of these risks in the share transfer procedure, the trust deed
arrangements may not be as effective in providing control as direct ownership
of the businesses. E. Property and Equipment As of December 31, 2003, our executive headquarters occupy approximately
26,305 square feet of gross office space under various leasing arrangements at
34/F, Citicorp Centre, 18 Whitfield Road, Causeway Bay, Hong Kong. We also
lease office and other space, as well as space for our servers, in various
locations in Asia, Australia and the United States. The only real estate we own
is our building located at 2-4 Old Street, Islington, London, which houses our
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion of our financial condition and
results of operations together with our consolidated financial statements and
the related notes included elsewhere in this Annual Report. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ significantly from those anticipated in these
forward-looking statements as a result of factors including, but not limited
to, those set forth under Item 3.D. of this Annual Report, Key Information 
Risk Factors, and included elsewhere in this Annual Report and Item 11 of this
Annual Report, Quantitative and Qualitative Disclosures About Market Risk. Overview We are a leading provider of enterprise software products and mobile
applications and services in China and internationally. Our strategic focus is
to achieve scale in our two core business areas through a combination of
ongoing organic expansion coupled with strategic acquisitions. In the
enterprise software area, we made several significant acquisitions in 2003
(including Praxa, IMI and Executive Suite), and in February 2004 we acquired an
internationally established pure-play CRM provider, Pivotal. We will
consolidate Pivotals financial results from March 2004 onwards. In addition,
in September 2003 we proposed the acquisition of Ross, an internationally
established pure-play process manufacturing ERP software provider. We expect to
complete our acquisition of Ross in the first half of 2004. In the mobile
services and applications business, we acquired Newpalm, a leading SMS provider
base in Beijing, China, in April 2003. The contribution of both Pivotal and
Ross to our consolidated financial statements, combined with a full year of
contribution in 2004 from companies acquired in 2003, will result in a
considerable expected increase in annual revenues in 2004 as compared to 2003. Subsequent to the year ended December 31, 2002, as a result of the
evolution in our business strategy, in order to present our revenue in a more
representative format, we changed our business segmental reporting from:  
    
    e-business Solutions,
    
    Advertising,
    
    Sale of IT Products, and
    
    Other Income to:  
    
    Software and Consulting Services,  
    
    Sale of IT Products
    
    Consulting Services  
    
    Mobile Services and Applications,
    
    Advertising and Marketing Activities, and
    
    Other Income, effective from January 1, 2003. From the first quarter of 2003 onwards, all
prior periods comparative figures have been adjusted accordingly. In addition, since we discontinued the operations of certain subsidiaries
in the software and consulting services and advertising and marketing
activities segments, certain historical comparative amounts have been
reclassified to conform with the current years presentation. Only the numbers
from continuing operations as of December 31, 2003 are presented for
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We recorded net profit of US$15.5 million in 2003, on US$89.4 million of
revenues from continuing operations, including acquisitions. For 2003, US$50.7
million of revenues were derived from software and consulting services, US$16.9
million from mobile services and applications, US$19.6 million from advertising
and marketing activities, and US$2.3 million from other income. We recorded our
first year of profit in 2003 since our IPO in July 1999, as the result of a
continued focus on cost control, the divestment or closure of non-profitable or
underperforming businesses, the contribution from new acquisitions, and from
interest income derived from our existing cash balances. Since 2000, we have derived a substantial portion of our income from
interest income from our investment in primarily AAA-rated debt securities.
For the fiscal year 2001, 2002, and 2003, we recorded interest income of
US$26.7 million, US$23.7 million and US$13.4 million, respectively. We expect
to earn less interest income in the future as we deploy our cash and invest the
remaining cash in interest-bearing debt securities with lower yields than our
current investments. Effect of acquisitions During 2003, we acquired several businesses material to our 2003 results
for which we commenced consolidation at an interim period during the year:  
    
    In February 2003, we acquired Praxa, a leading Australian
information technology outsourcing and professional services
organization. We commenced consolidating the results of Praxa in
February 2003, and Praxa contributed US$22.3 million of revenues
during 2003, representing approximately 24.9% of our revenues.
    
    In April 2003, we completed the acquisition of Newpalm, a
leading SMS provider based in Beijing, China to deliver value added
mobile services and products in China, and commenced consolidating
the results of Newpalm. Newpalm contributed US$16.9 million of
revenues during 2003, representing approximately 18.9% of our
revenues.
    
    In September 2003, we completed the acquisition of a 51% stake
in IMI, an international provider of software products and services
to the supply chain management sector principally across Europe and
the United States, and commenced consolidating the results of IMI.
IMI contributed US$11.2 million of revenues during 2003, representing
approximately 12.5% of our revenues for the period. The acquisitions of Praxa, Newpalm and IMI contributed a total of
approximately US$50.4 million of revenues during 2003, representing
approximately 56.4% of our total revenues. Excluding the impact of these
acquired businesses, revenues would have decreased by US$5.0 million during
2003, as compared to 2002. This reduction reflects the companys planned exit
from its low-margin, unprofitable on-line network advertising operation in
Korea, MEZZO Korea. MEZZO Korea contributed US$10.7 million in revenues in
2003, down 43% from US$19.0 million in 2002. We reduced our holding in MEZZO
Korea from 55% to 40% in November 2003, and sold our remaining holding
completely in January 2004. Excluding MEZZO Koreas revenues, core operating
revenues in 2003 from continuing operations, not including acquisitions, were
US$28.3 million, up 13% from 2002. Revenues by business segment The table below sets forth the revenues from our principal business
segments in US dollars and as percentages of our total revenues for the periods
indicated: 73




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Year ended December 31,2001
    
    2002
    
    2003(in thousands of US$, except percentages)RevenuesSoftware and consulting servicesSales of IT products
    
    
    743
    
    
    
    2
    %
    
    
    1,339
    
    
    
    3
    %
    
    
    8,000
    
    
    
    9
    %Consulting services
    
    
    15,900
    
    
    
    41
    %
    
    
    14,166
    
    
    
    32
    %
    
    
    42,699
    
    
    
    47
    %Mobile services and applications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,876
    
    
    
    19
    %Advertising and marketing activities
    
    
    18,087
    
    
    
    46
    %
    
    
    26,682
    
    
    
    61
    %
    
    
    19,558
    
    
    
    22
    %Other income
    
    
    4,507
    
    
    
    11
    %
    
    
    1,821
    
    
    
    4
    %
    
    
    2,299
    
    
    
    3
    %39,237
    
    
    
    100
    %
    
    
    44,008
    
    
    
    100
    %
    
    
    89,432
    
    
    
    100
    %
 Our revenues increased from US$39.2 million in 2001, to US$44.0 million in
2002 and to US$89.4 million in 2003, representing increases of 12% between 2001
and 2002 and 103% between 2002 and 2003. The increase in 2003 was principally
a result of three significant acquisitions, Praxa in February 2003, Newpalm in
April 2003, and IMI in September 2003. Our principal revenue segments are
composed of (i) software and consulting services, divided into sales of IT
products and consulting services, (ii) mobile services and applications, and
(iii) advertising and marketing activities. Software and consulting services Sales of IT products.This business sub-segment consists of sales of
software products (third-party software as well as proprietary and
internally-developed software). This segment generated approximately 9% of our
revenues during 2003, increasing from 3% of our revenues during 2002. Software
revenue increased by 497% from US$1.3 million during 2002 to US$8.0 million
during 2003 due primarily to the acquisition of Praxa in February 2003 which
contributed revenues of US$6 million to this revenue segment during 2003. We
expect revenues from this segment to increase in 2004 due to a full year of
consolidation of results from Praxa and IMI which we acquired in February 2003
and September 2003, respectively, the consolidation of the results of Pivotal,
which we acquired at the end of February 2004, starting from March 2004, and
potentially the inclusion of the financial results of Ross which we have
proposed to acquire within the first half of 2004. Consulting services.This business sub-segment consists of income from
provision of support and maintenance services of the software products,
outsourcing of information technology consultants, professional consulting
services, Web site design, and development and integration services. This
segment generated approximately 48% of our revenues during 2003, increasing
from 32% of our revenues during 2002. Consulting services revenue increased by
201% from US$14.2 million during 2002 to US$42.7 million during 2003 due
primarily to the acquisition of Praxa in February 2003 and IMI in September
2003 which contributed revenues of US$16.3 million and US$11.1 million
respectively during 2003. We expect revenues from this segment to increase in
2004 due to a full year of consolidation of results from Praxa which we
acquired in February 2003 and IMI which we acquired in September 2003. Mobile services and applications This business segment was introduced in the second quarter of 2003 as a
result of our acquisition of Newpalm. The mobile services and applications
segment consists of income from SMS subscriptions, content downloads and
interactive services, such as chatting and mobile dating, and contributed
approximately 19% of our revenues in 2003. We believe the acquisition of
Newpalm brought significant strategic and financial value to chinadotcom.
During 2003, gross margin attributed to Newpalm amounted to US$14.6 million,
representing a gross margin percentage of approximately 87%. Newpalms rate of
sequential quarter-on-quarter growth began to slow in the third and fourth
quarter of 2003, partly due to a considerably larger subscription base of over
5 million in the third quarter of 2003 compared to under 2.5 million as of the
beginning of 2003. In addition to 74




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slower sequential growth from an increasingly large subscription base, in
the second half of 2003 Newpalm began a deliberate focus on new product
development rather than on active marketing of existing products, which reduced
the rate of new net subscription additions in the second half of 2003.
Furthermore, the overall SMS market in China appeared to be experiencing a
slowdown in growth during the second half of 2003. Despite a slower sequential
quarterly growth rate recorded in the last two quarters of 2003, we expect
revenues from this segment to continue to increase in 2004, due to both a full
year of consolidation of results from Newpalm (which we acquired in April
2003), and also to the expected continued growth in the mobile applications
industry and SMS market in China during 2004. Advertising and marketing activities This business segment consists of income from travel-related publishing
and exhibition organizing activities, the sale of online banner advertising,
sponsorships, direct mailings and offline advertising campaigns. Advertising
and marketing activities revenue decreased 27% to US$19.6 million during 2003
from US$26.7 million during 2002. This segment generated approximately 22% of
our revenues during 2003, decreasing from 61% of our revenues during 2002. The
significant decline in the percentage of overall revenues attributable to
advertising and marketing activities was due in large part to the acquisitions
of Newpalm, Praxa, and IMI which resulted in a significant increase in our
total revenues from these business segments. In addition, the expiry of our
exclusive service agreement with Daum Communications, a leading South Korean
portal company, in April 2003 also resulted in a decline in our revenues in
this business segment. Because of low margins, we have terminated during 2003
most of our operations in Internet advertising and e-marketing services that
involve the planning, sales, electronic delivery, tracking and post-campaign
analysis of advertisements on a network of Web sites. Our last remaining
on-line network internet advertising operation in South Korea was fully
divested in January 2004. As a result, we expect the revenues from this
segment to further decline in 2004, when compared to 2003. Our top 10 customers accounted for 9%, 14% and 28% of our revenues for
2001, 2002 and 2003, respectively. Percentage of revenues generated from the
top 10 customers increased between 2002 and 2003 due to the addition of several
large governmental contracts, including contracts with Australia Post, a
government agency in Australia, and a contract with the Department of Trade and
Industry in the United Kingdom. No single customer accounted for 10% or more of
the revenues during any of 2001, 2002 or 2003. Cost of Revenues Our cost of revenues increased from US$25.4 million in 2001, to US$27.8
million in 2002 and to US$48.1 million in 2003, representing increases of 9%
between 2001 and 2002 and 73% between 2002 and 2003. The increase in 2003 was
principally a result of the three significant acquisitions of Praxa in February
2003, Newpalm in April 2003, and IMI in September 2003. However, the relatively
high gross margin of the Newpalm operation resulted in a significantly lower
growth in cost of revenues than in revenues for 2003. Software and consulting services. Sales of IT products.Our cost of revenue from software sales increased to
US$6.1 million for the year ended December 31, 2003 from US$668,000 in 2002. As
a percentage of revenues, our cost of revenues for our sales of IT products
increased to 76.5% in 2003 from 50% in 2002 mainly due to the lower margin of
the sales of IT products revenue from Praxa as reseller of the IT products. Consulting services.Our cost of revenue from consulting services
increased to US$25.7 million for the year ended December 31, 2003 from US$6.3
million in 2002. As a percentage of revenues, our cost of revenues for our
software and consulting services increased to 60% in 2003 from 44% in 2002
mainly due to the lower 75




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margin of the outsourcing revenue from Praxa which amounted to US$16.3
million, or 38% revenues of the consulting services revenue in 2003. Mobile services and applications. This business segment was introduced in the second quarter of 2003 as a
result of our acquisition of Newpalm. Although this segment contributed
approximately 19% of our revenues in 2003, its high gross margin percentage of
approximately 87% resulted in cost of revenues of only US$2.2 million, or only
5% of total cost of revenues for the company during 2003. We anticipate that
the cost of revenues from this segment will increase in 2004, due to both a
full year of consolidation of results from Newpalm (which we acquired in April
2003), and also to the expected continued growth in the mobile applications
industry and SMS market in China during 2004. In addition, we anticipate that
cost of revenues will increase at a slightly higher rate than the expected
growth in revenues due to competitive pressures and pricing erosion in the
marketplace. Advertising and marketing activities. The cost of revenues from advertising and marketing activities decreased
35% to US$13.0 million during 2003, from US$20.0 million during 2002,
reflecting the 27% fall in revenues for the period and the reduced relative
percentage of revenues contributed from the MEZZO Korea operation, which was
characterized by a high cost of revenues and a commensurate low gross profit
margin. Because of low margins, we terminated most of our operations in
Internet advertising and e-marketing services during 2003 that involve the
planning, sales, electronic delivery, tracking and post-campaign analysis of
advertisements on a network of Web sites. As part of this trend, the expiry of
our exclusive service agreement with Daum Communications, a leading South
Korean portal company, in April 2003 resulted in a decline in our revenues and
a more rapid decline in cost of revenues in the MEZZO Korea business segment.
Our last remaining on-line network internet advertising operation in South
Korea was fully divested in January 2004. As a result, we expect the cost of
revenues from this segment to further decline in 2004, when compared to 2003. Selling, General & Administrative expenses (SG&A) S,G&A expenses increased to US$34.3 million in the year ended December 31,
2003, up 26% from US$27.2 million in 2002. The rise in S,G&A expenses was
principally a result of the three major acquisitions made during 2003, Praxa,
Newpalm and IMI. Praxa contributed US$5.3 million of S,G&A during 2003, Newpalm
contributed US$3.7 million, and IMI contributed US$2.8 million. It is expected
that S,G&A expenses will continue to rise in 2004, due to the acquisition of
Pivotal in February 2004 as well as increased headcount, marketing and other
expenses required for us to execute on our strategy of cross-selling the
acquired companies products and integrating their operations in 2004 and
beyond. Depreciation and amortization Depreciation and amortization expenses fell 27% from US$9.9 million in
2002 to US$7.2 million in 2003. The decrease was primarily due to a reduction
in additional purchases of fixed assets combined with a greater percentage of
fully depreciated fixed assets during the course of the year. Net interest income Net interest income fell 42% to US$12.4 million in 2003, from US$21.2
million in 2002. The reduction was principally the result of the following
factors: (i) investments made during 2003 in acquiring new businesses which
reduced the overall cash balance during the year as compared to 2002, and; (ii)
lower prevailing interest rates in 2003 compared to 2002; (iii) a continuation
of our strategy of reducing the overall tenure of our investments in debt
securities to shorter-term, and lower yielding instruments. As of December 31,
2003, we had generated nearly all of our interest income from our investment of
US$313.3 million in debt securities. The 76




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treasury management program in 2003 involved investments in debt
securities that were funded with credit facilities, such as the Global Master
Repurchase Agreement between us and Fortis Bank nv-sa entered into in August
2001, or Repurchase Agreement, and the Total Return Swap Transaction Agreement
between us and DBS Bank entered into in August 2002, or Swap Agreement. Under
the Repurchase Agreement and the Swap Agreement, we may borrow up to US$400.0
million on such terms as we and the banks may mutually agree. These
arrangements do not have termination dates, but are reviewed annually for
renewal. Our debt security investments funded with the Repurchase Agreement
and Swap Agreement are composed of more conservative, lower yielding
instruments, involving the investment of cash holdings primarily into the debt
securities of the U.S. government or U.S. government sponsored enterprises.
During 2004, we intend to continue executing our strategy of reducing our
investments in long-term debt and transitioning to shorter-term, callable debt
of higher quality in anticipation of rising interest rates in the future. See
B  Liquidity and Capital Resources. Income Taxes We recorded US$0.7 million of income tax benefits for the year ended
December 31, 2003, principally as a result of deferred tax income arising from
Newpalm which generated deductible temporary differences for the year, as
compared to an income tax expense of US$0.1 million in 2002. While Newpalm tax
concessions may not continue, due to the cumulative historical losses
experienced by the Company in many of its key operating businesses over the
last few years, we anticipate that our total income tax expenses in 2004 and
2005 will be lower than the statutory imposed rates in our major markets. Net loss/income We generated full year net income for the first time in 2003 of US$15.5
million. We had a net loss of US$18.2 million in 2002, which represented an 85%
decrease from our net loss of US$124.4 million in 2001. As of December 31, 2001
and 2002, we had an accumulated deficit of US$216.2 million and US$234.4
million, respectively. As of December 31, 2003, accumulated deficit was reduced
to US$218.9 million. We had incurred net losses in each quarter from our
inception in June 1997 until September 30, 2002. We have recorded net income
in each quarter since the quarter ended December 31, 2002. While we plan to
continue our cost reduction efforts and expect to generate net income in future
periods as we integrate our acquisitions, we are also subject to numerous
risks. For further discussion regarding risks involved in our continued
profitability, see Item 3.D  Key Information  Risk Factors  Risks Relating
to chinadotcom  Risks Relating to Our Overall Business  We have until
recently a history of losses and cannot provide any assurance that we can
achieve or sustain profitability.  A.
    
    Results of Operations The following table summarizes our historical results of operations in
U.S. dollars and as percentages of total revenues for the years ended December
31, 2001, 2002 and 2003. Year ended December 31,2001
    
    2002
    
    2003(in thousands of U.S. dollars, except percentages)RevenuesSoftware & Consulting ServicesSales of IT products
    
    
    743
    
    
    
    2
    %
    
    
    1,339
    
    
    
    3
    %
    
    
    8,000
    
    
    
    9
    %Consulting services
    
    
    15,900
    
    
    
    41
    %
    
    
    14,166
    
    
    
    32
    %
    
    
    42,699
    
    
    
    47
    %Mobile Services & Applications
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    16,876
    
    
    
    19
    %Advertising & Marketing activities
    
    
    18,087
    
    
    
    46
    %
    
    
    26,682
    
    
    
    61
    %
    
    
    19,558
    
    
    
    22
    %Other income
    
    
    4,507
    
    
    
    11
    %
    
    
    1,821
    
    
    
    4
    %
    
    
    2,299
    
    
    
    3
    %39,237
    
    
    
    100
    %
    
    
    44,008
    
    
    
    100
    %
    
    
    89,432
    
    
    
    100
    %
 77




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Year ended December 31,2001
    
    2002
    
    2003(in thousands of U.S. dollars, except percentages)Cost of revenuesSoftware & Consulting ServicesSales of IT products
    
    
    (472
    )
    
    
    -1
    %
    
    
    (668
    )
    
    
    -2
    %
    
    
    (6,123
    )
    
    
    -7
    %Consulting services
    
    
    (11,451
    )
    
    
    -29
    %
    
    
    (6,255
    )
    
    
    -14
    %
    
    
    (25,697
    )
    
    
    -29
    %Mobile Services & Applications
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    (2,247
    )
    
    
    -3
    %Advertising & Marketing activities
    
    
    (11,625
    )
    
    
    -30
    %
    
    
    (19,999
    )
    
    
    -45
    %
    
    
    (12,966
    )
    
    
    -14
    %Other income
    
    
    (1,892
    )
    
    
    -5
    %
    
    
    (845
    )
    
    
    -2
    %
    
    
    (1,084
    )
    
    
    -1
    %(25,440
    )
    
    
    -65
    %
    
    
    (27,767
    )
    
    
    -63
    %
    
    
    (48,117
    )
    
    
    -54
    %Gross Margin
    
    
    13,797
    
    
    
    35
    %
    
    
    16,241
    
    
    
    37
    %
    
    
    41,315
    
    
    
    46
    %Gross Margin %Selling, general and administrative expenses
    
    
    (73,297
    )
    
    
    -187
    %
    
    
    (27,161
    )
    
    
    -62
    %
    
    
    (34,325
    )
    
    
    -38
    %Depreciation and amortization expenses
    
    
    (19,180
    )
    
    
    -49
    %
    
    
    (9,882
    )
    
    
    -22
    %
    
    
    (7,182
    )
    
    
    -8
    %Impairment of goodwill and intangible assets
    
    
    (21,908
    )
    
    
    -56
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,385
    )
    
    
    -292
    %
    
    
    (37,043
    )
    
    
    -84
    %
    
    
    (41,507
    )
    
    
    -46
    %Operating income/(loss)
    
    
    (100,588
    )
    
    
    -256
    %
    
    
    (20,802
    )
    
    
    -47
    %
    
    
    (192
    )
    
    
    0
    %Interest income
    
    
    26,689
    
    
    
    68
    %
    
    
    23,713
    
    
    
    54
    %
    
    
    13,440
    
    
    
    15
    %Interest expense
    
    
    (1,272
    )
    
    
    -4
    %
    
    
    (2,463
    )
    
    
    -7
    %
    
    
    (1,070
    )
    
    
    -2
    %Gains arising from share issuance of a subsidiary
    
    
    (55
    )
    
    
    0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain/(loss) on disposal of available-for-sale securities
    
    
    4,411
    
    
    
    11
    %
    
    
    (163
    )
    
    
    0
    %
    
    
    4,599
    
    
    
    5
    %Gain/(loss) on disposal of subsidiaries and investments
    
    
    (1,915
    )
    
    
    -5
    %
    
    
    (66
    )
    
    
    0
    %
    
    
    469
    
    
    
    1
    %Other non-operating gains
    
    
    
    
    
    
    0
    %
    
    
    508
    
    
    
    1
    %
    
    
    961
    
    
    
    1
    %Other non-operating (losses)
    
    
    (922
    )
    
    
    -2
    %
    
    
    (288
    )
    
    
    -1
    %
    
    
    (153
    )
    
    
    0
    %Impairment of cost investment and AFS sec
    
    
    (12,260
    )
    
    
    -31
    %
    
    
    (5,351
    )
    
    
    -12
    %
    
    
    
    
    
    
    0
    %Share of income/(loss) in equity investees
    
    
    (2,592
    )
    
    
    -7
    %
    
    
    682
    
    
    
    2
    %
    
    
    (115
    )
    
    
    0
    %Gain/(Loss) before income taxes
    
    
    (88,504
    )
    
    
    -226
    %
    
    
    (4,230
    )
    
    
    -10
    %
    
    
    17,939
    
    
    
    20
    %Income taxes benefits (expenses)
    
    
    (186
    )
    
    
    0
    %
    
    
    (113
    )
    
    
    0
    %
    
    
    689
    
    
    
    1
    %Gain/(loss) before minority interests
    
    
    (88,690
    )
    
    
    -226
    %
    
    
    (4,343
    )
    
    
    -10
    %
    
    
    18,628
    
    
    
    21
    %Minority interests in income of consolidated subsidiaries
    
    
    3,162
    
    
    
    8
    %
    
    
    248
    
    
    
    1
    %
    
    
    (2,204
    )
    
    
    -2
    %Income/(loss) from continuing operations
    
    
    (85,528
    )
    
    
    -218
    %
    
    
    (4,095
    )
    
    
    -9
    %
    
    
    16,424
    
    
    
    18
    %Discontinued operationsLoss from operations
    
    
    (38,858
    )
    
    
    -99
    %
    
    
    (14,681
    )
    
    
    -33
    %
    
    
    (3,027
    )
    
    
    -3
    %Income from disposals
    
    
    
    
    
    
    0
    %
    
    
    545
    
    
    
    1
    %
    
    
    2,127
    
    
    
    3
    %Net income/(loss)
    
    
    (124,386
    )
    
    
    -317
    %
    
    
    (18,231
    )
    
    
    -41
    %
    
    
    15,524
    
    
    
    17
    %
  (1)
    
    In 2003, chinadotcom adopted new reporting segmentation, changing from
the previous segmentation consisting of e-business solutions, advertising,
sales of IT products and other income, to the current segmentation of
software and consulting services, mobile services and applications,
advertising and marketing activities and other income. In addition,
chinadotcom discontinued the operations of certain subsidiaries in the
software and consulting services and the advertising and marketing
activities segments. In accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the operating results of the
discontinued operating units were retroactively reclassified as a loss
from operations of discontinued subsidiaries on the consolidated
statements of operations. As a result, the results of the continuing
operations of 2001 and 2002 were reclassified to conform to the 2003
presentation. Year ended December 31, 2003 compared to year ended December 31, 2002 Due to the adoption of the new reporting segments as described in note (1)
above, and due to the discontinued operations of certain subsidiaries in the
software and consulting services and advertising and marketing segments,
certain historical comparative amounts have been reclassified to conform with
the current years presentation. Only the numbers from continuing operations as
at December 31, 2003 are presented for comparison purposes in the following
sections. Revenues Total revenues for the year ended December 31, 2003 increased 103% to
US$89.4 million from US$44.0 million in 2002, principally as a result of three
major acquisitions made in the enterprise software and mobile applications
segments, including Praxa, IMI and Newpalm. 78




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Software and consulting services Sales of IT products. Revenues from our sale of IT products for the year
ended December 31, 2003 increased to US$8.0 million from US$1.3 million in
2002. The significant increase in software and consulting services revenue was
primarily attributable to the acquisition of Praxa in February 2003 which
contributed US$6.0 million of revenue from the date of the acquisition to
December 2003. The acquisition represents part of our strategy to grow our
software business. Excluding the acquisition of Praxa, revenue in 2003 would
have increased over 2002 by US$0.7 million. Consulting services. Revenues from our consulting services for the year
ended December 31, 2003 increased to US$42.7 million from US$14.2 million in
2002. The significant increase in consulting services revenue was primarily
attributable to the acquisition of Praxa in February 2003 and IMI in September
2003, which contributed US$16.3 million and US$ 11.1 million of revenue from
the date of their acquisitions to December 2003. The consulting services
include the support and maintenance services provided by IMI during the period.
Excluding the acquisition of Praxa and IMI, revenue in 2003 would have
increased over 2002 by US$1.1 million. Mobile services and applications This revenue segment was introduced in the second quarter of 2003 as a
result of the acquisition of Newpalm in April 2003 through our 81.3% owned
subsidiary, hongkong.com. Revenue from this segment which amounted to US$16.9
million for the year ended December 31, 2003 was attributable to the
subscription revenue from this newly acquired business. During 2003, Newpalm
recorded a rapid increase in paid SMS subscriptions, from approximately 2.2
million at the start of 2003 to approximately 5.5 million at the end of the
year. Advertising and marketing activities Advertising and marketing revenues decreased to US$19.6 million for the
year ended December 31, 2003 from US$26.7 million in the same period of 2002.
The general decline in advertising and marketing activities revenue between
2002 and 2003 is attributable to several factors, including:  
    
    our decision to close some of the non-profitable subsidiaries
engaged in the advertising and marketing business;
    
    the expiry in April 2003 of our exclusive service agreement
with Daum Communications, a leading South Korean portal company, from
which we had generated a significant amount of our online advertising
and e-marketing services business;
    
    a reduction in our holding in Mezzo Korea from 55% to 40% in
November 2003, and to 0% in January 2004; and
    
    difficult market conditions brought on by the outbreak of SARS
in early 2003. The adverse impact was partially offset by the contribution and
performance of Travel Trade Gazette, or TTG, a Singapore-based trade
publication owned by hongkong.com, contributing revenue of US$5.3 million for
the year ended December 31, 2003. While we saw signs during the fourth quarter
of 2003 of recovery in those markets which were exposed to SARS earlier in the
year, we do not expect a full recovery in such markets until at least the
second half of 2004. Other income.Revenues from other products and services we offer to our
clients, mainly from portal operations, increased to US$2.3 million for the
year ended December 31, 2003 from US$1.8 million in 2002. Despite the
unfavorable operating environment as a result of SARS, the portal continued to
make progress in 79




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terms of joint partnerships and strategic developments, which
contributed to the improvement in performance during the year. Cost of revenues Total cost of revenues increased by 73% to US$48.1 million for the year
ended December 31, 2003, up from US$27.8 million in 2002. The increase in cost
of revenues was lower than the increase in revenues due to the fact that the
newly acquired revenues had a higher gross profit margin compared to our
existing products. It is anticipated that this trend will continue in 2004 with
the addition of Pivotal and a full year of consolidation of Newpalms operating
results., which has a higher prevailing gross profit margin (and hence lower
relative cost of revenues) than our existing businesses. Software and consulting services Sales of IT products.Our cost of revenue from software sales increased to
US$6.1 million for the year ended December 31, 2003 from US$668,000 in 2002. As
a percentage of revenues, our cost of revenues for our sales of IT products
increased to 76.5% in 2003 from 50% in 2002 mainly due to the lower margin of
the sales of IT products revenue from Praxa as reseller of the IT products. Consulting services.Our cost of revenue from consulting services
increased to US$25.6 million for the year ended December 31, 2003 from US$6.3
million in 2002. As a percentage of revenues, our cost of revenues for our
software and consulting services increased to 60% in 2003 from 44% in 2002
mainly due to the lower margin of the outsourcing revenue from Praxa which
amounted to US$16.3 million, or 38% revenues of the consulting services revenue
in 2003. Mobile services and applications Our cost of revenue from mobile services and applications was US$2.2
million for the year ended December 31, 2003, representing a gross margin of
87% due to the high margin nature of the subscription revenue of mobile value
added services in China. Advertising and marketing activities Our cost of revenue from advertising and marketing activities revenues
decreased by 35% to US$13.0 million for the year ended December 31, 2003 from
US$20.0 million in 2002. This decline was greater than the 27% decline in
revenues for this segment in the year ended December 31, 2003 due to the steady
reduction in significance of the on-line network advertising operations in
Korea, which had lower gross profit margins (and hence higher cost of revenues)
than the average for this segment. An additional contributing factor was the
slightly higher margin contribution from the travel-related revenue from TTG
which amounted to US$5.3 million in 2003. Consequently, as a percentage of
revenues, our cost of revenues for our advertising and marketing activities
decreased to 66% in 2003 from 75% in 2002. Other income. Our cost of revenue from other income sources increased by
30% to US$1.1 million for the year ended December 31, 2003 from US$845,000 in
2002. The increase was in line with the corresponding increase in revenue. As a
percentage of revenues, our cost of revenue for our other income sources
increased slightly to 47% in 2003 from 46% in 2002. Operating expenses Total operating expenses rose by 12% for the year ended December 31, 2003
to US$41.5 million, from US$37.0 million in 2002. The increase was principally
a result of the three acquisitions made in the enterprise software and mobile
applications segments, offset by reductions in costs across the remainder of
our businesses. 80




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Selling, general and administrative expenses.Our selling, general and
administrative expenses increased 26% to US$34.3 million for the year ended
December 31, 2003 from US$27.2 million in 2002. As a percentage of revenues,
our selling, general and administrative expenses decreased to 38% of revenues
in 2003 from 62% of revenues in 2002. The decrease in selling, general and
administrative expenses as a percentage of revenues is attributable to several
factors, including the following:  
    
    the ongoing implementation of cost control measures, including
reductions in our workforce and closure of non-profitable offices.
Excluding the additional headcount resulting from our acquisitions of
Newpalm, IMI and Praxa, total headcount from our existing businesses
was reduced by approximately 40% from 952 in December 2002 to 576 in
December 2003, resulting in US$1.9 million of cost savings in
continuing operations. As at December 31, 2003, the headcount at
Newpalm and IMI were 189 and 213, respectively. Headcount at Praxa
as at December 31, 2003 was 201, comprised of 123 permanent employees
and 78 temporary staff. In addition, we closed non-profitable
offices relating to our software and consulting services operations
in Taiwan, the PRC, Hong Kong, Korea, the United States, Japan and
Thailand. We also closed non-profitable offices relating to our
advertising and marketing services operations in Taiwan and the PRC.
    
    a more rapid increase in revenues as a result of the
acquisitions of Newpalm, Praxa and IMI which, in general, have higher
net margins than our existing operations. During 2003, Newpalm,
Praxa and IMI had selling, general and administrative expenses of
US$3.5 million, US$5.3 million and US$2.8 million, respectively,
although these companies contributed US$16.9 million, US$22.3 million
and US$11.2 million of our revenues, respectively, during 2003. Excluding the impact of the acquisitions of Newpalm, Praxa and IMI,
selling, general and administrative expenses decreased as a percentage of
revenues from 61% during 2002 to 57% in 2003. Depreciation and amortization.Our depreciation and amortization expenses
decreased to US$7.2 million for the year ended December 31, 2003 from US$9.9
million in 2002. This decrease reflected the slowdown in investment in new
property, plant and equipment during the course of the years 2002 and 2003, as
well as the increasing percentage of fully depreciated fixed assets. However,
this decrease was partially offset by the increase in amortization expenses of
intangible assets as a result of the acquisition of Praxa, Newpalm and IMI
which collectively contributed an additional US$1.9 million of amortization
expenses in 2003. Impairment of goodwill and intangible assets. There was no impairment of
goodwill and intangible assets in 2003 or in 2002 based on our impairment tests
performed in accordance with SFAS 142. See Item 5  Operating and Financial
Review and Prospects  Critical Accounting Policies and Estimates  goodwill
and intangible assets. Interest income Our interest income decreased to US$13.4 million for the year ended
December 31, 2003 from US$23.7 million in 2002. This decrease was attributable
to several factors, including:  
    
    lower overall prevailing interest rates in 2003 as compared to
2002;
    
    implementation of a more conservative investment strategy of
buying shorter term securities with higher credit ratings and lower
attendant yields;
    
    lower overall cash levels in 2003 due to our acquisition activities; and
    
    a decrease in our holding of long-term range accrual notes. On a quarterly basis, our interest income ranged from approximately US$2.9
million to US$4.0 million. 81




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The treasury management program in 2003 involved investments in debt
securities that were funded with credit facilities, such as the Global Master
Repurchase Agreement between us and Fortis Bank nv-sa entered into in August
2001, or Repurchase Agreement, and the Total Return Swap Transaction Agreement
between us and DBS Bank entered into in August 2002, or Swap Agreement. For
further information on our repurchase facilities and their related risks, see
Item 5  Operating and Financial Review and Prospects  Liquidity and Capital
Resources. The weighted average interest rates on short-term borrowings as of
December 31, 2002 and 2003 were 2.1% and 1.4%, respectively. Interest expense Our interest expense decreased to US$1.1 million for the year ended
December 31, 2003 from US$2.5 million in 2002. This decrease in interest
expense was principally due to a reduction in aggregate borrowings under our
repurchase facilities and a decline in average interest rates during the same
period. Other gains and losses Our gain on disposal of available-for-sale securities was US$4.6 million
for the year ended December 31, 2003 as compared to a loss on disposal of
US$163,000 in 2002. We had no gain or loss on disposal of subsidiaries compared
to a loss of US$66,000 in 2002, which included the write-off of balances due
from disposed subsidiaries. We recorded other non-operating losses of
US$153,000 in 2003, compared to US$288,000 in 2002. We recorded a loss of
US$115,000 for the share of income in equity investees in 2003 compared with a
gain of US$682,000 in 2002. There was no impairment of available-for-sale
securities in 2003 compared to a loss of US$5.4 million in 2002. Net income/(loss) For the year ended December 31, 2003 we recognized a net income of US$15.5
million compared to a net loss of US$18.2 million in 2002. The principal
contributors to profitability were (i) a continued focus on the closure of
underperforming, unprofitable businesses; (ii) ongoing cost reduction exercises
across key markets and operations, including strategic headcount reductions,
and; (iii) the acquisition of businesses that contributed profit in 2003,
principally Newpalm, but also including Praxa and IMI. During 2003, we generated net income from continuing operations of US$16.4
million compared to a net loss from continuing operations of US$4.1 million
during 2002. The major factors behind the increase in net income from
continuing operations were a net contribution of US$10.9 million attributable
to the Praxa and Newpalm acquisitions and US$4.6 million of gains arising from
the disposal of securities during 2003. During 2003, we generated net losses from discontinued operations of
US$3.0 million compared to net losses from discontinued operations of US$14.7
million during 2002. Operations that were discontinued had incurred expenses
of US$16.7 million and US$2.5 million for the years ended December 31, 2002 and
2003, respectively. Income from disposals of such discontinued operations
resulted in a gain of US$2.1 million in 2003 and US$545,000 in 2002. Year ended December 31, 2002 compared to year ended December 31, 2001 Certain historical comparative amounts have been reclassified to conform
with new presentation in 2003, due to the adoption of new reporting
segmentation. In 2003, we changed from the previous segmentation
of e-business solutions, advertising, sales of IT products and other
income, to the current segmentation of software and consulting services, mobile
services and applications, advertising and marketing activities and other
income. We also discontinued the operations of certain subsidiaries in the
software and consulting services 82




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and the advertising and marketing activities
segments in 2003. Only the numbers from continuing operations are presented for
comparison purposes in the following sections. Revenues Total revenues for the year ended December 31, 2002 increased 12% to
US$44.0 million, from US$39.2 million in 2001, principally as a result of a
strong revenue income from the on-line network advertising business in Korea,
as a result of the 2002 Soccer World Cup, partially offset by US$1.1 million
decrease in revenue from our software and consulting services business and
US$2.7 million decrease from our portal operations. Software and consulting services Sales of IT products. Revenues from our software sales increased to
US$1.3 million for the year ended December 31, 2002 from US$743,000 in 2001.
The increase of sales was mainly attributable to the increased sales of
railroad ticketing software and hardware in China under Times Software in 2002. Consulting services. Revenues from our continuing operations in
consulting services decreased to US$14.2 million for the year ended December
31, 2002 from US$15.9 million in 2001. The decline in consulting services
revenue was generally attributable to an overall deterioration in market
conditions in 2002 across all of our major markets, as well as lower revenues
from our business units in Korea, Taiwan, Australia, Hong Kong, the United
States, Japan, the PRC and Thailand, due to the closure of non-profitable
units. These operations generated revenues of US$23.5 million and US$15.1
million, before restatement for discontinued operations, respectively, for the
years ended December 31, 2001 and 2002, which represented 41% and 26% of total
revenues for 2001 and 2002, respectively. The continued global economic
slowdown in 2002 resulted in a dramatic reduction in the demand for our
services and in the ability of companies to budget for and commission such
services. Advertising and marketing activities Our advertising and marketing revenues increased to US$26.7 million for
the year ended December 31, 2002 from US$18.1 million in 2001 due principally
to increased online network advertising revenues from South Korea which
experienced a significant increase in demand for marketing services, increasing
revenues from US$7.8 million in 2001 to US$18.9 million in 2002, as a result of
South Koreas hosting the World Cup in 2002. In addition, the acquisition of
IncNet and other direct marketing and data mining businesses in Australia
resulted in additional revenues of US$2.6 million for the year ended December
31, 2002. Other income Revenues from other products and services we offer to our clients, mainly
from portal operations, decreased to US$1.8 million for the year ended December
31, 2002 from US$4.5 million in 2001. The decline in other income revenue was
generally attributable to an overall deterioration in revenue and market
conditions in 2002 from portal operations including hongkong.com and china.com. Cost of revenues Total cost of revenues for the year ended December 31, 2002 increased 9%
to US$27.8 million, from US$25.4 million in 2001. The increase was broadly in
line with the increase in revenues for the year, and was principally the result
of the growth in the marketing and advertising business during the course of
the year. 83




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Software and consulting services Sales of IT products.Our cost of revenue from sales of IT products
increased to US$668,000 for the year ended December 31, 2002 from US$472,000 in
2001. As a percentage of revenues, our cost of revenues for software and
consulting services decreased to 50% in 2002 from 64% in 2001 primarily due to
the improved margins of sale of railroad ticketing software and hardware
products in China. Consulting services.Our cost of revenue from consulting services
decreased to US$6.3 million for the year ended December 31, 2002 from US$11.5
million in 2001. As a percentage of revenues, our cost of revenues for software
and consulting services decreased to 44% in 2002 from 72% in 2001. Cost of
revenues for consulting services revenue in 2002 decreased from 2001 due
principally to the reduced level of business activity during 2002. Advertising and marketing activities Our cost of revenues from advertising and marketing activities increased
to US$20.0 million for the year ended December 31, 2002 from US$11.6 million in
2001, reflecting the overall trend of revenue growth as a result of the soccer
World Cup held in Korea in mid-2002. As a percentage of revenues, our cost of
revenues for advertising and marketing activities increased to 75% in 2002 from
64% in 2001. This increase reflected the higher cost of revenues, and hence
lower gross profit margins, of the Korean marketing business relative to other
marketing activities. Other income Our cost of revenue for other income sources decreased to US$845,000 for
the year ended December 31, 2002 from US$1.9 million in 2001 which is
consistent with the 60% decrease in revenues from other income from US$4.5
million in 2001 to US$1.8 million in 2002. The decline in revenues from other
income was generally attributable to an overall deterioration in market
conditions in 2002 for our portal operations business, including hongkong.com
and china.com. Operating expenses Total operating expenses decreased 68% for the year ended December 31,
2002, to US$37.1 million, from US$114.2 million in 2001. The decrease was due
to (i) reduced selling, general and administrative expenses due to decreased
overall headcount, as well as across-the-board cost savings throughout the
company; (ii) Lower depreciation and amortization expenses in 2002; (iii) no
impairment of goodwill and intangible assets in 2002, as compared to US$21.9
million of such expenses recorded in 2001. Selling, general and administrative.Our selling, general and
administrative expenses significantly decreased to US$27.2 million for the year
ended December 31, 2002 from US$73.3 million in 2001. As a percentage of
revenues, our selling, general and administrative expenses decreased to 62% of
revenues in 2002 from 187% of revenues in 2001. This was due to effective cost
control measures, including closure of some non-profitable business units
during the period, and overall reductions in group-wide headcount. Depreciation and amortization expense.Our depreciation and amortization
expense decreased to US$9.9 million for the year ended December 31, 2002 from
US$19.2 million in 2001. This decrease reflected the decrease in additional
purchases of property, plant and equipment during the course of the years 2001
and 2002, as well as an increase in the percentage of fully depreciated fixed
assets. Impairment of goodwill and intangible assets.Based on our impairment
tests performed in accordance with SFAS 142, there was no impairment of
goodwill and intangible assets in 2002 as compared to US$21.9 million recorded
in 2001. See Item 5  Operating and Financial Review and Prospects  Critical
Accounting Policies and Estimates  goodwill and intangible assets. 84




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Interest income Our interest income decreased to US$23.7 million for the year ended
December 31, 2002 from US$26.7 million in 2001. This decrease was principally
due to several factors, including lower overall prevailing interest rates
during 2002, the implementation of a more conservative investment strategy of
buying more highly rated securities for our investment portfolio with lower
yields, lower cash levels in 2002, and a decrease in our holdings of long-term
range accrual notes. The treasury management program in 2002 involved
investments in debt securities that were funded with credit facilities, such as
the Repurchase Agreement and the Swap Agreement, and the investments were
composed of more conservative, lower yielding instruments, involving the
investment of cash holdings primarily into the debt securities of U.S.
government sponsored-enterprises. As of December 31, 2002, an aggregate of US$125.1 million was outstanding
under our repurchase facilities with US$115.0 million outstanding under our
Repurchase Agreement and US$10.1 million outstanding under our Swap Agreement.
Proceeds from the drawdowns were used to purchase additional treasury
instruments that yielded US$3.8 million in interest income in 2002.
Approximately US$151.1 million, or 30.0%, of our total cash and cash
equivalents and debt securities available-for-sale as of December 31, 2002 is
effectively set aside as collateral under the Repurchase Agreement and Swap
Agreement, and categorized as restricted debt securities in our consolidated
balance sheet. The weighted average interest rate on short-term borrowings as of December
31, 2001 and 2002 was 2.2% and 2.1%, respectively. Interest expense Our interest expense increased to US$2.5 million for the year ended
December 31, 2002 from US$1.3 million in 2001. This increase was principally
due to an increase in aggregate borrowings under our repurchase facilities for
the purchase of additional investments in debt obligations. Other gains and losses There was no gain or loss arising from share issuance of a subsidiary for
the year ended December 31, 2002 as compared to a loss of US$55,000 in 2001.
Our loss on disposal of available-for-sale securities was US$163,000 in 2002 as
compared to a US$4.4 million gain in 2001. Our loss on disposal of subsidiaries
and cost investments decreased to US$66,000 in 2002 from a loss of US$1.9
million in 2001 which included the write-off of balances due from disposed
subsidiaries of US$93,000. We recorded other non-operating gains of US$508,000
in 2002 and other non-operating losses of US$288,000 in 2002. We also recorded
a gain of US$682,000 for the share of results in equity investees in 2002
compared with a loss of US$2.6 million in 2001. Impairment of cost investments and available-for-sale securities We recorded a loss of US$5.4 million for the impairment of cost
investments and available-for-sale securities for the year ended December 31,
2002 compared to a loss of US$12.3 million in 2001. This loss was principally
the result of impairments on our available-for-sale securities. Net loss We recognized a net loss from continuing operations of US$4.1 million for
the year ended December 31, 2002 compared to a net loss of US$85.5 million in
2001. The principal contributors to the reduction in losses were a continued
focus on the closure of underperforming, unprofitable businesses, and ongoing
cost reduction exercises across key markets and operations, including strategic
headcount reductions. The net loss of the subsidiaries classified as
discontinued operations for the years ended for the year ended December 31,
2001 and 2002 was US$38.9 million and US$14.7 million, respectively. 85




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B.
    
    Liquidity and Capital Resources Liquidity.The table below sets forth the summary of our cash flows for the
periods indicated: Year ended December 31,2001
    
    2002
    
    2003(in thousands of US$)Net cash provided by (used in) operating activities
    
    
    (17,642
    )
    
    
    15,926
    
    
    
    13,195Net cash provided by (used in) investing activities
    
    
    (120,527
    )
    
    
    (8,830
    )
    
    
    118,119Net cash provided by (used in) financing activities
    
    
    111,506
    
    
    
    5,237
    
    
    
    (108,959
    )Net increase (decrease) in cash and cash equivalents
    
    
    (26,663
    )
    
    
    12,333
    
    
    
    22,355Cash and cash equivalents at beginning of period
    
    
    47,483
    
    
    
    20,820
    
    
    
    33,153Cash and cash equivalent as at end of period
    
    
    20,820
    
    
    
    33,153
    
    
    
    55,508
 Cash from operating activities.Net cash provided by operating activities
was US$14.9 million for the year ended December 31, 2003 compared to US$15.9
million for 2002. The positive cash flow from operations in 2003 was
attributable principally to the net income of US$15.5 million, gain on disposal
of available-for-sale securities of US$4.6 million, gain on disposal of
subsidiaries and cost investments of US$ 2.6 million, and a net increases in
operating liabilities of US$6.8 million. These items were partially offset by
adjustments for certain non-cash items including depreciation of US$5.3 million
and amortization of goodwill and intangible assets of US$3.6 million. Despite a net loss of US$18.2 million for the year ended December 31,
2002, cash flow from operations in that year was US$15.9 million. This was due
primarily to a net reduction in accounts receivable of US$7.2 million due to
improvements in credit control management, and a net reduction in deposits,
prepayments and other receivables of US$11.0 million due to the reduction in
office space and a prepayment for an investment which was subsequently paid.
These items were partially offset by the adjustments for certain non-cash items
including loss on disposal of property and equipment of US$1.7 million,
depreciation of US$11.3 million, amortization of US$1.2 million, net investment
impairment of US$ 5.4 million and other non-cash items, amounting to US$17.4
million. There was a cash outflow from operating activities of US$17.6 million for
the year ended December 31, 2001 principally as a result of ongoing operating
losses. Cash from investing activities.Net cash provided by investing activities
was US$116.4 million for the year ended December 31, 2003, which was mainly
from the net proceeds from disposal of available-for-sale securities of
US$155.9 million, partially offset by the use of US$13.4 million for the
acquisitions of subsidiaries (net of cash acquired of US$5.9 million and
exclusive of US$25 million paid for the acquisition of IMI which is eliminated
on consolidation), including US$14.0 million as the first installment for the
purchase of Newpalm and US$3.6 million for the purchase of Praxa. In addition,
loans of US$25.0 million to Symphony and US$2.0 million to Pivotal relating to
the acquisition were extended during the year. Net cash used in investing activities was US$8.8 million for fiscal year
2002. During 2002, we used US$18.9 million to expand our business in the
Asia-Pacific region, which included US$5.5 million used for property and
equipment, US$4.6 million used for the acquisitions of OpusOne Technologies and
Mezzo Australia, and US$8.8 million for the acquisition of intangible assets.
In addition, US$7.0 million was used for the purchase of promissory notes and
warrants to Sagent. These were partially offset by the net proceeds from
disposal of available-for-sale securities of US$15.1 million. 86




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Net cash used in investing activities in 2001 was US$120.5 million, the
result of numerous acquisitions made in the strategic business areas of
e-business consulting, marketing and advertising, and portal and related
businesses. Cash used in financing activities.During the year ended December 31,
2003, cash flows used in financing activities of US$109.0 million consisted
primarily of net repayment of bank loans of US$106.4 million and US$11.0
million used in the purchase of treasury stocks, offset by an issuance of share
capital of US$8.5 million. Positive cash flow from financing activities of US$5.2 million during 2002
was due to net increase of bank loans of US$8.9 million, offset by US$4.4
million used for the purchase of treasury stocks. Positive cashflow from financing activities was US$111.5 million in 2001,
due to a net increase of bank loans. Capital Resources As of December 31, 2003, we had US$55.5 million in cash and cash
equivalents, US$238,000 of restricted cash, which consisted of time deposits
pledged for utilities, and approximately US$313.3 million mainly invested in
available-for-sale securities issued by U.S. government-sponsored enterprises,
international corporations and commercial banking institutions. We believe that
the combination of our available cash and cash equivalents, the net cash
provided by operating activities and interest income will be sufficient to meet
our capital needs for the foreseeable future. Funding arrangements.Our primary capital funding sources are cash flow
from operations and interest income generated from our cash holdings and debt
securities, which can fluctuate according to the composition of our investment
portfolio. From July 1999 until December 2003, we financed our operations and met our
capital expenditures and commitments from the net proceeds of our private
placements, our July 1999 IPO, our second public offering in January 2000 and
our March 2000 initial public offering for hongkong.com, as well as the
interest income derived from investing such proceeds in debt securities. For
the year ended December 31, 2003, we generated net income of US$15.5 million., Our total capital expenditures amounted to US$8.3 million, US$5.5 million
and US$1.6 million in 2001, 2002 and 2003 respectively. The primary capital
expenditure in each of those years was the purchase of computers, servers and
network equipment, and other items related to the expansion of our business
network across the Asia-Pacific region, the United States and the United
Kingdom. For the foreseeable future we anticipate that we will fund operations and
capital expenditures primarily with net income generated by our operations, as
well as by applying the cash holdings still available to us from the proceeds
of our equity offerings. We have primary lines of credit with two commercial banks through our
repurchase facilities, which in the aggregate enable us to borrow up to
US$400.0 million on such terms as we and the banks may mutually agree. In
August 2001, each of chinadotcom and our subsidiary, hongkong.com, entered into
a Global Master Repurchase Agreement with Fortis Bank nv-sa, an AA- rated bank
(as rated by Standard & Poors) to establish a repurchase facility which
enables us to draw down via Fortis Bank, Hong Kong Branch up to US$250.0
million in funding for a one year term. In addition, another repurchase
facility with similar terms was negotiated in August 2002 with DBS Bank,
allowing us additional access of up to US$150.0 million for a three-year term.
Both facilities were established to provide us with a source of reasonably
priced capital to give us flexibility to finance operational working capital
and acquisitions, as well as our treasury management program, without having to
liquidate our investment portfolio at short notice. 87




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Under these repurchase facilities, any drawdown requires us to sell
certain debt securities to the bank at a certain price, and the bank agrees to
sell back to us the same securities at the same purchase price at a later date.
During the period of the drawdown, the bank has agreed to pay us any income
generated by coupons in respect to the sold debt securities. In return, we
have agreed to pay interest to the bank at Libor plus a spread. As of December
31, 2003, our cost of borrowing was Libor plus 0.20% for the Fortis Repurchase
Agreement and Libor plus 0.35% for the DBS Bank Swap Agreement. Over the course of 2003, we had an average outstanding balance from our
repurchase facilities of US$75.1 million used for the purpose of providing
working capital for operations, liquidity for tranche payments for
acquisitions, and for purchasing debt securities. Net of interest expense of
US$1.1 million, these debt securities produced US$1.0 million of interest
income, or approximately 7.5% of our total interest income in 2003. These
investments were composed of more conservative, lower yielding instruments,
involving the investment of cash holdings primarily into the debt securities of
U.S. government sponsored enterprises. We have reduced our total outstanding
balances under these repurchase facilities from US$125.1 million as at January
1, 2003 to US$25.1 million as of December 31, 2003. Of this US$25.1 million,
US$15.0 million was used for financing working capital needs and not for
purchasing debt investments, and is repayable within twelve months from
December 31, 2003. The remaining US$10.1 million is repayable through 2005.
Approximately US$31.1 million, or 8.4%, of our total cash and cash equivalents
and debt securities are effectively set aside as collateral under the
Repurchase Agreement and Swap Agreement, and categorized as restricted debt
securities in our consolidated balance sheet. As at March 11, 2004, we had executed additional drawdowns of US$62.0
million under the Fortis Repurchase Agreement to bring our total outstanding
balance under our lines of credit to US$87.1 million. As at such date,
approximately US$104.3 million has been set aside as collateral and categorized
as restricted debt securities. These additional drawdowns were used to fund
the final tranche payment of US$41.0 million for Newpalm, and our acquisition
of Pivotal, and not for the purchase of additional debt securities. In addition, certain of our operating companies maintain usual and
customary lines of credit and overdraft protection accounts with banks to meet
their operating needs. Contractual Obligations and Other Commitments Total long-term bank loans amounted to US$11.5 million as at December 31,
2003. Of this amount, US$10.1 million represents a swap transaction loan which
is due in 2005. Debt securities with a fair value of US$11.9 million were
pledged as collateral to secure this loan. The balance of long-term bank loans
of approximately US$1.4 million represents mortgages on property. Freehold
land and buildings with a carrying amount at December 31, 2003 of US$2.8
million are pledged as collateral to secure these mortgage loans. The weighted
average interest rates on long-term bank loans as of December 31, 2003 was 1.6%
compared to 2.1% as of December 31, 2002. Commitments, leases and long-term contracts.As of December 31, 2003, we
had future minimum office rental and telephone line lease payments under
non-cancelable operating leases of US$5.5 million for 2004, US$2.7 million for
2005, US$1.8 million for 2006, US$1.3 million for 2007, US$0.7 million for 2008
and US$3.5 million thereafter. Payments due by period(in thousands of U.S. dollars)Total
    
    less than 1 year
    
    2-3 years
    
    4-5 years
    
    more than 5 yearsOperating lease obligations(1)
    
    
    15,612
    
    
    
    5,527
    
    
    
    4,512
    
    
    
    2,066
    
    
    
    3,507Purchase obligations(2)
    
    
    41,000
    
    
    
    41,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    56,612
    
    
    
    46,527
    
    
    
    4,512
    
    
    
    2,066
    
    
    
    3,507
   As of December 31, 2003, we had incurred contractual obligations of US$56.6
million, consisting of the following:(1)
    
    Operating lease obligations consist of future minimum office rental and
telephone line lease payments under non-cancelable operating leases. 88




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(2)
    
    Purchase obligations of US$41 million for the final installment in the
acquisition of Newpalm, which was paid in February 2004. IMI.We have contractual obligations, as lender, for up to US$25 million
under two loan facilities we have entered into in connection with our
investment in IMI. In addition, in connection with our investment in IMI, we
had granted Symphony, our joint venture partner, an option to sell to us all of
its 49% interest in IMI under certain events. See Item 10.C  Material
Contracts  Expansion through Acquisitions and Partnerships  Cayman First Tier
Loan Facilities and  Put Option Agreement. Pivotal. At December 31, 2003, we had a contractual obligation pursuant
to a definitive agreement signed on December 8, 2003 to acquire Pivotal for
total consideration of US$35.9 million in cash, 1.85 million common shares with
a value of US$20.7 million using the value for chinadotcom shares in the
transaction formula (the value of these shares was US$21.4 million using the
trading price of chinadotcom shares on the day the acquisition was consummated)
and US$481,000 in stock option conversion expenses. The acquisition was
completed on February 25, 2004. See Item 10.C  Material Contracts 
Expansion through Acquisitions and Partnerships  Pivotal. Ross. We have contractual obligations under a definitive agreement
entered into on September 4, 2003 to acquire Ross Systems, Inc. for aggregate
consideration of approximately US$68.3 million in cash and chinadotcom shares.
See Item 10.C  Material Contracts  Expansion through Acquisitions and
Partnerships  Ross Merger Agreement. Annual variations Our historical revenues and operating results have varied substantially
from year to year, and we expect this to continue. Factors that cause
fluctuations in our operating results include:  
    
    completion of acquisitions, partnerships, joint ventures and other business combinations;;
    
    discontinuation of non-performing and non-profitable businesses;
    
    interest income from our treasury portfolio;
    
    mark to market or realized losses and realized gains related to our treasury portfolio;
    
    salaries and benefits to our employees;
    
    administrative expenditures such as legal and other professional services;
    
    general health of the economy and our sector and the ability of
our customers to remain or become viable to pay for services
provided;
    
    demand for our software, mobile services and advertising and
marketing services;
    
    the amount and timing of capital expenditures and other costs
relating the expansion of our operations;
    
    our ability to record revenue from key clients; and
    
    the introduction or elimination of products and services by us or our competitors. 89




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Inflation and changing prices We do not anticipate any material impact on our net sales and revenues, or
on our income from continuing operations as a result of the impact of inflation
and changing prices. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with US GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to goodwill and intangible assets,
investment, revenue recognition, accounts receivable and allowance for doubtful
accounts. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Revenue recognition We generate revenues from three primary sources: software and consulting
services, mobile services and applications, and advertising and marketing
services. Revenue is recognized in accordance with accounting principles
generally accepted in the United States, or US GAAP. The specific literature we
follow in connection with revenue recognition is the Securities and Exchange
Commissions Staff Accounting Bulletin No. 101 (SAB 101) Revenue
Recognition in Financial Statements, the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition,
as amended by SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions, and in certain instances, SOP 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. We recognize revenue when we have persuasive evidence of an
arrangement, the product has been shipped and title has passed or the services
have been delivered, the price is fixed or determinable and collectibility is
reasonably assured. In addition to these basic criteria, the following are the
specific revenue recognition policies followed for each major stream of revenue
by reporting segment. Software and consulting services.Revenues in the software and consulting
services segment are derived from the sale of software products, the
maintenance, service and support for software licenses, the outsourcing of
information technology consultants and the design, development and integration
of Internet web sites. Revenue from the sale of software products often includes a combination of
hardware, software, training and maintenance services. We allocate the
arrangement fee in these multi-element deals to each individual element using
its fair value as determined by vendor specific objective evidence. Vendor
specific objective evidence of fair value is determined by the customary price
charged for each element when sold separately after the application of any
standard approved discount. Where fair value exists for all undelivered
elements of the arrangement, we apply the residual method of accounting and
defer revenue allocated to the undelivered elements while recognizing the
residual revenue allocated to the delivered elements. In the absence of vendor
specific objective evidence for any undelivered element, we defer the entire
arrangement fee and recognize revenue when all undelivered elements are
delivered assuming all other basic criteria for revenue recognition have been
met. 90




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Outsourcing of information technology consultants involves contractual
time and material outsourcing agreements whereby consultants are provided at
agreed-upon billing rates for customers to deploy on their own internal
projects. Revenues from time and materials outsourcing contracts are recognized
as the services are delivered assuming all other basic criteria for revenue
recognition have been met. Revenues related to training services for software products are deferred
and recognized as the services are delivered, assuming all other basic criteria
for revenue recognition have been met. Where training services are sold as part
of a multi-element deal, those services are evaluated, on a case-by-case basis,
to determine whether they are essential to the functionality of the other
elements of the arrangement. In cases where training services are considered
essential to the functionality of the other elements of the arrangement,
revenue from the total arrangement is deferred and recognized as the training
services are delivered. Revenues related to maintenance agreements on software products are
deferred and recognized ratably over the term of the agreement which is
normally one year. Provisions for discounts and rebates to customers, estimated returns and
allowances, and other adjustments are provided for in the same period in which
the related revenues are recorded. Such provisions are calculated after
considering relevant historical data. Some of the engagements in the software and consulting services segment
are for the design, development and integration of Internet web sites. These
projects are usually fixed price and most have durations of six months or less.
Customers enter into contractual arrangements with us that specify the required
web design features, layout, functionality, implementation services required,
expected deliverables, pricing, payment terms and project timetable. Invoicing
and payments are usually made throughout the term of the project in accordance
with the contractual terms. A majority of the projects include acceptance
clauses requiring customers sign off at the conclusion of the projects. The
arrangements allow the customer to withhold 10% of the total project cost as a
retention until sign off and acceptance is obtained. Historically, we have not
experienced many projects where sign off or acceptance has been withheld by a
customer resulting in a material loss on a project. In limited situations, we
receive change orders from customers, in which case, each change order request
is assessed for its impact on the existing arrangement, and contract revenues
and costs are only adjusted after both parties agree to the changes. We also
receive change orders which result in the initiation of a separate project. Revenues from the design and development of Internet web sites and the
integration of those web sites with clients computer systems are recognized
using contract accounting. In order to calculate the amount of revenue earned,
we use the cost-to-cost percentage-of-completion method whereby amounts
recognized are calculated by reference to the hours incurred as a percentage of
the total estimated hours to complete the project. We use this input method to
calculate revenues because historical experience has demonstrated that it
produces a reliable indication of the progress on each engagement. Estimates of
total projected contract costs are re-evaluated on a regular basis and, if
appropriate, revised. Any adjustments to revenue due to changes in estimates
are accounted for in the period of the change in estimate. When estimates
indicate that a loss will be incurred on a contract upon completion, a
provision for the expected loss is recorded in the period in which the loss
becomes evident. Historically, we have not experienced material losses on
fixed-price contracts. The majority of our contracts are short term in
duration, and the use of the completed contract method would not result in a
material difference in revenue earned. We provide maintenance services related to Internet web sites. Maintenance
services related to Internet web sites involves support in connection with
non-significant customer requested changes to web site functionality, updates
to web site information, and telephone support for web site administrators.
Revenues from Internet web site maintenance agreements are deferred and
recognized ratably over the term of the related agreements which are usually
for periods of six months or one year. 91




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Mobile services and applications.Our mobile services and applications
segment derives revenues from the provision of value-added SMS such as dating
and friends matching, e-mail, ring tone and logo downloads and various other
related products to mobile phone users. We rely on mobile network operators in
China to transmit the SMS messages and bill mobile phone users for SMS fees on
a monthly or per message basis. SMS revenues are recognized in the month in which the services are
performed, assuming all other basic criteria for revenue recognition have been
met. We book revenues on a monthly basis based upon confirmations from the
network operators. At the end of each reporting period, where an operator fails
to provide us with a monthly statement confirming the amount of SMS charges
billed to their mobile phone users for that month, we use information generated
from our own internal system and historical financial data to make estimates of
the billing reconciliation rate and collectable SMS fees, and revenues are
accrued accordingly. Revenues from SMS services are recognized net of the mobile phone
operators share of revenue and uncollectible amounts because we consider the
operators to be the primary obligors in the information transmission and
delivery process. The network operators are the primary obligor in the
arrangement. The mobile phone operators are responsible for fulfillment,
including the transmission of the SMS messages to the end users. We are
transparent to the mobile phone users because we provide the services through
the mobile phone operators. We recognize revenues on a monthly basis in the
case of monthly subscriptions, on a message-received basis in the case of per
message services, and on the basis of each successfully downloaded content in
the case of games, ringtones and logos. We have no discretion over pricing of
the services. Under arrangements with each mobile phone operator, changes
require both parties approval. We have no discretion over supplier selection
since there are currently only two mobile phone operators in China, and all SMS
services must be routed through their networks. Advertising and marketing services.Advertising and marketing services
revenues are derived from the sale of online banner advertising, sponsorships,
direct mailings and offline advertising campaigns. Online banner advertising revenues are derived from short-term advertising
contracts (normally less than 90 days), in which customers advertisements are
placed on web sites for a set period of time or for a set number of
impressions. Impressions are defined as the number of times that an
advertisement appears on a selected web page. Customers typically identify the
web sites they wish their advertisements to be displayed on, and in certain
situations, the advertisements are also displayed on our own or our affiliated
companies web sites. Revenues from online banner advertising are recognized
in the period in which the advertisement is displayed at the lesser of the
ratio of impressions delivered over total guaranteed impressions or ratably
over the term of contract. Sponsorship revenues are derived from advertisements placed on our own or
our affiliated companies web sites and are usually for longer display periods
than online banner advertisement agreements, but normally do not exceed one
year. Sponsorship revenues are recognized ratably over the term of contracts,
assuming all other basic criteria for revenue recognition have been met. Direct mailing revenues are derived from targeted advertising campaigns.
We transmit the advertisements in either electronic or hard copy form to the
target profile or market. On occasion, we may also assist with the design of
the advertisements. Revenues from direct mailing are recognized when the
advertisements are sent, assuming all other basic criteria for revenue
recognition have been met. Offline advertising revenues are derived from the production and placement
of advertisements in magazines and publications for the travel and tourism
industry. Revenues are realized when the advertisements are published,
assuming all other basic criteria for revenue recognition have been met. 92




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We pay web sites for providing advertising space and become obligated to
make the payment in the period the advertising is delivered. Such expenses are
classified as cost of revenues in the consolidated statement of operations. Certain of our subsidiaries act as advertising agents for their customers,
and the related revenues derived from these agreements are recorded net in the
consolidated statement of operations. We pay affiliated web sites a percentage of advertising revenue, ranging
from 50% to 85%, in exchange for providing advertising space to our network.
We become obligated to make payments to such affiliated web sites in the period
the advertising is delivered. Such expenses are classified as cost of revenues
in the consolidated statement of operations. We record the revenue on a gross
basis since it is responsible for the fulfillment of the contract, including
the selection of the web site, arrangement of the ad placement and
acceptability of the ad. In addition, we assume the credit risk for the amount
billed to the customer and owed to an affiliated web site after the web site
performs, regardless of whether we fully collect the sales price from the
customer. Goodwill and intangible assets Goodwill represents the excess of cost over the fair value of net tangible
and identifiable intangible assets of acquired businesses. Effective January
1, 2002, we adopted SFAS 142, Goodwill and Other Intangible Assets. In
accordance with SFAS 142, we ceased amortizing goodwill and performed a
transitional test of our goodwill as of January 1, 2002. SFAS 142 requires that
goodwill be tested for impairment at the reporting unit level (operating
segment or one level below an operating segment) on an annual basis and between
annual tests in certain circumstances. The performance of the test involves a
two-step process. The first step of the impairment test involves comparing the
fair value of our reporting units with the reporting units carrying amount,
including goodwill. Fair value is primarily determined by computing the future
discounted cash flows expected to be generated by the reporting unit. If the
carrying value exceeds the fair value, goodwill may be impaired. If this
occurs, we perform the second step of the goodwill impairment test to determine
the amount of impairment loss. The fair value of the reporting unit is
allocated to its assets and liabilities in a manner similar to a purchase price
allocation in order to determine the implied fair value of the reporting unit
goodwill. This implied fair value is then compared with the carrying amount of
the reporting unit goodwill, and if it is less, we would then recognize an
impairment loss. Prior to January 1, 2002, goodwill was amortized to expense
on a straight-line basis over a period of two to five years. The carrying
value of goodwill was reviewed for possible impairment whenever events or
changes in circumstances indicated that an impairment might exist. The
transitional impairment test performed in June 2002 indicated that the fair
value of our reporting units exceeded the reporting units carrying amount
including goodwill, and accordingly, goodwill was not impaired. In December
2003, an annual impairment test was performed, and the fair value of our
reporting units exceeded the reporting units carrying amount including
goodwill. As such, we concluded that goodwill was not impaired. Intangible assets represent trademarks, service marks, URLs, software
applications and programs, customer base, business licenses and partnership
agreements. Intangible assets are carried at cost less accumulated
amortization. Amortization is computed using the straight-line method over the
estimated economic lives of the respective assets. The estimated useful lives
of the intangible assets used are as follows: Trademarks, service marks and URLs
    
    20 yearsSoftware applications and programs
    
    2 to 15 yearsCustomer base and contracts
    
    1.5 to 10 yearsBusiness licenses and partnership agreements
    
    6 to 7 years
 In determining the estimated useful lives of the acquired URLs, we
considered the
following pertinent factors:  i
    
    that the URLs represent brand identity in addition to providing a
technological platform, and that they should therefore be amortized
over a longer period than developed technologies without brand
identity characteristics;ii
    
    they are not related to any other group of assets with
identifiable economic lives;iii
    
    they are subject to no legal, regulatory, or contractual
restrictions or provisions that would impact their economic life;iv
    
    there is no anticipated effect of obsolescence, demand, or
competition on the useful lives of the URLs; and,v
    
    there is no material maintenance expenditure required to maintain
the URLs. While these factors might indicate that the URLs have an indefinite useful
life, we considered that our planning horizon for operations, and for the
internet market in China as a whole, do not exceed twenty years. Therefore,
projections beyond this period may not be sufficiently reliable to justify a
longer amortization period. Annually, we review and adjust the carrying value of purchased intangible
assets if the facts and circumstances suggest purchased intangible assets may
be impaired. If this review indicates that purchased intangible assets may not
be recoverable, as determined based on the undiscounted cash flows of the
entity 93




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acquired over the remaining amortization period, the carrying value of
intangible assets will be reduced by the estimated shortfall in discounted cash
flows. Investments Debt and marketable equity investments which represent securities
classified as available-for-sale are recorded at gain or loss at fair value.
Unrealized holding gains or losses, net of tax, on available-for-sale
securities are reported in other comprehensive income/(loss) and are included
in a separate component of shareholders equity. Realized gains and losses and
declines in fair value judged to be other than temporary on available-for-sale
securities are included in gain/(loss) on disposal of available-for-sale
securities and impairment of available-for-sale securities, respectively. The
cost of securities sold is based on the first-in, first-out method. Interest
and dividends on securities classified as available-for-sale are included in
interest income and other income, respectively. All other investments, as to which we are unable to exercise significant
influence and there is not a readily determinable market value, are accounted
for under the cost method of accounting. Dividends and other distributions of
earnings from investees, if any, are recorded as income when declared. We
periodically evaluate the carrying value of our investments accounted for under
the cost method of accounting, and any decline in value is included in
impairment of cost investments. When determining whether an impairment of investments exists or a decline
in value of an available-for-sale security is other than temporary, we evaluate
evidence to support a realizable value in excess of the current market price
for securities with readily determinable fair value. Such information may
include the investments financial performance, including such factors as
earnings trends, dividend payments, asset quality and specific events, the near
term prospects of the investment, the financial condition and prospects of the
investments region and industry, and our investment intent. Typically, a
sustained decline in the market value of a quoted security for six months is
generally indicative of an other-than-temporary impairment. Accounts receivable and allowance for doubtful accounts As we have operations in over 10 countries, there are variations in credit
terms from country to country and from segment to segment. Within the broad
range of credit policies, the credit terms applicable to each of our individual
business segments are based on the following general guidelines: For 2002  
    
    For sales of IT products, we offer 30 to 60 days credit from
date of delivery of software or cash on delivery;
    
    For sales of consulting services, we offer 30 to 60 days
credit after completion of milestones per agreement; and
    
    For sales in the advertising and marketing activities business,
we offer three standard payment options cash on delivery, 14
days after completion of campaign or 30 days credit. For 2003  
    
    For sales of IT products, we offer 30 to 60 days credit from
date of delivery of software or cash on delivery;
    
    For sales of consulting services, we offer 30 to 60 days
credit after completion of milestones per agreement; 94




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
    
    For sales in the mobile services and applications segment, we
offer 90 days credit from the date of issuance of invoices which
usually takes place one month following the month of actual sales;
and
    
    For sales in the advertising and marketing activities business,
we offer three standard payment options cash on delivery, 14
days after completion of campaign or 30 days credit. Our general policy for the provision of allowance for doubtful accounts in
2002 and 2003 was as follows: Number of days past due
    
    Rate (% of Accounts Receivable)Over 90 days
    
    
    25
    %Over 120 days
    
    
    50
    %Over 180 days
    
    
    100
    %
 Accounts receivable are carried at their original amount less an allowance
for doubtful accounts. We have adopted credit control policies to ensure that
collection of accounts receivable is probable and that recognition of the
related revenue is appropriate. The allowance for doubtful accounts is
established based on our credit control policies. Our accounts receivable balances are in excess of what would be expected
if we consistently enforced our credit terms. The reasons for the inconsistency
in each segment are as follows: Software and consulting services: The 26% and 38% of receivables over 90 days outstanding in 2001 and 2002,
respectively, was mainly due to the prevailing practice for customers in China
to delay payments beyond their due dates. In addition, the rapid global
reversal of spending on technology and internet-related products and services
that occurred during the course of 2001 had a severe knock-on effect which
reduced economic growth in the markets and for the companies to which we were
exposed, particularly in China. As a result, many of the companies that we
provided services for were unable to pay or simply delayed payment, or in some
instances refused payment, when the time came for collection. The reduction in
the days sales outstanding, or DSO and the improvements in aging to over 94%
receivables outstanding less than 90 days in 2003 was mainly attributable to
improvement in the collection process. In addition, the acquisition of IMI, a
company which has generally shorter credit terms, resulted in an overall
improvement of accounts receivable aging. The DSO of 78 days in 2003 was
approximately in line with our credit terms disclosed above. For 2001, 2002 and 2003, we made the appropriate provision for allowance
for doubtful accounts based on our credit policies as described above. Mobile services and applications: The DSO in 2003 of 138 days is approximately consistent with the credit
terms as disclosed above. For 2003, we made the appropriate provision for allowance for doubtful
accounts based on our credit policies for the provision of doubtful debts as
described above. Advertising and marketing activities: The 7% and 23% of receivables over 90 days outstanding in 2001 and 2002,
respectively, was mainly due to the same factors as described above which
affected the collection rates for software and consulting services, namely the
prevailing practice for customers in China to delay payments beyond their due
dates. In
addition, the adverse economic environment in 2002 also affected some
customers ability to pay on time. The 95




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reduction in receivables aged over 90
days in 2003 was attributable to improvements in the collection process, and
the closing of business units that had a history of long outstanding accounts
receivable. The DSO of 30 days in 2003 is consistent with our credit terms
disclosed above. For 2001, 2002, and 2003, we made the appropriate provision for allowance
for doubtful accounts based on our credit policies as described above. In each period, we concluded that the recorded accounts receivable
balances were collectible and that revenue recognition was appropriate based on
the criteria outlined in SAB 101 for mobile applications and services and
advertising and marketing activities, in SOP 97-2 for sales of IT products, and
in SOP 81-1 for consulting services. Specifically, in each case where a
receivable is recorded and revenue is recognized:  
    
    Persuasive evidence of an arrangement existed - evidence of the
arrangement is provided by a contract signed by ourselves and the
customer.
    
    Delivery has occurred - delivery occurs when the customer has
taken title and assumed the risks and rewards of ownership. Risk of
ownership must have passed to the customer. Delivery is considered
not to have occurred if there are undelivered elements that are
essential to the functionality of the product or services that we
have delivered.
    
    Fee is fixed or determinable  prices for products and services
are always pre-determined and included in the terms of the contract.
    
    Collectibility is reasonably assured  determined by assessing
customers credit, establishing credit limits, performing credit
checks as warranted and signing contracts with all customers to
establish a legal obligation to pay, to provide assurances that
accounts will be collectible. We believe that our assessment of the collectibility of accounts
receivable has subsequently proven to be valid, as evidenced by the percentage
subsequent settlement received up to April 2004 for balances as at December 31,
2002 and 2003. Accounting treatment of the business combination We will account for the business combinations of Ross and Pivotal in our
financial statements prepared in accordance with US GAAP using the purchase
method of accounting pursuant to SFAS 141, Business Combinations. The
assets acquired and liabilities assumed from Ross and Pivotal will be recorded
at their fair values as of the date of the business combination. Any excess of
the purchase price over the fair value of the net tangible assets and
identifiable intangible assets acquired will be recorded as goodwill. The
results of operations of Ross and Pivotal will be included in our results of
operations from the date of the closing of the business combination. A final
determination of the required purchase accounting adjustments and the fair
value of the assets and liabilities has not yet been made. Impact of Certain Recently Issued Accounting Standards In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Instruments that are indexed
to and potentially settled in an issuers own shares that are not within the
scope of SFAS 150 remain subject to existing guidance. SFAS 150 must be
applied immediately to instruments entered into or modified after May 31, 2003
and to all other instruments that exist as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. Certain
provisions of this statement relating to non-controlling interests in
limited-life subsidiaries were deferred indefinitely. We adopted 96




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SFAS 150 and there was no impact on our results of operations or financial
position upon the adoption of the new statement. In January 2003, the FASB issued FIN 46, consolidation of Variable
Interest Entities. In December 2003, the FASB modified FIN 46 to make certain
technical corrections and address certain implementation issues that had
arisen. FIN 46 provides a new framework for identifying variable interest
entities (VIEs) and determining when a company should include the assets,
liabilities, non-controlling interests and results of activities of a VIE in
its consolidated financial statements. In general, a VIE is a corporation,
partnership, limited liability corporation, trust, or any other legal structure
used to conduct activities or hold assets that either (i) has an insufficient
amount of equity to carry out its principal activities without additional
subordinated financial support, (ii) has a group of equity owners that are
unable to make significant decisions about its activities, or (iii) has a group
of equity owners that do not have the obligation to absorb losses or the right
to receive returns generated by its operations. FIN 46 requires a VIE to be
consolidated if a party with an ownership, contractual or other financial
interest in the VIE (a variable interest holder) is obligated to absorb a
majority of the risk of loss from the VIEs activities, is entitled to receive
a majority of the VIEs residual returns (if no party absorbs a majority of the
VIEs losses), or both. A variable interest holder that consolidates the VIE
is called the primary beneficiary. Upon consolidation, the primary beneficiary
generally must initially record all of the VIEs assets, liabilities and
non-controlling interests at fair value and subsequently account for the VIE as
if it were consolidated based on majority voting interest. FIN 46 also
requires disclosures about VIEs that the variable interest holder is not
required to consolidate but in which it has a significant variable interest. FIN 46 was effective immediately for VIEs created after January 31, 2003.
The provisions of FIN 46, as revised, were adopted early in respect of our
interests in all VIEs and there was no cumulative effect on our results of
operations or financial position upon the adoption of the provisions of the
revised FIN 46.  C.
    
    Research and Development, Patents and Licenses, etc. We do not have a formal research and development policy, and to date we
have not spent significant amounts on company-sponsored research and
development activities. During fiscal 2003, research and development costs
represented approximately 1% of our revenues. As part of our overall strategy
to develop and introduce more proprietary products to sell across our business
lines and service offerings, we anticipate that our research and development
costs may increase as a percentage of overall revenues, particularly
considering the anticipated cost of software development activities in China.
As a result of the acquisition of several software companies in 2003 and early
2004, we expect our research and development costs for 2004 to increase as a
percentage of revenues compared to 2003, but our expectation is that it will
continue to be less than 5% of total revenues in 2004.  D.
    
    Trend Information Our focus on the enterprise software and mobile applications industries
has positioned us within industry sectors which continued to undergo rapid
change over the course of fiscal 2003 as competitive models evolved. In
enterprise software, the industry continues to see consolidation
internationally, as larger competitors aim to increase their scale and breadth
of service offerings. During 2003, we made progress in achieving scale through
acquisitions of supply-chain, business analytics, application outsourcing and
other software-related products and services. These acquisitions complemented
the growth in our core China-based human resource and payroll administration
and financial reporting packages. We continued complementary acquisitions in
February 2004 with the purchase of an internationally established CRM
front-office software provider, Pivotal. With an enlarged product portfolio, we
believe it will take several quarters for us to leverage the synergies that we
consider are inherent within our enlarged software businesses, and we expect
2004 overall to be a year of integration and focus on operational improvements.
We will continue to execute our software strategy through investments in
software-related business and through entering strategic partnerships with
leading software vendors. 97




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In the mobile applications sector, the addition of Newpalm, a mobile SMS
services and applications provider in the PRC, in April 2003 provided
significant impetus to our revenue growth in a rapidly growing sector of the
mobile applications market in China, and helped contribute to an overall
increase in our gross margins. We continue to look to add investments in mobile
applications-related companies that feature their own proprietary intellectual
property. In this way, we aim to continue to broaden our service offering by
overlaying such acquisitions on our existing subscriber base and technical
platform capabilities. While the first half of fiscal 2003 continued to reflect the effects of
the regional and global economic slowdown due to the SARS epidemic, there were
signs by the fourth quarter of fiscal 2003 that conditions were beginning to
stabilize, as evidenced by a 20% improvement in our revenues for the fourth
quarter of fiscal 2003 compared to the third quarter of fiscal 2003, through
both organic growth as well as through acquisitions. For the company as a
whole, as a result of rigorous cost control, improvements in core operations,
and the complementary acquisitions outlined above, we recorded a net profit of
US$15.5 million for the year ended December 31, 2003, our first annual profit
since our public offering in July 1999. Looking forward, we will seek to increase the proportion of revenues in
our business generated by projects with recurrent revenue streams, particularly
in the software and consulting services business areas where maintenance and
support revenues can comprise over 50% of the combined revenues of such
businesses, as well as by looking to acquire companies that have a relatively
high percentage of recurrent revenues in their current business mix. We believe
such characteristics can be found in some of our recent acquisition activities,
such as that of IMI, the supply-chain management software company based out of
Europe. IMIs core business is the provision of mission critical software which
enables large retail and wholesale distribution companies to manage their
supply chains. IMI has a core group of long established clients that provide a
regular maintenance revenue stream on an annual basis. In 2004, we expect continued growth in our software and consulting
revenues, as well as our mobile applications revenues, as a result of ongoing
organic growth and the addition of complementary acquisitions. However, we
expect our advertising revenues to continue to decline as a percentage of total
revenues, due to the material acquisitions made in the enterprise software area
and the growth seen in our mobile applications business as well as our
divestiture of our online network advertising business as of January 2004.
While we are re-orienting our advertising strategy to higher margin database
marketing related services, we are uncertain whether we will be successful in
generating sufficient revenues or margins from these services to replace
revenues and margins from our online network advertising business. In light of the many risks and uncertainties surrounding chinadotcom,
Greater China, Asia and the enterprise software, technology, mobile
applications, marketing and media markets, shareholders, investors and
prospective investors should keep in mind that we cannot guarantee that the
forward-looking statements described in this Annual Report will or can
materialize.  E.
    
    Off Balance Sheet Arrangements The company does not have, and has not engaged or entered into, any off
balance sheet transactions, agreements, or other contractual arrangements.  F.
    
    Tabular Disclosure of Contractual Obligations See  B Liquidity and Capital Resources  Contractual Obligations and
Other Commitments above. 98




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES  A.
    
    Directors and Senior Management The following table sets forth information regarding our directors and
executive officers as of May 6, 2004: Board of Directors**
    
    Age
    
    Position
    
    Class of DirectorshipRaymond K.F. Chien
    
    52
    
    Executive Chairman
    
    III, term to expire in 2005Peter Yip
    
    52
    
    Vice Chairman and Chief Executive Officer
    
    III, term to expire in 2005Zhou Shun Ao
    
    55
    
    Vice Chairman
    
    III, term to expire in 2005Thomas M. Britt, III
    
    43
    
    Director
    
    I, term to expire in 2004*William Fung
    
    55
    
    Director
    
    II, term to expire in 2004*Kwong Ki Chi
    
    53
    
    Director
    
    III, term to expire in 2004*Carrick John Clough
    
    56
    
    Director
    
    I, term to expire in 2004*Executive OfficersDaniel Widdicombe
    
    37
    
    Chief Financial OfficerSteven Chan
    
    36
    
    General Counsel and Company SecretaryRudy Chan
    
    42
    
    Chief Executive Officer of CDC MobileJohn Xiao
    
    40
    
    Chief Executive Officer of Newpalm andhongkong.com
   *
    
    Subject to re-election by shareholders at our 2004 annual general
meeting.**
    
    Both Mr. J. Carter Beese, Jr. and Mr. Harry Edelson ceased to be a
director on June 17, 2003. Mr. Chan Wing-Tak, Douglas ceased to be a
director on July 17, 2003. The address of each of our executive officers and directors is c/o
chinadotcom corporation, 34/F Citicorp Centre, 18 Whitfield Road, Causeway Bay,
Hong Kong. The following is a brief biography of each of our directors and
executive officers: Raymond K.F. Chienhas served as executive chairman of our board of
directors since April 2001. Previously, since January 1999, Dr. Chien served
as our chairman. Between October 1996 and March 2001, he was also a member of
the board of directors of our former parent company, CIC. Dr. Chien is
chairman and executive committee member of our Hong Kong listed subsidiary,
hongkong.com. Dr. Chien is also currently on the boards of HSBC Holdings plc,
the Hongkong and Shanghai Banking Corporation Limited, Inchcape plc,
Convenience Retail Asia Limited, VTech Holdings Ltd. and The Wharf (Holdings)
Limited. He is also non-executive chairman of HSBC Private Equity (Asia)
Limited and MTR Corporation Limited. Dr. Chien is chairman of the Hong
Kong/Japan Business Co-operation Committee and chairman of the Advisory
Committee on Corruption of the Independent Commission Against Corruption. In
addition, Dr. Chien is the honorary president and past chairman of the
Federation of Hong Kong Industries. He is also President of Hong Chi
Association, Hong Kongs leading non-government organization helping mentally
handicapped persons. From 1992 to 1997, Dr. Chien was a member of the
Executive Council of Hong Kong, then under British Administration. He was
appointed a member of the Executive Council of the Hong Kong SAR from July 1997
and served until June 2002. Dr. Chien received a doctoral degree in economics
from the University of Pennsylvania in 1978. He was appointed a Justice of the
Peace in 1993 and a Commander in the Most Excellent Order of the British Empire
in 1994. In 1999, he was awarded the Gold Bauhinia Star medal. 99




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Peter Yipis a vice chairman of our board of directors. He has been our
chief executive officer since January 1999. Mr. Yip is also an executive
director of hongkong.com. Between May 1996 and February 2003, he was also the
vice chairman of the board of directors of CIC. Mr. Yip has international
experience as an entrepreneur in the media and telecommunications industry.
Prior to forming chinadotcom, Mr. Yip founded a systems integration company
which eventually was sold to SHL Systemshouse, a company since acquired by MCI.
He previously was a senior management consultant at KPMG Consulting and was a
Senior Research Fellow at Wharton Applied Research. Mr. Yip received a masters
degree in business administration from the Wharton School and both a masters
degree and a bachelors degree in electrical engineering from the University of
Pennsylvania. Zhou Shun Aohas been a vice chairman of our board of directors since
December 2000. He was our chief China officer from January 1999 to December
2000. Mr. Zhou has served for more than 30 years at Xinhua, and is currently
general manager of the Asia-Pacific Bureau at Xinhua. He has also served as
executive deputy general manager at Xinhua. He was deputy director of Xinhua
Department for Business Development, general manager of China Media Development
Corporation and chairman of the board of China Global Public Relations
Corporation. Mr. Zhou has also served as an executive director of our Hong Kong
listed subsidiary, hongkong.com. He has also served as the chairman of the
board of directors of CIC since October 1998. Thomas M. Britt, IIIhas served as an independent director since May 2000.
Mr. Britt is a partner with the international law firm, Debevoise & Plimpton
LLP, resident in the firms Hong Kong office. Prior to joining Debevoise &
Plimpton in 2004, Mr. Britt was the Managing Director of IRG Limited, an
investment banking boutique he co-founded in 2000. Prior to co-founding IRG,
Mr. Britt was the senior partner of the US Securities Group in the Hong Kong
office of Clifford Chance LLP, the worlds largest law firm, and the founding
and managing partner of the Hong Kong office of Rogers & Wells LLP, a leading
US law firm. Mr. Britt has a juris doctor and a masters degree in business
administration from New York University and a bachelors degree from Georgetown
University. Carrick John Cloughhas served as an independent director since December
2003. Prior to this, Mr. Clough has served as the non-executive chairman of the
board of Praxa since May 2003. He has been a special advisor to General
Atlantic Partners since December 2000. Before joining General Atlantic
Partners, Mr. Clough gained over 25 years of management experience in the IT
industry internationally. He was a co-founder and managing director of the CSSL
Group, A mid-range software distributors and hardware reseller in Asia. Prior
to co-founding the CSSL Group, Mr. Clough held the position of general manager
of JBA in Asia, an Australia-based worldwide mid-range software distributor,
and gained working experience as a consultant in the United Kingdom and Europe.
Mr. Clough received his education in New Zealand. William Funghas served as an independent director since June 2001. Dr.
Fung is group managing director of Li & Fung Limited, and has held key
positions in major trade associations. He is the current chairman of the
Pacific Economic Cooperation Council and is a member of the Economic Advisory
Committee to the Financial Secretary. Dr. Fung is also non-executive director
of Convenience Retail Asia Limited, HSBC Holdings plc, VTech Holdings Limited
and CLP Group Holdings Limited. He was past chairman of the Hong Kong General
Chamber of Commerce, the Hong Kong Exporters Association and the Hong Kong
Committee for the Pacific Economic Cooperation Council. Dr. Fung holds a
bachelors degree in Engineering from Princeton University and a masters
degree in business administration from the Harvard Graduate School of Business.
He has been awarded an honorary doctorate degree in business administration by
the Hong Kong University of Science and Technology. Kwong Ki Chihas served as an independent director since June 2003. Mr.
Kwong has served in the Government of Hong Kong for 27 years and held positions
principally in the economic and financial fields. He was the Secretary for the
Treasury from 1995 to 1998, with responsibility for the public finances, and
also the first appointee to the new position of Secretary for Information
Technology and Broadcasting from 1998 to March 2000, with responsibility for
information technology, telecommunications and broadcasting. After 100




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retiring from government service in March 2000, Mr. Kwong joined the Hong
Kong Exchanges and Clearing Limited as its first chief executive until April
2003, following the demutualization and merger of the Stock Exchange of Hong
Kong, the Hong Kong Futures Exchange and their associated clearing houses. In
January 2004, Mr. Kwong was appointed managing director of Hsin Chong
International Holdings Ltd., alternate director of each of Hsin Chong
Construction Group Ltd. and Synergis Holdings Ltd., and also director of Hsin
Chong Land Ltd. and Summit Insurance (Asia) Ltd. With effect from April 26,
2004, Mr. Kwong has been appointed an independent non-executive director of
Giordano International Ltd. Mr. Kwong is a non-official Justice of the Peace
in Hong Kong and has been awarded the Gold Bauhinia Star. He holds a number of
public service positions, including council member of the Chinese University of
Hong Kong and board director of the Hong Kong Community Chest. Mr. Kwong
earned a Bachelor of Science degree in physics and mathematics from the
University of Hong Kong and a Master of Philosophy degree in economics and
politics of development from the University of Cambridge, England. Daniel Widdicombehas served as our chief financial officer since December
2000. Prior to joining chinadotcom, Mr. Widdicombe was chief financial officer
of I-Quest Corporation. He was also the managing director of Telecoms and
Internet Equity Research at Bear Stearns Asia Ltd. where he worked as an
investment analyst researching and evaluating companies across Asia. He was
previously an equity analyst at HSBC James Capel in London and Hong Kong. Mr.
Widdicombe is a first class honors graduate of Edinburgh University, Scotland. Steven Chanhas served as our director, legal and company secretary since
May 2001 and as general counsel and company secretary since October 2003. He is
responsible for the management and execution of the global legal operations of
the company and that of its various businesses worldwide. He advises the
management of the company on legal, operational and strategic issues. In such
regard, Mr. Chan concentrates on refining the existing operations and
developing future operations, principally through mergers, acquisitions,
strategic investments and synergistic operational initiatives. Prior to joining
the company, Mr. Chan had worked with the New York offices of Morrison &
Foerster LLP and Milbank, Tweed, Hadley & McCloy LLP. He received a juris
doctor degree from Boston College Law School and a bachelors degree from
University of California at Berkeley. Rudy Chanserved as chief executive officer at hongkong.com from February
2000 until January 2004, and currently serves as chief executive officer of our
wholly owned subsidiary, CDC Mobile since January 2004. Mr. Chan first joined
us as director of e-commerce in November 1999. Immediately prior to joining us,
Mr. Chan was a founding member of Bartercard in Hong Kong. His previous
experience includes eight years with Time Inc., and he has served as the
managing director of Time Inc.s Asian operations. Mr. Chan received his
bachelors degree and masters degree in business administration from the
Wharton School at the University of Pennsylvania. He is also a certified public
accountant registered with the State of New York. John Xiaois the founder of Newpalm which hongkong.com acquired in April
2003 and has been chief executive officer of Newpalm since March 2000. In
November 2003, Mr. Xiao was appointed as executive director of hongkong.com and
in January 2004, he was appointed as the chief executive officer of
hongkong.com. Prior to founding Newpalm, Mr. Xiao served as director of
wireless Internet, personal networking group at Motorola (Asia). Mr. Xiao
graduated from Donghua University with a bachelors of science degree in
mechanical engineering. He also earned a masters of science degree in
computer science from the University of Illinois at Urbana-Champaign. 101




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B.
    
    Compensation Directors During fiscal 2003, we paid our directors compensation, inclusive of
directors fees in an aggregate amount equal to US$160,000, as well as options
to purchase our Class A common shares as described below. Directors are
reimbursed for all expenses incurred in connection with each meeting of the
board of directors and when carrying out their duties as directors of
chinadotcom. In 2002, our board of directors established the director compensation
structure with respect to our non-executive directors and chairman. In 2003,
our policy was to pay each non-employee director and the chairman US$25,000 per
year for their respective services, provided they attend at least 60% of the
board meetings held each year. We also pay members of our audit committee
US$10,000 per year for their services on the audit committee, and we pay
US$40,000 to the independent members of our executive committee, provided they
each attend at least 60% of their respective committee meetings held each year. During 2003, we granted our newly appointed non-executive directors
options to purchase a total of 70,000 Class A common shares to be vested
quarterly over two years. Executive Officers During fiscal 2003, we paid our executive officers as a group compensation
in an aggregate amount equal to US$825,589 and granted to them a total of 894,264 options
to purchase Class A common shares, with exercise prices ranging between US$4.95 and US$7.43
per share. All of such options expire in 2013. We have entered into employment
agreements with a number of the executive officers named in Item 6.A 
Directors, Senior Management and Employees  Directors and Senior
Management. These arrangements provide for terms of service, salary and
additional compensation arrangements, including in some cases housing refunds
and other benefits, all of which have been reflected in the aggregate
compensation amount for fiscal 2003. For certain directors and executive
officers, these arrangements also include the right to receive a payment equal
to three months of their respective salaries if such person is terminated by us
without cause. Mandatory Provident Fund The Mandatory Provident Fund, or MPF, scheme is the standard pension
payment required by the Hong Kong government. In the MPF scheme, mandatory
contributions are basically calculated on the basis of 10% of an employees
relevant income, with the employer and employee each paying US$128 per month or
up to 5% of the employees relevant income. This requirement also applies to
our executive officers in compliance with the overall scheme. 1999 Stock Option Plan Pursuant to our 1999 Stock Option Plan, as amended, options may be granted
to directors, executive officers, employees and consultants of chinadotcom
corporation and our subsidiaries for the purchase of up to an aggregate of 20.0
million Class A common shares. As of February 29, 2004, there are
approximately 6.6 million Class A common shares reserved for issuance under
outstanding options granted under our 1999 Stock Option Plan, with a weighted
average exercise price of approximately US$6.49 per share. These options are
generally exercisable for a period of five or ten years. From the inception of
the Stock Option Plan, our directors and employees had exercised options to
purchase approximately 5.2 million Class A common shares. As of February 29,
2004, outstanding options to purchase 3.7 million Class A common shares under
our 1999 Stock Option Plan have vested. Of the total number of shares reserved
for issuance under options outstanding under our 1999 Stock Option Plan,
500,000 shares are reserved for issuance under options granted to APOL, a
company owned by the spouse of Mr. Yip, our chief executive officer and a
trust established for Mr. Yips children, 200,000 of which
are exercisable at a price of US$2.82, another 200,000 of which are exercisable
at a price of US$4.95, and 100,000 of which are exercisable
at a price of US$5.16. In addition to the 20.0 million Class A common
shares reserved under our 1999 Stock 102




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Option Plan, there are also 1,881,442
Class A common shares reserved for issuance under options we granted to APOL at
an exercise price of US$5.00. Our 1999 Stock Option Plan is administered by the compensation committee
of the board of directors, which determines, at its discretion, the number of
Class A common shares subject to each option granted and the related purchase
price and option period. The 1999 Stock Option Plan requires that each option will expire on the
date specified by the compensation committee, but not more than ten years from
the date on which the option was granted. Under the 1999 Stock Option Plan,
unless otherwise specified in the option award agreement, upon the voluntary
termination of employment by an option holder or termination of an option
holder for cause by chinadotcom, any options granted under the 1999 Stock
Option Plan to the option holder generally will terminate. If termination was
due to death, retirement or disability, the option holder, or his or her
successors, have a period of one year within which to exercise the option
holders options. If termination was due to any other reason, options granted
under the 1999 Stock Option Plan may be exercised within three months of the
termination. Options granted are nontransferable except by will or as otherwise
authorized by the compensation committee. Upon the occurrence of any change in our capital structure, including any
merger, liquidation, reorganization, or recapitalization, the compensation
committee may amend the 1999 Stock Option Plan to preserve the rights of option
holders substantially proportionate to their rights existing prior to the
occurrence of such event, as it may deem necessary. Upon the occurrence of a
change of control in chinadotcom, the compensation committee may amend the 1999
Stock Option Plan as it may deem appropriate provided that such adjustments do
not have a substantial adverse impact on the option holder. Unless terminated
earlier by action of the board of directors, the 1999 Stock Option Plan will
terminate on May 17, 2009, the ten year anniversary of the approval of the 1999
Stock Option Plan by the board of directors and the shareholders. Options Held by Directors and Officers As of February 29, 2004, of the approximately 6.6 million outstanding
options for the purchase of our Class A common shares, our directors and
executive officers as a group held options to purchase a total of approximately
3.7 million of our Class A common shares. The weighted average exercise price
of these options is approximately US$5.78 per share. The options granted to
such directors and executive officers generally vest 25%, 33-1/3%, 50% or 100%
per year on a quarterly basis over a one to four year period, as applicable,
commencing immediately upon grant, on the first quarter or first anniversary
of the relevant grant. As of March 31, 2004, our directors and officers, as a
group, held vested options to purchase approximately 2.3 million Class A common
shares. Warrants In connection with AOLs strategic acquisition of 6,795,200 of our Class A
common shares prior to our IPO in July 1999, we granted AOL two warrants to
purchase subject to certain conditions up to 18.5% and 6.5% of our total
outstanding capital at an exercise price of US$5.00 per share and US$42.50 per
share, respectively. The first of these warrants became exercisable in October
2000 and the second became exercisable in July 2001. Both warrants expired in
July 2003. In connection with our acquisition of all the issued and outstanding
shares of Pacific Connections Limited, in August 1999, we granted the initial
shareholders of Pacific Connections Limited an option to acquire an additional
240,000 Class A common shares at an exercise price of US$9 per share. During
fiscal 2003, 140,000 of these options had been exercised and the remaining
options expired in August 2003. 103




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C.
    
    Board Practices Terms of Directors and Executive Officers Our board of directors is divided into three classes, each class generally
having a term of three years. Each year the term of one class expires and
nominees for membership in that class are eligible to be elected at the
relevant annual meeting of shareholders. All directors hold office until the
relevant annual meeting of shareholders or until their successors have been
duly elected and qualified. Executive officers are elected by and serve at the
discretion of the board of directors. Mr. Peter Yip was appointed chief executive officer of chinadotcom
pursuant to a services agreement, as amended, dated July 12, 1999 between
chinadotcom and APOL. The services agreement was replaced and the new services
agreement approved by the Board of Directors in January 2002 for an initial
term of one year with automatic renewal provisions. Mr. Yip currently also
serves as vice chairman and director of our board of directors and his term as
director ends in 2005 subject to re-election by shareholders at the 2005 annual
shareholder meeting. Dr. Raymond Chien was appointed as executive chairman of our board of
directors pursuant to a services agreement between chinadotcom and Dr. Chien.
The term of Dr. Chiens services agreement ended as of April 27, 2004 and a
new services agreement is currently being negotiated. His current term as
director continues until 2005 when he is subject to re-election by shareholders
at the 2005 annual shareholder meeting. For a summary of the terms of Dr.
Chiens services agreement, see Item 7.B Major Shareholders and Related
Party Transactions  Related Party Transactions. No director or executive officer has been the subject of any order,
judgment, or decree of any governmental agency or administrator or of any court
of competent jurisdiction, revoking or suspending for cause any license, permit
or other authority of such person or of any corporation in which he or she is a
director or executive officer, to engage in normal business activities of such
person or corporation. There are no family relationships between any of the named directors and
executive officers. There are no material arrangements or understandings that
exist between any such director or executive officer and chinadotcom pursuant
to which any such person was appointed as a director or executive officer of
chinadotcom except for the arrangements between chinadotcom and each of Mr. Yip
and Dr. Chien. Committees of the Board of Directors During fiscal 2003, the board of directors had four standing committees:  
    
    the executive committee;
    
    the audit committee;
    
    the compensation committee; and
    
    the nominating committee. The executive committee is authorized during any interim period between
quarterly meetings of the full board of directors, to act for and in lieu of
the full board of directors and to approve of any transaction requiring board
approval by the board of directors that does not exceed aggregate consideration
to be paid by chinadotcom of more than US$20.0 million in cash and equity, with
any equity component not to exceed 1.0 million Class A common shares.
Currently, Messrs. Chien, Yip, Zhou, Britt and Clough serve on the executive
committee with Dr. Chien serving as chairman. 104




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The audit committee selects and engages, on our behalf, the independent
public accountants to audit our annual financial statements, and will review
and approve the planned scope of our annual audit. In addition, since February
2002, the audit committee reviews the terms of proposed transactions with
related parties in accordance with the terms of our articles of association.
Since May 2003, the audit committee has also had responsibility to review our
compliance with the Sarbanes-Oxley Act . This includes reviewing documentation
of our internal controls and key processes and procedures in order to report on
compliance with Section 404, Management Assessment of Internal Controls.
We have appointed to the audit committee directors who qualify as an
independent director for purposes of the rules and regulations of the Nasdaq
National Market and the Sarbanes-Oxley Act of 2002. The audit committee
operates under a charter that is compliant with the rules and regulations of
the Nasdaq National Market. Currently, Messrs. Kwong, Britt and Clough serve on
the audit committee with Mr. Britt serving as chairman. The compensation committee establishes remuneration levels for our
officers, performs such functions as provided under employee benefit programs
and administers the 1999 Stock Option Plan and the 2000 and 2001 Employee Share
Purchase Plans. Currently, Messrs. Chien, Kwong and Fung serve on the
compensation committee with Dr. Chien serving as chairman. The Nominating Committee formulates and reviews appropriate criteria to be
used in connection with selection of persons to serve on our board of directors
and assesses and recommends nominees for election to our board of directors by
shareholders at the Annual General Meeting. Currently, Messrs. Chien, Fung
and Britt serve on the nominating committee with Dr. Chien serving as
chairman.  D.
    
    Employees As of December 31, 2003, we had approximately 1,179 full-time, part-time
and temporary employees, as compared to 952 at the beginning of fiscal 2003. Of
our 1,179 employees, 421 are in technical positions, 121 are in research and
development positions, 81 in design and editorial positions, 210 in sales,
marketing and business development positions, 65 in finance positions, 13 in
legal positions, 18 in human resources positions, 37 in administration
positions, 5 in mergers and acquisitions and 67 in general and operations
management positions, with the remainder principally consisting of part-time
and temporary employees. Going forward, we aim to continue to attract, retain
and motivate highly qualified technical and management personnel, particularly
highly skilled technical personnel and engineers involved in new product
development. From time to time, we also employ independent contractors to
support our research and development, marketing, sales and support and
administrative organizations. Our employees are not represented by any
collective bargaining unit, and we have never experienced a work stoppage.  E.
    
    Share Ownership Beneficial ownership of our Class A common shares by our directors, senior
executive officers and other major shareholders is determined in accordance
with the rules of the Commission, and generally includes voting or investment
power with respect to those shares. In computing the number of Class A common
shares beneficially owned by a person, and the percentage ownership of that
person, Class A common shares subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60 days
after April 1, 2004 are deemed beneficially owned and outstanding, but such
Class A common shares are not deemed outstanding for the purposes of computing
the ownership percentage of any other person. None of our directors or senior executive officers beneficially owned more
than 1% of our Class A common shares as of April 1, 2004, other than Mr. Peter
Yip who is the beneficial owner of approximately 18,789,528 or approximately
18.1%, of our Class A common shares. Mr. Yips beneficial ownership under the
Commissions rules is the same as that of his spouse and APOL. APOL is the
owner of record of 11,835,686 Class A common shares and the beneficial owner of
an additional 2,318,942 Class A common shares due to exercisable options
attributable to APOL. Mr. Yip is the beneficial owner of 190,000 Class A common
shares 105




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due to options attributable to him. Mr. Yips spouse owns 4,444,900 Class
A common shares. APOL is a company owned by Mr. Yips spouse and a trust
established for the benefit of Mr. Yips children. This information is based
solely on information reported on a Schedule 13D jointly filed with the SEC on
April 2, 2004 by APOL, Mr. Yip and his spouse. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS  A.
    
    Major Shareholders We are a publicly owned corporation, and our shares are owned by U.S.
residents and residents of other countries. As of March 15, 2004, we were not
directly owned or controlled by another corporation or by any foreign
government, and a total of 452 shareholders of record were U.S. residents
holding approximately 75% of our Class A common shares. Holders of our Class A
common shares do not have different voting rights. The following table sets forth information concerning each person known by
us who own beneficially 5% or more of our Class A common shares as at April 1,
2004: Beneficial OwnershipShares
    
    PercentShareholderAsia Pacific Online Limited(1)
    
    
    18,789,528
    
    
    
    18.1
    %Xinhua News Agency(2)
    
    
    7,362,734
    
    
    
    7.1
    %
   (1)
    
    APOL is owned by the spouse of our chief executive officer and a trust
established for the benefit of Mr. Yips children. APOL was the owner of
record, as at April 1, 2004, of 11,835,686 Class A common shares and the
beneficial owner of an additional 2,318,942 Class A common shares due to
exercisable options attributable to APOL. Mr. Yip was the beneficial owner
of 190,000 Class A common shares due to exercisable options attributable
to him. Mr. Yips spouse owned 4,444,900 Class A common shares.(2)
    
    Xinhua holds our shares through a wholly-owned subsidiary, Golden Tripod
Technology Limited. Based on publicly available information, America Online, Inc., a
wholly-owned subsidiary of AOL Time Warner Inc., ceased to be one of our
shareholders following the sale of their entire chinadotcom shareholding in
September 2003. Based on publicly available information as of December 31, 2003, Capital
Group International, Inc. and Jayhawk Capital Management, L.L.C. have reduced
their shareholdings to 4% and 1.82% respectively during the year 2003. For a discussion of risks associated with the holdings of our major
shareholders, see Item 3.D  Key Information  Risk Factors  Risks Related
to Our Class A Common Shares  Our share price could be adversely affected if
our major strategic shareholders materially change their holdings in our
shares, particularly if the share holdings are not disposed of in an orderly
manner and  A small group of our existing shareholders control a
significant percentage of our common shares, and their interests may differ
from other shareholders.  B.
    
    Related Party Transactions New World.In October 2000, we entered into an agreement to acquire a
50.3% interest in Wealth Corporation Limited for an aggregate consideration of
US$9.3 million consisting of US$6.8 million worth of our Class A Common Shares
to purchase shares from the selling shareholders and US$2.5 million in cash to
purchase newly issued shares. The selling shareholders of Wealth Corporation
Ltd. included New World 106




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Infrastructure, one of our former shareholders, which as of October 2002
held approximately 11.4% of our Class A common shares, and received
approximately US$1.4 million worth of our Class A common shares as
consideration for its shares in Wealth Corporation Ltd. Wealth Corporation Ltd.
operated a web site which sold travel products and services, such as airline
tickets and hotel accommodations, to corporations and travel agencies in the
PRC. The acquisition was based upon a strategy to build a Greater China online
and off-line travel capability focused on the tour-group market. As a result of deteriorating financial performance at Wealth Corporation
Limited through 2002, we de-emphasized the development on an online travel
business in Greater China and sought to recover some of its original investment
in the company. We entered into negotiations with the other shareholders in
Wealth Corporation Limited, including New World Infrastructure, and in November
2002, the parties agreed to permit us to reduce our shareholdings to 19.9%
through a share repurchase by Wealth Corporation Limited. Wealth Corporation
Limited was not profitable at such time, and the shareholders agreed to value
the company based upon the cash balances of the company. As a result of the
consummation of the share repurchase, we reduced our shareholdings to 19.9% for
a payment from Wealth Corporation of US$1.0 million. In January 2003, New World Infrastructure Limited ceased to be one of our
shareholders following the sale of their entire chinadotcom shareholding in the
open market, as well as in privately negotiated transactions with us, APOL and
our chairman, Dr. Chien. We purchased 4,468,560 Class A common shares, APOL
purchased 4,300,000 Class A common shares, and our chairman purchased 200,000
Class A common shares from New World Infrastructure Limited in January 2003. 24/7 Real Media, Inc. Pursuant to a License and Software Agreement
entered into with 24/7 Real Media, Inc. (formerly known as 24/7 Media, Inc. and
hereafter referred to as 24/7) on October 23, 1998, 24/7 granted to us a
non-exclusive license to use certain 24/7 software products to serve
advertisements on the Internet and an exclusive license to use the 24/7
Media trademark in the Asian market. Under the terms of the agreement with 24/7, we were obligated to pay to
24/7 10% of our revenues generated from advertisements on our advertising
network. Net revenue included all revenue generated from advertising sales,
net of commissions retained or paid to advertising agencies, and service fees
paid to advertising affiliates or our Web sites. Service fees paid to our Web
sites, exclusive of our www.cww.comportal, were set at 70% of advertising
sales while service fees to advertising affiliates, including our www.cww.com
portal, ranged from 30% to 50% of advertising sales. During the year ended
December 31, 2001 and December 31, 2002, payments made under the Agreement
amounted to US$800,000 and nil, respectively. Where U.S. based advertisements were sold on our advertising network by
24/7, 24/7 was obligated to pay 70% of the sales revenue, net of commissions
retained or paid to advertising agencies, to us. 24/7 served as our exclusive
agent for the sale of U.S. based advertisements on our advertising network. Where Asian-based advertisements were sold on 24/7 U.S. network of
advertising affiliates, we would pay 70% of such sales revenue, net of
commissions retained or paid to advertising agencies, to 24/7. We served as
24/7 Media Asias exclusive agent for the sale of Asian-based advertisements on
24/7 U.S. network of advertising affiliates. In August 2000, the agreement with 24/7 was superceded by the 24/7
Media-Asia Agreement and supplemental related agreements. In October 2000, as
part of the Media Asia Agreement, we sold 19.9% of our shares in 24/7 Media
Asia Limited, a then wholly-owned subsidiary, to 24/7 in exchange for 2,500,000
shares of common stock of 24/7 valued at US$4.3125 per share, resulting in a
net gain of US$10.4 million. In June 2001, we gave notice of termination of the Media Asia Agreement to
24/7, which notice was effective September 2001. 107




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In June 2001, we demanded from 24/7 Media Asia Limited the repayment of a
portion of loans that we had extended to 24/7 Media Asia Limited. In January
2002, 24/7 Media Asia Limited completed a rights issue whereby it issued and
allotted additional equity shares to all shareholders participating in the
rights issue as a means to settle the loan demand. While we participated in
this rights issue, 24/7 chose not to participate in this rights issue and
therefore, 24/7s interest in 24/7 Media Asia Limited was effectively diluted.
Our interest in 24/7 Media Asia Limited increased to approximately 98% while
24/7s interest declined to under 2%. In February 2003, 24/7 filed suit in Federal District Court in New York
against us to enforce obligations allegedly owed under the Media Asia
Agreement. We contest these allegations and, in May 2003, obtained an order
compelling arbitration of the claims, at the International Chamber of Commerce,
or the ICC. Pursuant to the ICC arbitration, in July 2003 we filed a request for
arbitration seeking damages in excess of US$24.0 million for breach of the
Media Asia Agreement. In October 2003, 24/7 filed an answer and counterclaim
seeking US$2.6 million in damages for, among other things, services allegedly
unpaid under the same agreement. In December 2003, we filed a reply to answer
and counterclaims denying these allegations. Since December 2003, no further
documents have been filed by either party. In 2003, 24/7 ceased to be a related party. AOL Time Warner, Inc.During 2001, we paid advertising fees totaling
US$3.5 million to AOL Time Warner Inc., a shareholder, for the provision of
Internet advertising services. In addition, we paid AOL Time Warner Inc. US$3.7
million for computer software from PurchasePro.com, Inc., a strategic alliance
partner of AOL Time Warner Inc. In other matters involving AOL, we sought the
return of US$2.2 million which we spent under a software development agreement
among AOL, CIC and chinadotcom. Under the terms of the software development
agreement dated February 1, 2000, we agreed to provide AOL with US$2.2 million
to finance the development of AOL software which could be utilized in the China
market. We entered into the software development agreement in anticipation of
a joint venture with AOL to develop consumer interactive services for the
Chinese market. No joint venture arrangement with AOL was ever entered into,
and AOL never delivered a software product. In addition, we sought the return
of US$3.5 million in connection with an agreement to purchase advertising
services from AOL. Under the terms of the agreement dated March 8, 2001, AOL
agreed to render ad impressions on its web sites for a total fee of
approximately US$7.0 million, and we paid US$3.5 million, approximately
one-half of the amount due, on March 31, 2001. These amounts were expensed
under sales, general and administrative expenses in March 2001. We entered
into the agreement to purchase advertising services from AOL and made partial
payment under the contract as a result of representations from AOLs
representatives that AOL would be more favorably inclined to enter into a joint
venture with us to develop consumer interactive services for the Chinese market
if we purchased the advertising services, which did not occur following our
purchase of and payment for the advertising services. We are cooperating with
information requests by the Commission and other government agencies in
connection with their investigation of AOL with respect to the PurchasePro.com
and advertising services transactions. On July 28, 2003, we reached a settlement with AOL including all claims
between the two companies and their affiliates. We also agreed with AOL to
cancel AOLs two warrants to acquire additional shares in chinadotcom. We
currently have no remaining operational, strategic or other agreements with
AOL. Based solely upon filings with the Commission, on September 11, 2003, AOL
disposed of its entire holding of chinadotcom shares. Golden Tripod.In June 2001, we signed contracts with entities affiliated
with Xinhua, Golden Tripod (Holdings) Limited, or Golden Tripod, and Xinhua
News Agency Shanghai Branch, or Shanghai Xinhua, to acquire 30% of the shares
of Xin Hua Asia Pacific TV (H.K.) Center Limited, a company 51% owned by Golden
Tripod and 49% owned by Shanghai Xinhua, as well as to form a 50% owned joint
venture in the PRC. We paid 108




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US$500,000 as a deposit after the contracts had been signed. As certain
conditions precedent for the joint venture were not met during the course of
2001, we terminated the transaction and made a bad debt provision for the full
deposit amount at the end of the year. We actively sought a refund during the
course of 2001 and 2002, and obtained a refund of US$348,000 in 2003. For the
years ended December 31, 2001, 2002 and 2003, we paid management fees of
US$261,000, US$293,000 and US$137,000, respectively, to Golden Tripod Limited,
an entity affiliated with Xinhua, one of our major shareholders, for the
provision of general management services to us. Dr. Raymond Chien.In April 2001, we entered into an executive services
agreement with our chairman and director Raymond Chien to serve as our
executive chairman. Under this agreement we have agreed to provide Dr. Chien
the following:  
    
    options to purchase 400,000 Class A common shares, par value
US$0.00025 per share, at an exercise price of US$2.74 per share that
vest quarterly over three years starting July 27, 2001;
    
    options to purchase up to 400,000 additional Class A common shares at an exercise price of US$2.97 that vest quarterly over three
years starting October 13, 2001;
    
    an annual salary of US$1.00;
    
    reimbursement of company car expenses, as well as office
executive assistant expenses incurred, capped at a maximum amount of
US$100,000 per annum; and
    
    reimbursement of all reasonable travel, entertainment and
subscription fees incurred in the performance of his duties as
executive chairman. While Dr. Chiens services agreement expired on April 27, 2004, a new
services agreement is currently being negotiated. CIC.In June 1999, we entered into a Support Services Agreement with CIC
under which we agreed to provide CIC with the services required to operate
local online services for AOL in Hong Kong which was amended in
April 2000. CIC was our parent company until June 1999 when, concurrently with entry into
the support services agreement, CIC distributed its total interest in us to
CICs shareholders. At the time of entry into the support services agreement,
several members of the board of directors of CIC also served as members of our
board of directors. Since January 1, 2001, we did not recognize any revenue in connection with
the amended and restated support services agreement due to the uncertainty of
the collectibility of the receivable from CIC. We recorded US$5.4 million
incurred in connection with the provision of these services under selling,
general and administrative expenses in 2001. In September 2001, as we had
already decided at the beginning of the year to waive our legal rights to the
amount owing, we agreed to CICs request to formalize the forgiveness of up to
US$7.7 million owed to us by CIC. In October 2001, we entered into an asset purchase agreement with CIC to
purchase the three URLs, www.china.com, www.hongkong.com and www.taiwan.com,
and related intellectual property rights for US$16.8 million and the final
payment for the purchase was made in February 2002. A portion of the proceeds
was used to repay loans extended to CIC by certain of our shareholders and
members of our board of directors, some of whom are also our shareholders,
officers and members of our board of directors. We sought third party advice
related to accounting, legal and valuation issues when considering the
transaction. We obtained releases with respect to registered charges over CICs
assets, including the URLs from material creditors of CIC which included our
affiliates. See Item 3.D  Key Information  Risk Factors  Risks relating to
chinadotcom  We are subject to risks related to our purchase of the URLs from
CIC, and Item 4.B  Business Overview  Software and other investment
initiatives. Sportasia.In November 2001, as part of the liquidation of our equity
investee Sportasia Media Limited, we acquired the URL, www.sportasia.com. 109




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Asia Pacific Online Limited.For the year ended December 31, 2001, we
reimbursed US$120,000 per year to APOL for expenses incurred for the provision
of general management services principally consisting of providing the
full-time services of Mr. Peter Yip to act as our chief executive officer. In
January 2002, we entered into a new services agreement with APOL. Under this
agreement, we agreed to provide an annual management fee of US$1 and reimburse
expenses incurred up to US$270,000 annually for the provision of general
management services principally consisting of providing the full-time services
of Mr. Peter Yip to act as our chief executive officer. APOL is a trust owned
by the spouse of Mr. Peter Yip, who is our chief executive officer, for the
benefit of Mr. Yips children. There are no common directors between us and
APOL. Mr. Yip acted as our chief executive officer in each of 2001, 2002 and
2003. APOL is the owner of record of 11,835,686 Class A common shares and the
beneficial owner of an additional 2,318,942 Class A common shares due to
exercisable options attributable to APOL. In addition, Mr. Yip is the
beneficial owner of 190,000 Class A common shares due to exercisable options
attributable to him. As of March 31, 2004, Mr. Yips spouse also owns 4,444,900
Class A common shares. See Item 7.A  Major Shareholders.  C.
    
    Interests of Experts and Counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION We have appended our Consolidated Financial Statements as of and for the
year ended December 31, 2003 on pages F-1 to F-45 of our annual report. 
 ITEM 9. THE OFFER AND LISTING  A.
    
    Offer and Listing Details Our shares have been quoted on the Nasdaq National Market under the symbol
CHINA since our IPO on July 12, 1999. Prior to July 12, 1999, there was no
public market for our shares. The following table sets forth, for the years
indicated, the high and low closing prices per share as reported on the Nasdaq
National Market. On December 31, 2003, the closing price for our Class A common
shares on the Nasdaq National Market was US$8.07 per share. Closing prices(1)High
    
    Low(in U.S. dollar per share)2000:Annual
    
    
    73.4375
    
    
    
    4.40632001:First quarter
    
    

    7.6250
    
    
    
    2.3125Second quarter
    
    
    3.5500
    
    
    
    2.0625Third quarter
    
    
    4.0000
    
    
    
    1.8700Fourth quarter
    
    
    3.0000
    
    
    
    1.9500Annual
    
    
    7.6250
    
    
    
    1.87002002:First quarter
    
    
    3.2800
    
    
    
    2.6300Second quarter
    
    
    2.7800
    
    
    
    2.1600Third quarter
    
    
    2.5400
    
    
    
    1.8600Fourth quarter
    
    
    3.0722
    
    
    
    1.9100
 110




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Closing prices(1)High
    
    Low(in U.S. dollar per share)Annual
    
    
    3.2800
    
    
    
    1.86002003:First quarter
    
    
    3.5800
    
    
    
    2.7300Second quarter
    
    
    8.4100
    
    
    
    3.2100Third quarter
    
    
    14.4600
    
    
    
    8.2800Fourth quarter
    
    
    10.3800
    
    
    
    7.4300Annual
    
    
    14.4600
    
    
    
    2.7300Past six calendar months:2003:December
    
    
    8.6700
    
    
    
    7.4300November
    
    
    9.4500
    
    
    
    8.2600October
    
    
    10.3800
    
    
    
    8.2000September
    
    
    10.1300
    
    
    
    8.2800August
    
    
    11.9900
    
    
    
    8.6700July
    
    
    14.4600
    
    
    
    9.2500
   (1)
    
    All share prices are adjusted retroactively to reflect the two-for-one
share split effected as of each of December 13, 1999 and May 8, 2000,
respectively. Source: Bloomberg.  B.
    
    Plan of DistributionNot applicable.  C.
    
    Markets Our Class A common shares have been traded on the Nasdaq National Market
in the United States under the symbol CHINA since our IPO on July 12, 1999.
Prior to July 12, 1999, there was no public market for our shares. There can be
no assurance we can continue to satisfy the relevant criteria for maintaining
our listing on the Nasdaq National Market.  D.
    
    Selling ShareholdersNot applicable.E.
    
    DilutionNot applicable.F.
    
    Expenses of the IssueNot applicable. 
 ITEM 10. ADDITIONAL INFORMATION  A.
    
    Share CapitalNot Applicable.B.
    
    Memorandum and Articles of Association 111




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We incorporate by reference into this Annual Report the description of our
Amended and Restated Articles of Association contained in our Current Report of
Foreign Private Issuer on Form 6-K (File No. 000-30134) filed with the
Commission on September 18, 2002.  C.
    
    Material Contracts Expansion through Acquisitions and Partnerships We have acquired, and intend to continue to acquire, companies and assets
that we believe will enhance our business model, revenue base, operations and
profitability, particularly relating to our strategy in enterprise software,
outsourced software development and mobile services. Our acquisitions require
the investment of significant amounts of cash and our Class A common shares,
and, in the past has involved amortization expenses related to certain
intangible assets. A brief summary of our material transactions during the
past three years is set forth below. In October 2001, we entered into an asset purchase agreement with CIC to
purchase the three URLs, www.china.com, www.hongkong.com and www.taiwan.com,
and related intellectual property rights for US$16.8 million from CIC, and the
final payment for the purchase was made in February 2002. For further details,
see Item 3.D  Key Information  Risk Factors  Risks relating to chinadotcom
 We are subject to risks related to our purchase of the URLs from CIC and
Item 7.B  Major Shareholders and Related Party Transactions  Related Party
Transactions. In March 2002, we acquired Layabo Pty. Limited (now renamed Mezzo Business
Databases Pty Limited), an Australian database marketing business and owner of
the trademark IncNet. With the acquisition of Layabo Pty. Limited and the prior
acquisition of RNR International Marketing Group (Australia) Pty Limited in
2000, we are consolidating our marketing business in Australia under the MEZZO
brand. In March 2002, we acquired a 51% interest in OpusOne Technologies, the
parent of Platinum China Holdings, Inc., a developer and service provider of
business management software solutions for state enterprises and multi-national
corporations in Greater China. We acquired the remaining interest in OpusOne
Technologies in May 2003. The total consideration was based upon a set multiple
of average net earnings under US GAAP for the three years from 2003 through
2005 inclusive, and will be paid in installments during that period. The total
consideration is payable in cash and shares and will be contingent upon the
future performance of the business. In October 2002, we entered into a transaction with Sagent Technology,
Inc., a provider of enterprise business intelligence solutions, involving an
asset-based senior secured loan with a principal amount of US$7.0 million and
warrants for shares of Sagent. In March 2003, based upon the occurrence of what
we viewed to be certain events of default under the loan, we exercised our
rights as a secured lender to enforce our security interest in certain loan
collateral and filed a claim for damages against Sagent. In April 2003, we
reached a settlement with Sagent pursuant to which our loan was repaid in full,
and we received an additional agreed upon sum in respect of terminated warrants
and other rights we had in the company. In February 2003, our subsidiary, CDC Australia Limited, completed the
acquisition of Praxa, a leading Australian information technology professional
services organization with a 21-year operating history. The acquisition was
completed for a purchase price of up to A$11.0 million (approximately US$6.4
million), subject to clawback provisions based on future performance. We paid
US$3.5 million in cash in February 2003 at the time of acquisition. As of
December 31, 2003, we had future commitments relating to the acquisition of
Praxa for up to US$2.9 million. The amount to be paid will depend upon
Praxas earnings before interest, tax, depreciation and amortization for the
year ended December 31, 2003. In the event Praxas EBITDA for 2003
multiplied by 3.004 is greater than US$6.4 million, then we are required
to pay US$2.9 million. In the event Praxas EBITDA for 2003 multiplied by 3.004
is less than US$6.4 million, then we are only required to pay the difference
between US$2.9 million minus the difference between US$6.4 million minus such
product, such 112




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amount not to be less than zero. As of the date of this filing,
the determination of this contingent portion of the consideration had not been
finalized. In addition, we had a US$3.9 million loan to Praxa outstanding
pursuant to a Loan Agreement  Fully Drawn Advance Facility dated as of
February 12, 2004. In April 2003, we completed the acquisition of Newpalm, a leading short
message service mobile software platform developer and application service
provider in China, through our mobile applications and portal arm and
81.3%-owned
subsidiary, hongkong.com. We paid cash consideration of US$14.0 million in 2003
and US$41.0 million in February 2004. In May 2003, our wholly-owned subsidiary, CDC Outsourcing Holdings Ltd.,
entered into a 51% owned joint venture agreement with vMoksha Technologies
Limited, an information technology outsourcing company headquartered in
Bangalore, India. The joint venture aims to provide a broad range of
outsourcing related services to major software vendors and enterprises in the
United States, Europe and the Asia-Pacific region. In September 2003, we acquired a majority interest in IMI, an
international provider of software to the supply chain management sector
principally across Europe and the United States, by acquiring 51% of IMIs
holding company, Cayman First Tier, in exchange for
US$25.0 million to subscribe for new shares in Cayman First Tier and
up to an aggregate of US$25.0 million in revolving loan facilities provided to
Cayman First Tier. Symphony Technology Group, a Palo Alto, California based
venture capital company, holds the remaining 49% in Cayman First Tier. The
following discussion sets forth the terms of some of our arrangements with
Cayman First Tier and our joint venture partner, Symphony. Cayman First Tier Loan Facilities.In addition to the US$25.0 million
investment we paid as consideration for our 51% stake in Cayman First Tier, we
provided additional consideration in the form of the Cayman Loan Facility, in
which Cayman First Tier is the borrower, and the Symphony Loan Facility, in
which Symphony Enterprise Solutions, S.ar.L., a wholly-owned subsidiary of
Cayman First Tier is the borrower. Under these loan facilities, we are
obligated to loan up to an aggregate of US$25.0 million. The two loan
facilities have substantially similar terms. Each of the loan facilities are
documented as revolving credit facilities and expire on September 8, 2008.
Under their terms, we agreed to make advances in the form of cash or
chinadotcom shares. Interest on advances accrues at the rate of 3% per year,
and is payable quarterly in arrears. The borrower has the option of prepaying
borrowed amounts at any time upon three business days notice without penalty
or premium in increments of US$100,000. The borrower is required to make a
mandatory prepayment of all outstanding advances in full upon our request in
the event any one of our competitors makes an equity investment in Symphony in
excess of US$2.0 million or more than one of our competitors make equity
investments in Symphony in excess of US$5.0 million in the aggregate. Proceeds of advances may be used for the following purposes:  
    
    to acquire assets of, or equity interests in, companies that
are in the business of providing software for warehousing management,
logistics and distribution management, and supply chain execution;
    
    to provide working capital for any businesses so acquired;
    
    to make loans and capital contributions to subsidiaries; or
    
    to repay a then existing loan agreement among affiliates of IMI and Foothill Capital Corporation. Under each of the loan facilities, the borrowers are obligated to provide,
upon our request, guarantees and security agreements guaranteeing and/or
securing payment of the borrowers obligations under the loan facilities, which
could include liens on the assets of the borrower and the assets and securities
of subsidiaries. In
addition, the lines of credit contain other covenants typical for such
facilities, including limitations on liens, limitations on debt and
restrictions on sale of assets. In addition, at any time when we are no longer
entitled to 113




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appoint a majority of the board of directors of IMI, the borrower
is required to comply with the following financial covenants:  
    
    maintain tangible asset value, which is defined as total assets
minus goodwill and other intangible assets, as follows:  o
    
    if the total outstanding advances are less than
US$15.0 million, greater than the total outstanding advances;
oro
    
    if the total outstanding advances are greater than
US$15.0 million, greater than US$15.0 million plus a specified
percentage of the total outstanding advances greater than
US$15.0 million which percentage is 33% during the first year
of the advance, 66% during the second year of the advance, and
100% of the advance thereafter;  
    
    maintain positive EBITDA for each fiscal quarter as follows:  o
    
    if budgeted EBITDA was at least US$3.0 million, at least 50% of such amount; oro
    
    if budgeted EBITDA is less than US$3.0 million, not
more than US$1.5 million less than the amount budgeted for such
quarter;o
    
    make expenditures for fixed or capital assets only
to the extent that the aggregate of all such expenditures in
such year do not exceed the lesser of 3% of the gross revenues
of the borrower and the amount equal to 120% of the amount of
such expenditures budgeted for such year; and  
    
    maintain consolidated cash and permitted investments of at
least US$3.0 million. As of December 31, 2003, US$7.0 million was outstanding under the Cayman
Loan Facility, and no amount was outstanding under the Symphony Loan Facility.
Amounts drawn under the Cayman Loan Facility were used to repay amounts
outstanding under, and to terminate, a Loan and Security Agreement among
affiliates of IMI and Foothill Capital Corporation, as lender. The US$7.0
million drawn under the Cayman Loan Facility is secured by a first priority
pledge by Symphony in our favor for all of Symphonys right, title and interest
in Symphonys 49% interest in Cayman First Tier. Put Option Agreement. Also in connection with our investment in IMI, we
granted Symphony an option to sell us all of Symphonys 49% interest in IMI at
any time during the twelve months following the occurrence of any of the
following events:  
    
    The composition of IMIs executive committee is altered by the
IMI board such that it does not consist of four members of the IMI
board, with two members elected by each of chinadotcom and Symphony;
provided, that a change in the composition of the executive committee
to five members permitted under the terms of the executive committee
charter in limited circumstances, does not trigger Symphonys option;
    
    A decision of the executive committee, made under the exclusive
authority delegated to it under the executive committee charter is
overruled by the entire IMI board; or
    
    The rights, powers or responsibilities set forth in the
executive committee charter are adjusted or terminated by the entire
IMI board without the approval of the directors elected by Symphony. The purchase price for Symphonys interest in IMI is based on the
financial performance of IMI, and is set at a fixed multiple of IMIs annual
revenues. The multiple is selected based upon a table using IMIs revenue
growth and EBITDA as a percentage of revenue as the selected metrics. The fixed
multiple varies from 0.25, in
the event revenues for IMI are decreasing greater than 10% per year and
EBITDA as a percentage of revenues for IMI is less than 5%, to 6.0, in the
event revenues for IMI are increasing greater than 20% per year and 114




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EBITDA as a
percentage of revenues for IMI is greater than 20%. The parties have agreed to
review the fixed multiples set forth in the table at least once a year so that
the multiples would accurately reflect the fair market value for enterprise
software companies, or earlier in the event the Nasdaq National Market
composite index changes by more than 30% between periods the multiples are last
reviewed. The form of payment of the purchase price will be determined by the
parties, and may consist of cash, chinadotcom common shares, a combination of
both cash and chinadotcom common shares, or other form of payment. Symphony Note.In addition to the Symphony Loan Facility and the Cayman
Loan Facility, on November 14, 2003, Cayman First Tier provided a loan in the
principal amount of US$25.0 million to Symphony in exchange for a non-recourse
promissory note from Symphony, or the Symphony Note. Symphony would use the
proceeds from the loan to pursue acquisitions of enterprise resource planning
software companies. Under the terms of the Symphony Note, the entire principal
amount outstanding is payable by Symphony on November 14, 2007, with interest
accruing at the rate of 3% per annum. Accrued interest is payable quarterly in
the event Symphonys net worth falls below the amount outstanding under the
Symphony Note. Symphony has the option of prepaying borrowed amounts at any
time upon three business days notice without penalty or premium, in increments
of US$100,000. Symphonys obligations under the promissory note are secured by
a pledge from Symphony in favor of Cayman First Tier of all of Symphonys
right, title and interest in Symphonys 49% interest in Cayman First Tier. The
security interest is subordinate to the security interest Symphony granted in
its 49% interest in Cayman First Tier to secure amounts outstanding under the
line of credit we provided to Cayman First Tier. The promissory note allows
Cayman First Tier to declare the note immediately due and payable upon the
occurrence of events of default typical for such promissory notes including
payment defaults, Symphonys inability to pay its debts as they become due or
becomes insolvent, or if the security agreement fails to create a valid lien on
the collateral to secure the loan. In connection with the US$25.0 million loan under the Symphony Note and
the US$7.0 million loan under the Cayman Loan Facility, on November 14, 2003,
Symphony waived its right to receive, and granted to us, up to a maximum of
US$10.0 million per year of Symphonys pro rata portion of the profits of IMI
available for distribution by dividend to Symphony during the two year period
ending September 30, 2005. If the total profits of IMI during the two year
period are less than US$20.0 million, the term of Symphonys waiver and grant
automatically extends until the earlier of March 31, 2006 or such time as the
total profits of IMI waived by Symphony equal US$20.0 million. Any such amounts
we receive from Symphonys pro rata portion of IMIs actual aggregate profits
available for distribution by dividend to Symphony may be used to set-off any
amounts of accrued and unpaid interest and outstanding principal under the
Symphony Note. The amount of profits of IMI that will be available for
distribution by dividend, if any, will depend upon the financial performance of
IMI which is subject to risks and uncertainties. Also in connection with the US$25.0 million loan under the Symphony Note
and the US$7.0 million loan under the Cayman Loan Facility, on November 14,
2003, Symphony granted Cayman First Tier an option to purchase from Symphony a
portion of the securities of the company Symphony acquired with the proceeds
from the Symphony Note, or the Symphony Acquisition. Symphony granted Cayman
First Tier an option to purchase a number of securities in equal to 5% of the
amount of securities acquired by Symphony in the Symphony Acquisition. The
purchase price for the securities was set at 175% of the price Symphony paid
for the acquired securities. Cayman First Tier, with the consent of Symphony,
has assigned the option to us. Ross Merger Agreement.Pursuant to a definitive agreement entered on
September 4, 2003 as amended among Ross, chinadotcom and CDC Software Holdings,
we proposed to acquire Ross for approximately US$68.1 million in consideration.
Under the amended merger agreement, stockholders of Ross have the option to
receive either:  
    
    US$17.00 in cash, or
    
    US$19.00 in a combination of cash and chinadotcom common shares 115




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for each share of Ross common stock. As a result of the amended merger
agreement, at the closing of the merger, Ross stockholders who elect to receive
cash and shares will receive, for each share of Ross common stock, US$5.00 in
cash and a number of chinadotcom shares equal to US$14.00 divided by the
average closing price of chinadotcom shares for the 10 trading days preceding
the second trading day before the closing date. Moreover, if the average price
of chinadotcom shares is below US$8.50, the amended merger agreement permits
chinadotcom to elect to increase the amount of cash that Ross common
stockholders will receive and decrease the number of chinadotcom shares that
Ross common stockholders will receive. In such case, Ross common stockholders
still would receive US$19.00 in a combination of cash and chinadotcom shares
for each share of Ross common stock, but would receive more than US$5.00 in
cash per share and less than US$14.00 worth of chinadotcom shares for each Ross
common share. In connection with the acquisition of Ross, Ross stock options with an
exercise price of US$19.00 per share or less will be replaced with options to
purchase chinadotcom common shares under substantially similar terms. Each Ross
stock option will be converted into an option to acquire a number of
chinadotcom common shares based on a conversion ratio. The conversion ratio is
calculated as follows:  
    
    If we do not elect to adjust the exchange ratio to determine
the merger consideration, the conversion ratio is the sum of: (a)
US$14.00 divided by the average closing price of chinadotcom common shares for the 10 trading days ending on, and including, the second
trading day before the closing date of the merger; and (b) US$5.00
divided by the closing sales price of chinadotcom common shares on
Nasdaq for the last trading day prior to the closing date of the
merger.
    
    If we elect to adjust the exchange ratio to determine the
merger consideration, the conversion ratio is the sum of: (a) the
adjusted exchange ratio, which is a fraction, (i) the numerator of
which is US$14.00, and (ii) the denominator of which is a number, not
less than the ten-day average price or more than US$8.50, to be
determined by us, and (b) the quotient obtained by dividing the total
cash amount to be paid per share of Ross common stock based on the
adjusted exchange ratio by the closing price of each chinadotcom
common share on the Nasdaq National Market for the last trading date
before the closing date of the merger. Pivotal.On December 8, 2003, we announced that we had signed a
definitive agreement to acquire Pivotal by way of either an all-cash or a
cash-and-stock transaction. We consummated our acquisition of Pivotal on
February 25, 2004. Pivotal is a leading international CRM company that
provides a complete set of highly flexible, powerful CRM applications and
implementation services for mid-sized enterprises, licensed to over 1,700
clients worldwide. CDC Software acquired all of the outstanding shares of
Pivotal under a plan of arrangement pursuant to which Pivotal shareholders
elected to receive, for each Pivotal share, either (1) US$2.00 in cash; or (2)
US$2.14 comprised of US$1.00 cash plus US$1.14 of common shares of chinadotcom.
The value of the share portion of this option was calculated using the average
closing price of the chinadotcom shares on the Nasdaq National Market over the
ten trading day period ending two days prior to closing, which was US$11.2204. In addition to the consideration paid for each outstanding Pivotal share,
each outstanding option to acquire Pivotal common shares with an exercise price
of less than US$2.00 was converted into an option to acquire, on the same terms
and conditions as were applicable under the Pivotal option plans before
closing, chinadotcom common shares. Each such option to acquire Pivotal common
shares was converted into a number of chinadotcom common shares equal to the
product of (a) the number Pivotal common shares issuable upon exercise of
option immediately before closing; multiplied by (b) the exchange ratio. The
exchange ratio is equal to a fraction, the numerator of which is US$2.00, and
the denominator of which was the average per share closing price of chinadotcom
common shares on the Nasdaq National Market during the ten consecutive trading
days ending on (and including) the trading day that is two trading days before
closing, or US$11.2204. 116




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In connection with the acquisition, we paid total consideration of US$35.9
million in cash, 1.85 million common shares with a value of US$20.7 million
using the formula above (the value of these shares was US$21.4 million using
the trading price of chinadotcom shares on the day the acquisition was
consummated), US$0.5 million in stock option conversion expenses, and
approximately US$0.5 million in deal-related expenses. Financings Each of us and our subsidiary, hongkong.com has entered into a Global
Master Repurchase Agreement with Fortis Bank nv-sa, an AA- rated bank, as rated
by Standard & Poors, to establish a repurchase facility which enables us to
draw down via Fortis Bank, Hong Kong Branch as of May 31, 2003 up to US$250.0
million in funding for a one year term. The Fortis Bank facility has been
renewed for 2003. In addition, another repurchase facility with similar terms
was negotiated with DBS Bank, an A+ rated bank, as rated by Standard & Poors,
allowing us to draw down up to US$150.0 million for a three-year term. Each
drawdown under the DBS Bank facility is to be agreed upon between ourselves and
DBS Bank prior to execution. Both facilities were established to provide us
with a source of reasonably priced capital to give us flexibility to finance
operational working capital requirements and acquisitions, as well as our
treasury management program, without having to liquidate our investment
portfolio at short notice. Under these repurchase facilities, any draw down
requires us to sell certain debt securities to the bank at a certain price, and
the bank agrees to sell back to us the same securities at the same purchase
price at a later date. The repurchase dates are set in three or six month
intervals for an entire term of one year or three years, depending on which
facility is drawn. In effect, the bank retains title to our securities as
collateral to enable us to draw down up to a total of US$400.0 million. See
Item 5.B  Operating and Financial Review and Prospects  Liquidity and
Capital Resources and Item 11  Quantitative and Qualitative Disclosures
About Market Risk.  D.
    
    Exchange Controls General There are no exchange control restrictions on payments of dividends on our
Class A common shares or on the conduct of our operations in Hong Kong, where
our principal executive offices are located, or the Cayman Islands, where
chinadotcom is incorporated. In addition, both Hong Kong and the Cayman Islands
are not party to any double tax treaties and no exchange control regulations or
currency restrictions exist in these countries. We are a Cayman Islands company and our affairs are governed by, among
other things, the Companies Law of the Cayman Islands. The following is a
summary of material differences between the Companies Law and general corporate
law in the United States insofar as they relate to the material terms of our
Class A common shares. Differences in Corporate Law The Companies Law of the Cayman Islands is modeled after that of England
but does not follow recent United Kingdom statutory enactments and differs from
laws applicable to United States corporations and their shareholders. Set forth
below is a summary of the significant differences between the provisions of the
Companies Law applicable to chinadotcom and the laws applicable to companies
incorporated in the United States and their shareholders. Mergers and Similar Arrangements.Cayman Islands law does not provide for
mergers as that expression is understood under U.S. corporate law. However,
there are statutory provisions that facilitate the reconstruction and
amalgamation of companies, provided that the arrangement in question is
approved by a majority in number of each class of shareholders and creditors
with whom the arrangement is to be made, and who must in addition represent
three-fourths in value of each such class of shareholders or creditors, as the
case may be, that are present and voting either in person or by proxy at a
meeting, or meetings convened for that purpose. The 117




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convening of the meetings and subsequently the arrangement must be
sanctioned by the Grand Court of the Cayman Islands. While a dissenting
shareholder would have the right to express to the court the view that the
transaction ought not to be approved, the court can be expected to approve the
arrangement if it satisfies itself that:  
    
    the statutory provisions as to majority vote have been complied with;
    
    the shareholders have been fairly represented at the meeting in question;
    
    the arrangement is such as a businessman would reasonably approve; and
    
    the arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law. When a take over offer is made and accepted by holders of 90% of the
shares within four months, the offeror may, within a two month period, require
the holders of the remaining shares to transfer such shares on the terms of the
offer. An objection can be made to the Grand Court of the Cayman Islands but
this is unlikely to succeed unless there is evidence of fraud, bad faith or
collusion. If the arrangement and reconstruction is thus approved, the dissenting
shareholder would have no rights comparable to appraisal rights, which would
otherwise ordinarily be available to dissenting shareholders of United States
corporations, providing rights to receive payment in cash for the judicially
determined value of the shares. Shareholders Suits. Based solely on our inspection of the Register of
Writs and Other Originating process in the Grand Court of the Cayman Islands
from the date of our incorporation, except for the petition filed by e-Planet
Sdb. Bhd. which was withdrawn on September 16, 2003, as of April 30, 2004, we
are not currently aware of any actions or petitions pending against us in the
courts of the Cayman Islands. Indemnification Cayman Islands law does not limit the extent to which a companys articles
of association may provide for indemnification of officers and directors,
except to the extent any such provision may be held by the Cayman Islands
courts to be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime. Our Articles of
Association provide for indemnification of officers and directors for losses,
damages, costs and expenses incurred in their capacities as such, except if
they acted in a willfully negligent manner or defaulted in any action against
them. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, we have been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. Inspection of Books and Records Holders of our Class A common shares will have no general right under
Cayman Islands law to inspect or obtain copies of our list of shareholders or
our corporate records. However, we provide our shareholders with annual audited
financial statements. Proxy materials Under Cayman Islands law, we are only obligated to send proxy materials to
members which is equivalent to the registered shareholders of record. Our
proxy materials are delivered to all of our registered 118




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shareholders. We offer electronic delivery of proxy materials to our
registered shareholders, and we mail proxy materials to each registered owner
who has not opted to receive proxy materials electronically. In an effort to
maintain cost effectiveness, we have, and will continue to, mail the proxy
materials to those beneficial shareholders who hold greater than 10,000 of our
shares. Restrictions on Nonresident or Foreign Shareholders Under Cayman Islands law there are no limitations on the rights of
nonresident or foreign shareholders to hold or vote our Class A common shares.  E.
    
    Taxation The following is a summary of the material Cayman Islands and United
States Federal income tax consequences of an investment in the Class A common
shares based upon laws and relevant interpretations thereof in effect as of the
date of this Annual Report, all of which are subject to change. This summary
does not deal with all possible tax consequences relating to an investment in
the Class A common shares, such as the tax consequences under state, local and
other tax laws. Cayman Islands Taxation The Cayman Islands currently levy no taxes on individuals or corporations
based upon profits, income, gains or appreciation and there is no taxation in
the nature of inheritance tax or estate duty. There are no other taxes likely
to be material to us levied by the Government of the Cayman Islands except for
stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of, the Cayman Islands. The Cayman
Islands are not party to any double taxation treaties. There are no exchange
control regulations or currency restrictions in the Cayman Islands. United States Federal Income Taxation The following summary sets forth certain material U.S. Federal income tax
consequences of the purchase, ownership and disposition of the Class A common
shares as a capital asset. This summary is based upon the Internal Revenue Code
of 1986, as amended, or the Code, our legislative history, existing and
proposed U.S. Treasury regulations promulgated thereunder, published rulings by
the U.S. Internal Revenue Service, or the IRS, and court decisions, all in
effect as of the date of this Annual Report, all of which authorities are
subject to change or differing interpretations, which changes or differing
interpretations could apply retroactively. This summary does not purport to
discuss all aspects of U.S. Federal income tax which may be relevant to
particular investors, such as financial institutions, insurance companies,
dealers or traders in securities or currencies, regulated investment companies,
tax-exempt entities, U.S. holders, as defined below, liable for alternative
minimum tax, persons holding Class A common shares as part of a position in a
straddle or as part of a hedging transaction or conversion transaction for U.S.
tax purposes, persons that enter into a constructive sale transaction with
respect to Class A common shares, persons holding 10% or more of our voting
shares or U.S. holders whose functional currency as defined in Section 985 of
the Code is not the U.S. dollar. In addition, this summary does not discuss any
foreign, state or local tax considerations. This summary only applies to
original purchasers of Class A common shares who purchase Class A common shares
as capital assets, or property held for investment within the meaning of
Section 1221 of the Code. The term U.S. holder means a beneficial owner of a note or Class A common shares who or which is:  
    
    a citizen or resident of the United States;
    
    a corporation or partnership created or organized in or under
the laws of the United States or of any political subdivision of the
United States;
    
    an estate the income of which is subject to U.S. Federal income
tax regardless of our source; 119




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
    
    a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more U.S. persons have authority to control all substantial decisions
of the trust, or the trust elects under U.S. Treasury Regulations to
be treated as a U.S. person; or
    
    any other person who is subject to U.S. Federal income taxation
on a net income basis with respect to a Class A common share. Partners of a partnership holding Class A common shares should consult
their tax advisor. Tax Consequences of U.S. Holders Dividends Subject to the discussion in Passive Foreign Investment Company Status
below, in the event that a U.S. holder receives a distribution, other than pro
rata distributions of Class A common shares or rights with respect to Class A
common shares, on the Class A common shares, that U.S. holder will be required
to include the distribution in gross income as a taxable dividend to the extent
such distribution is paid from our current or accumulated earnings and profits
as determined for United States Federal income tax purposes. Distributions in
excess of our current and accumulated earnings and profits will first be
treated, for United States Federal income tax purposes, as a nontaxable return
on capital to the extent of the U.S. holders basis in the Class A common
shares and thereafter as gain from the sale or exchange of a capital asset.
Dividends paid by us will not be eligible for the corporate dividends received
deduction. The amount of any distribution of property other than cash will be
the fair market value of such property on the date of distribution. Dividends will constitute foreign source income for foreign tax credit
limitation purposes. The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of income. For this
purpose, dividends distributed by us with respect to Class A common shares will
be passive income or, in the case of U.S. holders, financial services income.
Special rules apply to individuals whose foreign source income during the
taxable year consists entirely of qualified passive income and whose creditable
foreign taxes paid or accrued during the taxable year do not exceed US$300 or
US$600 in the case of a joint return. Further, in particular circumstances, a
U.S. holder that:  
    
    has held Class A common shares for less than a specified
minimum period during which it is not protected from risk of loss;
    
    is obligated to make payments related to the dividends; or
    
    holds the Class A common shares in arrangements in which the
U.S. holders expected economic profit, after non-U.S. taxes, is
insubstantial will not be allowed a foreign tax credit for foreign taxes imposed on dividends
paid on Class A common shares. Distributions to a U.S. holder of Class A common shares or rights to
subscribe for Class A common shares that are received as part of a pro rata
distribution to all our shareholders should not be subject to United States
Federal income tax. The basis of the new Class A common shares or rights so
received will be determined by allocating the U.S. holders basis in the old
Class A common shares between the old Class A common shares and the new Class A
common shares or rights received, based on their relative fair market values on
the date of distribution. However, the basis of the rights will be zero if (i)
the fair market value of the rights is less than 15% of the fair market value
of the old Class A common shares at the time of distribution or (ii) the rights
are not exercised and expire. 120




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Dispositions of Shares Subject to the discussion in Passive Foreign Investment Company Status
below, gain or loss realized by a U.S. holder on the sale or other disposition
of the Class A common shares will be subject to United States Federal income
tax as capital gain or loss in an amount equal to the difference between that
U.S. holders basis in the Class A common shares and the amount realized on the
disposition. Such capital gain or loss will be long-term capital gain or loss
if the U.S. holder has held the Class A common shares for more than one year at
the time of the sale or exchange. Generally, gain or loss realized by a U.S.
holder will be treated as U.S. source gain or loss for U.S. foreign tax credit
purposes. Passive Foreign Investment Company Status Based upon an analysis of our assets as at December 31, 2003 and income
for the year 2003, during 2003, we are a PFIC for United States federal income
tax purposes. Although we intended to conduct our business activities in a
manner to reduce the risk of our classification as a PFIC, we have substantial
passive assets in the form of cash and cash equivalents and treasury
instruments, and can provide no assurance that we will not continue to be
classified as a PFIC for 2004 or any future tax year. The determination of
whether we would continue to be a PFIC would be principally based upon:  
    
    the composition of our assets, including goodwill, the amount
of which will depend, in part, on our total net assets and the market
value of our Class A common shares, which is subject to change; and  
    
    the amount and nature of our income from time to time. We have limited control over these variables. To the extent we do have
control over these variables, we may take steps to reduce the material and
adverse effect that our PFIC classification may have on our business, financial
condition and results of operations. In general, we will be a PFIC with respect to a U.S. holder if, for any
taxable year in which the holder owns Class A common shares:  
    
    at least 75% of our gross income for such taxable year is
passive income; or  
    
    at least 50% of our assets, measured by value on a quarterly
average basis, produce or are held for the production of passive
income. For this purpose, passive income generally includes dividends, interest,
rents, royalties, other than certain rents and royalties derived in the active
conduct of a trade or business, annuities, gains from assets that produce
passive income, net income from notional principal contracts and certain
payments with respect to securities loans. If we own, directly or indirectly,
at least 25% by value of the stock of another corporation, we will be treated
as owning our proportionate share of the assets of the other corporation and as
receiving directly our proportionate share of the other corporations income. Subject to the discussion of the mark to market election and qualified
electing fund, or QEF, election below, if we were a PFIC for any taxable year
during which the investor held Class A common shares, the investor would be
subject to special tax rules, regardless of whether we ceased to be a PFIC at a
later date, with respect to:  
    
    any excess distribution by us to the investor, which means any
distributions, possibly including any return of capital
distributions, received by the investor on the Class A common shares
in a taxable year that are greater than 125% of the average annual
distributions received by the investor in the three preceding taxable
years, or the investors holding period for the Class A common shares, if shorter; and  
    
    any gain realized on the sale or other disposition, including a
pledge, of Class A common shares. 121




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Under these special tax rules:  
    
    the excess distribution or gain would be allocated ratably over
the U.S. holders holding period for the Class A common shares;  
    
    the amount allocated to the current taxable year and any
taxable year prior to the first taxable year in which we were a PFIC
would be treated as ordinary income;  
    
    the amount allocated to each of the other years would be taxed
as ordinary income at the highest tax rate in effect for that year;
and  
    
    the interest charge applicable to underpayments of tax would be
imposed with respect to the resulting tax attributable to each prior
year in which we were a PFIC. If we are a PFIC in any year, you will be required to make an annual
return on Internal Revenue Service, or IRS, Form 8621 regarding distributions
received with respect to the Class A common shares and any gain realized on the
disposition of the Class A common shares. As an alternative to the special rules, a U.S. holder may elect to treat
our Class A common shares that constitute marketable stock as if those Class A
common shares were sold and immediately repurchased by the U.S. holder at the
close of each taxable year, a mark to market election. If the election is made,
the U.S. holder would be required to include as ordinary income the amount of
any increase in the market value of the Class A common shares since the close
of the preceding taxable year, or the beginning of the U.S. holders holding
period, if such holding period began during the taxable year. Likewise, the
U.S. holder would be allowed an ordinary deduction for the amount of any
decrease in the market value of the Class A common shares since the close of
the preceding taxable year, up to the amount of any prior increase in the Class
A common shares market value that has not previously been taken into account
in calculating allowable deductions. The U.S. holders basis in our Class A
common shares would be increased by the amount of any ordinary income, and
reduced by the amount of any deduction, arising under the mark to market
election. In the case of a sale or other disposition of Class A common shares
as to which a mark to market election is in effect, any gain realized on the
sale or other disposition would be treated as ordinary income. Any loss
realized on the sale or other disposition would be treated as an ordinary
deduction, up to the amount of any prior increase in the Class A common shares
market value that has not previously been taken into account in calculating
allowable deductions, and as a capital loss to the extent of any excess. PFIC
shares, other than shares held by certain regulated investment companies, are
considered marketable only if the foreign exchange or market on which the
shares are regularly traded is designated by the U.S. Treasury Department as a
qualified foreign exchange or market. Under the Treasury Regulations, the Class
A common shares would be considered to be regularly traded on a qualified
foreign exchange or market if (i) the ordinary shares are traded at least 15
days during each calendar quarter of the relevant calendar year in more than de
minimis quantities, and (ii) the foreign exchange or market on which the
ordinary shares are regularly traded is subject to regulation or supervision by
a governmental authority of the country in which such exchange or market is
located and the exchange has financial disclosure, surveillance and other
requirements designed to prevent fraudulent and manipulative practices and
remove impediments to the mechanism of a free and open, fair and orderly market
and the rules of the exchange effectively promote active trading of listed
stocks. We expect that the Class A common shares to be marketable within the
meaning of the Treasury Regulations. As a second alternative, a U.S. holder can make a QEF election to include
annually our pro rata share of a PFICs earnings and net capital gains
currently in income each year, regardless of whether or not dividend
distributions are actually distributed. This means a U.S. holder could have a
tax liability for the earnings or gain without a corresponding receipt of cash.
The U.S. holders basis in the common stock will be increased to reflect the
amount of the taxed but undistributed income. Distributions of income that had
previously been taxed will result in a corresponding reduction of basis in the
common stock and will not be taxed again as a distribution to the U.S. holder.
Each U.S. holder who desires QEF treatment must individually make a QEF
election. To make a 122




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QEF election you will need to have an annual information statement from
the PFIC setting forth the earnings and capital gains for the year. As a PFIC,
we would supply the PFIC annual information statement to any shareholder or
former shareholder who requests it. In general, a U.S. holder must make a QEF
election on or before the due date for filing its income tax return for the
first year to which the QEF election will apply. U.S. holders will be permitted
to make retroactive elections in particular circumstances, including if the
U.S. holder had a reasonable belief that the foreign corporation was not a PFIC
and filed a protective election. Investors should consult their tax advisors as
to the consequences of making a protective QEF election or other consequences
of the QEF election. As soon as practicable after the date of this filing, we will make our
2003 PFIC annual information statement and other PFIC-related information
available under a link entitled PFIC on our corporate website which you may
access at http://www.corp.china.com/investor_relations. Information contained
on our website does not constitute a part of this Annual Report. Although we generally will be treated as a PFIC as to any U.S. holder if
we are a PFIC for any year during a U.S. holders holding period, if we cease
to satisfy the requirements for PFIC classification, you may avoid such
classification for years after such cessation if (1) you have made a QEF
election in the first taxable year in which you own the Class A common shares,
or (2) you elect to recognize gain based on the realized appreciation in the
Class A common shares through the close of the tax year in which we cease to be
a PFIC. Transfer Reporting Requirements Under recently promulgated regulations, a U.S. holder, including a tax
exempt entity, that purchases Class A common shares for cash will be required
to file an IRS Form 926 or similar form with the IRS, if (1) the U.S. holder
owned, directly or by attribution, immediately after the transfer at least 10%
by vote or value of us, or (2) the purchase, when aggregated with all purchases
made by that U.S. holder, or any related person thereto, within the preceding
12 month period, exceeds US$100,000. If a U.S. holder fails to file any such
required form, the U.S. holder could be required to pay a penalty equal to 10%
of the gross amount paid for the Class A common shares, subject to a maximum
penalty of US$100,000, except in cases involving intentional disregard. You
should consult your tax advisors with respect to this or any other reporting
requirement which may apply with respect to their acquisition of the Class A
common shares. Backup Withholding and Information Reporting The relevant paying agents for the shares must comply with information
reporting requirements in connection with dividend payments or other taxable
distributions made within the U.S. on the Class A common shares to a
non-corporate U.S. person. In addition, backup withholding at the rate of
31% generally will apply to those payments unless the beneficial owner provides
an accurate taxpayer identification number on a properly completed IRS Form
W-9, certifies its non-U.S. status under penalties of perjury on a properly
completely IRS Form W-8BEN, or otherwise certifies that the beneficial owner is
not subject to backup withholding. Payment of the proceeds from sale of the Class A common shares to or
through a U.S. office of a broker is subject to both U.S. backup withholding
and information reporting requirements, unless the beneficial owner provides an
accurate taxpayer identification number or establishes an exemption from backup
withholding, as described in the preceding paragraph. In general, neither U.S.
backup withholding nor information reporting will apply to a payment of sale
proceeds made outside the U.S. through an office outside the U.S. of a non-U.S.
broker. Special rules may require information reporting in the case of payments
of sale proceeds made outside the U.S. through a U.S. broker. Amounts withheld under the backup withholding rules may be credited
against a U.S. Holders U.S. federal income tax liability, and a holder may
obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the IRS. 123




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F.
    
    Dividends and Paying AgentsNot applicable.G.
    
    Statement by ExpertsNot applicable.H.
    
    Documents on Display Any statement in this Annual Report about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this Annual Report. You should review the
exhibits for a complete description of the contract or document. We are subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended. Under the
Exchange Act, we are required to file reports and other information with the
Commission. Specifically, we are required to file annually a Form 20-F no later
than six months after the close of our fiscal year, which is December 31.
Copies of the registration statement, its accompanying exhibits, as well as
reports and other information, when filed, may be inspected without charge and
may be obtained at prescribed rates at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Securities and
Exchange Commission located at Seven World Trade Center, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The public may obtain information regarding the Washington,
D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. You may
access the Securities and Exchange Commissions Web site at http://www.sec.gov.
Our Class A common shares are listed for trading on NASDAQ under the symbol
CHINA. As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing of proxy statements, and officers,
directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. We furnish our shareholders with annual reports, which include a review of
operations and annual audited consolidated financial statements prepared in
conformity with US GAAP.  I.
    
    Subsidiary Information For a listing of our material subsidiaries, see Item 4.C  Information
on the Company  Organizational Structure. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK You should read the following discussion of our Quantitative and Qualitative
Disclosures About Market Risk together with our financial condition and results
of operations as set forth in Item 5 of this Annual Report, Operating and
Financial Review and Prospects and with our consolidated financial statements
and the related notes included elsewhere in this Annual Report. Market risk is the risk related to adverse changes in market prices of
financial instruments. We are exposed to various types of market risks,
including changes in interest rates and foreign currency exchange rates,
in the normal course of business. In addition, we are exposed to
investment risks due to our substantial investment holdings of
available-for-sale debt securities in our treasury management program. Interest Rate Risk.Our exposure to interest rate risk relates primarily to
our short-term and long-term available-for-sale debt securities. In general,
when interest rates change, the price of a fixed-coupon bond changes in the 124




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opposite direction. Thus, when interest rates increase, a bonds value drops.
If we were to sell securities under such adverse interest rate conditions, we
could lose some of our principal. Historically the fluctuation in value of our
debt portfolio has not exceeded 5% although there can be no guarantee that our
portfolio will not undergo greater fluctuations in the future. As of December 31, 2003, we had invested US$313.3 million in fixed and
floating rate debt securities, including US$31.1 million of restricted debt
securities set aside as collateral pursuant to US$25.1 million in drawdowns
under our repurchase facilities. The following table sets forth information as of December 31, 2003 about
our debt investments that are sensitive to changes in interest rates. Expected Maturity Dates2008 and2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    thereafter
    
    Total(in thousands of U.S. dollars, except percentages)Debt securities:Unsecured
    
    
    
    
    
    
    30,022
    
    
    
    
    
    
    
    22,701
    
    
    
    43,068
    
    
    
    166,655
    
    
    
    262,746Fixed Rate
    
    
    
    
    
    
    2
    %
    
    
    
    
    
    
    2%-3.1
    %
    
    
    2.58%-3.4
    %
    
    
    3.03%-4.5
    %Unsecured
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,400
    
    
    
    19,400Variable interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    LIBOR+2.50%Secured
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,267
    
    
    
    5,672
    
    
    
    18,169
    
    
    
    31,108Fixed rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.0%-3.1
    %
    
    
    2.58
    %
    
    
    3.75%-4.125
    %
 Foreign Exchange Risk. Most of our monetary assets and liabilities are
denominated in Hong Kong dollars, RMB, and U.S. dollars. Approximately 49% of
our revenues for the year ended December 31, 2003 was derived from our Asia
subsidiaries, which conducted their businesses and also incurred expenses in
their local currency. We do not use any derivatives to hedge against foreign
currency fluctuations. As exchange rates in these Asian currencies vary, our
revenues and operating results, when translated, may be adversely impacted and
vary from expectations. The effect of foreign exchange rate fluctuations on our
financial results for the year ended December 31, 2003 was not material. All of
our debt securities are US-dollar denominated and therefore not subject to
foreign currency risk. However, as long as we continue to rely on US-dollar
denominated interest income for a significant portion of our cashflows and use
this to support our operations, any material depreciation of the U.S. dollar
against currencies of the countries where we have operations might have a
negative effect on our cashflows. Renminbi, or RMB, is not freely convertible into foreign currencies. On
January 1, 1994, the PRC government abolished the dual rate system and
introduced a single rate of exchange as quoted daily by the Peoples Bank of
China. However, the unification of the exchange rates does not imply the
convertibility of RMB into United States dollars or other foreign currencies.
All foreign exchange transactions continue to take place either through the
Peoples Bank of China or other banks authorized to buy and sell foreign
currencies at the exchange rates quoted by the Peoples Bank of China. Approval
of foreign currency payments by the Peoples Bank of China or other
institutions requires submitting a payment application form together with
suppliers invoices, shipping documents and signed contracts. Credit Default and Investment Risk.When we purchase debt securities as
part of our treasury management program, we are subject to risks that can
reduce the value of our investments. The primary factors that can cause
significant fluctuations or a decline in the fair market value of our
investments include:  
    
    the issuers actual or perceived credit quality following changes in its debt to equity ratio;
    
    increased writedowns for goodwill or intangible assets;
    
    declining revenues or earnings that fall short of expectations; and 125




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
    
    inability to comply with financial instrument covenants. These and other indicators could reduce the value of our investments due to:  
    
    reduced liquidity;
    
    ratings downgrades, or a negative outlook by credit agencies;
    
    a decline in the price of an issuers equity or debt securities; or
    
    an issuer being placed on CreditWatch. While all of our current investments in debt securities are investment
grade, there can be no assurance that the issuers of those securities will not
default on their obligations or their ratings will remain investment grade. A
debt security may remain an investment grade instrument, but events such as
those listed above could cause the value of that debt security to decline. In
such an instance, we would suffer either an actual loss if we sell the debt
security, or a mark to market loss if the fair market value were less than its
purchase price for six or more consecutive months. As of December 31, 2003, we
recorded approximately US$34,000 in accumulated other comprehensive income in

the shareholders equity account in our consolidated balance sheet, reflecting
an aggregate appreciation in fair market value of our debt portfolio since the
date of investment. We are exposed to the risk of default by the issuers of our debt
securities. We can quantify the risk by dividing our debt securities portfolio
into the four primary risk categories based on the Standard and Poors credit
ratings of the debt issuers as of December 31, 2003. Even if an issuer did not
default, but the market perceives an increased likelihood of a default, we may
suffer a principal loss if we sell a debt security of such issuer under
unfavorable market circumstances. The table below shows the value of our debt
securities as of December 31, 2003 as categorized based on ratings assigned to
our debt securities by each of Standard & Poors and Moodys Investors Service. Rating (Standard & Poors)
    
    AAA
    
    AA
    
    A
    
    BBBRating (Moodys Investors Service)
    
    Aaa
    
    Aa2
    
    A2
    
    Baa2
    
    TotalAmounts of debt securities outstanding as of December 31, 2003 (in US$ millions)Moodys Investors Service
    
    
    293.9
    
    
    
    0
    
    
    
    0
    
    
    
    19.4
    
    
    
    313.3Standard & Poors
    
    
    293.9
    
    
    
    0
    
    
    
    0
    
    
    
    19.4
    
    
    
    313.3
 Our investment in Centauri Fund, currently rated Baa2 by Moodys Investors
Service and BBB by Standard & Poors, a bond fund managed by a third party
professional manager, is also exposed to external management risk, as the
Centauri Fund relies on the professional skills of the fund manager to deliver
its target interest income. There can be no assurance that we will achieve our
interest income target. Also, our investment in the Centauri Fund is highly
illiquid and could be difficult to realize prior to first available redemption
in 2006. On January 15, 2004, we disposed of US$9.7 million of our original
US$19.4 million holdings of Centauri Fund. Call Risk. If interest rates decrease, it is possible that issuers of
debt securities with the right to call such instruments might exercise their
right to call, or exercise the right to buy back their debt at predetermined
dates prior to their maturity date at a predetermined price. If this were to
happen our portfolio yield could potentially decrease as we might have to
reinvest this portion of the portfolio in new investments at lower
interest rates. In addition, the cash flows associated with callable
bonds are somewhat unpredictable, since the bond life could be much shorter
than its stated maturity. Risks Related to the Repurchase Facilities.We have invested funds
borrowed from our repurchase facilities in fixed rate AAA-rated debt securities
issued by U.S. government sponsored enterprises to enhance our investment
income. As of December 31, 2003, we had borrowed US$10.1 million from our
repurchase 126




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facilities for this purpose. Use of the repurchase facilities with
Fortis Bank and DBS Bank creates the following three primary risks for us:  
    
    The risk associated with increased leverage, which includes our
ability to pay back the borrowed funds in a timely manner and without
which we may need to liquidate a portion of our treasury portfolio at
a time where we may need to incur losses on the sale of sufficient
debt instruments to repay the borrowing.
    
    By setting aside debt securities as collateral under either
repurchase facility, we incur the risk that if the banks themselves
were to undergo an insolvency event, we could lose all or part of our
debt securities set aside at such time with the bank. Currently,
Fortis credit rating is AA- by Standard & Poors and Aa3 by Moodys
Investors Service and DBS Banks credit rating is A+ by Standard &
Poors and Aa2 by Moodys Investors Service.
    
    The interest that we pay under our repurchase facilities is
dependent upon Libor and therefore, our future interest expenses with
respect to any amounts drawn down under the repurchase facilities may
exceed our expectations due to changes in interest rates. For
example, if Libor rises extremely rapidly over the next few years,
interest expenses will rise commensurately Negative Interest Rate Differential.When purchasing debt securities
using proceeds from our repurchase facilities, we expect the coupon paid on
these debt securities will be substantially higher than the interest we pay on
our repurchase facilities. However, we will be exposed to the risk of a
negative interest rate differential, or negative carry situation, if interest
rates rise. For example, if on the day of a drawdown current LIBOR is 1.2%,
and our cost of borrowing is LIBOR + 0.20%, our total cost of borrowing will be
1.4%. Since the interest rate on our repurchase facilities are reset either
every three, six or twelve months as we so choose prior to each drawdown,
assuming we use the proceeds from our repurchase facilities to purchase a
fixed-rate coupon bond yielding 2.3% and a 1.0% increase in LIBOR occurs, our
total borrowing cost on the facility would increase to 2.4% Equity Price Risk As of December 31, 2003, we had US$0.6 million invested in shares of
publicly listed companies. The table below presents the carrying amounts and
fair values of our investment in shares of publicly listed companies, which are
held for non-trading purposes. The amount of the carrying value is the same as
the fair value because we have marked to market the carrying amount of our
investments as at the end of the period. December 31, 2002
    
    December 31, 2003Carrying
    
    Fair
    
    Carrying
    
    Fairamount
    
    value
    
    amount
    
    valueAvailable-for-sale equity securities (US$ million)
    
    
    2.1
    
    
    
    2.1
    
    
    
    0.6
    
    
    
    0.6
 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 127




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PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Not applicable. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS None. 
 ITEM 15. CONTROLS AND PROCEDURES An evaluation of the effectiveness of our disclosure controls and
procedures was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer, or CEO, and our Chief
Financial Officer, or CFO. Based on that evaluation, our CEO and CFO concluded
that as of the end of the period covered by this report we maintained
disclosure controls and procedures that are effective in providing reasonable
assurance that information required to be disclosed in our reports under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commissions rules and forms, and that
such information is accumulated and communicated to our management, including
our CEO and its CFO, as appropriate, to allow timely decisions regarding
required disclosure. There have been no changes in our internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 
 ITEM 16. [RESERVED] 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT The board of directors has determined that Thomas M. Britt III is an audit
committee financial expert, as defined in Item 16A of Form 20-F. Thomas M.
Britt III is an independent audit committee member. 
 ITEM 16B. Code of Ethics We have adopted a Code of Ethics and Guidelines for Employee Conduct, or
Code of Conduct, that applies to our principal executive officer, principal
financial officer and principal accounting officer as well as all our
directors, other officers and employees. This Code of Conduct is available upon
request from the address on the cover of this Form 20-F. 
 ITEM 16C. Principal Accountant Fees and Services Ernst & Young has served as our independent public accountant for each of
the fiscal years in the three-year period ended December 31, 2003, for which
audited financial statements appear in this annual report on Form 20-F. The
auditor is elected annually by our shareholders at the Annual General Meeting.
The audit committee will propose to our shareholders at the 2004 Annual General
Meeting that Ernst & Young be elected as our auditor for fiscal 2004. 128




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(a)     Audit Fees.Audit fees were US$574,000 in fiscal 2003 and US$456,000
in fiscal 2002. Audit fees consist of fees billed for the annual audit of our
consolidated financial statements and the statutory financial statements of our
subsidiaries. (b)     Audit-Related Fees.Audit-related fees were US$845,000 in fiscal 2003
and US$206,000 in 2002. Audit-related fees consist of fees billed for services
that are reasonably related to the review of the companys financial statements
or that are traditionally performed by the external auditor. Of the US$845,000
billed for audit-related fees in 2003, US$753,000 was incurred in respect of
services related to mergers and acquisitions and capital market transactions. (c)     Tax Fees. Tax fees were US$10,000 in 2003 and US$13,000 in 2002. Tax
Fees include fees billed for tax compliance services, including the preparation
of original and amended tax returns and claims for refund; tax consultations,
such as assistance in connection with tax audits and appeals, tax advice
related to mergers and acquisitions, transfer pricing, and requests for rulings
or technical advice from taxing authorities; tax planning services; and
expatriate tax compliance, consultation and planning services. (d)     All Other Fees. All other fees were nil in 2003 and nil in 2002. (e) (1)     Audit Committee Pre-approval Policies and Procedures The audit committee of our board of directors is responsible,
among other matters, for the oversight of the external auditor
subject to the requirements of applicable securities and corporate
laws. The audit committee has adopted a policy regarding
pre-approval of audit and permissible non-audit services provided by
our independent auditors, or the Policy. Under the Policy, proposed
services are approved either (i) by general approval, which provides
pre-approval by the audit committee without consideration of
specific case-by-case services; or (ii) specific pre-approval, which
provides the specific pre-approval of the audit committee. The audit
committee may delegate either type of pre-approval authority to one
or more of its members. The appendices to the Policy set out the
audit, audit-related, tax and other services that have received the
general pre-approval of the audit committee; these services are
subject to annual review by the audit committee. All other audit,
audit-related, tax and other services must receive a specific
pre-approval from the audit committee. (2)     Percentage of Services Approved by the Audit Committee During 2003, none of the fees for services provided to us by
Ernst & Young described in each of paragraphs (b) through (d) above
were approved by the audit committee pursuant to paragraph
(c)(7)(i)(c) of rule 2-01 of Regulation S-X. All fees were approved
either by general or specific approval, as described in paragraph
(e)(1) above. 
 ITEM 16D. Exemptions from the Listing Standards for Audit Committees Not Applicable 129




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##### Table of Contents



ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers (c) Total number of
    
    (d) Maximum NumberShares Purchased as
    
    of Shares that MayPart of Publicly
    
    Yet Be Purchased(a) Total Number of
    
    (b) Average Price
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Shares Purchased*
    
    Paid Per Share*
    
    Programs
    
    ProgramsJanuary 1, 2003 to
    
    200,000 Class A
    
    US$
    2.50January 31, 2003
    
    common sharespurchased byRaymond Ch'ien4,300,000 Class A
    
    US$
    2.50common sharespurchased by APOL4,468,560 Class A
    
    US$
    2.50
    
    
    4,468,560 Class Acommon shares
    
    
    
    
    
    common sharespurchased by CCC
    
    
    
    
    
    purchased under theNominees Limited
    
    
    
    
    
    Share RepurchaseProgramFebruary 1, 2003 to
February 28, 2003
    
    NIL
    
    
    March 1, 2003 to
March 31, 2003
    
    NIL
    
    
    April 1, 2003 to
April 30, 2003
    
    NIL
    
    
    May 1, 2003 to May
31, 2003
    
    NIL
    
    
    June 1, 2003 to
June 30, 2003
    
    127,530
    
    $
    3.2062July 1, 2003 to
July 31, 2003
    
    211,696
    
    $
    3.3388August 1, 2003 to
August 31, 2003
    
    197,526
    
    $
    3.4033September 1, 2003
to September 30,
2003
    
    194,900
    
    $
    3.2006October 1, 2003 to
October 31, 2003
    
    36,700
    
    $
    2.7307November 1, 2003 to
November 30, 2003
    
    36,700
    
    $
    3.2832December 1, 2003 to
December 31, 2003
    
    56,700
    
    $
    2.4220
 *Represents shares purchased pursuant to option exercises only. 130




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##### Table of Contents



PART III 
 ITEM 17 FINANCIAL STATEMENTS We have elected to provide financial statement pursuant to Item 18. 
 ITEM 18 FINANCIAL STATEMENTS We have appended our Consolidated Financial Statements as of and for the
year ended December 31, 2003 on pages F-1 to F-62 of this annual report. 
 ITEM 19 EXHIBITS No.
    
    Description1.1
    
    Conformed copy of the Amended and Restated Memorandum of
Association.*******1.2
    
    Conformed copy of the Amended and Restated Articles of Association.*******2(a).1
    
    1999 Employee Stock Option Plan, as amended.*2(a).2
    
    2000 Employee Share Purchase Plan.**2(a).3
    
    2001 Employee Share Purchase Plan.*****4.(a).1
    
    Amended and Restated Support Services Agreement dated April 1, 2000 by
and between China Internet Corporation Limited and chinadotcom
corporation.****4.(a).2
    
    Agreement dated March 12, 2001 by and between China Internet Corporation
Limited and chinadotcom corporation. ****4.(a).3
    
    Agreement dated March 13, 2001 by and between China Internet Corporation
Limited and chinadotcom corporation. ****4.(a).4
    
    Guarantee Agreement dated April 4, 2001 by chinadotcom corporation in
favor of hongkong.com Limited. ****4.(a).5
    
    Asset Purchase Agreement dated October 24, 2001 between China Internet
Corporation Limited and chinadotcom Strategic, Inc.******4.(a).6
    
    Share Purchase Agreement by and among CDC Australia Limited, Praxa
Limited, Mantech International Corporation and Mantech Australia
 131




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##### Table of Contents



No.
    
    DescriptionInternational Inc. dated December 31, 2002. yyyy4.(a).7
    
    Share Purchase Agreement by and between CDC Mobile Media Corporation,
hongkong.com Corporation and Palmweb Inc., dated March 14, 2003. ++++++4.(a).8
    
    Agreement and Plan of Merger among chinadotcom corporation, CDC Software
Holdings, Inc. and Ross Systems, Inc., dated as of September 4,
2003. +++4.(a).9
    
    Transition and Stock Vesting Agreement among chinadotcom corporation, CDC
Software Holdings, Inc., Ross Systems, Inc. and J. Patrick Tinley dated
as of September 4, 2003. +++4.(a).10
    
    Transition and Stock Vesting Agreement among chinadotcom corporation, CDC
Software Holdings, Inc., Ross Systems, Inc. and Robert B. Webster dated
as of September 4, 2003. +++4.(a).11
    
    Series B Preferred Share Purchase Agreement by and between Cayman First
Tier and chinadotcom Capital Limited, dated September 8, 2003.
++++4.(a).12
    
    Shareholders Agreement by and among Cayman First Tier, Symphony
Technology II-A, L.P. and chinadotcom Capital Limited, dated September 8,
2003.++++4.(a).13
    
    Voting Agreement by and among Cayman First Tier, Symphony Technology
II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).14
    
    Put Option Agreement by and among Cayman First Tier, Symphony Technology
II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).15
    
    Amended and Restated Memorandum and Articles of Association of Cayman
First Tier, adopted of September 4, 2003.++++4.(a).16
    
    Executive Committee Charter of Cayman First Tier, adopted September 4,
2003. ++++4.(a).17
    
    Revolving Credit Agreement by and between Cayman First Tier and
chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).18
    
    Revolving Credit Agreement by and between Symphony Enterprise Solutions,
S.ar.l and and chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).19
    
    Amendment to Agreement and Plan of Merger signed between chinadotcom
corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated
October 3, 2003. +++++4.(a).20
    
    Guaranty dated as of September 8, 2003 from chinadotcom corporation. +++++4.(a).21
    
    Amended and Restated Memorandum and Articles of Association of Cayman
First Tier adopted November 14, 2003.y
 132




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##### Table of Contents



No.
    
    Description4.(a).22
    
    Amended and Restated Executive Committee Charter of Cayman First Tier
adopted November 14, 2003.y4.(a).23
    
    Second Amendment to the Agreement and Plan of Merger among chinadotcom
corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated
January 7, 2004.yy4.(a).24
    
    Arrangement Agreement by and among Pivotal Corporation, chinadotcom
corporation, a Cayman Islands corporation and CDC Software Corporation,
dated December 6, 2003.yy4.(a).25
    
    Notice of Extraordinary General Meeting to be held on February 23, 2004
and Management Information Circular and Notice of Hearing of Petition for
Arrangement under the British Columbia Company Act relating to a proposed
arrangement involving Pivotal Corporation and Its Common Shareholders and
Its Optionholders and CDC Software Corporation, dated January 20, 2004.yy4.(a).26
    
    Amended and Restated Arrangement Agreement by and among Pivotal
Corporation, chinadotcom corporation, a Cayman Islands corporation and
CDC Software Corporation, dated January 19, 2004.yy4.(a).27
    
    Third Amendment to the Agreement and Plan of Merger among chinadotcom
corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated
April 29, 2004.+++++++4.(a).28
    
    Amendment to Share Purchase Agreement by and among CDC Australia
Limited, Praxa Limited, Mantech International Corporation and Mantech
Australia International Inc. dated February 10, 2003. yyyy4,(a).29
    
    Amendment to Preferred Stockholder
Agreement by and among chinadotcom corporation, Ross Systems, Inc.
and Benjamin W. Griffith, III dated January 31, 2004.+++++++4.(b).1
    
    Cooperation Agreement on Short Message Services between China Unicom,
Sichuan, and Beijing Newpalm Information Technology Co. Ltd.yyy4.(b).2
    
    Monternet SMS Cooperation Agreement.yyy4.(c)1
    
    Executive Services Agreement dated April 27, 2001, by and between
chinadotcom corporation and Raymond Chien. ****4.(c)2
    
    Executive Services Agreement effective as of January 1, 2002, by and
between chinadotcom corporation and Asia Pacific Online Limited.******6.
    
    Details of how EPS information is calculated can be found in Note 4(o) to
our Consolidated Financial Statements.yyyy8.
    
    List of principal subsidiaries of the Company.yyyy12.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a)12.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a)13.(a).1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002yyyy13.(a).2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002yyyy
 133




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*
    
    Incorporated by reference to our registration statement on Form S-8 (File
No.: 333-12966) filed with the Commission on December 7, 2000.**
    
    Incorporated by reference to our registration statement on Form S-8 (File
No.: 333-12958) filed with the Commission on December 7, 2000.***
    
    Incorporated by reference to our registration statement on Form F-3 (File
No. 333-12674) filed with the Commission on October 3, 2000.****
    
    Incorporated by reference to our annual report on Form 20-F (File No.
000-30134) filed with the Commission on May 10, 2001.*****
    
    Incorporated by reference to our current report on Form 6-K (File No.
000-30134) filed with the Commission on February 28, 2002.******
    
    Incorporated by reference to our annual report of Form 20-F (File No.
000-30134) filed with the Commission on June 11, 2002.*******
    
    Incorporated by reference to our current report on Form 6-K (File No.
000-30134) filed with the Commission on September 18, 2002.+
    
    Incorporated by reference to our annual report on Form 20-F (File
No. 000-30134) filed with the Commission on June 16, 2003.++
    
    Incorporated by reference to our current report on Form 6-K (File
No. 000-30134) filed with the Commission on June 16, 2003.+++
    
    Incorporated by reference to our current report on Form 6-K (File
No. 000-30134) filed with the Commission on September 5, 2003.++++
    
    Incorporated by reference to our current report on Form 6-K (File
No. 000-30134) filed with the Commission on September 15, 2003.+++++
    
    Incorporated by reference to our registration statement on Form F-4
(File No. 333-109493) filed with the Commission on October 6, 2003.++++++
    
    Incorporated by reference to Amendment No. 2 to our registration
statement on Form F-4 (File No. 333-109493) filed with the
Commission on January 21, 2004.+++++++
    
    Incorporated by reference to Amendment No. 4 to our registration
statement on Form F-4 (File No. 333-109493) filed with the
Commission on May 7, 2004.y
    
    Incorporated by reference to our current report on Form 6-K (File
No. 000-30134) filed with the Commission on December 11, 2003.yy
    
    Incorporated by reference to our current report on Form 6-K (File
No000-30134) filed with the Commission on January 8, 2004.yyy
    
    Incorporated by reference to our registration statement on Form
F-4/A (File No. 333-109493) filed with the Commission on January 21,
2004.yyyy
    
    Incorporated by reference to our annual report on
Form 20-F (File No. 000-30134) filed with the Commission on
May 7, 2004. 134




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##### Table of Contents



SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this Annual Report on its behalf on this
7th day of
July, 2004. (CHINADOTCOM CORPORATION LOGO)/s/ Raymond K.F. ChienRaymond K.F. ChienExecutive Chairman andActing
Chief Executive Officer/s/ Daniel WiddicombeDaniel WiddicombeChief Financial Officer
 135




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS PageReport of the Independent Auditors
    
    
    F-1Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-3Consolidated Statements of Operations for each of the three
years ended December 31, 2001, 2002 and 2003
    
    
    F-4Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2001, 2002 and 2003
    
    
    F-6Consolidated Statements of Changes in Shareholders Equity for each
of the three years ended December 31, 2001, 2002 and 2003
    
    
    F-9Notes to Consolidated Financial Statements
    
    
    F-12
 F-index




---



REPORT OF THE INDEPENDENT AUDITORS The Board of Directors and Shareholders
chinadotcom corporation We have audited the accompanying
consolidated balance sheets of
chinadotcom corporation and subsidiaries as of December 31, 2002 and 2003, and
the related consolidated statements of operations, cash flows and shareholders
equity for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of IMI Global Holdings
Ireland Limited, a 51% owned subsidiary acquired in September 2003, which
statements reflect total assets constituting 4.0% in 2003 and total revenues
constituting 12.5% in 2003 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for IMI
Global Holdings Ireland Limited, is based solely on the report of the other
auditors. We conducted our audits in
accordance
with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and
the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of chinadotcom corporation and
subsidiaries at December 31, 2002 and 2003, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States. As discussed in notes 2(c) and 4 to the
consolidated financial statements,
the Company changed its method of accounting for goodwill and other intangible
assets in 2002 and variable interest entities in 2003. Ernst & Young
Hong Kong
April 28, 2004 F-1




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS The Board of Directors and
Stockholder of
IMI Global Holdings Ireland Limited In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders deficit and of
cash flows present fairly, in all material respects, the financial position of
IMI Global Holdings Ireland Limited and its subsidiaries (the Company) at
December 31, 2003 and the results of their operations and their cash flows for
the period from September 9, 2003 through December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these statements based on our
audit. We conducted our audit of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States), which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion. PricewaterhouseCoopers LLP
February 9, 2004 F-2




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars, except number of shares and per share data) December 31,
    
    December 31,Notes
    
    2002
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    33,153
    
    
    
    55,508Restricted cash
    
    
    5
    
    
    
    109
    
    
    
    238Accounts receivable
(net of allowance of USD4,139 for 2002 and USD2,816 for 2003)
    
    
    6
    
    
    
    15,030
    
    
    
    16,562Deposits, prepayments and other receivables
    
    
    
    
    
    
    8,363
    
    
    
    10,461Available-for-sale debt securities
    
    
    7
    
    
    
    300,056
    
    
    
    262,745Restricted debt securities
    
    
    7
    
    
    
    139,255
    
    
    
    19,213Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    240Total current assets
    
    
    
    
    
    
    495,966
    
    
    
    364,967Loan receivables
    
    
    8
    
    
    
    5,325
    
    
    
    27,000Property and equipment, net
    
    
    9
    
    
    
    9,375
    
    
    
    7,210Goodwill
    
    
    10
    
    
    
    12,016
    
    
    
    81,427Intangible assets
    
    
    11
    
    
    
    16,980
    
    
    
    28,880Investments in equity investees
    
    
    
    
    
    
    330
    
    
    
    434Investments under cost method
    
    
    
    
    
    
    387
    
    
    
    609Available-for-sale debt securities
    
    
    7
    
    
    
    20,000
    
    
    
    19,400Restricted debt securities
    
    
    7
    
    
    
    11,868
    
    
    
    11,896Available-for-sale equity securities
    
    
    12
    
    
    
    2,050
    
    
    
    590Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    305Other assets
    
    
    
    
    
    
    6,660
    
    
    
    3,336Total assets
    
    
    
    
    
    
    580,957
    
    
    
    546,054LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    
    
    
    
    13,662
    
    
    
    7,800Other payables
    
    
    
    
    
    
    12,952
    
    
    
    4,602Purchase consideration payable
    
    
    2
    (c)
    
    
    
    
    
    
    39,835Accrued liabilities
    
    
    
    
    
    
    9,064
    
    
    
    16,896Short-term bank loans
    
    
    13
    
    
    
    115,650
    
    
    
    15,199Long-term bank loans, current portion

    
    
    14
    
    
    
    149
    
    
    
    171Deferred revenue
    
    
    
    
    
    
    2,693
    
    
    
    9,357Income tax payable
    
    
    
    
    
    
    636
    
    
    
    656Amounts due to related parties
    
    
    
    
    
    
    684
    
    
    
    Total current liabilities
    
    
    
    
    
    
    155,490
    
    
    
    94,516Deferred tax liabilities
    
    
    
    
    
    
    
    
    
    
    1,618Long-term bank loans, net of current
portion
    
    
    14
    
    
    
    11,585
    
    
    
    11,456Accrued pension liability
    
    
    
    
    
    
    
    
    
    
    2,272Minority interests
    
    
    
    
    
    
    36,182
    
    
    
    45,746Shareholders equity:Class A common shares, USD0.00025 par
value:Authorized - 800,000,000 sharesIssued and outstanding -
101,588,009 shares as of December 31, 2003 and
101,296,363 shares as of December 31, 2002
    
    
    
    
    
    
    25
    
    
    
    25Preferred shares, USD0.001 par value:Authorized - 5,000,000 sharesIssued and
outstanding - Nil as of
December 31, 2002 and 2003
    
    
    
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    
    
    
    
    610,340
    
    
    
    614,721Treasury stock - 63,564 shares as of December 31,
2002 and
1,766,552 shares as of December 31, 2003
    
    
    
    
    
    
    (238
    )
    
    
    (4,067
    )Accumulated deficits
    
    
    
    
    
    
    (234,417
    )
    
    
    (218,893
    )Accumulated other comprehensive income
    
    
    15
    
    
    
    1,990
    
    
    
    (1,340
    )Total shareholders equity
    
    
    
    
    
    
    377,700
    
    
    
    390,446Total liabilities and shareholders
equity
    
    
    
    
    
    
    580,957
    
    
    
    546,054
 The accompanying notes form an integral part of these consolidated
financial statements. F-3




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S. dollars, except number of shares and per share data) Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,Notes
    
    2001
    
    2002
    
    2003Revenues (a)Software and consulting servicesSales of IT products
    
    
    
    
    
    
    743
    
    
    
    1,339
    
    
    
    8,000Consulting services
    
    
    
    
    
    
    15,900
    
    
    
    14,166
    
    
    
    42,699Mobile services and applications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,876Advertising and marketing activities
    
    
    
    
    
    
    18,087
    
    
    
    26,682
    
    
    
    19,558Other income
    
    
    
    
    
    
    4,507
    
    
    
    1,821
    
    
    
    2,29939,237
    
    
    
    44,008
    
    
    
    89,432Less: Cost of revenuesSoftware and consulting servicesSales of IT products
    
    
    
    
    
    
    (472
    )
    
    
    (668
    )
    
    
    (6,123
    )Consulting services
    
    
    
    
    
    
    (11,451
    )
    
    
    (6,255
    )
    
    
    (25,697
    )Mobile services and applications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,247
    )Advertising and marketing activities
    
    
    
    
    
    
    (11,625
    )
    
    
    (19,999
    )
    
    
    (12,966
    )Other income
    
    
    
    
    
    
    (1,892
    )
    
    
    (845
    )
    
    
    (1,084
    )Gross margin
    
    
    
    
    
    
    13,797
    
    
    
    16,241
    
    
    
    41,315Selling, general and administrative expenses
(b)
    
    
    
    
    
    
    (73,297
    )
    
    
    (27,161
    )
    
    
    (34,325
    )Depreciation and amortization expenses
    
    
    
    
    
    
    (19,180
    )
    
    
    (9,882
    )
    
    
    (7,182
    )Impairment of goodwill and intangible
assets
    
    
    
    
    
    
    (21,908
    )
    
    
    
    
    
    
    Operating loss
    
    
    
    
    
    
    (100,588
    )
    
    
    (20,802
    )
    
    
    (192
    )Interest income
    
    
    
    
    
    
    26,689
    
    
    
    23,713
    
    
    
    13,440Interest expense
    
    
    
    
    
    
    (1,272
    )
    
    
    (2,463
    )
    
    
    (1,070
    )Loss arising from share issuance of a
subsidiary
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    Gain/(loss) on disposal of available-for-sale
securities
    
    
    
    
    
    
    4,411
    
    
    
    (163
    )
    
    
    4,599Gain/(loss) on disposal of
subsidiaries and cost investments
    
    
    
    
    
    
    (1,915
    )
    
    
    (66
    )
    
    
    469Other non-operating gains (c)
    
    
    
    
    
    
    
    
    
    
    508
    
    
    
    961Other non-operating losses
    
    
    
    
    
    
    (922
    )
    
    
    (288
    )
    
    
    (153
    )Impairment of cost investments and
available-for-sale securities
    
    
    
    
    
    
    (12,260
    )
    
    
    (5,351
    )
    
    
    Share of income/(losses) in equity
investees
    
    
    
    
    
    
    (2,592
    )
    
    
    682
    
    
    
    (115
    )Income/(loss) before income taxes
    
    
    
    
    
    
    (88,504
    )
    
    
    (4,230
    )
    
    
    17,939Income tax benefits/(income taxes)
    
    
    18
    
    
    
    (186
    )
    
    
    (113
    )
    
    
    689Income/(loss) before minority interests
    
    
    
    
    
    
    (88,690
    )
    
    
    (4,343
    )
    
    
    18,628Minority interests in losses/(income) of
consolidated subsidiaries
    
    
    
    
    
    
    3,162
    
    
    
    248
    
    
    
    (2,204
    )Income/(loss) from continuing operations
    
    
    
    
    
    
    (85,528
    )
    
    
    (4,095
    )
    
    
    16,424Discontinued operations:
    
    
    20Loss from operations of discontinued
subsidiaries, net of related tax expense of
USD175 for 2001, USD47 for 2002 and USD1 for 2003
    
    
    
    
    
    
    (38,857
    )
    
    
    (14,681
    )
    
    
    (3,027
    )Gain on disposal/dissolution of discontinued
subsidiaries, net
    
    
    
    
    
    
    
    
    
    
    545
    
    
    
    2,127Net income/(loss)
    
    
    19
    
    
    
    (124,385
    )
    
    
    (18,231
    )
    
    
    15,524Basic earnings/(loss) per share
    
    
    19
    
    
    
    (1.21
    )
    
    
    (0.18
    )
    
    
    0.15Diluted earnings/(loss) per share
    
    
    19
    
    
    
    (1.21
    )
    
    
    (0.18
    )
    
    
    0.15
 F-4




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S. dollars, except number of shares and per share data) Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,Notes
    
    2001
    
    2002
    
    2003(a)
    
    Software and consulting services  revenue from related parties
    
    17
    
    
    60
    
    
    
    
    
    
    
    (b)
    
    Selling, general and administrative expenses to related parties
    
    17
    
    
    (10,106
    )
    
    
    (413
    )
    
    
    (257
    )(c)
    
    Non-operating gain from a related party
    
    17
    
    
    
    
    
    
    
    
    
    
    715
 The accompanying notes form an integral part of these consolidated
financial statements. F-5




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. dollars, except number of shares and per share data) Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003Cash flows from operating activities:Net income/(loss)
    
    
    (124,385
    )
    
    
    (18,231
    )
    
    
    15,524Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:Minority interests in income/(losses)
of consolidated subsidiaries
    
    
    (4,010
    )
    
    
    (1,036
    )
    
    
    2,204Loss on disposal/write-off of property
and equipment
    
    
    3,066
    
    
    
    1,732
    
    
    
    127Loss arising from share issuance of a
subsidiary
    
    
    55
    
    
    
    
    
    
    
    Loss/(gain) on disposal of available-for-sale
securities
    
    
    (4,411
    )
    
    
    158
    
    
    
    (4,599
    )Loss/(gain) on disposal of subsidiaries
and cost investments
    
    
    2,055
    
    
    
    (428
    )
    
    
    (2,596
    )Amortization of goodwill and intangible
assets
    
    
    15,323
    
    
    
    1,183
    
    
    
    3,571Depreciation
    
    
    12,739
    
    
    
    11,340
    
    
    
    5,293Stock compensation expenses
    
    
    1,169
    
    
    
    309
    
    
    
    328Share of losses/(income) in equity
investees
    
    
    2,592
    
    
    
    (682
    )
    
    
    115Impairment of cost investments and
available-for-sale securities
    
    
    12,260
    
    
    
    5,351
    
    
    
    Impairment of goodwill and intangible
assets
    
    
    40,698
    
    
    
    
    
    
    
    Gain in value of derivative instruments
    
    
    
    
    
    
    (571
    )
    
    
    Changes in operating assets and
liabilities:Accounts receivable
    
    
    10,427
    
    
    
    7,191
    
    
    
    9,486Deposits, prepayments and other receivables
    
    
    (8
    )
    
    
    10,909
    
    
    
    3,144Amounts due from related companies
    
    
    21,450
    
    
    
    
    
    
    
    Other assets
    
    
    1,623
    
    
    
    (252
    )
    
    
    1,794Accounts payable
    
    
    (1,468
    )
    
    
    (1,107
    )
    
    
    (7,413
    )Other payables
    
    
    (5,754
    )
    
    
    4,824
    
    
    
    (8,505
    )Accrued liabilities
    
    
    145
    
    
    
    (3,968
    )
    
    
    (4,006
    )Deferred revenue
    
    
    (2,307
    )
    
    
    (66
    )
    
    
    (557
    )Amounts due to related companies
    
    
    1,099
    
    
    
    (730
    )
    
    
    (715
    )Net cash provided by/(used in) operating
activities
    
    
    (17,642
    )
    
    
    15,926
    
    
    
    13,195
 F-6




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands of U.S. dollars, except number of shares and per share data) Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003Cash flows from investing activities:Acquisition of subsidiaries, net of cash
acquired
    
    
    (15,580
    )
    
    
    (4,587
    )
    
    
    (13,446
    )Acquisition of property and equipment
    
    
    (8,250
    )
    
    
    (5,471
    )
    
    
    (1,551
    )Acquisition of cost investments
    
    
    (398
    )
    
    
    
    
    
    
    Acquisition of available-for-sale
securities
    
    
    (1,932,249
    )
    
    
    (660,599
    )
    
    
    (424,667
    )Acquisition of intangible assets
    
    
    (12,392
    )
    
    
    (8,800
    )
    
    
    (2,355
    )Advances of loans to equity investees
    
    
    (179
    )
    
    
    
    
    
    
    Issuance of loans
    
    
    
    
    
    
    
    
    
    
    (27,000
    )Purchase of promissory notes and warrants
    
    
    
    
    
    
    (7,000
    )
    
    
    Collection of promissory notes and warrants
    
    
    
    
    
    
    
    
    
    
    6,878Proceeds from disposal of available-for-sale
securities
    
    
    1,843,943
    
    
    
    675,728
    
    
    
    580,607Proceeds from disposal of property
and equipment
    
    
    138
    
    
    
    1,386
    
    
    
    381Proceeds/(cash disbursements) from share issuance
by disposal of subsidiaries
    
    
    982
    
    
    
    (652
    )
    
    
    (2,349
    )Proceeds from disposal of cost investments
    
    
    598
    
    
    
    
    
    
    
    1,750Decrease/(increase )in restricted cash
    
    
    2,860
    
    
    
    1,165
    
    
    
    (129
    )Net cash provided by/(used in) investing
activities
    
    
    (120,527
    )
    
    
    (8,830
    )
    
    
    118,119Cash flows from financing activities:Issuance of share capital
    
    
    279
    
    
    
    724
    
    
    
    8,585Additional bank loans
    
    
    117,307
    
    
    
    125,278
    
    
    
    15,015Repayment of bank loans
    
    
    (2,737
    )
    
    
    (116,349
    )
    
    
    (121,388
    )Purchases of treasury stock
    
    
    
    
    
    
    (4,416
    )
    
    
    (11,171
    )Settlement of promissory notes in relation to
acquisitions
    
    
    (3,343
    )
    
    
    
    
    
    
    Net cash provided by/(used in) in financing
activities
    
    
    111,506
    
    
    
    5,237
    
    
    
    (108,959
    )Net increase/(decrease) in cash and cash
equivalents
    
    
    (26,663
    )
    
    
    12,333
    
    
    
    22,355Cash and cash equivalents at beginning of
year
    
    
    47,483
    
    
    
    20,820
    
    
    
    33,153Cash and cash equivalents at end of year
    
    
    20,820
    
    
    
    33,153
    
    
    
    55,508
 F-7




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. dollars, except number of shares and per share data) Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003Interest paid
    
    
    1,495
    
    
    
    2,632
    
    
    
    519Non-cash activities:Class A common shares issued for settlement
of other payables
    
    
    4,467
    
    
    
    
    
    
    
    Class A common shares issued for settlement
of promissory notes
    
    
    3,033
    
    
    
    
    
    
    
    Subsidiarys ordinary shares issued for
acquisition of
a subsidiary
    
    
    1,410
    
    
    
    
    
    
    
    Subsidiarys ordinary shares issued for purchases
of assets
    
    
    221
    
    
    
    
    
    
    
    Repurchase of Class A common shares from disposal
of an
equity investee
    
    
    53
    
    
    
    
    
    
    
    Reissuance of treasury stock for the acquisition
of subsidiaries
    
    
    
    
    
    
    
    
    
    
    2,810Reissuance of treasury stock for settlement of
employee
stock ownership plan obligations
    
    
    
    
    
    
    24
    
    
    
    Purchase consideration on the acquisition of a
subsidiary
    
    
    
    
    
    
    
    
    
    
    39,835
 The accompanying notes form an integral part of these consolidated
financial statements. F-8




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Amounts in thousands) Accumulated
    
    
    
    TotalAdditional
    
    
    
    
    
    
    
    other
    
    
    
    shareholdersNumber
    
    Common
    
    paid-in
    
    Treasury
    
    Comprehensive
    
    comprehensive
    
    Accumulated
    
    equity/of
    
    shares
    
    capital
    
    stock
    
    loss
    
    income/(loss)
    
    deficits
    
    (deficit)shares
    
    USD
    
    USD
    
    USD
    
    USD
    
    USD
    
    USD
    
    USDBalance at January 1, 2001
    
    
    101,828
    
    
    
    25
    
    
    
    604,566
    
    
    
    
    
    
    
    
    
    
    
    (766
    )
    
    
    (91,801
    )
    
    
    512,024Exercise of employee stock options
    
    
    92
    
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279Issuance of shares for non-cash transactions
    
    
    795
    
    
    
    1
    
    
    
    7,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,500Redemption and retirement of shares
for non-cash transactions
    
    
    (23
    )
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )Stock compensation expenses
on options granted
    
    
    
    
    
    
    
    
    
    
    1,169
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,169Unrealized losses, net of unrealized gains,
on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,956
    )
    
    
    (9,956
    )
    
    
    
    
    
    
    (9,956
    )Other-than-temporary impairment of
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,216
    
    
    
    4,216
    
    
    
    
    
    
    
    4,216Minority interests share of unrealized
losses, net of unrealized gains on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    337
    
    
    
    
    
    
    
    337Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,199
    )
    
    
    (1,199
    )
    
    
    
    
    
    
    (1,199
    )Less: reclassification adjustment
for gains, net of losses included
in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )
    
    
    (71
    )
    
    
    
    
    
    
    (71
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124,385
    )
    
    
    
    
    
    
    (124,385
    )
    
    
    (124,385
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131,058
    )Balance at December 31, 2001
    
    
    102,692
    
    
    
    26
    
    
    
    613,460
    
    
    
    
    
    
    
    
    
    
    
    (7,439
    )
    
    
    (216,186
    )
    
    
    389,861
 The accompanying notes form an integral part of these consolidated
financial statements. F-9




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Amounts in thousands) Accumulated
    
    
    
    TotalAdditional
    
    
    
    
    
    
    
    
    
    other
    
    
    
    shareholdersNumber
    
    Common
    
    paid-in
    
    Treasury
    
    Comprehensive
    
    comprehensive
    
    Accumulated
    
    equity/of
    
    shares
    
    capital
    
    stock
    
    loss
    
    income/(loss)
    
    deficits
    
    (deficit)shares
    
    USD
    
    USD
    
    USD
    
    USD
    
    USD
    
    USD
    
    USDBalance at January 1, 2002
    
    
    102,692
    
    
    
    26
    
    
    
    613,460
    
    
    
    
    
    
    
    
    
    
    
    (7,439
    )
    
    
    (216,186
    )
    
    
    389,861Exercise of employee stock options
    
    
    296
    
    
    
    
    
    
    
    724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    724Redemption of shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,416
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,416
    )Retirement of shares
    
    
    (1,692
    )
    
    
    (1
    )
    
    
    (4,153
    )
    
    
    4,154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reissuance of treasury stock for
non-cash transactions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Stock compensation expenses
on options granted
    
    
    
    
    
    
    
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    309Unrealized losses, net of unrealized
gains on available-for-
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,276
    )
    
    
    (1,276
    )
    
    
    
    
    
    
    (1,276
    )Other-than-temporary impairment of
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,125
    
    
    
    5,125
    
    
    
    
    
    
    
    5,125Minority interests share of
unrealized gains, net of
unrealized losses on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (484
    )
    
    
    (484
    )
    
    
    
    
    
    
    (484
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    661
    
    
    
    661
    
    
    
    
    
    
    
    661Less: reclassification adjustment
for losses, net of gains included
in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,403
    
    
    
    5,403
    
    
    
    
    
    
    
    5,403Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,231
    )
    
    
    
    
    
    
    (18,231
    )
    
    
    (18,231
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,802
    )Balance at December 31, 2002
    
    
    101,296
    
    
    
    25
    
    
    
    610,340
    
    
    
    (238
    )
    
    
    
    
    
    
    1,990
    
    
    
    (234,417
    )
    
    
    377,700
 The accompanying notes form an integral part of these consolidated
financial statements. F-10




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##### Table of Contents



chinadotcom corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Amounts in thousands) Accumulated
    
    
    
    TotalAdditional
    
    
    
    
    
    
    
    
    
    other
    
    
    
    shareholdersNumber
    
    Common
    
    paid-in
    
    Treasury
    
    Comprehensive
    
    comprehensive
    
    Accumulated
    
    equity/of
    
    shares
    
    capital
    
    stock
    
    loss
    
    income/(loss)
    
    deficits
    
    (deficit)shares
    
    USD
    
    USD
    
    USD
    
    USD
    
    USD
    
    USD
    
    USDBalance at January 1, 2003
    
    
    101,296
    
    
    
    25
    
    
    
    610,340
    
    
    
    (238
    )
    
    
    
    
    
    
    1,990
    
    
    
    (234,417
    )
    
    
    377,700Exercise of employee stock options
    
    
    2,592
    
    
    
    1
    
    
    
    8,584
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,585Redemption of shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,171
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,171
    )Retirement of shares
    
    
    (2,300
    )
    
    
    (1
    )
    
    
    (5,749
    )
    
    
    5,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reissuance of treasury stock for
non-cash transactions
    
    
    
    
    
    
    
    
    
    
    1,218
    
    
    
    1,592
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,810Stock compensation expenses
on options granted
    
    
    
    
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328Unrealized gains, net of unrealized
losses on available-for-
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    644
    
    
    
    644
    
    
    
    
    
    
    
    644Minority interests share of
unrealized losses, net of
unrealized gains on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    184
    
    
    
    
    
    
    
    184Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    186
    
    
    
    
    
    
    
    186Less: reclassification adjustment
for gains, net of losses included
in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,344
    )
    
    
    (4,344
    )
    
    
    
    
    
    
    (4,344
    )Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,524
    
    
    
    
    
    
    
    15,524
    
    
    
    15,524Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,194Balance at December 31, 2003
    
    
    101,588
    
    
    
    25
    
    
    
    614,721
    
    
    
    (4,067
    )
    
    
    
    
    
    
    (1,340
    )
    
    
    (218,893
    )
    
    
    390,446
 The accompanying notes form an integral part of these consolidated
financial statements. F-11




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  1.
    
    ORGANIZATION AND BASIS OF PRESENTATION chinadotcom corporation
(chinadotcom or the Company) is a leading
provider of enterprise software and solutions, value-added mobile services
and applications and marketing and advertising services. The Company
offers the following services to companies throughout Greater China and
Asia, North America, the United Kingdom and the rest of Europe:  -
    
    software products and services, including the implementation
and development of packaged software for use in enterprise resource
planning targeting mid-market manufacturers;-
    
    value-added mobile services and applications, including
offering SMS to mobile subscribers in China and providing mobile
development and technology services in Korea for leading telecom
network operators, mobile handset manufacturers and mobile
application and content providers;-
    
    technology services and outsourcing, including offering
economical, high-quality software development services to the
Companys enterprise software customers by utilizing programmers
located principally in China and India; and-
    
    marketing and advertising services, including developing
targeted advertising campaigns by utilizing information gathered from
the Companys proprietary databases. The Company was incorporated under the laws
of the Cayman Islands in
June 1997 as a wholly-owned subsidiary of China Internet Corporation
Limited (CIC), a company incorporated under the laws of Bermuda. In March 2000, hongkong.com Corporation
(hongkong.com), a then
wholly-owned
e-business solutions and advertising services provider, was listed on the
Growth Enterprise Market of The Stock Exchange of Hong Kong Limited and
736,000,000 shares of hongkong.com were issued at a price of USD0.24 per
share for net proceeds of USD168,462. As a result, the Companys
shareholding in hongkong.com was diluted to 84%. Currently, the
Companys ownership interest is 81.3%. No deferred tax has been provided
for the gain as the future disposal of shares in hongkong.com by the
Company will not be taxable in any jurisdiction. On December 12, 2003, the Company
announced that it would reorganize
its mobile and portal unit as a wholly-owned subsidiary, chinadotcom
Mobile Interactive Corporation, CDC Mobile), and register an offering of
CDC Mobiles American Depositary Shares under the Securities Act of 1933,
as amended. The purpose of the intended offering is to fund the operations
of CDC Mobile following its reorganization as an independent company
holding the Companys assets and businesses that provide mobile services
and applications, advertising and interactive media and Internet services.
As a selling shareholder, the Company may also receive proceeds from the
intended offering. While the offering is expected to commence in the first
half of 2004, subject to the completion of all applicable regulatory

review, there is no assurance that it will be successfully completed. The
Company anticipates that Newpalm will be included within CDC Mobile. The consolidated financial statements were
prepared in accordance
with accounting principles generally accepted in the United States. F-12




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  2.
    
    BUSINESS COMBINATIONS (a) OpusOne Technologies
International Inc. (OpusOne) On February 28, 2002, the Company
acquired a 51% equity interest in
OpusOne, through the purchase of outstanding and newly issued common shares of OpusOne. The results of
OpusOnes operations have been included
in the consolidated financial statements since the date of acquisition.
OpusOne is a developer of business software solutions in the Peoples
Republic of China (the PRC). As a result of the acquisition, OpusOne is
expected to complement and serve to further expand the Companys portfolio
of proprietary software solutions in the PRC market and the Company is
expected to reduce costs and improve operational profitability through
economies of scale. The total initial purchase price was USD8,950
cash for 368,100 issued
and outstanding and 300,000 newly issued common shares of OpusOne. The
Company paid USD4,488 cash on the date of acquisition. The remaining
purchase price will be paid in three yearly installments subsequent to
December 31, 2002 and will be adjusted based on the audited financial
statements of OpusOne for each of the fiscal years ended December 31,
2003, 2004 and 2005. The following table summarizes the estimated
fair values of the
assets acquired and liabilities assumed at the date of acquisition. USDCurrent assets
    
    
    1,850Property and equipment, net
    
    
    297Goodwill
    
    
    4,764Intangible assets*
    
    
    720Other assets
    
    
    821Total assets acquired
    
    
    8,452Current liabilities
    
    
    (3,532
    )Long-term debt
    
    
    (432
    )Total liabilities assumed
    
    
    (3,964
    )Net assets acquired
    
    
    4,488
 *  The estimated weighted average
useful life of the identifiable
intangible assets acquired is 3 years. During the year ended December 31, 2003,
the Company acquired the
remaining 49% equity interest in OpusOne through the issuance of 519,032
common shares of the Company to OpusOnes minority shareholders. Goodwill of USD6,794 in aggregate in respect
of the two stages of the
acquisition was assigned to the software and consulting services segment
and such goodwill is not deductible for tax purposes. F-13




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  2.
    
    BUSINESS COMBINATIONS (continued) (b) Praxa Limited
(Praxa) On February 12, 2003, the Company
acquired a 100% equity interest in
Praxa, through the acquisition of the entire issued share capital of
Praxa. The results of Praxas operations have been included in the
consolidated financial statements since the date of acquisition. Praxas
core business is the provision of information technology products and
services in the form of outsourcing, application development and support,
and systems integration in Australia and Asia. As a result of the
acquisition, the Company is expected to increase the number of clients for
its low-cost China-based outsourcing platform and to extend the
distribution network of the Companys own software products to Australia. The purchase price was approximately USD3,567
cash for 6,304,478
common shares of Praxa. The following table summarizes the estimated
fair values of the
assets acquired and liabilities assumed at the date of acquisition. USDCurrent assets
    
    
    4,552Property and equipment, net
    
    
    1,061Goodwill
    
    
    3,589Intangible assets*
    
    
    1,996Other assets
    
    
    193Total assets acquired
    
    
    11,391Current liabilities
    
    
    (7,292
    )Deferred tax liabilities
    
    
    (532
    )Total liabilities assumed
    
    
    (7,824
    )Net assets acquired
    
    
    3,567
 *  The estimated weighted average
useful life of the identifiable
intangible assets acquired is 4.5 years. The goodwill of USD3,589 was assigned to the
software and consulting
services segment and such goodwill is not deductible for tax purposes. F-14




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  2.
    
    BUSINESS COMBINATIONS (continued) (c) Palmweb Inc.
(Palmweb) In April 2003, hongkong.com acquired a
100% equity interest in
Palmweb, through the acquisition of the entire issued share capital of
Palmweb. The results of operations of Palmweb and its subsidiary and
variable interest entities (collectively the Palmweb Group) have been
included in the consolidated financial statements since the date of
acquisition. Palmweb is primarily engaged in the provision of mobile
services and applications in the mainland of the PRC (Mainland China).
As a result of the acquisition, the Company can participate in the
provision of value-added mobile services in Mainland China. Pursuant to
the corresponding share purchase agreement (the Agreement), the total
purchase consideration, including certain amount to be paid to certain
employees of Palmweb as further detailed below, has been agreed as
follows:  -
    
    an initial cash consideration of USD14,000; and-
    
    an earnout cash consideration, which is equal to the aggregate
of (i) an amount equal to the audited net income of the Palmweb Group
for the year ended December 31, 2003 multiplied by 3.56918 and (ii)
an amount equal to the audited net income of the Palmweb Group for
the year ended December 31, 2004 multiplied by 1.13982 (the
Contingent Consideration). The initial cash consideration of USD14,000
was paid in April 2003.
The total purchase consideration is subject to a maximum of USD55,000. The following table summarizes the estimated
fair values of the
assets acquired and liabilities assumed at the date of acquisition. USDCurrent assets
    
    
    7,058Property and equipment, net
    
    
    402Goodwill*
    
    
    7,869Intangible assets**
    
    
    2,822Other assets
    
    
    66Total assets acquired
    
    
    18,217Current liabilities
    
    
    (3,286
    )Deferred tax liabilities
    
    
    (931
    )Total liabilities assumed
    
    
    (4,217
    )Net assets acquired
    
    
    14,000
  * Based on the initial consideration payable at the date of acquisition,
which was subsequently adjusted to USD47,704 upon the finalization of the
Contingent Consideration as further detailed below.**
The estimated weighted average useful live of the identifiable
intangible assets acquired is 2.67 years. F-15




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  2.
    
    BUSINESS COMBINATIONS (continued) (c) Palmweb Inc.
(Palmweb) (continued) Based on the audited net income of the
Palmweb Group for the year
ended December 31, 2003 and in accordance with the Agreement, the
Contingent Consideration, which is limited to the maximum consideration
less the amount already paid, was finalized at USD41,000 and was paid in
February 2004. That part of the Contingent Consideration that was
directly related to the acquisition of Palmweb, equal to USD39,835, has
been accounted for as an adjustment of the purchase price of Palmweb.
That part of the Contingent Consideration that was paid to certain
employees of Palmweb, who were the former holders of the share options of
Palmweb and who are subject to certain continuing employment requirements,
equal to USD1,165 has been accounted for as compensation for services. The total goodwill of USD47,704 in relation
to the acquisition of
Palmweb was assigned to the mobile services and applications segment and
such goodwill is not deductible for tax purposes. The business in which the Palmweb Group
operates is subject to
foreign ownership restrictions in the PRC. To comply with the PRC laws
and regulations that prohibit or restrict foreign ownership of
telecommunications and other information services within the PRC, Palmweb
arranged for the establishment of two entities (the PRC Entities). The
legal owners of the PRC Entities are two PRC citizens who are also
employees of the Company (the Nominees). In order to control the PRC
Entities, the Company entered into certain cooperation, trust and other
arrangements with relevant parties, including the PRC Entities and the
Nominees. Based on the contractual arrangements
mentioned above, the Company
believes that the PRC Entities are considered as Variable Interest
Entities under the revised Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51,because the equity investors in
the PRC Entities do not have the characteristics of a controlling
financial interest and the Company is the primary beneficiary of the PRC
Entities. Accordingly, the PRC Entities have been consolidated by the
Company in accordance with FIN 46. F-16




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  2.
    
    BUSINESS COMBINATIONS (continued) (d) IMI Global Holdings Ireland
Limited (IMI) On September 9, 2003, CDC Software, a
wholly-owned subsidiary and a
software unit of the Company, acquired a 51% equity interest in Cayman
First Tier, an investment holding company organized in the Cayman Islands
which owns 100% of IMI, a leading provider of supply chain management
solutions in North America and Europe. Supply chain management software
is considered by the Company as an important component of a broad
enterprise resource planning product and service offering, and forms part
of the Companys strategic software initiative. The remaining 49% equity
interest is held by Symphony Technology Group (Symphony), a Palo Alto,
California-based private equity firm focused on enterprise software and
services, which previously owned 100% of IMI. Symphony has an option to
sell to the Company all of its 49% interest in IMI at any time during the
twelve months following the occurrence of unpermitted changes in the
composition of IMIs executive committee being overruled by the IMI board,
or modifications to the rights, powers or responsibilities of IMIs
executive committee without the approval of the directors appointed by
Symphony. The purchase price for Symphonys interest in IMI is based on
the financial performance of IMI, and is set at a fixed multiple of IMIs
annual revenues. In consideration for the 51% interest, CDC Software has
agreed to invest USD25,000 into Cayman First Tier, and has also agreed to
finance loan facilities for Cayman First Tier and Symphony Enterprise
Solutions, S.ar.L., a wholly-owned subsidiary of Cayman First Tier of up
to an aggregate of USD25,000. All the funds provided to Cayman First Tier
are intended to be used primarily for further expansion in the supply
chain management software sector via acquisitions, strategic investments
and organic growth. The following table summarizes the estimated
fair values of the
assets acquired and liabilities assumed at the date of acquisition. USDCurrent assets
    
    
    36,363Property and equipment, net
    
    
    1,689Goodwill
    
    
    15,802Intangible assets*
    
    
    5,063Other assets
    
    
    2,184Total assets acquired
    
    
    61,101Current liabilities
    
    
    (26,178
    )Minority interests
    
    
    (9,923
    )Total liabilities assumed
    
    
    (36,101
    )Net assets acquired
    
    
    25,000
 *  The estimated weighted average
useful life of the identifiable
intangible assets acquired is 7 years. The goodwill of USD15,802 was assigned to the
software and consulting
services segment and such goodwill is not deductible for tax purposes. F-17




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  2.
    
    BUSINESS COMBINATIONS (continued) (e) Unaudited pro forma consolidated financial information The following unaudited pro forma
consolidated financial information
reflects the results of the operations of the Company for the years ended
December 31, 2001, 2002 and 2003, as if the acquisition of OpusOne had
occurred on January 1, 2001 and the acquisitions of Praxa, Palmweb and IMI
had occurred on January 1, 2002. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the acquisitions of
subsidiaries actually taken place on January 1, 2001 and 2002,
respectively, and may not be indicative of future operating results. Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USD(unaudited)
    
    (unaudited)
    
    (unaudited)Revenue
    
    
    46,913
    
    
    
    45,503
    
    
    
    94,334Net income/(loss)
    
    
    (129,217
    )
    
    
    (18,045
    )
    
    
    16,261Basic and diluted earnings/(loss) per share
    
    
    (1.26
    )
    
    
    (0.18
    )
    
    
    0.16
 The difference in the pro forma and audited
net income/(loss) for the
years ended December 31, 2001, 2002 and 2003 is primarily due to the
inclusion of the results of operations of those acquired subsidiaries from
the beginning of the respective years of acquisition to the date of
acquisition and for the immediately preceding comparable year as though
the corresponding business combinations had been completed at the
beginning of that year, net of the additional amortization of
corresponding purchased amortizable intangible assets for the years ended
December 31, 2001, 2002 and 2003.  3.
    
    CHANGES IN THE PRESENTATION OF COMPARATIVE FINANCIAL STATEMENTS Subsequent to the year ended
December 31, 2002, the Companys
operating segments have been changed from e-business solutions,
advertising, the sale of IT products and other income, to software and
consulting services, mobile services and applications, advertising and
marketing activities, and other income. The Company believes that this
new segmental classification is more representative of the Companys
business strategies and reflects the Companys current internal reporting
practices. Due to the change of operating segments and
the discontinued
operations of certain components, certain comparative amounts have been
reclassified to conform with the current years presentation. F-18




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.

    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of consolidation The accompanying consolidated financial
statements include the
accounts of the Company and its majority-owned subsidiaries that are not
considered variable interest entities and all variable interest entities
for which the Company is the primary beneficiary, after eliminations of
all material inter-company accounts, transactions and profits. (b) Use of estimates The preparation of the consolidated financial
statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. (c) Cash and cash equivalents The Company considers all highly liquid
investments with a maturity
of three months or less when purchased to be cash equivalents. Except for
the restricted cash disclosed in note 5, none of the Companys cash and
cash equivalents is restricted as to withdrawal or use. (d) Property and equipment and
depreciation Buildings, leasehold improvements, furniture
and fixtures, office
equipment, computer equipment and motor vehicles are stated at cost less
accumulated depreciation. Maintenance, repairs and minor renewals are
expensed as incurred. Depreciation of buildings, leasehold improvements,
furniture and fixtures, office equipment, computer equipment and motor
vehicles is computed using the straight-line method over the assets
estimated useful life. No depreciation is provided on freehold land,
which is stated at cost. The principal annual rates used are as follows: Buildings
    
    4%Leasehold improvements
    
    Over the lesser of the lease term and the estimated useful lifeFurniture and fixtures
    
    10% to 100%Office equipment
    
    20% to 33 1/3%Computer equipment
    
    33 1/3% to 100%Motor vehicles
    
    33 1/3%
 F-19




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (e) Goodwill and intangible assets Goodwill represents the excess of cost over
the fair value of net
tangible and identifiable intangible assets of acquired businesses.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets.
In accordance with SFAS 142, the Company ceased amortizing goodwill and
performed a transitional test of its goodwill as of January 1, 2002. SFAS
142 requires that goodwill be tested for impairment at the reporting unit
level (operating segment or one level below an operating segment) on an
annual basis and between annual tests in certain circumstances. The
performance of the test involves a two-step process. The first step of the
impairment test involves comparing the fair value of the Companys
reporting units with the reporting units carrying amount, including
goodwill. Fair value is primarily determined by computing the future
discounted cash flows expected to be generated by the reporting unit. If
the carrying value exceeds the fair value, goodwill may be impaired. If
this occurs, the Company performs the second step of the goodwill
impairment test to determine the amount of impairment loss. The fair
value of the reporting unit is allocated to its assets and liabilities in
a manner similar to a purchase price allocation in order to determine the
implied fair value of the reporting unit goodwill. This implied fair value
is then compared with the carrying amount of the reporting unit goodwill,
and if it is less, the Company would then recognize an impairment loss.
Prior to January 1, 2002, goodwill was amortized to expense on a
straight-line basis over a period of two to five years. The carrying
value of goodwill was reviewed for possible impairment whenever events or
changes in circumstances indicated that an impairment might exist. The
transitional impairment test performed in June 2002, indicated that the
fair value of the Companys reporting units exceeded the reporting units
carrying amount including goodwill, and accordingly, goodwill was not
impaired. In December 2002 and 2003, annual impairment tests were
performed and the fair value of the Companys reporting units exceeded the
reporting units carrying amount including goodwill. As such, the Company
concluded that goodwill was not impaired. Intangible assets represent trademarks,
service marks and uniform
resource locators (URLs); software applications and programs; customer
base and contracts; and business licenses and partnership agreements.
Intangible assets are carried at cost less accumulated amortization.
Amortization is computed using the straight-line method over the estimated
useful lives of the respective assets. The estimated useful lives of the
intangible assets are as follows: Trademarks, service marks and URLs
    
    20 yearsSoftware applications and programs
    
    2 to 15 yearsCustomer base and contracts
    
    1.5 to 10 yearsBusiness licenses and partnership
agreements
    
    6 to 7 years
 Annually, the Company reviews and adjusts the
carrying value of
purchased intangible assets if the facts and circumstances suggest
purchased intangible assets may be impaired. If this review indicates
that purchased intangible assets may not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying value of intangible assets
will be reduced by the estimated shortfall in discounted cash flows. F-20




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Investments Debt and equity investments which represent
available-for-sale
securities are stated at fair value. Unrealized holding gain or loss, net
of tax, on available-for-sale securities is reported in other
comprehensive income/(loss) and is included in a separate component of the
shareholders equity. Realized gains and losses and any decline in fair
value judged to be other-than-temporary on available-for-sale securities
are included in gain/(loss) on disposal of available-for-sale securities
and impairment of available-for-sale securities, respectively. The cost
of securities sold is based on the first-in, first-out method. Interest
on securities classified as available-for-sale securities are included in
interest income. All other investments, for which the Company
does not have the
ability to exercise significant influence and there is not a readily
determinable fair value, are accounted for under the cost method of
accounting. Dividends and other distributions of earnings from investees,
if any, are included in income when declared. The Company periodically
evaluates the carrying value of its investments accounted for under the
cost method of accounting and any decline in value is included in
impairment of cost investments. When determining whether an impairment of
investments exists or a
decline in value of an available-for-sale security is
other-than-temporary, the Company evaluates evidence to support a
realizable value in excess of the current market price for securities with
fair value. Such information may include the investments financial
performance (including such factors as earnings trends, dividend payments,
asset quality and specific events), the near term prospects of the
investment, the financial condition and prospects of the investments
region and industry, and the Companys investment intent. Typically, a
sustained decline in the market value of a quoted security for six months
is generally indicative of an other-than-temporary impairment. (g) Investments in equity investees The Companys investments in equity
investees for which its ownership
exceeds 20%, but which are not majority-owned, are accounted for using the
equity method. Under the equity method, the Companys proportionate share
of each equity investees net income or loss and amortization of the
Companys net excess investment over its equity in each equity investees
net assets is included in share of income/(losses) in equity investees.
Amortization is recorded on a straight-line basis over the estimated
useful life of three years. (h) Foreign currency translation Foreign currency transactions are translated
at the applicable rates
of exchange ruling at the transaction dates. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date
are translated at the applicable rates of exchange ruling at that date.
Exchange differences are dealt with in the statement of operations. The functional currency of the Company is the
United States dollar.
The functional currency of the Companys subsidiaries in the locations
outside Hong Kong are the respective local currencies. The financial
statements of the Companys subsidiaries have been translated into United
States dollars in accordance with SFAS 52, Foreign Currency Translation.
All balance sheet accounts have been translated using the exchange rates
in effect at the balance sheet date. Statement of operations amounts have
been translated using the average exchange rates for the year. The
effects of foreign currency translation adjustments are included as a
component of accumulated other comprehensive income/(loss) in the
shareholders equity. F-21




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Advertising expenses Advertising expenses are charged to the
consolidated statement of
operations when incurred. The advertising expenses are indirect costs for
promoting the brand name of the Company and for implementing its corporate
marketing strategy, which are included in the selling, general and
administrative expenses line item. (j) Shipping and handling Costs related to shipping and handling are
included in cost of
revenues for all periods presented. (k) Revenue recognition The Company generates revenues from three
primary sources: software
and consulting services, mobile services and applications, and advertising
and marketing services. Revenue is recognized in accordance with
accounting principles generally accepted in the United States, or GAAP.
The specific literature the Company follows in connection with revenue
recognition is the Securities and Exchange Commissions Staff Accounting
Bulletin No. 101 (SAB 101) Revenue Recognition in Financial Statements,
the American Institute of Certified Public Accountants Statement of
Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP
98-9 Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions,and in certain instances, SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts. The Company recognizes revenue when it has persuasive evidence
of an arrangement, the product has been shipped and title has passed or
the services have been delivered, the price is fixed or determinable and
collectibility is reasonably assured. In addition to these basic criteria,
the following are the specific revenue recognition policies for each major
stream of revenue by reporting segment. Revenues in the software and consulting
services segment are derived
from the outsourcing of information technology consultants, the sale of
software products and the design, development and integration of Internet
web sites.  Outsourcing of information technology consultants involves contractual
time and materials outsourcing agreements whereby consultants are provided
at agreed-upon billing rates for customers to deploy on their own internal
projects. Revenues from time and materials outsourcing contracts are
recognized as the services are delivered assuming all other basic criteria
for revenue recognition have been met. F-22




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (k) Revenue recognition (continued) Revenue from the sale of software products
often includes a
combination of hardware, software, training and maintenance services. The
Company allocates the arrangement fee in these multi-element deals to each
individual element using its fair value as determined by vendor specific
objective evidence. Vendor specific objective evidence of fair value is
determined by the customary price charged for each element when sold
separately after the application of any standard approved discount. Where
fair value exists for all undelivered elements of the arrangement, the
Company applies the residual method of accounting and defers revenue
allocated to the undelivered elements while recognizing the residual
revenue allocated to the delivered elements. In the absence of vendor
specific objective evidence for any undelivered element, the Company
defers the entire arrangement fee and recognizes revenue when all
undelivered elements are delivered assuming all other basic criteria for
revenue recognition have been met. Revenues related to training services for
software products are
deferred and recognized as the services are delivered, assuming all other
basic criteria for revenue recognition have been met. Where training
services are sold as part of a multi-element deal, those services are
evaluated, on a case-by-case basis, to determine whether they are
essential to the functionality of the other elements of the arrangement.
In cases where training services are considered essential to the
functionality of the other elements of the arrangement, revenue from the
total arrangement is deferred and recognized as the training services are
delivered. Revenues related to maintenance agreements on
software products are
deferred and recognized ratably over the term of the agreement which is
normally one year. Provisions for discounts and rebates to
customers, estimated returns
and allowances, and other adjustments are provided for in the same period
in which the related revenues are recorded. Such provisions are calculated
after considering relevant historical data. Some of the engagements in the software and
consulting services
segment are for the design, development and integration of Internet web
sites. These projects usually have fixed prices and most have durations of
six months or less. Customers enter into contractual arrangements with the
Company that specify the required web design features, layout,
functionality, implementation services required, expected deliverables,
pricing, payment terms and project timetable. Invoicing and payments are
usually made throughout the term of the project in accordance with the
contractual terms. A majority of the projects include acceptance clauses
requiring customers sign off at the conclusion of the projects. The
arrangements allow the customer to withhold 10% of the total project cost
as a retention until sign off and acceptance is obtained. Historically,
the Company has not experienced projects where sign off or acceptance has
been withheld by a customer resulting in a material loss on a project. In
limited situations, the Company receives change orders from customers, in
which case, each change order request is assessed for its impact on the
existing arrangement, and contract revenues and costs are only adjusted
after both parties agree to the changes. The Company also receives change
orders which result in the initiation of a separate project. F-23




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (k) Revenue recognition (continued) Revenues from the design and development of
Internet web sites and
the integration of those web sites with clients computer systems are
recognized using contract accounting. In order to calculate the amount of
revenue earned, the Company uses the cost-to-cost percentage-of-completion
method whereby amounts recognized are calculated by reference to the hours
incurred as a percentage of the total estimated hours to complete the
project. The Company uses this input method to calculate revenues because
historical experience has demonstrated that it produces a reliable
indication of the progress on each engagement. Estimates of total
projected contract costs are re-evaluated on a regular basis and, if
appropriate, revised. Any adjustments to revenue due to changes in
estimates are accounted for in the period of the change in estimate. When
estimates indicate that a loss will be incurred on a contract upon
completion, a provision for the expected loss is recorded in the period in
which the loss becomes evident. Historically, the Company has not
experienced material losses on fixed-price contracts. The majority of the
Companys contracts are short term in duration, and the use of the
completed contract method would not result in a material difference in
revenue earned. The Company provides maintenance services
related to Internet web
sites. Maintenance services related to Internet web sites involves support
in connection with non-significant customer requested changes to web site
functionality, updates to web site information, and telephone support for
web site administrators. Revenues from Internet web site maintenance
agreements are deferred and recognized ratably over the terms of the
related agreements which are usually for periods of six months or one
year. The Companys mobile services and
applications segment derives
revenues from the provision of value-added short messaging services, or
SMS, such as dating and friends matching, e-mail, ring tone and logo
downloads and various other related products to mobile phone users. The
Company relies on mobile network operators in Mainland China to transmit
the SMS messages and bill mobile phone users for SMS fees on a monthly or
per message basis. SMS revenues are recognized in the month in
which the services are
performed, assuming all other basic criteria for revenue recognition have
been met. The Company books revenues on a monthly basis based upon
confirmations from the network operators. At the end of each reporting
period, where an operator fails to provide the Company with a monthly
statement confirming the amount of SMS charges billed to their mobile
phone users for that month, the Company uses information generated from
its own internal system and historical financial data to make estimates of
the billing reconciliation rate and collectible SMS fees, and revenues are
accrued accordingly. Revenues from SMS are recognized net of the
mobile phone operators
share of revenue and uncollectible amounts because the Company considers
the operators to be the primary obligors in the information transmission
and delivery process. The network operators are the primary obligor in the
arrangement. The mobile phone operators are responsible for fulfillment,
including the transmission of the SMS messages to the end users. The
Company is transparent to the mobile phone users because it provides the
services through the mobile phone operators. The Company recognizes
revenues on a monthly basis in the case of monthly subscriptions, on a
message-received basis in the case of per message services, and on the
basis of each successfully downloaded content in the case of games,
ringtones and logos. The Company has no discretion over pricing of the
services. Under arrangements with each mobile phone operator, changes
require both parties approval. The Company has no discretion over
supplier selection since there are currently only two mobile phone
operators in Mainland China, and all SMS must be routed through their
networks. F-24




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (k) Revenue recognition (continued) Advertising and marketing services revenues
are derived from the sale
of online banner advertisements, sponsorships, direct mailings and offline
advertising campaigns. Online banner advertising revenues are
derived from short-term
advertising contracts (normally less than 90 days), in which customers
advertisements are placed on web sites for a set period of time or for a
set number of impressions. Impressions are defined as the number of times
that an advertisement appears on a selected web page. Customers typically
identify the web sites they wish their advertisements to be displayed on,
and in certain situations, the advertisements are also displayed on the
Companys own or affiliated companies web sites. Revenues from online
banner advertising are recognized in the period in which the advertisement
is displayed at the lesser of the ratio of impressions delivered over
total guaranteed impressions or ratably over the term of the contract. Sponsorship revenues are derived from
advertisements placed on the
Companys own or affiliated companies web sites and are usually for
longer display periods than online banner advertisement agreements, but
normally do not exceed one year. Sponsorship revenues are recognized
ratably over the term of contracts, assuming all other basic criteria for
revenue recognition have been met. Direct mailing revenues are derived from
targeted advertising
campaigns. The Company transmits the advertisements in either electronic
form to the target profile or market. On occasion, the Company may also
assist with the design of the advertisements. Revenues from direct
mailing are recognized when the advertisements are sent, assuming all
other basic criteria for revenue recognition have been met. Offline advertising revenues are derived from
the production and
placement of advertisements in magazines and publications for the travel
and tourism industry. Revenues are realized when the advertisements are
published, assuming all other basic criteria for revenue recognition have
been met. The Company pays web sites for providing
advertising space and
becomes obligated to make the payment in the period the advertising is
delivered. Such expenses are classified as cost of revenues in the
consolidated statement of operations. Certain subsidiaries of the Company act as
advertising agents for
their customers, and the related revenues derived from these agreements
are recorded net in the consolidated statement of operations. The Company pays affiliated web sites a
percentage of advertising
revenue, ranging from 50% to 85%, in exchange for providing advertising
space to the Companys network. The Company becomes obligated to make
payments to such affiliated web sites in the period the advertising is
delivered. Such expenses are classified as cost of revenues in the
consolidated statement of operations. The Company records the revenue on
a gross basis since it is responsible for the fulfillment of the contract,
including the selection of the web site, arrangement of the advertisement
placement and acceptability of the advertisement. In addition, the
Company assumes the credit risk for the amount billed to the customer and
owed to an affiliated web site after the web site performs, regardless of
whether the Company fully collects the sales amount from the customer. F-25




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (l) Deferred revenue Deferred revenue represents cash received for
software and consulting
services and advertising and marketing services in advance of services
being rendered. The Company reports deferred revenue as a
liability on the balance
sheet when there is a contractual obligation as at the balance sheet date
to provide services or software product to the customer but the services
have not yet been completed or product has not yet been delivered, and
thus no recognition of revenue has taken place. The Company has adopted revenue recognition
polices in respect of
deferred revenue as follows:  
    
    contracted support/maintenance revenue is recognized ratably
(straight-line) over the life of the contracts, which are typically
one year in duration;
    
    contracted training and installation revenue is recognized as
service is delivered and completed;
    
    contracted online paid email/advertising campaign revenue is
recognized ratably (straight-line) over the life of the contracts,
which are typically one year in duration for paid email and two to
three months for advertising campaigns; and,
    
    deferred contracted consulting revenue is recognized as
services are delivered. (m) Income taxes Income taxes, if any, are determined under
the liability method as
required by SFAS 109, Accounting for Income Taxes. F-26




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (n) Stock compensation expenses The Company accounts for stock-based employee
compensation
arrangements in accordance with the provisions of Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
and complies with the disclosure provisions of SFAS 123, Accounting for
Stock-Based Compensation. The Company and hongkong.com issued share
options to certain of their employees in accordance with their respective
stock option plans. Under APB 25, compensation cost is recognized over
the vesting period based on the difference, if any, on the date of grant
between the fair value of the Companys and hongkong.coms shares and the
amount an employee must pay to acquire the shares. Had the Company
determined compensation cost based on the fair value at the grant date for
the stock options under SFAS 123, the Companys net income would have been
reduced as indicated below: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDNet income/(loss):As reported
    
    
    (124,385
    )
    
    
    (18,231
    )
    
    
    15,524Add: Stock compensation expense
included in income/(loss)
    
    
    1,227
    
    
    
    309
    
    
    
    328Deduct: Stock compensation expense
determined under fair value
based method
    
    
    (29,625
    )
    
    
    (15,924
    )
    
    
    (4,886
    )Pro forma
    
    
    (152,783
    )
    
    
    (33,846
    )
    
    
    10,966Basic earnings/(loss) per share:As reported
    
    
    (1.21
    )
    
    
    (0.18
    )
    
    
    0.15Pro forma
    
    
    (1.49
    )
    
    
    (0.33
    )
    
    
    0.11Diluted earnings/(loss) per share:As reported
    
    
    (1.21
    )
    
    
    (0.18
    )
    
    
    0.15Pro forma
    
    
    (1.49
    )
    
    
    (0.33
    )
    
    
    0.11
  For the purposes of pro forma disclosures above, the estimated fair value
of the options is amortized to expense over the options vesting period. (o) Earnings/(loss) per share The Company computes earnings/(loss) per
share in accordance with
SFAS 128, Earnings per Share. Under the provisions of SFAS 128, basic
earnings or loss per share is computed by dividing the net income or loss
available to common shareholders for the year by the weighted average
number of common shares outstanding during the year. Diluted earnings or
loss per share is computed by dividing the net income or loss for the year
by the weighted average number of common and common equivalent shares
outstanding during the year. Common equivalent shares, composed of
incremental common shares issuable upon the exercise of stock options, are
included in diluted earnings or loss per share to the extent such shares
are dilutive. F-27




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (p) Repurchase agreements Debt securities sold under agreements to
repurchase are classified as
secured borrowings. Agreements with the third party specify the third
partys rights to request additional collateral. Both parties monitor the
fair value of the underlying securities as compared with the related
receivable or payable, including accrued interest, and may request a cash
transfer at least equal to that net exposure as necessary. (q) Accounts receivable and
allowance for doubtful accounts Accounts receivable are carried at their
original amount less an
estimate made for uncollectible amounts. The allowance for doubtful accounts is
established based on the
Companys credit control policies. Allowances are made based upon regular
reviews of all significant outstanding invoices and, in addition, invoices
not specifically reviewed are provided for at differing rates, based upon
the age of the receivable. The determination of these rates is based upon
our historical collection experience and assessment of the economic
environment in which the customer is situated. Receivables more than 180
days past due are automatically reserved unless collection is deemed
probable. If the assessments made and historical data used to calculate
the allowance for doubtful accounts does not reflect the ability to
collect outstanding receivables, additional provisions for doubtful
accounts may be needed, and the future results of operations could be
materially affected. (r) Comprehensive income/(loss) Comprehensive income/(loss) includes net
earnings or loss as well as
additional other comprehensive income/(loss). The Companys other
comprehensive income/(loss) consists of unrealized gains and loss on
available-for-sale securities and foreign currency translation, all
recorded net of tax. (s) Gain on issuances of shares by
subsidiaries At the time a subsidiary sells its shares to
unrelated parties at a
price in excess of its book value, the Companys net investment in that
subsidiary increases. If at that time, the subsidiary is not a
newly-formed, non-operating entity, nor a research and development,
start-up or development stage company, nor is there question as to the
subsidiarys ability to continue in existence, the Company records the
increase as a non-operating gain in the consolidated statement of
operations. Otherwise, the increase is reflected in effect of
subsidiaries equity transactions in the Companys consolidated statement
of shareholders equity. (t) Retirement costs Retirement costs relating to defined benefit
plans are actuarially
determined based on assumptions concerning the future events that will
determine the amount and timing of the benefit payments. Contributions
relating to defined contribution plans are made based on a percentage of
the employees salaries and are charged to the results of operations as
they become payable. F-28




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  4.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (u) Derivative instruments SFAS 133, Accounting for Derivative
Instruments and Hedging
Activities, as modified by SFAS 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities, requires all contracts
which meet the definition of a derivative to be recognized in the
consolidated financial statements as either assets or liabilities and
recorded at fair value. Changes in the fair value of derivative financial
instruments are either recognized periodically in the income/(loss) or in
shareholders equity as a component of other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. Changes in fair values of derivatives not qualified as hedges
are reported in income. The estimated fair values of derivative
instruments are determined at discrete points in time based on the
relevant market information. These estimates are calculated with
reference to the market rates using industry standard valuation
techniques. (v) Impact of recently issued
accounting standards In May 2003, the FASB issued SFAS 150,
Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity.
Instruments that are indexed to and potentially settled in an
issuers own shares that are not within the scope of
SFAS 150 remain subject to
existing guidance. SFAS 150 must be applied immediately to instruments
entered into or modified after May 31, 2003 and to all other instruments
that exist as of the beginning of the first interim financial reporting
period beginning after June 15, 2003. Certain provisions of this
statement relating to noncontrolling interests in limited-life
subsidiaries were deferred indefinitely. The Company adopted SFAS 150 and
there was no impact on the Companys results of operations or financial
position upon the adoption of the new statement. In January 2003, the FASB issued FIN 46.
In December 2003, the FASB
modified FIN 46 to make certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new framework
for identifying variable interest entities (VIEs) and determining when a
company should include the assets, liabilities, non-controlling interests
and results of activities of a VIE in its consolidated financial
statements. In general, a VIE is a corporation, partnership, limited
liability corporation, trust, or any other legal structure used to conduct
activities or hold assets that either (i) has an insufficient amount of
equity to carry out its principal activities without additional
subordinated financial support, (ii) has a group of equity owners that are
unable to make significant decisions about its activities, or (iii) has a
group of equity owners that do not have the obligation to absorb losses or
the right to receive returns generated by its operations. FIN 46 requires
a VIE to be consolidated if a party with an ownership, contractual or
other financial interest in the VIE (a variable interest holder) is
obligated to absorb a majority of the risk of loss from the VIEs
activities, is entitled to receive a majority of the VIEs residual
returns (if no party absorbs a majority of the VIEs losses), or both. A
variable interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary generally must
initially record all of the VIEs assets, liabilities and non-controlling
interests at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest. FIN 46 also requires
disclosures about VIEs that the variable interest holder is not required
to consolidate but in which it has a significant variable interest. FIN 46 was effective immediately for VIEs
created after January 31,
2003. The provisions of FIN46, as revised, were early adopted for the
Companys interests in all VIEs and there was no cumulative effect on the
Companys results of operations or financial position upon the adoption of
the provisions of the revised FIN 46. F-29




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  5.
    
    RESTRICTED CASH At December 31, 2002 and 2003, cash of
USD109 and USD238,
respectively, was pledged for banking facilities.  6.
    
    ACCOUNTS RECEIVABLE December 31,
    
    December 31,2002
    
    2003USD
    
    USDAccounts receivable:Amounts billed
    
    
    17,648
    
    
    
    18,058Unbilled
    
    
    1,521
    
    
    
    1,32019,169
    
    
    
    19,378Allowance for doubtful accounts
    
    
    (4,139
    )
    
    
    (2,816
    )Net
    
    
    15,030
    
    
    
    16,562
 Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDAllowance for doubtful accounts:Balance at beginning of year
    
    
    3,488
    
    
    
    6,538
    
    
    
    4,139Additions
    
    
    3,050
    
    
    
    4,296
    
    
    
    2,297Write-offs net of recoveries
    
    
    
    
    
    
    (6,695
    )
    
    
    (3,620
    )Balance at end of year
    
    
    6,538
    
    
    
    4,139
    
    
    
    2,816
 As the Company has operations in many
countries, there are variations
in its credit terms between countries and between revenue segments.
Within the range of credit policies, the credit terms for each revenue
segment are based on the following general guidelines:  
    
    For sales of IT products, the Company offers 30 to 60
days credit from date of delivery of software or cash on
delivery;
    
    For sales of consulting services, the Company offers 30
to 60 days credit after completion of milestones per agreement;
    
    For sales in the mobile services and applications, the
Company offers 90 days credit from the date issuance of invoices
which usually takes place one month following the month of actual
sales;
    
    With respect to sales in advertising and marketing
activities segment, the Company offers three standard payment
options cash on delivery, 14 days after completion of campaign
or 30 days credit. F-30




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  6.
    
    ACCOUNTS RECEIVABLE (continued) Accounts receivable are carried at their
original amount less
allowance for doubtful accounts. The Company has adopted credit control
policies to ensure that collection of the accounts receivable is probable
and that recognition of the related revenue is appropriate. The allowance
for doubtful accounts is established based on the Companys credit control
policies as listed below: Period
    
    Rate (% of accounts receivable)Over 90 days
    
    
    25
    %Over 120 days
    
    
    50
    %Over 180 days
    
    
    100
    %
 Allowances are made based upon regular
reviews of all significant
outstanding invoices and, in addition, invoices not specifically reviewed
are provided for at differing rates, based upon the aging of the accounts
receivable. The determination of these rates is based upon the Companys
historical collection experience and assessment of the customers economic
environment. Accounts receivable which are more than 180 days past due are
automatically reserved unless collection is deemed probable. Unbilled receivables of USD1,521 and USD1,320
in 2002 and 2003,
respectively, represented the recognized sales value of performance
relating to software and consulting services and these amounts had not
been billed and were not billable to the customers at the date of the
balance sheet. The balances will be billed upon the fulfillment of
certain conditions agreed between the parties.  7.
    
    AVAILABLE-FOR-SALE DEBT SECURITIES In 2002, the Company recorded an impairment
loss of certain
available-for-sale debt securities of approximately USD5,000. The value
of debt securities was determined to have been impaired because the fair
value of the debt securities was below the cost for over six months in
2002. The decline in fair value was not expected to recover prior to the
time of sale as the Company may not hold such debt securities to maturity. December 31,
    
    December 31,2002
    
    2003USD
    
    USDDebt obligations issued by corporations and
federally supervised/chartered organizations:Amortized cost
    
    
    467,842
    
    
    
    313,219Net unrealized gain/(loss)*
    
    
    3,337
    
    
    
    35Estimated fair value
    
    
    471,179
    
    
    
    313,254Restricted debt securities pledged for banking
facilities
    
    
    (151,123
    )
    
    
    (31,109
    )Non-restricted
    
    
    320,056
    
    
    
    282,145
  *
The net unrealized gain/(loss) consisted of the gross unrealized gain
of USD1,471 (2002: USD3,959) and the gross unrealized loss of USD1,436
(2002: USD622). F-31




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  7.
    
    AVAILABLE-FOR-SALE DEBT SECURITIES (continued) For the years ended December 31, 2002
and 2003, the gross realized
gain amounts were USD1,258 and USD6,834, respectively, and the gross
realized loss amounts were USD1,166 and USD5,356, respectively. Non-restricted available-for-sale debt
securities consist of: December 31,
    
    December 31,2002
    
    2003USD
    
    USDCurrent
    
    
    300,056
    
    
    
    262,745Non-current
    
    
    20,000
    
    
    
    19,400320,056
    
    
    
    282,145
 At December 31, 2003, all the debt
securities were carried at market
value and temporary unrealized gains and losses at December 31, 2003 were
reported in other comprehensive income/(loss). At December 31, 2002 and 2003, the
Companys debt securities had
maturity dates falling due as follows: December 31,
    
    December 31,2002
    
    2003USD
    
    USDMaturity dateOne year or less
    
    
    15,459
    
    
    
    30,322Over one year to five years
    
    
    294,817
    
    
    
    233,342Over five years to ten years
    
    
    160,903
    
    
    
    49,590471,179
    
    
    
    313,254
 All debt securities held by the Company have
maturity terms ranging
from one to over ten years. At December 31, 2003, all the debt securities
were carried at market value and temporary unrealized gains and losses at
December 31, 2003 were reported in other comprehensive income. Included in debt securities owned as of
December 31, 2002 and 2003
were debt securities with a market value of USD151,123 and USD31,109,
respectively, which were segregated and secured in accordance with the
Global Master Repurchase Agreement and the Total Return Swap Transaction
Agreement as further detailed in note 13. All debt securities as at December 31,
2002 and 2003 had been in an
unrealized loss position for less than 12 months. For the debt securities
in an unrealized loss position at the year end, the Company evaluated the
length of the time and the extent to which the market value had been less
than cost as well as the financial condition and performance of the
issuer, and reached the conclusion that the impairments are not
other-than-temporary. F-32




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  8.
    
    LOAN RECEIVABLES The balance as of December 31, 2003 is
comprised of (i) a USD2,000
loan to Pivotal Corporation, a subsidiary newly acquired subsequent to the
balance sheet date as further detailed in note 28, which is unsecured,
bears interest at the U.S. prime rate and is repayable in December 2006,
and (ii) a USD25,000 loan to Symphony, a minority shareholder of IMI as
further detailed in note 2 (d), which is secured by a pledge from Symphony
in favor of Cayman First Tier (the holding company organized in the Cayman
Islands which owns 100% of IMI) of all of Symphonys right, title and
interest in Symphonys 49% interest in Cayman First Tier, bears interest
at 3% per annum and is repayable in November 2007. The balance as of December 31, 2002
represented a USD5,325 loan to
Sagent Technology Inc., a NASDAQ listed company. The balance was early
settled in 2003.  9.
    
    PROPERTY AND EQUIPMENT December 31,
    
    December 31,2002
    
    2003USD
    
    USDFreehold land
    
    
    1,262
    
    
    
    1,348Buildings
    
    
    1,262
    
    
    
    1,348Leasehold improvements
    
    
    2,579
    
    
    
    2,156Furniture and fixtures
    
    
    2,531
    
    
    
    301Office equipment
    
    
    2,142
    
    
    
    1,740Computer equipment
    
    
    29,408
    
    
    
    26,754Motor vehicles
    
    
    488
    
    
    
    51139,672
    
    
    
    34,158Less: Accumulated depreciation
    
    
    (30,297
    )
    
    
    (26,948
    )9,375
    
    
    
    7,210
 F-33




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  10.
    
    GOODWILL The changes in the carrying amount of
goodwill for the years ended
December 31, 2002 and 2003 are as follows: MobileSoftware and
    
    services
    
    Advertisingconsulting
    
    and
    
    and marketingservices
    
    applications
    
    activities
    
    TotalUSD
    
    USD
    
    USD
    
    USDBalance as of January 1, 2002
    
    
    1,834
    
    
    
    
    
    
    
    4,596
    
    
    
    6,430Goodwill acquired during the year
    
    
    5,277
    
    
    
    
    
    
    
    1,295
    
    
    
    6,572Less: Goodwill written off related
to sale/dissolution of business units
    
    
    (203
    )
    
    
    
    
    
    
    (783
    )
    
    
    (986
    )Balance as of December 31, 2002
    
    
    6,908
    
    
    
    
    
    
    
    5,108
    
    
    
    12,016Reallocation of goodwill
    
    
    653
    
    
    
    
    
    
    
    (653
    )
    
    
    Balance as of January 1, 2003
    
    
    7,561
    
    
    
    
    
    
    
    4,455
    
    
    
    12,016Goodwill acquired during the year
    
    
    21,063
    
    
    
    47,704
    
    
    
    879
    
    
    
    69,646Less: Goodwill written off related
to sale/dissolution of business units
    
    
    (235
    )
    
    
    
    
    
    
    
    
    
    
    (235
    )Balance as of December 31, 2003
    
    
    28,389
    
    
    
    47,704
    
    
    
    5,334
    
    
    
    81,427
 Due to the adoption of SFAS 142 on
January 1, 2002, the Company
ceased amortizing goodwill. Had SFAS 142 been in effect during the year
ended December 31, 2001, the Company would not have recorded goodwill
amortization expenses of USD15,323. The following table summarizes net
loss adjusted to exclude amortization expense in relation to goodwill that
is no longer subject to amortization: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDReported net income/(loss)
    
    
    (124,385
    )
    
    
    (18,231
    )
    
    
    15,524Goodwill amortization
    
    
    15,323
    
    
    
    
    
    
    
    Adjusted net income/(loss)
    
    
    (109,062
    )
    
    
    (18,231
    )
    
    
    15,524Basic earnings/(loss) per share
    
    
    (1.06
    )
    
    
    (0.18
    )
    
    
    0.15Diluted earnings/(loss) per share
    
    
    (1.06
    )
    
    
    (0.18
    )
    
    
    0.15
 F-34




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  10.
    
    GOODWILL (continued) The goodwill represents the excess
consideration paid for the
purchase of subsidiaries over the fair values of the identifiable net
assets acquired at the date of acquisition adjusted for contingent
consideration paid, if any.  11.
    
    INTANGIBLE ASSETS The following table summarizes the
Companys amortized intangible assets, net, as of December 31: 2002
    
    2003Gross
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    Accumulated
    
    
    
    
    
    carrying
    
    Accumulatedamount
    
    amortization
    
    Net
    
    amount
    
    amortization
    
    NetUSD
    
    USD
    
    USD
    
    USD
    
    USD
    
    USDTrademarks, service marks and URLs
    
    
    17,092
    
    
    
    (885
    )
    
    
    16,207
    
    
    
    17,092
    
    
    
    (1,765
    )
    
    
    15,327Software applications and programs
    
    
    720
    
    
    
    (200
    )
    
    
    520
    
    
    
    6,585
    
    
    
    (813
    )
    
    
    5,772Customer base and contracts
    
    
    351
    
    
    
    (98
    )
    
    
    253
    
    
    
    9,303
    
    
    
    (2,098
    )
    
    
    7,205Business licenses and partnership
agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654
    
    
    
    (78
    )
    
    
    57618,163
    
    
    
    (1,183
    )
    
    
    16,980
    
    
    
    33,634
    
    
    
    (4,754
    )
    
    
    28,880
 For the year ended December 31, 2003,
the Company recognized USD3,571 of amortization expense. Based
on the current amount of intangible assets subject to amortization, the estimated amortization expense
for each of the succeeding five years is as follows: Year ended December 31:
    
    USD2004
    
    
    4,9942005
    
    
    3,8122006
    
    
    3,0922007
    
    
    2,4152008
    
    
    1,576
 F-35




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  12.
    
    AVAILABLE-FOR-SALE EQUITY SECURITIES December 31,
    
    December 31,2002
    
    2003USD
    
    USDCost
    
    
    1,875
    
    
    
    813Net unrealized gain/(loss)
    
    
    175
    
    
    
    (223
    )Market value
    
    
    2,050
    
    
    
    590
  *
    The net unrealized gain/(loss) consisted of gross unrealized gain of
USD103 (2002: USD755) and gross unrealized loss of USD326 (2002: USD580). For the years ended December 31, 2002
and 2003, the gross realized
gain was USD243 and USD3,545, respectively, and the gross realized loss
was USD498 and USD424, respectively. All equity securities as at December 31,
2002 and 2003 had been in an
unrealized loss position for less than 12 months. The Companys
available-for-sale equity securities are held for sale. For the equity
securities in an unrealized loss position at the year end, the Company
evaluated the length of the time and the extent to which the market value
had been less than cost as well as the financial condition and performance
of the issuer of the equity securities, and reached the conclusion that
the impairments are not other-than-temporary.  13.
    
    CREDIT ARRANGEMENTS Under line of credit arrangements with two
banks, including the
Global Master Repurchase Agreement (the Repurchase Agreement) and the
Total Return Swap Transaction Agreement (the Swap Agreement) as
described below, the Company may borrow up to USD401,554 on such terms as
the Company and the banks mutually agree upon. Except for bank loans of
USD15,199 due in 2004 and USD11,456 due in 2005 through to 2011, these
arrangements do not have termination dates, but are reviewed annually for
renewal. At December 31, 2003, the unused portion of the credit lines was
USD374,899. The Company entered into the Repurchase
Agreement with Fortis Bank
pursuant to which the Company sold certain debt securities to the bank at
a discounted price (the Purchase Price) and the bank agreed to sell back
to the Company at the Purchase Price at a later date (the Repurchase
Date). Either party with a net exposure from the transaction arising
from the fluctuations in the market value of the securities or other means
may request the other party to make a cash or acceptable debt securities
transfer at least equal to that net exposure. During the period between
the date that the Company sold the debt securities to the bank (the
Purchase Date) and the Repurchase Date, the bank shall pay to the
Company any income in respect of the debt securities and the Company shall
pay to the bank interest calculated using the Purchase Price at London
Inter-Bank Offered Rate (LIBOR) plus 0.2% per annum and the number of
days between the Purchase Date and the Repurchase Date. At December 31,
2002 and 2003, the repurchase transactions entered into only allowed the
buyer to request the seller to make a cash or acceptable debt securities
transfer at least equal to the net exposure. F-36




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  13.
    
    CREDIT ARRANGEMENTS (continued) The Company entered into the Swap Agreement
with another bank
pursuant to which the Company transferred securities and financial
instruments to the bank in exchange for cash and concurrently the Company
agreed to reacquire the securities and financial instruments at a future
date for an amount equal to the cash exchanged and an interest factor.
The Swap Agreement permitted the Company to elect for net cash settlement
upon termination of the total return swap transaction. During the period
between the Purchase Date and the Repurchase Date of three calendar years,
the bank would pay to the Company any income in respect of the securities
transferred and the Company would in return pay to the bank a price
differential calculated by the Purchase Price multiplied by LIBOR plus
0.35% per annum and the number of days between the Purchase Date and the
Repurchase Date. In connection with the credit lines granted
to the Company, the
Company maintained compensating balances of USD238 and USD109 in cash at
December 31, 2003 and 2002, respectively, and pledged debt securities with
a net book value of USD31,109 and USD151,123 at December 31, 2003 and
2002, respectively. The weighted average interest rates on
short-term borrowings as of
December 31, 2002 and 2003 were 2.1% and 1.4% per annum, respectively.  14.
    
    LONG-TERM BANK LOANS  Long-term bank loans consist of the following: December 31,
    
    December 312002
    
    2003USD
    
    USDLIBOR + 1.75% mortgage loan
    
    
    831
    
    
    
    7774.1% mortgage loan
    
    
    830
    
    
    
    777LIBOR + 0.35% total return swap transaction
loan
    
    
    10,073
    
    
    
    10,07311,734
    
    
    
    11,627Less: Current portion
    
    
    (149
    )
    
    
    (171
    )11,585
    
    
    
    11,456
 Maturities of long-term debts for the five
years succeeding December
31, 2003 are USD171 in 2004, USD10,249 in 2005, USD189 in 2006, USD204 in
2007, USD226 in 2008 and USD588 thereafter. The above mortgage loans will be repaid by
installments with the last
payment due in 2011. Freehold land and buildings with a carrying amount
of USD2,524 at December 31, 2002 and USD2,806 at December 31, 2003 were
pledged as collateral to secure these loans. The above total return swap transaction loan
is due in 2005. Debt
securities with a fair value of USD11,896 at December 31, 2003 were
pledged as collateral to secure the loan. The weighted average interest rates on
long-term bank loans as of
December 31, 2002 and 2003 were 2.1% and 1.6% per annum, respectively. F-37




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  15.
    
    ACCUMULATED OTHER COMPREHENSIVE INCOME The components of accumulated other
comprehensive income are as follows: Unrealizedgains/(losses)
    
    Foreignon available-
    
    currencyfor-sale
    
    translationsecurities
    
    adjustments
    
    TotalUSD
    
    USD
    
    USDBalance at December 31, 2000
    
    
    71
    
    
    
    (837
    )
    
    
    (766
    )Unrealized losses, net of unrealized gain of
available-for-sale securities
    
    
    (9,956
    )
    
    
    
    
    
    
    (9,956
    )Other-than-temporary impairment of available-for-sale securities
    
    
    4,216
    
    
    
    
    
    
    
    4,216Minority interests share of unrealized losses,
net of unrealized gains of available-for-sale securities
    
    
    337
    
    
    
    
    
    
    
    337Foreign currency translation adjustments
    
    
    
    
    
    
    (1,199
    )
    
    
    (1,199
    )Less: reclassification adjustment for gains,
net of losses included in net loss
    
    
    (71
    )
    
    
    
    
    
    
    (71
    )Balance at December 31, 2001
    
    
    (5,403
    )
    
    
    (2,036
    )
    
    
    (7,439
    )Unrealized losses, net of unrealized gains of
available-for-sale securities
    
    
    (1,276
    )
    
    
    
    
    
    
    (1,276
    )Other-than-temporary impairment of available-for-sale securities
    
    
    5,125
    
    
    
    
    
    
    
    5,125Minority interests share of unrealized gains,
net of unrealized losses of available-for-sale securities
    
    
    (484
    )
    
    
    
    
    
    
    (484
    )Foreign currency translation adjustments
    
    
    
    
    
    
    661
    
    
    
    661Less: reclassification adjustment for gains,
net of losses included in net income
    
    
    5,403
    
    
    
    
    
    
    
    5,403Balance at December 31, 2002
    
    
    3,365
    
    
    
    (1,375
    )
    
    
    1,990Unrealized gains, net of unrealized losses of
available-for-sale securities
    
    
    644
    
    
    
    
    
    
    
    644Minority interests share of unrealized losses,
net of unrealized gains of available-for-sale securities
    
    
    184
    
    
    
    
    
    
    
    184Foreign currency translation adjustments
    
    
    
    
    
    
    186
    
    
    
    186Less: reclassification adjustment for gains,
net of losses included in net income
    
    
    (4,344
    )
    
    
    
    
    
    
    (4,344
    )Balance at December 31, 2003
    
    
    (151
    )
    
    
    (1,189
    )
    
    
    (1,340
    )
 F-38




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  16.
    
    SUPPLEMENTARY OPERATIONS STATEMENT INFORMATION Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDThe Company incurred the following
expenses:Rental expenses  minimum rental under operating
leases
    
    
    8,100
    
    
    
    4,198
    
    
    
    3,086Advertising expenses
    
    
    9,110
    
    
    
    930
    
    
    
    580Defined contribution retirement plans
expenses
    
    
    475
    
    
    
    1,423
    
    
    
    2,922
  17.
    
    RELATED PARTY TRANSACTIONS In addition to the transactions and balances
detailed elsewhere in
these financial statements, the Company had the following material
transactions with related parties during the years ended December 31,
2001, 2002 and 2003: (a) 24/7 Real Media, Inc. Pursuant to the License and Software
Agreement (the Agreement)
entered into by the Company and 24/7 Real Media, Inc. (formerly known as
24/7 Media, Inc. and hereafter referred to as 24/7), which was a
shareholder of the Company in 2001. On October 23, 1998, 24/7 granted to
the Company a non-exclusive license to use certain 24/7 software products
to serve advertisements on the Internet and an exclusive license to use
the 24/7 Media trademark in the Asian market. Under the terms of the agreement with 24/7,
the Company was obligated
to pay to 24/7 10% of the Companys net revenue generated from
advertisements on the Companys advertising network. Such net revenue
included all revenues generated from advertising sales, net of commissions
retained or paid to advertising agencies, and service fees paid to
advertising affiliates or the Companys web sites. Service fees paid to
the Companys web sites, exclusive of the Companys www.cww.comportal,
was set at 70% of advertising sales while service fees to the advertising
affiliates, including the Companys www.cww.comportal, ranged from 30% to
50% of advertising sales. During the year ended December 31, 2001,
payments made under the Agreement amounted to USD800. Where U.S. based advertisements were sold on
the Companys
advertising network by 24/7, 24/7 was obligated to pay 70% of the sales
revenue, net of commissions retained or paid to advertising agencies, to
the Company. 24/7 served as the Companys exclusive agent for the sale of
U.S. based advertisements on the Companys advertising network. F-39




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  17.
    
    RELATED PARTY TRANSACTIONS (continued) (a) 24/7 Real Media, Inc.
(continued) Where Asian-based advertisements were sold on
24/7 U.S. network of
advertising affiliates, the Company would pay 70% of such sales revenue,
net of commissions retained or paid to advertising agencies, to 24/7. The
Company served as 24/7 Media Asia Limiteds exclusive agent for the sale
of Asian-based advertisements on 24/7 U.S. network of advertising
affiliates. In August 2000, the Agreement was
superceded by the 24/7 Media Asia
Agreement and supplemental related agreements (collectively the Media
Asia Agreement). In October 2000, as part of the Media Asia Agreement,
the Company sold 19.9% of its shares in 24/7 Media Asia Limited, a then
wholly-owned subsidiary of the Company, to 24/7 in exchange for 2,500,000
shares of common stock of 24/7 valued at USD4.3125 per share, resulting in
a net gain of USD10,417. The Company continued to own less than 5% of
24/7. In June 2001, the Company gave notice of
termination of the Media
Asia Agreement to 24/7, which notice was effective in September 2001. In June 2001, the Company demanded from
24/7 Media Asia Limited the
repayment of a portion of certain loans that the Company had extended to
24/7 Media Asia Limited. The loans consisted of USD10,956 made prior to
June 30, 2000 and USD9,569 made during the period from July 1, 2000 to May
31, 2001. The Company entered into negotiations with 24/7 Media Asia
Limited, and, due to limited cash resources available at 24/7 Media Asia
Limited and a desire by the parties to allow 24/7 Media Asia Limited to
keep the proceeds of the remaining USD9,569 to enable it to continue to
fund its operations, the Company agreed that 24/7 Media Asia Limited would
repay only the loans made prior to June 30, 2000 amounting to USD10,956.
In January 2002, 24/7 Media Asia Limited completed a rights issue whereby
it issued and allotted additional equity shares to all shareholders
participating in the rights issue as a means to settle the loan demand.
While the Company participated in this rights issue, 24/7 chose not to
participate in this rights issue and therefore, 24/7s interest in 24/7
Media Asia Limited was effectively diluted to under 2%, while the
Companys interest in 24/7 Media Asia Limited increased to approximately
98%. In February 2003, 24/7 filed suit against the Company in the Federal
District Court in New York to enforce obligations allegedly owed under the
Media Asia Agreement. The Company contested these allegations and, in May
2003, obtained an order staying the lawsuit in New York and compelling
arbitration of the claims at the International Chamber of Commerce, or the
ICC. Pursuant to the ICC arbitration, in July 2003 the Company filed a
request for arbitration seeking damages in excess of USD24,000 for the
breach of the Media Asia Agreement. In October 2003, 24/7 filed an answer
and counterclaim seeking USD2,600 being damages for, among other things,
services allegedly unpaid under the same agreement. In December 2003, the
Company filed a reply to answer and counterclaims denying these
allegations. The arbitration is at an early stage and the arbitration
panel is yet to be fully constituted. F-40




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  17.
    
    RELATED PARTY TRANSACTIONS (continued) (b) Equity investee The Company derived software and consulting
services revenues from
the following equity investee of the Company: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDSportasia Media Limited
    
    
    60
    
    
    
    
    
    
    
    
 In November 2001, the Company acquired
the URL of www.sportasia.com
from Sportasia Media Limited for a consideration of USD39. (c) CIC In June 1999, the Company entered into a
Support Services Agreement
with CIC under which the Company agreed to provide CIC with the services
required to operate local online services for America Online, Inc. (AOL)
in Hong Kong which was amended in April 2000. Since January 1, 2001, the Company has
not recognized any revenue
arising from the Amended and Restated Support Services Agreement due to
the uncertainty of the collectibility of the receivable from CIC.
USD5,425 incurred in connection with the provision of these services was
recorded under selling, general and administrative expenses in 2001.
Therefore, in September 2001, the Company agreed to CICs request to
formalize the forgiveness of up to USD7,730 owed to the Company from CIC. In October 2001, the Company entered
into an Asset Purchase Agreement
with CIC to acquire the URLs of www.china.com, www.hongkong.com and
www.taiwan.com, and all intellectual property and other proprietary
rights in connection with the URLs for a cash consideration of USD16,800.
The purchase price of the URLs was determined by reference to valuations
performed by third party appraisers and negotiation with CIC. During 2003, CIC waived the current account
with the Company
amounting to USD715. (d) Golden Tripod Limited In June 2001, the Company signed
contracts with entities affiliated
with Xinhua, Golden Tripod (Holdings) Limited, or Golden Tripod, and
Xinhua News Agency Shanghai Branch, or Shanghai Xinhua, to acquire 30% of
the shares of Xin Hua Asia Pacific TV (H.K.) Center Limited, a company 51%
owned by Golden Tripod and 49% owned by Shanghai Xinhua, as well as to
form a 50% owned joint venture in the PRC. The Company paid USD500 as a
deposit after the contracts had been signed. As certain conditions
precedent for the joint venture were not met during the course of 2001,
the Company terminated the transaction and made a bad debt provision for
the full deposit amount at the end of the year. The Company obtained a
refund amounting to USD348 in 2003. F-41




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  17.
    
    RELATED PARTY TRANSACTIONS (continued) (d) Golden Tripod Limited
(continued) For the years ended December 31, 2001,
2002 and 2003, the Company
paid management fees of USD261, USD293 and USD137, respectively, to Golden
Tripod Limited, an entity affiliated with Xinhua News Agency, one of the
Companys major shareholders, for the provision of general management
services to the Company, including the consultancy fees of Zhao Shun Ao
and Li Yong Chian, Chen You Hua in the years 2001 and 2002, and Wang Xiao
Hui in the year 2003. (e) Asia Pacific Online Limited For the year ended December 31, 2001,
the Company reimbursed USD120
to Asia Pacific Online Limited, or APOL, for expenses incurred for the
provision of general management services principally consisting of
providing the full-time services of Mr. Peter Yip to act as the Companys
chief executive officer. In January 2002, the Company entered into a new
service agreement with APOL. Under this agreement, the Company agreed to
provide an annual management fee of USD0.001 and reimburse expenses
incurred up to USD270 annually for the provision of general management
services principally consisting of providing the full-time services of Mr.
Peter Yip to act as the Companys chief executive officer. The management
service agreement was renewed in 2003 under the terms of the agreement.
APOL is a Cayman Islands company that is owned 50% by the spouse of Mr.
Peter Yip, who is the chief executive officer of the Company, and 50%
owned by a trust set up for the benefit of Mr. Yips children. There are
no common directors between APOL and the Company. APOL is the owner of
11,835,686 Class A common shares and has exercisable options to purchase
2,381,442 additional Class A common shares. These options include options
to purchase 200,000 Class A common shares granted on June 3, 2003 at an
exercise price of US$4.95 per share and 100,000 Class A common shares
granted on June 14, 2003 at an exercise price of US$5.16 per share. In
addition, Mr. Yip has exercisable options to purchase 190,000 Class A
common shares. Mr. Yips spouse also owns 6,142,900 Class A common shares
including 1,500,000 Class A common shares which may be acquired pursuant
to a trading plan between her and Redwine & Company, Inc. dated December
19, 2003. Mr. Yip acted as the Companys
chief executive officer in each of
2001, 2002 and 2003. (f) New World Infrastructure In October 2000, the Company entered
into an agreement to acquire a
50.3% interest in Wealth Corporation Limited for an aggregate
consideration of USD9,300 consisting of USD6,800 of the Companys Class A
common shares to purchase shares from the selling shareholders, and
USD2,500 in cash to purchase newly issued shares. The selling shareholders
of Wealth Corporation Ltd. included New World Infrastructure, a former
shareholder of the Company which as of October 2002 held approximately
11.4% of the Companys Class A common shares, and received approximately
USD1,400 worth of the Companys Class A common shares as consideration for
its shares in Wealth Corporation Ltd. Wealth Corporation Ltd. operated a
web site which sold travel products and services, such as airline tickets
and hotel accommodations, to corporations and travel agencies in the PRC.
The acquisition was based upon a strategy to build a Greater China online
and off-line travel capability which focused on the tour-group market. F-42




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  17.
    
    RELATED PARTY TRANSACTIONS (continued) (f) New World Infrastructure
(continued) As a result of deteriorating financial
performance at Wealth
Corporation Limited through 2002, the Company de-emphasized the
development of an online travel business in Greater China and sought to
recover some of its original investment in the company. The Company
entered into negotiations with the other shareholders in Wealth
Corporation Limited, including New World Infrastructure, and in November
2002, the parties agreed to permit the Company to reduce its shareholdings
to 19.9% through a share repurchase by Wealth Corporation Limited. Wealth
Corporation Limited was not profitable at such time, and the shareholders
agreed to value the company based upon the cash balances of the company.
As a result of the consummation of the share repurchase, the Company
reduced its shareholdings to 19.9% for a payment from Wealth Corporation
of USD1,000. In January 2003, New World
Infrastructure ceased to be one of the
Companys shareholders following the sale of its entire shareholding in
the Company in the open market, as well as in privately negotiated
transactions with the Company, APOL and Dr. Raymond Chien. The Class A
common shares of the Company purchased from New World Infrastructure were
4,468,560 by the Company, 4,300,000 by APOL and 200,000 by Dr. Raymond
Chien. Accordingly, New World Infrastructure ceased to be a related
party of the Company since then. (g) AOL Time Warner Inc. During the year ended December 31, 2001,
the Company paid advertising
fees totaling USD3,500 to AOL Time Warner Inc., a shareholder of the
Company, for the provision of Internet advertising services to the
Company. In addition, the Company paid AOL Time Warner Inc. USD3,700 for
computer software from PurchasePro.com, Inc., a strategic alliance partner
of AOL Time Warner Inc. In other matters involving AOL, the Company sought
the return of USD2,200 spent by the Company under a software development
agreement among AOL, CIC and the Company. Under the terms of the software
development agreement dated February 1, 2000, the Company agreed to
provide AOL with USD2,200 to finance the development of AOL software which
could be utilized in the China market. The Company entered into the
software development agreement in anticipation of a joint venture between
AOL and the Company to develop consumer interactive services for the
Chinese market. No joint venture arrangement with AOL was ever entered
into, and AOL never delivered a software product to the Company. In
addition, the Company sought the return of USD3,500 in connection with an
agreement to purchase advertising services from AOL as well as the return
of USD3,700 in connection with the PurchasePro.com, Inc. computer software
for which the Company paid AOL. These amounts were expensed under
selling, general and administrative expenses in March 2001. In July 2003, the Company reached a
settlement with AOL involving all
claims between the two companies and their affiliates including as
summarized above. The Company also agreed with AOL to cancel AOLs two
warrants as described in note 24(c) to acquire additional shares in the
Company. The Company currently has no remaining operational, strategic or
other agreements with AOL. According to public filings, as of September
2003, AOL disposed of its entire holding of the Companys shares.
Accordingly, AOL has ceased to be a related party of the Company. F-43




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  18.
    
    INCOME TAXES Under the current tax laws of the Cayman
Islands, the Company and its
subsidiaries are not subject to tax on income or capital gains, and no
Cayman Islands withholding tax is imposed upon payments of dividends by
the Company to its shareholders. The subsidiaries in all geographical regions
are governed by the
respective local income tax laws with statutory tax rates ranging from 0%
to 35%. Deferred tax liabilities and assets are
comprised of the following: December 31,
    
    December 31,2002
    
    2003USD
    
    USDDeferred tax liabilities:Accelerated depreciation allowances
    
    
    (193
    )
    
    
    (1,618
    )Deferred tax assets:Net operating loss carryforwards
    
    
    34,484
    
    
    
    58,353Others
    
    
    5,213
    
    
    
    1,000Total deferred tax assets
    
    
    39,697
    
    
    
    59,353Valuation allowance for deferred tax assets
    
    
    (39,504
    )
    
    
    (59,048
    )Net deferred tax assets
    
    
    193
    
    
    
    305Net deferred tax liabilities
    
    
    
    
    
    
    (1,313
    )
 Significant components of the provision for
income taxes are as follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDCurrent:Tax expense/(benefit) allocated to net income/loss
from continuing operations
    
    
    186
    
    
    
    113
    
    
    
    (117
    )Tax expense/(benefit) allocated to net income/loss
From discontinued operations
    
    
    175
    
    
    
    47
    
    
    
    1361
    
    
    
    160
    
    
    
    (116
    )Deferred
    
    
    
    
    
    
    
    
    
    
    (572
    )Total provision for income taxes
    
    
    361
    
    
    
    160
    
    
    
    (688
    )
 F-44




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  18.
    
    INCOME TAXES (continued) The reconciliation of income taxes computed
at the respective
statutory tax rates to the effective income tax provision recorded is as
follows: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDIncome tax benefits/(income taxes) computed
at the respective statutory rates
    
    
    (15,702
    )
    
    
    453
    
    
    
    (3,482
    )Changes in tax rates
    
    
    
    
    
    
    384
    
    
    
    (1,181
    )Tax concession of a subsidiary of Palmweb
    
    
    
    
    
    
    
    
    
    
    (2,806
    )Non-deductible items
    
    
    2,349
    
    
    
    108
    
    
    
    3,903Non-taxable items
    
    
    (3,378
    )
    
    
    (308
    )
    
    
    (1,271
    )Change in valuation allowance
    
    
    16,917
    
    
    
    (524
    )
    
    
    4,148Total income taxes from continuing
operations
    
    
    186
    
    
    
    113
    
    
    
    (689
    )Total income taxes from discontinued
operations
    
    
    175
    
    
    
    47
    
    
    
    1
 Benefits from operating losses not recorded
from discontinued
operations amounted to USD3,131, USD4,139 and USD177 for the years ended
December 31, 2001, 2002 and 2003, respectively. Due to its history of losses, the Company
does not believe that
sufficient objective, positive evidence currently exists to conclude that
the recoverability of certain of its deferred tax assets is more likely
than not. Consequently, the Company has provided a valuation allowance of
USD58,808 and USD39,504 as of December 31, 2003 and 2002, respectively, to
cover its net deferred tax assets. At December 31, 2003, the Company had
net operating loss
carryforwards of approximately USD203,479 for income tax purposes that
expire in years 2004 to indefinity. NewPalm (China) Information Technology
Company Limited (NewPalm), a
subsidiary of Palmweb established in the PRC, is subject to PRC corporate
income tax at a rate of 33%. Upon fulfilling certain criteria, NewPalm is
entitled to certain PRC corporate income tax exemptions. During the year
ended December 31, 2003, based on interim information provided to the tax
authorities, NewPalm received a preliminary confirmation from the relevant
tax authorities that it would be fully exempt from PRC corporate income
tax for the 2003 fiscal year. Management believes the necessary criteria
for tax exemption stated in the preliminary confirmation have been met for
the full year of 2003 and accordingly, no provision for PRC corporate
income tax has been made for the year. The tax concession was USD2,806
for the year ended December 31, 2003 and the per share effect is
approximately USD0.03. Corporate income tax exemption of NewPalm for
future periods is not as certain as of December 31, 2003 and the effect of
the future tax exemptions will be recognized when the approval has been
obtained from the relevant tax authorities. F-45




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  19.
    
    BASIC AND DILUTED EARNINGS/(LOSS) PER SHARE The following table sets forth the
computation of basic and diluted
earnings/(loss) per share: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDNumerator for basic and diluted
earnings/(loss) per share:Income/(loss) from continuing operations
    
    
    (85,528
    )
    
    
    (4,095
    )
    
    
    16,424Loss from discontinued operations,
net of gain on disposal/dissolution
    
    
    (38,857
    )
    
    
    (14,136
    )
    
    
    (900
    )Income/(loss) attributable to common
shareholders
    
    
    (124,385
    )
    
    
    (18,231
    )
    
    
    15,524Number
    
    Number
    
    NumberDenominator for basic earnings/(loss) per
share:Weighted average number of shares after
adjusting for the Share Splits
    
    
    102,589,760
    
    
    
    102,269,735
    
    
    
    100,532,594Number
    
    Number
    
    NumberDenominator for basic earnings/(loss) per
share:Weighted average number of shares after
adjusting for the Share Splits
    
    
    102,589,760
    
    
    
    102,269,735
    
    
    
    100,532,594Effect of dilutive securities:Dilutive common shares equivalent
    
    
    
    
    
    
    
    
    
    
    2,666,827Denominator for diluted earnings/(loss) per
share:Weighted average number of shares after
adjusting for the Share Splits
    
    
    102,589,760
    
    
    
    102,269,735
    
    
    
    103,199,421Basic earnings/(loss) per share:Earnings/(loss) from continuing operations
    
    
    (0.83
    )
    
    
    (0.04
    )
    
    
    0.16Loss from discontinued operations
    
    
    (0.38
    )
    
    
    (0.14
    )
    
    
    (0.01
    )Earnings/(loss) attributable to common
shareholders
    
    
    (1.21
    )
    
    
    (0.18
    )
    
    
    0.15Diluted earnings/(loss) per share:Earnings/(loss) from continuing operations
    
    
    (0.83
    )
    
    
    (0.04
    )
    
    
    0.16Loss from discontinued operations
    
    
    (0.38
    )
    
    
    (0.14
    )
    
    
    (0.01
    )Earnings/(loss) attributable to common
shareholders
    
    
    (1.21
    )
    
    
    (0.18
    )
    
    
    0.15
 The computation of diluted earnings/(loss)
per share did not assume
the conversion of the warrants of the Company because their inclusion
would have been antidilutive. F-46




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  20.
    
    DISCONTINUED OPERATIONS The Company makes monthly reviews of all
business units and performs
analyses on: (i) the cashflow forecast; (ii) profitability; and (iii) viability of the business
units. These reviews are conducted in the context of
the overall strategic
direction of the Company. If a business unit is non-profitable, has
negative cash flows, does not appear to have growth potential or a path to
profitability, and is not strategic to the overall Company strategy, the
management may decide to close it down. This is done by first notifying
staff to stop all sales activities and concentrate on the collection of
outstanding accounts receivable. There are two methods of disposal of
discontinued operations: (i) sales to third parties; and (ii) liquidation/closure of
business. During the year ended December 31, 2002,
the Company discontinued
the operations of certain subsidiaries in the software and consulting
services and the advertising and marketing activities segments. With
the adoption of SFAS 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, the operating results of the discontinued
operating units were classified as loss from operations of
discontinued subsidiaries on the consolidated statement of
operations. During the year ended December 31, 2003, the Company
further discontinued some of its subsidiaries to realign its
operations with changes in its business model. Most of these
discontinued operations were grouped in the software and consulting
services and the advertising and marketing segments under the new
segment classification, while the rest were included in other income. From August to December 2002,
liquidators were appointed to
oversee the dissolution of the discontinued subsidiaries. The
combined assets and liabilities of the discontinued subsidiaries on
the respective dates of liquidation were USD2,019 and USD2,564,
respectively, resulting in a net gain on dissolution of USD545, which
was included in the gain on dissolution of discontinued subsidiaries
for the year ended December 31, 2002. Since January 2003, the Company has
closed down certain
unprofitable subsidiaries. The combined assets and liabilities of
the discontinued subsidiaries on the respective dates of liquidation
were USD7,266 and USD7,936, respectively, resulting in a net gain on
dissolution of USD2,127, which was included in the gain on
dissolution of discontinued subsidiaries for the year ended December
31, 2003. The net loss of the subsidiaries classified
as discontinued

operations for the years ended December 2001, 2002 and 2003 were
USD38,857, USD14,681 and USD3,027, respectively. Revenues of the
discontinued operations for the years ended December 2001, 2002 and
2003 were USD34,603, USD19,104 and USD2,866, respectively. Pretax
loss reported by the discontinued operations for the years ended
December 2001, 2002 and 2003 were USD38,682, USD14,634 and USD3,026,
respectively. F-47




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  21.
    
    FINANCIAL INSTRUMENTS The carrying amount of the Companys
cash and cash equivalents
approximates their fair values because of the short maturity of those
instruments. The carrying value of receivables, payables and short-term
debt approximates their fair values due to their short maturity. The
total fair values of available-for-sale equity securities in listed
companies as of December 31, 2002 and 2003 were USD2,050 and USD590,
respectively, based on the market values of publicly traded shares as of
December 31, 2002 and 2003. The total fair values of the debt securities
as of December 31, 2002 and 2003 were USD471,179 and USD313,254,
respectively, based on the market values of publicly traded debt
securities and the estimated fair values of unlisted debt securities, as
determined by the management of the Company having regard to, inter alia,
the prices of the most recent reported sales and purchases of the
securities as of December 31, 2002 and 2003. The fair value of related
party receivables and payables cannot be determined due to the related
party nature of the accounts. The carrying amount of the Companys
long-term bank loan approximates its fair value because the interest rate
of the bank loan is close to the prevailing bank interest rate. In October 2002, the Company entered
into a promissory note and
warrant purchase agreement with Sagent Technology Inc. (Sagent), a
NASDAQ listed company, whereby the Company paid USD7,000 cash to Sagent
for a promissory note and 8,000,000 warrants to purchase Sagents common
 shares for investment purposes. The
fair values of the promissory note
and the warrants as of December 31, 2002 were USD5,325 and USD2,320,
respectively. The amount of the promissory note was included in the loan
receivables and the amount of the warrants was included in the other
assets as disclosed in the consolidated balance sheet. The Company
recognized a USD571 gain in value of the warrants, which is included in
the other non-operating gains for the year ended December 31, 2002. The
Company determined the estimated fair value amounts of those instruments
by using available market information and commonly accepted valuation
methodologies. However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts
that the Company or holders of the instruments could realize in a current
market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair values.
The promissory note was settled and the warrants were cancelled during
2003. F-48




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  22.
    
    CONCENTRATION OF RISKS Concentration of credit risk: The Company is engaged in the provision of
software and consulting
services, mobile services and applications and advertising and marketing
activities to businesses in Hong Kong, Australia, Japan, Korea, Taiwan,
Mainland China, Singapore, Europe and North America. Financial instruments that potentially
subject the Company to
significant concentrations of credit risk consist principally of cash and
cash equivalents, investments and trade accounts receivable. The Company maintains cash and cash
equivalents and investments with
various financial institutions in Hong Kong, Australia, Japan, Taiwan,
Korea, Mainland China, Singapore, Europe and North America. The Companys
policy is designed to limit exposure to any one institution. The Company
performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Companys investment
strategy. The Company does not require collateral on these financial
instruments. Concentration of credit risk with respect to
trade accounts
receivable are limited due to the large number of entities comprising the
Companys customer base. The Company generally does not require
collateral for trade accounts receivable. Concentration of business risk: Revenue has been derived from a number of
clients that use the
Companys services. The top 10 customers accounted for 9%, 14% and 28% of
the Companys revenue for the years ended December 31, 2001, 2002 and
2003, respectively. Current vulnerability due to certain
concentrations: The Companys operations may be
adversely affected by significant
political, economic and social uncertainties in the PRC. Although the PRC
government has been pursuing economic reform policies for the past 20
years, no assurance can be given that the PRC government will continue to
pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or
political disruption or unforeseen circumstances affecting the PRCs
political, economic and social conditions. There is also no guarantee
that the PRC governments pursuit of economic reforms will be consistent
or effective. The PRC has recently enacted new laws and
regulations governing
Internet access and the provision of online business, economic and
financial information. Current or proposed laws aimed at limiting the use
of online services to transmit certain materials could, depending upon
their interpretation and application, result in significant potential
liability to the Company, as well as additional costs and technological
challenges in order to comply with any statutory or regulatory
requirements imposed by such legislation. Additional legislation and
regulations that may be enacted by the PRC government could have an
adverse effect on the Companys business, financial condition and results
of operations. Some of the Companys businesses are
transacted in Renminbi (RMB),
which is not freely convertible into foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of
China or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the Bank of China. Approval of foreign currency
payments by the Bank of China or other institutions requires submitting a
payment application form together with suppliers invoices, shipping
documents and signed contracts. F-49




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  23.
    
    SHARE CAPITAL Pursuant to the Articles of Association of
the Company, each Class A
common share is entitled to one vote on all matters upon which the Class A
common share is entitled to vote. The Board of Directors has the
authority, without further action by the shareholders, to issue up to five
million preferred shares in one or more series and to fix the
designations, powers, preference, privileges and relative participatory,
optional or special rights and the qualifications, limitation or
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of
which may be greater than the rights of common shares. No preferred shares have been issued. During the year ended December 31, 2001,
91,426 Class A common shares were issued at prices ranging from USD1.75 to USD6.8125 per share from the
exercise of stock options granted to employees. During the year ended December 31, 2001,
521,589 Class A common shares were issued at a price of USD5.8125 per share as settlement of
promissory notes and 273,198 Class A common shares were issued at a price
of USD16.3516 per share as settlement of other payables. In addition,
23,084 Class A common shares were redeemed and retired at a price of
USD2.35 per share arising from the disposal of an equity investee. The
redemption premium was deducted from the additional paid-in capital. During the year ended December 31, 2002,
296,492 Class A common shares were issued at prices ranging from USD2.03 to USD2.5266 per share
from the exercise of stock options granted to employees. During the year ended December 31, 2002,
1,764,555 Class A common shares were repurchased at prices ranging from USD1.92 to USD3.24 per
share. 1,692,001 of the repurchased Class A common shares were retired at
prices ranging from USD2.334 to USD2.826 per share. The redemption
premium was deducted from the additional paid-in capital. During the year ended December 31, 2003,
2,591,646 Class A common shares were issued at prices ranging from USD1.89 to USD9.00 per share
from the exercise of stock options granted to employees. During the year ended December 31, 2003,
4,468,560 Class A common shares were repurchased at USD2.50 per share. 2,300,000 of the
repurchased Class A common shares were retired at USD2.50 per share. The
redemption premium was deducted from the additional paid-in capital. F-50




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  24.
    
    STOCK-BASED COMPENSATION AND WARRANTS (a) Stock options The Company applies APB 25 in accounting for
stock options granted to
employees. Accordingly, the compensation expense is recorded for the
difference between the fair value of shares at date of grant and the
exercise price of the stock option. Pursuant to the 1999 Stock Option Plan (the
Plan), options may be
granted to employees of and consultants and advisors to the Company and
its subsidiaries for the purchase of up to an aggregate of 12 million
class A common shares. During 2000, options for the purchase of an
additional 8 million class A common shares were made available, which
increased the options available for grant to employees of and consultants
and advisors to the Company and its subsidiaries for the purchase of class
A common shares to 20 million. The Plan is administered by a committee of
the Board of Directors, which will determine, at its discretion, the
number of shares subject to each option granted and the related exercise
price and option period. Incentive stock options, as defined by the U.S.
Internal Revenue Code of 1986, as amended, and non-qualified stock options
may be granted under the Plan. A summary of the Companys stock option
activities and related
information for the years ended December 31, 2002 and 2003 is as follows: 2002
    
    2003Weighted-
    
    
    
    
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    
    
    
    
    averageAvailable
    
    Options
    
    exercise
    
    Available
    
    Options
    
    exercisefor grant
    
    outstanding
    
    price
    
    for grant
    
    outstanding
    
    price(Number)
    
    (Number)
    
    USD
    
    (Number)
    
    (Number)
    
    USDOutstanding at the
beginning of the year
    
    
    6,998,268
    
    
    
    14,065,911
    
    
    
    6.66
    
    
    
    9,432,844
    
    
    
    11,334,843
    
    
    
    5.94Granted
    
    
    (1,648,960
    )
    
    
    1,648,960
    
    
    
    2.44
    
    
    
    (2,217,343
    )
    
    
    2,217,343
    
    
    
    5.40Forfeited
    
    
    4,083,536
    
    
    
    (4,083,536
    )
    
    
    7.27
    
    
    
    2,832,962
    
    
    
    (2,832,962
    )
    
    
    7.89Exercised
    
    
    
    
    
    
    (296,492
    )
    
    
    2.42
    
    
    
    
    
    
    
    (2,591,646
    )
    
    
    3.32Outstanding at the end of the year
    
    
    9,432,844
    
    
    
    11,334,843
    
    
    
    5.94
    
    
    
    10,048,463
    
    
    
    8,127,578
    
    
    
    5.94Exercisable at the end of the year
    
    
    
    
    
    
    7,686,104
    
    
    
    
    
    
    
    
    
    
    
    5,648,618Weighted-average fair value of
options granted during the year
    
    
    
    
    
    
    2.00
    
    
    
    
    
    
    
    
    
    
    
    4.23
 As of December 31, 2003, the
Companys outstanding stock options are
exercisable at exercise prices ranging from USD1.89 to USD67.125 per share
(inclusive). F-51




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  24.
    
    STOCK-BASED COMPENSATION AND WARRANTS (continued) (a) Stock options (continued) The following table summarizes information
concerning outstanding and
exercisable options at December 31, 2003. Options outstanding
    
    Options exercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weightedaverage
    
    average
    
    
    
    
    
    averageremaining
    
    exercise
    
    
    
    
    
    exerciseExercise
    
    Numbers
    
    contractual
    
    price
    
    Numbers
    
    priceprice range
    
    outstanding
    
    life (in years)
    
    per share
    
    exercisable
    
    per shareUSD
    
    
    
    
    
    USD
    
    
    
    USD1.89-2.78
    
    
    1,419,424
    
    
    
    8.04
    
    
    
    2.38
    
    
    
    926,488
    
    
    
    2.462.8-3.375
    
    
    1,338,977
    
    
    
    6.95
    
    
    
    3.11
    
    
    
    1,153,521
    
    
    
    3.133.504-5
    
    
    2,260,787
    
    
    
    6.08
    
    
    
    4.96
    
    
    
    2,174,173
    
    
    
    4.965.01-9.76
    
    
    2,433,271
    
    
    
    8.68
    
    
    
    6.03
    
    
    
    765,141
    
    
    
    6.6410.1875-19.125
    
    
    399,559
    
    
    
    5.00
    
    
    
    14.29
    
    
    
    363,882
    
    
    
    14.2121.62-29.9218
    
    
    179,760
    
    
    
    6.40
    
    
    
    24.43
    
    
    
    177,068
    
    
    
    24.4232.125-48.405
    
    
    64,080
    
    
    
    6.15
    
    
    
    44.92
    
    
    
    59,484
    
    
    
    45.0351.875-67.125
    
    
    31,720
    
    
    
    6.25
    
    
    
    60.04
    
    
    
    28,861
    
    
    
    60.088,127,578
    
    
    
    
    
    
    
    
    
    
    
    5,648,618
 Pursuant to resolutions adopted by the Board
of Directors in December
2000, the vesting of certain of the Companys options was accelerated such
that vesting would be changed from an annual basis to a quarterly basis
upon the lapse of 12 months from the date of grant. Based on the
historical and expected employee turnover and the expected market price of
the Class A common shares, the Company estimated that the number of
options the employees will ultimately retain that would have been
otherwise forfeited was minimal for the years ended December 31, 2001,
2002 and 2003. For the year ended December 31, 2001, a
total stock compensation
expense of USD1,227 was recognized in the financial statements. For the
purpose of determining the fair value of the options under SFAS 123 for
2001 as set out in note 4(n), the Company used the Black-Scholes option
pricing model based on the United States risk-free interest rates ranging
from 3.91% to 6.69%, a weighted-average expected life of the option of
five years, assuming volatility factors of the expected market price of
the Companys common shares ranging from 38% to 167% and no dividend
yield. For the year ended December 31, 2002, a
total stock compensation
expense of USD309 was recognized in the financial statements. For the
purpose of determining the fair value of the options under SFAS 123 for
2002 as set out in note 4(n), the Company used the Black-Scholes option
pricing model based on the United States risk-free interest rates ranging
from 2.65% to 6.69%, a weighted-average expected life of the option of
five years, assuming volatility factors of the expected market price of
the Companys common shares ranging from 38% to 167% and no dividend
yield. F-52




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  24.
    
    STOCK-BASED COMPENSATION AND WARRANTS (continued) (a) Stock options (continued) For the year ended December 31, 2003, a
total stock compensation
expense of USD328 was recognized in the financial statements. For the
purpose of determining the fair value of the options under SFAS 123 for
2003 as set out in note 4(n), the Company used the Black-Scholes option
pricing model based on the United States risk-free interest rates ranging
from 2.08% to 6.69%, a weighted-average expected life of the option of 5
years, assuming volatility factors of the expected market price of the
Companys common share ranging from 38% to 167% and no dividend yield. In 2001, 95,369 stock options were settled by
USD1,383 discretionary
cash settlements to the shareholders. In January 2002, the Company granted to
APOL additional stock options
to purchase up to 200,000 Class A common shares of the Company with an
exercise price of USD2.82 per share and a quarterly vesting schedule over
the one-year term of the new services agreement and the right to
accelerate existing share options upon a change of control of the Company. In January 2003, the Company renewed the
management services
agreement with APOL under the terms of the agreement. In addition, the
Company granted to APOL additional stock options to purchase up to 200,000
Class A common shares as of June 3, 2003 with an exercise price of USD4.95
per share, and further stock options to purchase up to 100,000 Class A
common shares as of June 16, 2003, with an exercise price of USD5.16 per
share. Both grants had a quarterly vesting schedule over the one-year
term of the new services agreement and the right to accelerate existing
share options upon a change of control of the Company. (b) 2000 and 2001 Employee Share
Purchase Plan During each of 2000 and 2001, the Company
established and implemented
an employee share purchase plan, which was qualified as a non-compensatory
plan under Section 423 of the U.S. Internal Revenue Code. The plan allows
qualified employees to purchase the Companys Class A common shares during
the relevant six-month plan period. Qualifying employees are allowed to
purchase up to 500 Class A common shares for each plan period. The maximum
number of Class A common shares, par value USD0.00025 per share, issuable
under the plan is 500,000, and a maximum of 100,000 shares will be
available for issuance for each plan period. F-53




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chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  24.
    
    STOCK-BASED COMPENSATION AND WARRANTS (continued) (c) Warrants In connection with the private placement of
6,795,200 Class A common shares of the Company issued to AOL on June 8, 1999, warrants were granted
to AOL to purchase, subject to certain conditions, up to 18.5% and 6.5% of
the Companys total outstanding capital at an exercise price of USD5.00
per share and USD42.50 per share, respectively. No such warrants were
exercised and both warrants were cancelled in July 2003. In May 2000, GE Capital Equity
Investments Ltd., (GE), was granted
a warrant under which GE will be entitled to purchase a number of Class A
common shares of the Company determined according to the Companys revenue
from services provided to affiliates of General Electric Capital
Corporation during 2000 and 2001. The warrants were exercisable during
the period between January 5, 2002 and January 4, 2003 at an exercise
price of USD39.50 per share. No such warrants were exercised and the
warrants expired in January 2003. In connection with our acquisition of all the
issued and outstanding shares of Pacific Connections Limited (PCL), a wholly-owned subsidiary
of the Company, the Company granted the initial shareholders of PCL an
option to acquire 240,000 additional Class A common shares at an exercise
price of USD9.00 per share. During the year ended December 31, 2003,
140,000 of these options had been exercised and the remaining options
expired in August 2003. All warrants may not be sold, transferred,
assigned, or hypothecated
to any person, other than to any limited partnership with the same general
partner, or to any company that directly, or indirectly, controls or is
controlled by or is under common control with the holder of the warrants,
without the prior consent of the Company.  25.
    
    EMPLOYEE BENEFIT PLANS IMI, a newly acquired subsidiary of the
Company, provides retirement
benefits for substantially all employees in the United States and in
foreign locations. In the United States, the United Kingdom and the
Netherlands, IMI sponsors defined contribution plans. In addition, IMIs
Swedish subsidiary (IMAB) has a supplemental defined contribution plan
for certain key management employees. Contributions by IMI relating to
its defined contribution plans for the post-acquisition period ended
December 31, 2003 were USD1,004. IMAB also participates in several pension
plans (non-contributory for
employees) which cover substantially all employees of its Swedish
operations. The plans are in accordance with a nationally-agreed standard
plan, the ITP Plan, and administered by a national organization,
Pensionsregisteringsinstitutet (PRI). The level of benefits and
actuarial assumptions are calculated and established by the national
organization and, accordingly, IMAB may not change benefit levels or
actuarial assumptions. The Company accounts for pensions in accordance
with SFAS 87, Employers Accounting for Pensions. IMAB is financing these
plans via premiums paid to Alecta, the Swedish National Pension
Organization. The pension book reserve will, in the future, only increase
with an interest component. F-54




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  25.
    
    EMPLOYEE BENEFIT PLANS (continued) The net periodic benefit cost for IMABs
defined benefit retirement
plan in Sweden includes the following components: Post-acquisitionperiod endedDecember 31,2003USDService cost
    
    
    Interest cost
    
    
    61Net periodic benefit cost
    
    
    61
 The following table sets forth the change in
the benefit obligation
for IMABs defined benefit plan in Sweden: Post-acquisitionperiod endedDecember 31,2003USDChange in benefit obligationsBenefit obligation at date of acquisition
    
    
    3,608Service cost
    
    
    Interest cost
    
    
    61Actuarial gains
    
    
    (286
    )Settlements
    
    
    (895
    )Effect of foreign currency exchange rate
changes
    
    
    582Benefit obligation at December 31,
2003
    
    
    3,070
 The following table shows the plans
funded status and amounts
recognized in the consolidated balance sheet: Actuarial present value of benefit
obligation as of December 31, 2003 USDUnfunded status
    
    
    3,070Out of which long-term liability
    
    
    2,272Out of which short-term liability
    
    
    798
 The following assumptions were used to
determine the IMABs
obligation under the Swedish plan: Discount rate
    
    
    5.30
    %Rate of increase in salaries
    
    
    3.00
    %Inflation rate
    
    
    2.00
    %
 F-55




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  26.
    
    CONTINGENCIES AND COMMITMENTS Operating lease commitments As of December 31, 2003, the Company had
future minimum office rental
and telephone line lease payments under non-cancelable operating leases as
follows: Year ended December 31:
    
    USD2004
    
    
    5,5272005
    
    
    2,7242006
    
    
    1,7882007
    
    
    1,3442008
    
    
    722Thereafter
    
    
    3,50715,612
 Class action lawsuit against the Company A class action lawsuit was filed in the
United States District Court,
Southern District of New York on behalf of purchasers of the securities of
the Company, between July 12, 1999 and December 6, 2000, inclusive. The
complaint charges defendants the Company, Lehman Brothers, Inc. (Lehman
Brothers), Bear, Stearns & Co., Inc. (Bear Stearns), BancBoston
Robertson Stephens (Robertson Stephens), Merrill Lynch, Pierce Fenner &
Smith Inc. (Merrill Lynch), Raymond Chien, Peter Yip, Zhou Shun Ao, and
David Kim with violations of Sections 11, 12(a) (2) and 15 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On July 12, 1999, the Company commenced
an initial public offering of
4,200 of its shares of common stock at an offering price of USD20.00 per
share, not taking into account two separate 1:2 stock splits, (the
chinadotcom IPO). In connection therewith, the Company filed a
registration statement, which incorporated a prospectus (the
Prospectus), with the Securities and Exchange Commission. The complaint
further alleges that the Prospectus was materially false and misleading
because it failed to disclose, among other things, that (i) the
Underwriter Defendants (Lehman Brothers, Bear Stearns, Robertson Stephens
and Merrill Lynch) had solicited and received excessive and undisclosed
commissions from certain investors in exchange for which the Underwriter
Defendants allocated to those investors material portions of the
restricted number of the Companys shares issued in connection with the
chinadotcom IPO; and (ii) the Underwriter Defendants had entered into
agreements with customers whereby the Underwriter Defendants agreed to
allocate the Companys shares to those customers in the chinadotcom IPO in
exchange for which the customers agreed to purchase the Companys
additional shares in the aftermarket at pre-determined prices. F-56




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  26.
    
    CONTINGENCIES AND COMMITMENTS (continued) Class action lawsuit against the Company
(continued) In June 2003, the plaintiffs announced a
proposed settlement with the
Company and other issuer defendants. The proposed settlement provides
that the insurers of all settling issuers will guarantee that the
plaintiffs recover USD1,000,000 from non-settling defendants, including
the investment banks that acted as underwriters in those offerings. In
the event that the plaintiffs do not recover USD1,000,000, the insurers
for the settling issuers will make up the difference. Under the proposed
settlement, the maximum amount that could be charged to the Companys
insurance policy in the event that the plaintiffs recovered nothing from
the investment banks would be approximately USD3,900. The Company
believes that the insurance coverage is sufficient to cover the maximum
amount that the Company may be responsible for under the proposed
settlement. The independent members of the board of directors of the
Company approved the proposed settlement at a meeting held in June 2003.
It is possible, however, that the parties may not reach agreement on the
final settlement documents or that the United States Federal District
Court may not approve the settlement in whole or in part, in which event
litigation could continue, and the Company could be liable for significant
judgment awards against the Company if a final judgment is rendered
against the Company. No provision has been made for any expenses that
might arise as a result of the class action lawsuit. The class action lawsuit against each of
Raymond Chien, Peter Yip,
Zhou Shun Ao, and David Kim has been dismissed. The management of the
Company considers the outcome of any judgment on the lawsuit with respect
to the Company to be quite uncertain and any expenditure from the lawsuit
is not estimable. Consequently, no provision has been made for any
expenses that may arise from the class action lawsuit. 24/7 Real Media, Inc. (24/7) In February 2003, 24/7 filed suit
against the Company in the Federal
District Court in New York to enforce obligations allegedly owed under the
Media Asia Agreement as mentioned in note 17(a). The Company contested
these allegations and, in May 2003, obtained an order staying the lawsuit
in New York and compelling arbitration of the claims at the International
Chamber of Commerce, or the ICC. In July 2003, the Company filed its own
request for arbitration with the ICC seeking damages in excess of
USD24,000 for the breach of the Media Asia Agreement. In October 2003,
24/7 filed an answer and counterclaim seeking USD2,600 being damages for,
among other things, services allegedly unpaid under the same agreement.
In December 2003, the Company filed a reply to answer and counterclaims
denying these allegations. The arbitration is at an early stage and the
arbitration panel is yet to be fully constituted. Based on the claims made by 24/7, the Company
has made certain
provisions for potential payables to 24/7 which in managements view is
sufficient based on their assessment of the case. Others In addition, the Company is a defendant in
various matters of
litigation generally arising out of the normal course of business.
Although it is difficult to predict the ultimate outcome of these cases,
management believes, based on discussions with the legal counsel, that any
ultimate liability would not materially affect the Companys financial
position, results of operations or cash flows. F-57




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  27.
    
    SEGMENTAL INFORMATION Description of Products and Services
by Segment The Company has three reportable segments:
software and consulting
services, mobile services and applications, and advertising and marketing
activities. The Companys software and consulting services segment mainly
represents the sale of software products, outsourcing of IT professionals,
systems integration, professional consulting, web site design, and the
provision of development and integration services. The Companys mobile
services and applications segment is primarily engaged in the provision of
mobile services and applications in the PRC. The Companys advertising
and marketing activities segment primarily includes database marketing,
online advertising sales and travel related publishing and exhibition
organizing activities. Measurement of Segment Profit or Loss
and Segment Assets The Company evaluates performance and
allocates resources based on
revenues and income/loss before income taxes. Revenues and income/loss
before income taxes for the three reportable segments are reported
separately for internal purposes, but selling, general and administrative
expenses, other operating expenses, net loss and assets and liabilities
are not reported separately for each segment because this information is
not produced internally. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Factors Management Used to Identify
the Enterprises Reportable Segments The Companys reportable segments are
business units that offer
different services. The reportable segments are each managed separately.
Revenue from segments in the other income category is mainly attributable
to publishing and event organizing services. No single component within
the revenue segments has ever met the quantitative thresholds for
determining reportable segments. (i) Segmental information by
business segment: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDSegment revenues:Software and consulting services
    
    
    16,643
    
    
    
    15,505
    
    
    
    50,699Mobile services and applications
    
    
    
    
    
    
    
    
    
    
    16,876Advertising and marketing activities
    
    
    18,087
    
    
    
    26,682
    
    
    
    19,558Other income
    
    
    4,507
    
    
    
    1,821
    
    
    
    2,299Total consolidated revenues
    
    
    39,237
    
    
    
    44,008
    
    
    
    89,432
 F-58




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  27.
    
    SEGMENTAL INFORMATION (continued) (i) Segmental information by
business segment (continued): Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDSegment income/(loss) before income taxes:Software and consulting services
    
    
    (39,921
    )
    
    
    (2,937
    )
    
    
    175Mobile services and applications
    
    
    
    
    
    
    
    
    
    
    10,098Advertising and marketing activities
    
    
    (24,420
    )
    
    
    (8,384
    )
    
    
    105Other income
    
    
    (10,674
    )
    
    
    (2,124
    )
    
    
    (1,371
    )Total segment income:
    
    
    (75,015
    )
    
    
    (13,445
    )
    
    
    9,007Reconciling item:Corporate
    
    
    (25,573
    )
    
    
    (7,357
    )
    
    
    (9,199
    )Total segment income before income taxes:
    
    
    (100,588
    )
    
    
    (20,802
    )
    
    
    (192
    )Reconciling items:Interest income
    
    
    26,689
    
    
    
    23,713
    
    
    
    13,440Interest expenses
    
    
    (1,272
    )
    
    
    (2,463
    )
    
    
    (1,070
    )Loss arising from share issuance of a
subsidiary
    
    
    (55
    )
    
    
    
    
    
    
    Gain/(loss) on disposal of available-for-sale
securities
    
    
    4,411
    
    
    
    (163
    )
    
    
    4,599Gain/(loss) on disposal of subsidiaries and
cost investments
    
    
    (1,915
    )
    
    
    (66
    )
    
    
    469Other non-operating gains
    
    
    
    
    
    
    508
    
    
    
    961Other non-operating losses
    
    
    (922
    )
    
    
    (288
    )
    
    
    (153
    )Impairment of cost investments and
available-for-sale securities
    
    
    (12,260
    )
    
    
    (5,351
    )
    
    
    Share of income/(losses) in equity
investees
    
    
    (2,592
    )
    
    
    682
    
    
    
    (115
    )Total consolidated income/(loss) before income
tax
    
    
    (88,504
    )
    
    
    (4,230
    )
    
    
    17,939Segment depreciation and amortization
expenses:Software and consulting services
    
    
    1,558
    
    
    
    1,182
    
    
    
    2,289Mobile services and applications
    
    
    
    
    
    
    
    
    
    
    1,056Advertising and marketing activities
    
    
    5,368
    
    
    
    5,873
    
    
    
    2,686Other income
    
    
    8,279
    
    
    
    1,732
    
    
    
    76815,205
    
    
    
    8,787
    
    
    
    6,799Corporate
    
    
    3,975
    
    
    
    1,095
    
    
    
    383Total consolidated depreciation and amortization
expenses
    
    
    19,180
    
    
    
    9,882
    
    
    
    7,182
 F-59




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  27.
    
    SEGMENTAL INFORMATION (continued) (i) Segmental information by
business segment (continued): December 31,
    
    December 31,2002
    
    2003USD
    
    USDSegment assets:Software and consulting services
    
    
    31,147
    
    
    
    108,330Mobile services and applications
    
    
    
    
    
    
    66,908Advertising and marketing activities
    
    
    39,123
    
    
    
    21,174Other income
    
    
    21,964
    
    
    
    10,42592,234
    
    
    
    206,837Corporate
    
    
    488,723
    
    
    
    339,217Total consolidated assets
    
    
    580,957
    
    
    
    546,054
 (ii) Segmental information by
geographical segment: Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDSegment revenues:Australia
    
    
    1,711
    
    
    
    3,003
    
    
    
    26,818Greater China
    
    
    10,218
    
    
    
    9,102
    
    
    
    25,334North Asia
    
    
    10,090
    
    
    
    19,622
    
    
    
    12,364South Asia
    
    
    8,775
    
    
    
    5,468
    
    
    
    5,867Europe
    
    
    2,911
    
    
    
    1,750
    
    
    
    10,149North America
    
    
    5,532
    
    
    
    5,063
    
    
    
    8,900Total consolidated revenues
    
    
    39,237
    
    
    
    44,008
    
    
    
    89,432
 Revenues are attributed to countries
based on the location of customers. F-60




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and
per share data)  27.
    
    SEGMENTAL INFORMATION (continued) (ii)
Segmental information by geographical
segment (continued): Year ended
    
    Year ended
    
    Year endedDecember 31,
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003USD
    
    USD
    
    USDSegment income/(loss) before income taxes:Australia
    
    
    (1,173
    )
    
    
    (327
    )
    
    
    1,409Greater China
    
    
    (92,988
    )
    
    
    (17,726
    )
    
    
    (761
    )North Asia
    
    
    (514
    )
    
    
    (464
    )
    
    
    (117
    )South Asia
    
    
    (1,119
    )
    
    
    (855
    )
    
    
    (468
    )Europe
    
    
    (1,000
    )
    
    
    (487
    )
    
    
    165North America
    
    
    (3,794
    )
    
    
    (943
    )
    
    
    (420
    )Total segment income before income taxes
    
    
    (100,588
    )
    
    

    (20,802
    )
    
    
    (192
    )Reconciling items:Interest income
    
    
    26,689
    
    
    
    23,713
    
    
    
    13,440Interest expenses
    
    
    (1,272
    )
    
    
    (2,463
    )
    
    
    (1,070
    )Loss arising from share issuance of a
subsidiary
    
    
    (55
    )
    
    
    
    
    
    
    Gain/(loss) on disposal of available-for-sale
securities
    
    
    4,411
    
    
    
    (163
    )
    
    
    4,599Gain/(loss) on disposal of subsidiaries and
cost investments
    
    
    (1,915
    )
    
    
    (66
    )
    
    
    469Other non-operating gains
    
    
    
    
    
    
    508
    
    
    
    961Other non-operating losses
    
    
    (922
    )
    
    
    (288
    )
    
    
    (153
    )Impairment of cost investments and
available-for-sale securities
    
    
    (12,260
    )
    
    
    (5,351
    )
    
    
    Share of income/(losses) in equity
investees
    
    
    (2,592
    )
    
    
    682
    
    
    
    (115
    )Total consolidated income/(loss) before income
tax
    
    
    (88,504
    )
    
    
    (4,230
    )
    
    
    17,939
 December 31,
    
    December 31,2002
    
    2003USD
    
    USDSegment long-lived assets:Australia
    
    
    339
    
    
    
    1,223Greater China
    
    
    5,140
    
    
    
    1,486North Asia
    
    
    235
    
    
    
    49South Asia
    
    
    789
    
    
    
    152Europe
    
    
    2,738
    
    
    
    2,823North America
    
    
    134
    
    
    
    1,477Total consolidated long-lived assets
    
    
    9,375
    
    
    
    7,210
 F-61




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  28.
    
    SUBSEQUENT EVENTS Pursuant to a definitive agreement entered
into on September 4, 2003,
as amended (the Ross Agreement), between Ross Systems Inc. (Ross)
(NASDAQ: ROSS), the Company and a subsidiary of the Company, the Company
proposes to acquire Ross for a total consideration of approximately
USD68,115. Under the Ross Agreement, stockholders of Ross have the option
to receive either:  -
    
    USD17.00 in cash, or-
    
    USD19.00 in a combination of cash and the Companys common shares for each share of Rosss common
stock. As a result of the amended merger agreement,
at the closing of the
merger, Rosss stockholders will receive, for each share of Rosss common
stock, USD5.00 in cash and a number of the Companys common shares equal
to USD14.00 divided by the average closing price of the
Companys common shares for the 10 trading days
preceding the second trading day before the
closing date. Moreover, if the average price of the Companys
common shares is below USD8.50 per share, the
amended merger agreement permits
the Company to elect to increase the amount of cash that Rosss common
stockholders will receive. In such case, Rosss common stockholders still
would receive USD19.00 in a combination of cash and the Companys common
 shares for each share of Rosss
common stock, but would receive more than
USD5.00 in cash per share and less than USD14.00 worth of the Companys
shares for each Rosss common
shares. On December 8, 2003, the Company signed
a definitive agreement to
acquire 100% of the outstanding shares of Pivotal Corporation (Pivotal)
(NASDAQ: PVTL and TSX: PVT) by way of either an all-cash or a
cash-and-share transaction. Subsequent to the balance sheet date, on
February 25, 2004, the acquisition of Pivotal was completed for a total
consideration of approximately USD60,000, which comprised (i) cash of
USD35,925, (ii) 1,846,429 of the Companys Class A common shares, which
would result in an approximate 2% increase in the Companys common shares
outstanding, (iii) the assumption of Pivotal stock options of USD481, and
(iv) estimated transaction costs of approximately USD550. The Company is
in the process of assessing the allocation of the purchase price for
Pivotal. In February 2004, CDC Mobile entered
into a Senior Secured
Convertible Loan Agreement with Equity Pacific Limited (EPL), whereby
CDC Mobile agreed to make available to EPL a loan, which is convertible
into shares of EPL up to USD3,200. The loan shall be secured by the
pledge to CDC Mobile of over 50% of all the shares of each of EPL and
Beijing 17 game Network Technology Co. Ltd. In addition, CDC Mobile
entered into an Option Agreement with the ultimate beneficiary owners of
EPL, whereby CDC Mobile was granted a call option to progressively acquire
some or all of the shares of EPL, and the ultimate beneficiary owners of
EPL were also granted an option to sell to CDC Mobile the shares of EPL,
subject to the terms and conditions of the Option Agreement. F-62




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##### Table of Contents



chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares, number of options and per share data)  28.
    
    SUBSEQUENT EVENTS (continued) In February 2004, CDC International
Mobile Limited, a wholly-owned
subsidiary of CDC Mobile, signed an agreement to acquire a 100% interest
in Group Team Investments Limited (GTI), a company incorporated in the
British Virgin Islands, subject to customary closing conditions. Pursuant
to the corresponding sales and purchase agreement, the total purchase
price is subject to certain earnout provisions, whereby a portion of the
purchase price is based on the future earnings of GTI and certain
entities, which are beneficially owned by GTI and are engaged in the
provision of valued-added mobile services to mobile phone subscribers in
Mainland China, for the years ending 31 December 2004 and 2005, and is
subject to a maximum limit of USD60,000. In connection with the acquisition, the
Company made an initial
payment of USD9,600 in April 2004, with remaining consideration, not to
exceed USD50,400 to be paid in two instalments in early 2005 and 2006. F-63




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##### Table of Contents



INDEX TO EXHIBITS No.
    
    Description1.1
    
    Conformed copy of the Amended and Restated Memorandum of
Association.*******1.2
    
    Conformed copy of the Amended and Restated Articles of Association.*******2(a).1
    
    1999 Employee Stock Option Plan, as amended.*2(a).2
    
    2000 Employee Share Purchase Plan.**2(a).3
    
    2001 Employee Share Purchase Plan.*****4.(a).1
    
    Amended and Restated Support Services Agreement dated April 1, 2000 by
and between China Internet Corporation Limited and chinadotcom
corporation.****4.(a).2
    
    Agreement dated March 12, 2001 by and between China Internet Corporation
Limited and chinadotcom corporation. ****4.(a).3
    
    Agreement dated March 13, 2001 by and between China Internet Corporation
Limited and chinadotcom corporation. ****4.(a).4
    
    Guarantee Agreement dated April 4, 2001 by chinadotcom corporation in
favor of hongkong.com Limited. ****4.(a).5
    
    Asset Purchase Agreement dated October 24, 2001 between China Internet
Corporation Limited and chinadotcom Strategic, Inc.******4.(a).6
    
    Share Purchase Agreement by and among CDC Australia Limited, Praxa
Limited, Mantech International Corporation and Mantech Australia
International Inc. dated December 31, 2002. yyyy4.(a).7
    
    Share Purchase Agreement by and between CDC Mobile Media Corporation,
hongkong.com Corporation and Palmweb Inc., dated March 14, 2003.++++++4.(a).8
    
    Agreement and Plan of Merger among chinadotcom corporation, CDC Software
Holdings, Inc. and Ross Systems, Inc., dated as of September 4, 2003. +++4.(a).9
    
    Transition and Stock Vesting Agreement among chinadotcom corporation, CDC
Software Holdings, Inc., Ross Systems, Inc. and J. Patrick Tinley dated
as of September 4, 2003. +++4.(a).10
    
    Transition and Stock Vesting Agreement among chinadotcom corporation, CDC
Software Holdings, Inc., Ross Systems, Inc. and Robert B. Webster dated
as of September 4, 2003. +++4.(a).11
    
    Series B Preferred Share Purchase Agreement by and between Cayman First
Tier and chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).12
    
    Shareholders Agreement by and among Cayman First Tier, Symphony
Technology II-A, L.P. and chinadotcom Capital Limited, dated September 8,
2003.++++




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##### Table of Contents

a).

No.
    
    Description4.(a).13
    
    Voting Agreement by and among Cayman First Tier, Symphony Technology
II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).14
    
    Put Option Agreement by and among Cayman First Tier, Symphony Technology
II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).15
    
    Amended and Restated Memorandum and Articles of Association of Cayman
First Tier, adopted of September 4, 2003.++++4.(a).16
    
    Executive Committee Charter of Cayman First Tier, adopted September 4,
2003. ++++4.(a).17
    
    Revolving Credit Agreement by and between Cayman First Tier and
chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).18
    
    Revolving Credit Agreement by and between Symphony Enterprise Solutions,
S.ar.l and and chinadotcom Capital Limited, dated September 8, 2003. ++++4.(a).19
    
    Amendment to Agreement and Plan of Merger signed between chinadotcom
corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated
October 3, 2003. +++++4.(a).20
    
    Guaranty dated as of September 8, 2003 from chinadotcom corporation. +++++4.(a).21
    
    Amended and Restated Memorandum and Articles of Association of Cayman
First Tier adopted November 14,
2003.y4.(a).22
    
    Amended and Restated Executive Committee Charter of Cayman First Tier
adopted November 14, 2003.y4.(a).23
    
    Second Amendment to the Agreement and Plan of Merger among chinadotcom
corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated
January 7, 2004.yy4.(a).24
    
    Arrangement Agreement by and among Pivotal Corporation, chinadotcom
corporation, a Cayman Islands corporation and CDC Software Corporation,
dated December 6,
2003.yy4.(a).25
    
    Notice of Extraordinary General Meeting to be held on February 23, 2004
and Management Information Circular and Notice of Hearing of Petition for
Arrangement under the British Columbia Company Act relating to a proposed
arrangement involving Pivotal Corporation and Its Common Shareholders and
Its Optionholders and CDC Software Corporation, dated
January 20, 2004.yy4.(a).26
    
    Amended and Restated Arrangement Agreement by and among Pivotal
Corporation, chinadotcom corporation, a Cayman Islands corporation and
CDC Software Corporation, dated January 19, 2004.yy4.(a).27
    
    Third Amendment to the Agreement and Plan of Merger among chinadotcom
corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated
April 29, 2004.+++++++4.(a).28
    
    Amendment to Share Purchase Agreement by and among CDC Australia
Limited, Praxa Limited, Mantech International Corporation and Mantech
Australia International Inc. dated February 10, 2003. yyyy4,(a).29
    
    Amendment to Preferred Stockholder
Agreement by and among chinadotcom corporation, Ross Systems, Inc.
and Benjamin W. Griffith, III dated January 31, 2004.+++++++4.(b).1
    
    Cooperation Agreement on Short Message Services between China Unicom,
Sichuan, and Beijing Newpalm Information Technology Co. Ltd.yyy




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##### Table of Contents



No.
    
    Description4.(b).2
    
    Monternet SMS Cooperation Agreement.yyy4.(c)1
    
    Executive Services Agreement dated April 27, 2001, by and between
chinadotcom corporation and Raymond Chien. ****4.(c)2
    
    Executive Services Agreement effective as of January 1, 2002, by and
between chinadotcom corporation and Asia Pacific Online Limited.******6.
    
    Details of how EPS information is calculated can be found in Note 4(o) to
our Consolidated Financial Statements.yyyy8.
    
    List of principal subsidiaries of the Company.yyyy12.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a)12.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a)13.(a).1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002yyyy13.(a).2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002yyyy
   *
    
    Incorporated by reference to our registration statement on Form S-8 (File
No.: 333-12966) filed with the Commission on December 7, 2000.**
    
    Incorporated by reference to our registration statement on Form S-8 (File
No.: 333-12958) filed with the Commission on December 7, 2000.***
    
    Incorporated by reference to our registration statement on Form F-3 (File
No. 333-12674) filed with the Commission on October 3, 2000.****
    
    Incorporated by reference to our annual report on Form 20-F (File No.
000-30134) filed with the Commission on May 10, 2001.*****
    
    Incorporated by reference to our current report on Form 6-K (File No.
000-30134) filed with the Commission on February 28, 2002.******
    
    Incorporated by reference to our annual report of Form 20-F (File No.
000-30134) filed with the Commission on June 11, 2002.*******
    
    Incorporated by reference to our current report on Form 6-K (File No.
000-30134) filed with the Commission on September 18, 2002.+
    
    Incorporated by reference to our annual report on Form 20-F (File
No. 000-30134) filed with the Commission on June 16, 2003.++
    
    Incorporated by reference to our current report on Form 6-K (File
No. 000-30134) filed with the Commission on June 16, 2003.+++
    
    Incorporated by reference to our current report on Form 6-K (File
No. 000-30134) filed with the Commission on September 5, 2003.++++
    
    Incorporated by reference to our current report on Form 6-K (File
No. 000-30134) filed with the Commission on September 15, 2003.+++++
    
    Incorporated by reference to our registration statement on Form F-4
(File No. 333-109493) filed with the Commission on October 6, 2003.+++++
    
    Incorporated by reference to our registration statement on Form F-4
(File No. 333-109493) filed with the Commission on October 6, 2003.++++++
    
    Incorporated by reference to Amendment No. 2 to our registration
statement on Form F-4 (File No. 333-109493) filed with the
Commission on January 21, 2004.+++++++
    
    Incorporated by reference to Amendment No. 4 to our registration
statement on Form F-4 (File No. 333-109493) filed with the
Commission on May 7, 2004.




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##### Table of Contents



y
    
    Incorporated by reference to our current report on Form 6-K (File
No. 000-30134) filed with the Commission on December 11, 2003.yy
    
    Incorporated by reference to our current report on Form 6-K (File
No000-30134) filed with the Commission on January 8, 2004.yyy
    
    Incorporated by reference to our registration statement on Form
F-4/A (File No. 333-109493) filed with the Commission on January 21,
2004.yyyy
    
    Incorporated by reference to our annual report on
Form 20-F (File No. 000-30134) filed with the Commission on
May 7, 2004.