EXHIBIT 10.2
GLOBAL SOURCES LTD. AND SUBSIDIARIES
Index to Consolidated Financial Statements
December 31, 2001
Page
Report of Independent Public Accountants .............................. 1
Consolidated Balance Sheets............................................ 2
Consolidated Statements of Income...................................... 3
Consolidated Statements of Cash Flows.................................. 4
Consolidated Statement of Shareholders' Equity......................... 5
Notes to Consolidated Financial Statements............................. 6 - 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Global Sources Ltd.
We have audited the accompanying consolidated balance sheets of Global Sources
Ltd. (a company incorporated under the laws of Bermuda) and its subsidiaries as
of December 31, 2001 and 2000, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2001. 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 conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Global
Sources Ltd. and its subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ ARTHUR ANDERSEN
Singapore
February 28, 2002
Page 1
GLOBAL SOURCES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
At At
December 31 December 31
----------- -----------
2000 2001
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ........................................ $ 12,727 $ 20,236
Accounts receivable, net ......................................... 7,803 5,710
Receivables from sales representatives ........................... 556 709
Receivables from related party sales representatives ............. 3,438 2,900
Inventory of paper ............................................... 1,213 856
Prepaid expenses and other current assets ........................ 1,768 1,122
-------- --------
Total Current Assets ....................................... 27,505 31,533
-------- --------
Property and equipment, net ......................................... 23,205 19,058
Intangible assets, net .............................................. 373 3
Long term investments ............................................... 1,250 100
Bonds held to maturity, at amortized cost ........................... 2,027 1,709
Other assets ........................................................ 1,346 1,199
-------- --------
Total Assets ............................................... $ 55,706 $ 53,602
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................. $ 5,536 $ 3,625
Deferred income and customer prepayments ......................... 15,888 17,122
Accrued liabilities .............................................. 5,879 5,127
Short-term loan .................................................. 4,000 --
Income taxes payable ............................................. 158 164
-------- --------
Total Current Liabilities .................................. 31,461 26,038
-------- --------
Liabilities for incentive and bonus
plans ........................................................... 1,794 1,434
Amount due to parent company ..................................... 11,404 11,404
Minority interest ................................................ 2,432 2,515
Deferred tax liability ........................................... 454 610
-------- --------
Total Liabilities .......................................... 47,545 42,001
-------- --------
Shareholder's equity:
Ordinary shares, US$0.01 par value; 50,000,000 shares authorized;
26,303,949 (2000: 26,303,949) shares issued and outstanding 263 263
Additional paid in capital ....................................... 75,726 80,196
Retained earnings/(deficit) ...................................... (62,762) (61,987)
Less : Unearned compensation ..................................... (5,066) (6,871)
-------- --------
Total shareholders' equity ................................. 8,161 11,601
-------- --------
Total liabilities and shareholders' equity ................. $ 55,706 $ 53,602
======== ========
The accompanying notes are an integral part of these financial statements.
Page 2
GLOBAL SOURCES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
Year Ended December 31,
----------------------------------------------------
1999 2000 2001
------------ ------------ ------------
Revenues:
Online marketplace services ................................... $ 25,463 $ 55,121 $ 55,468
Transaction software and services ............................. 584 733 305
Complementary media services .................................. 60,846 42,602 34,964
Other ......................................................... 3,379 4,597 4,548
------------ ------------ ------------
90,272 103,053 95,285
Operating Expenses:
Sales ....................................................... 29,481 34,436 32,047
Circulation ................................................. 13,069 13,337 11,757
General and administrative .................................. 32,134 36,197 33,726
Online services development ................................. 3,461 6,665 8,393
Non-cash compensation expense (Note a) ...................... -- 65,689 2,501
Non-cash listing expenses ................................... -- 1,353 --
Amortization of intangibles/Software development cost ....... 371 1,018 3,476
------------ ------------ ------------
Total Operating Expenses ........................................ 78,516 158,695 91,900
------------ ------------ ------------
Income/(Loss) from Operations ................................... 11,756 (55,642) 3,385
------------ ------------ ------------
Interest expense ............................................ (337) (649) (172)
Interest income ............................................. 558 1,135 357
Foreign exchange gains (losses), net ....................... 427 50 (470)
Write-down of investments ................................... -- (11,750) (1,150)
------------ ------------ ------------
Income/(Loss) before Income Taxes ............................... 12,404 (66,856) 1,950
Income Tax Provision ............................................ (1,435) (1,277) (1,143)
------------ ------------ ------------
Income/(Loss) before minority interest .......................... $ 10,969 $ (68,133) $ 807
------------ ------------ ------------
Equity in (loss)/income of affiliate ............................ -- (51) 51
Minority interest ............................................... -- (37) (83)
------------ ------------ ------------
Net Income/(Loss) ............................................... $ 10,969 $ (68,221) $ 775
============ ============ ============
Basic and diluted net income/(loss) per share ................... $ 0.44 $ (2.63) $ 0.03
============ ============ ============
Shares used in basic and diluted net income /(loss) per share
calculations (Note 14) ........................................ 25,051,380 25,948,028 26,303,949
============ ============ ============
Note : a. Reflects the non-cash compensation expenses associated with the
transfer of shares from the parent company to the chairman and chief
executive officer of the Company and the employee equity
compensation plans. Approximately $381 (2000: $291) represents sales
expenses, $87 (2000: $168) represents circulation, $1,546 (2000:
$65,044) represents general and administrative and $487 (2000: $186)
represents online services development expenses.
The accompanying notes are an integral part of these financial statements.
Page 3
GLOBAL SOURCES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars Thousands)
Year Ended December 31,
----------------------------------------
1999 2000 2001
-------- -------- --------
Cash flows from operating activities:
Net income/(Loss) ............................................... $ 10,969 $(68,221) $ 775
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization ................................... 2,441 4,069 8,934
Loss/(Profit) on sale of property and equipment ................. 19 (23) 34
Accretion of U.S. Treasury strips zero % coupon ................. (170) (139) (122)
Bad debt expense ................................................ 1,123 1,188 765
Expenses allocated by Parent Company ............................ 640 -- --
Non-cash compensation expense ................................... -- 65,689 2,501
Non-cash listing expenses ....................................... -- 1,353 --
Income attributable to minority shareholder ..................... -- 37 83
Write-down of investments ....................................... -- 11,750 1,150
Equity in loss/(income) of affiliate ............................ -- 51 (51)
Property and equipment written off .............................. -- 12 108
-------- -------- --------
15,022 15,766 14,177
Changes in assets and liabilities:
Accounts receivables ............................................ (407) (1,865) 1,328
Receivables from sales representatives .......................... (11) 1,527 (153)
Receivables from related party sales representatives ............ 2,090 651 538
Inventory of paper .............................................. 200 (630) 357
Prepaid expenses and other current assets ....................... 1,611 1,459 646
Loan to chief executive officer ................................. -- (5,350) --
Repayment of loan from chief executive officer .................. -- 5,350 --
Long term assets ................................................ 308 (123) 147
Accounts payable ................................................ (1,157) 2,067 (1,911)
Accrued liabilities and liabilities for incentive and bonus plans 77 (2,987) (1,061)
Deferred income and customer prepayments ........................ 3,447 750 1,234
Amount due to Parent Company .................................... (6,268) -- --
Tax liability ................................................... 227 298 162
-------- -------- --------
Net cash provided by operating activities .................. 15,139 16,913 15,464
-------- -------- --------
Cash flows from investing activities:
Purchase of bonds ............................................... (93) -- --
Purchase of long term investments ............................... -- (13,000) --
Purchase of property and equipment .............................. (8,318) (17,128) (4,874)
Proceeds from sales of property and equipment ................... 39 25 315
Proceeds from matured bonds ..................................... 460 460 440
Capital contributed by minority shareholder in a joint venture ... -- 6,000 --
-------- -------- --------
Net cash used for investing activities ..................... (7,912) (23,643) (4,119)
-------- -------- --------
Cash flows from financing activities:
Short-term borrowings ........................................... -- 13,260 --
Repayment of short-term borrowings .............................. -- (9,260) (4,000)
Dividends paid .................................................. (14,945) -- --
Advances from shareholders ...................................... 7,438 -- --
Amount received towards directors stock option plan ............. -- -- 164
Additional capital contributed .................................. -- 24 --
-------- -------- --------
Net cash (used for) generated from financing activities .... (7,507) 4,024 (3,836)
-------- -------- --------
Net (decrease)/increase in cash and cash equivalents ................ (280) (2,706) 7,509
Cash and cash equivalents, beginning of the year .................... 15,713 15,433 12,727
-------- -------- --------
Cash and cash equivalents, end of the year .......................... $ 15,433 $ 12,727 $ 20,236
======== ======== ========
Supplemental cash flow disclosures:
Income tax paid ................................................. $ 1,208 $ 979 $ 981
Interest paid ................................................... 337 639 172
======== ======== ========
The accompanying notes are an integral part of these financial statements.
Page 4
GLOBAL SOURCES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In U.S. Dollars Thousands, Except Number of Shares)
Ordinary Shares
--------------------
Additional Total
Number of paid in Retained Unearned Shareholders'
Shares Amounts Capital Earnings Compensation Equity
------ ------- ------- -------- ------------ ------
Balance at December 31, 1998 .......... 25,051,380 $ 251 -- $ 9,435 -- $ 9,686
Net income ............................ -- -- -- 10,969 -- $ 10,969
Dividends ............................. -- -- -- (14,945) -- $(14,945)
---------- -------- -------- -------- ------- --------
Balance at December 31, 1999 .......... 25,051,380 $ 251 -- $ 5,459 -- $ 5,710
Net income ............................ -- -- -- (68,221) -- $(68,221)
Issuance of shares upon share exchange 1,252,569 $ 12 $ 12 -- -- $ 24
Non-cash compensation expenses ........ -- -- 70,755 -- -- $ 70,755
Unearned compensation ................. -- -- -- -- (5,066) $ (5,066)
Non-cash listing expenses ............. -- -- 1,353 -- -- $ 1,353
Interest in Joint Venture ............. -- -- $ 3,606 -- -- $ 3,606
---------- -------- -------- -------- ------- --------
Balance at December 31, 2000 .......... 26,303,949 $ 263 $ 75,726 $(62,762) $(5,066) $ 8,161
Net income ............................ -- -- -- 775 -- $ 775
Non-cash compensation expenses ........ -- -- 4,306 -- -- $ 4,306
Unearned compensation ................. -- -- -- -- (1,805) $ (1,805)
Amount received towards directors -
stock option plan ................... -- -- 164 -- -- $ 164
---------- -------- -------- -------- ------- --------
Balance at December 31, 2001 .......... 26,303,949 $ 263 $ 80,196 $(61,987) $(6,871) $ 11,601
=========== ======== ======== ======== ======= ========
The accompanying notes are an integral part of
these consolidated financial statements.
Page 5
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
1. The Company
Global Sources Ltd. (the "Company") was incorporated in November 1999
under the laws of Bermuda. The Company is majority owned by Hung Lay Si Co
Ltd. (the "Parent Company"). The Parent Company is a company organized
under the laws of the Cayman Islands. It is wholly owned by the Quan Gung
1986 Trust, a trust formed under the laws of the Island of Jersey. Hill
Street Trustees Ltd. is the trustee of the trust (the "Trustee") and the
Trustee has sole and exclusive voting investment and dispositive power
over the shares of capital stock of the Parent Company owned by the Trust.
The Company's principal business is to provide services that allow global
buyers to identify suppliers and products, and enable suppliers to market
their products to a large number of buyers. The Company's primary online
service is creating and hosting Marketing Websites that present suppliers'
product and company information in a consistent, easily searchable manner
on Global Sources Online. The Company also offers electronic cataloguing
services for buyers and suppliers. Private Buyer Catalogs enable buyers to
maintain customized information on suppliers. Private Supplier Catalogs
are password-protected online environments where suppliers can develop and
maintain their own product and company data. Complementing these services
are various trade magazines and CD-ROMs. The Company's businesses are
conducted primarily through Trade Media Ltd., its wholly owned subsidiary,
which was incorporated in October 1984 under the laws of Cayman Islands.
Through certain other wholly owned subsidiaries, the Company also
organizes conferences and exhibitions on technology related issues and
licenses Asian Sources / Global Sources Online and catalog services.
2. Summary of Significant Accounting Policies
(a) Basis of Consolidation and Presentation
(i) The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States of America and comprise the accounts of the Company,
its majority owned subsidiaries and those owned through nominee
shareholders. All significant intercompany transactions and balances
have been eliminated on consolidation.
(ii) The results of subsidiaries acquired or disposed of during the year
are included in the consolidated statement of income from the
effective dates of acquisition or up to the effective dates of
disposal.
(iii) The functional currency of the Company and certain subsidiaries is
the United States dollar. The functional currencies of other
subsidiaries are their respective local currencies. United States
dollars are used as the reporting currency as the Company's
operations are global.
Page 6
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
(b) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
(c) Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(d) Inventory of Paper
Inventory of paper is stated at the lower of cost or net realizable value.
Cost is determined on the first-in, first-out basis.
(e) Property and Equipment
(i) Property and equipment are stated at cost less accumulated
depreciation. Cost represents the purchase price of the asset and
other costs incurred to bring the asset into its existing use.
(ii) Depreciation on property and equipment is calculated to amortize
their cost on a straight line basis over their estimated useful
lives as follows:
Fixtures, fittings and office equipment .................. 5 years
Leasehold improvements ................................... 5 years
Motor vehicles ........................................... 5 years
Computer equipment and software .......................... 3 years
(iii) Effective January 1, 1999, the Company adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Costs incurred in the preliminary
project stage with respect to the development of software for
internal use are expensed as incurred; costs incurred during the
application development stage are capitalized and are amortized over
the estimated useful life of three years upon the commissioning of
service of the software. Training and maintenance costs will be
expensed as incurred.
(f) Intangible Assets
Copyrights are carried at cost less accumulated amortization. Copyrights
are amortized on a straight line basis over a period of ten years.
Goodwill, which represents the excess of the cost of purchased businesses
over the fair value of their net assets at dates of acquisition, is
amortized on a straight-line basis over twenty years.
Page 7
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
(g) Investments
Long term investments for business and strategic purposes in
privately-held companies where such investments are less than 20% of the
equity capital of the investees, with no significant influence over the
investees, are stated at cost.
Long term investments in companies where such investments are in the range
of 20% to 50% of the equity capital of the investees and over whom the
Company exercises significant influence, are accounted under the equity
method.
Interest in subsidiaries with more than 50% ownership are consolidated and
the ownership interests of minority investors are recorded as minority
interest.
Long term investments in U.S. Treasury strips zero % coupon, held to
maturity are stated at amortized cost.
(h) Impairment of Long-lived Assets
The Company reviews the carrying value of its long-lived assets based upon
a gross cash flow basis and will reserve for impairment whenever events or
changes in circumstances indicate the carrying amount of the assets may
not be fully recoverable. The impairment loss is measured based on the
difference between the carrying amount of the asset and its fair value.
There was no impairment of the Company's property and equipment or
intangibles as of December 31, 2001.
(i) Revenue Recognition
The Company derives its revenues from advertising fees in its published
trade magazines and Web sites, sales of trade magazines, fees from
licensing its trade and service marks, service fees from the provision of
software maintenance service, and organizing business seminars.
Revenues from advertising in trade magazines and Web sites are recognized
ratably in the period in which the advertisement is displayed. Advertising
contracts do not exceed one year. Revenue from sales of trade magazines is
recognized upon delivery of the magazine. Magazine subscriptions received
in advance are deferred and recognized as revenue upon delivery of the
magazine. Revenue from the provision of maintenance service is deferred
and recognized ratably over the maintenance service period. Revenue from
organizing business seminars is recognized at the conclusion of the
seminar.
The Company receives license fees and royalties from licensing its trade
and service marks. Revenue from license fees is recognized ratably over
the term of the license, currently four to five years. Royalties from
license arrangements are earned ratably in the period in which the
advertisement is displayed by the licensee.
The interest income from investments in U.S. Treasury strips zero %
coupons is recognized as it accrues, taking into account the effective
yield on the asset.
Page 8
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
(j) Transactions with Sales Representatives and Related Party Sales
Representatives
The Company utilizes sales representatives and related party sales
representatives in various territories to promote the Company's products
and services. Under these arrangements, these sales representatives are
entitled to commissions as well as marketing fees. Commissions expense is
recorded when owed to these sales representative and is included in sales
expenses.
These sales representatives, which are mainly corporate entities, handle
collections from clients on behalf of the Company. Included in receivables
from these sales representatives are amounts collected on behalf of the
Company as well as cash advances made to these sales representatives.
The Company nominated a director to the Board of Directors of eight of
these sales representative companies. The nominated directors are
employees of the Company. The Company and the nominated directors do not
have any interest in the share capital of these related party sales
representative companies. Approximately $16,056, $20,315, and $20,172 of
commissions and marketing fees expense was associated with these related
party sales representative companies for 1999, 2000, and 2001,
respectively.
(k) Advertising Expenses
Advertising expenses are expensed as incurred.
(l) Operating Leases
The Company leases certain office facilities under cancelable operating
leases that expire in two to five years. Rentals under operating leases
are expensed on a straight line basis over the life of the leases.
(m) Liabilities for Bonus Plan
Before the commencement of the Equity Compensation Plans as described in
note 23, the Company rewarded its senior management staff based on their
performance through long term discretionary bonus awards. These awards
were payable in cash generally at the end of five or ten years from the
date of the award, even in the event of termination of employment unless
certain non-compete provisions had been violated. These awards were
expensed in the period to which the performance bonus relates.
(n) Retirement Benefits
The Company operates a number of defined contribution retirement benefit
plans. Contributions are based on a percentage of each eligible employee's
salary and are expensed as the related salaries are incurred.
Page 9
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
(o) Income Taxes
The Company accounts for deferred income taxes using the liability method,
under which the expected future tax consequences of temporary differences
between the financial reporting and tax basis of its assets and
liabilities are recognized as deferred tax assets and liabilities. A
valuation allowance is established for any deferred tax asset when it is
more likely than not that the deferred tax asset will not be recovered.
(p) Minority Interest
In 2000 the Company entered into an agreement with CMP Media Inc., through
United Business Media B.V., a subsidiary of United News and Media plc.
(CMP) to set-up a corporation (eMedia Asia Ltd.) to provide new technology
content, media and e-commerce services to the electronics technology
market in Asia. The Company holds a 60.1% controlling equity interest in
the eMedia Asia Ltd. and consolidates the results of operations. As part
of obtaining its 39.9% interest, CMP has committed to pay $6,000 and
interest thereon to the Company upon the payment of specified future
dividends of eMedia Asia Ltd. Due to the contingent nature of the payment,
the Company did not record in its balance sheet the promissory note
receivable of $6,000 due from CMP and no interest income was accrued as at
December 31, 2001. The minority interest liability of $2,515 at December
31, 2001 reflects CMP's proportionate interest of the net book value in
the eMedia Asia Ltd.
(q) Foreign Currencies
Transactions in currencies other than the functional currency are measured
and recorded in the functional currency using the exchange rate in effect
on the date of the transaction. As of the balance sheet date, monetary
assets and liabilities that are denominated in currencies other than the
functional currency are remeasured using the exchange rate at the balance
sheet date. All gains and losses arising from foreign currency
transactions and remeasurement of foreign currency denominated accounts
are included in the determination of net income in the year in which they
occur.
The financial statements of the subsidiaries reporting in their respective
local currencies are translated into U.S. dollars for consolidation as
follows: assets and liabilities at the exchange rate as of the balance
sheet date, shareholders' equity at the historical rates of exchange, and
income and expenses amounts at the average monthly exchange rate for the
year. The cumulative translation differences were not material as of
December 31, 2000 and 2001.
(r) Segment Reporting
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131")
requires that companies report separately, in the financial statements,
certain financial and descriptive information about operating segment
profit or loss, certain specific revenue and expense items, and segment
assets. Additionally, companies are required to report information about
the revenues derived from their products and services groups, about
geographic areas in which the Company earns revenues and holds assets, and
about major customers.
Page 10
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
The Company identifies its operating segments based on business
activities, management responsibility and geographic location. The Company
has three reportable segments: online marketplace services, transaction
software and services, and complementary media services.
(s) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances
excluding transactions resulting from investment by owners and
distribution to owners. For each of the years ended December 31, 1999,
2000 and 2001, the Company had no material comprehensive income items.
(t) Basic and Diluted Net Income Per Share
Basic net income per share is computed by dividing net income by the
weighted average number of shares of ordinary shares outstanding during
the period, as restated as discussed in note 14. Diluted net income per
share is calculated using the weighted average number of outstanding
ordinary shares, as restated as discussed in note 14, plus other dilutive
potential ordinary shares. For all periods presented, the Company did not
have any dilutive securities; therefore, both the basic and diluted net
income per share computations resulted in the same amounts.
(u) Stock Based Compensation
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company accounts for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees" and related interpretations. Accordingly,
compensation cost of stock options is measured as the excess, if any, of
the fair value of the Company's stock at the date of the grant over the
option exercise price and is charged to operations over the vesting
period.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No.123 and Emerging Issues Task
Force (EITF) Issue No. 96-18, "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods and Services." All transactions in which services are
received for the issuance of equity instruments are accounted for based on
the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The
measurement date of the fair value of the equity instrument issued is the
earlier of the date on which the counterparty's performance is complete or
the date on which it is probable that performance will occur.
Page 11
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
(v) Recent Accounting Pronouncements
As of December 31, 2001, the Company adopted the Emerging Issues Task
Force Issue No. 00-14, "Accounting for Certain Sales Incentives" (EITF
00-14). EITF 00-14 stipulates that the reduction in the selling price of
the product or service resulting from any cash sales incentive should be
classified as a reduction of revenue. The adoption of this EITF resulted
in the Company reclassifying certain sales incentives from a sales expense
to a reduction of revenue for all periods presented. This reclassification
represented less than 3% of revenues for each period presented and did not
impact net income.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statements of Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137
and SFAS No. 138. This statement, as amended, was effective January 1,
2001, and established accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. The adoption of SFAS No. 133, as
amended, did not impact the Company's financial position or results of
operations.
In June, 2001, FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS No. 142
apply immediately to goodwill and intangible assets acquired after June
30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt SFAS No. 142 effective
January 1, 2002. As goodwill was fully amortized and no acquisitions
occurred during 2001, management believes that the adoption of these
standards will not have a material impact on the Company's financial
statement of position, results of operations, or cash flows.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The purpose of this
statement is to develop consistent accounting for asset retirement
obligations and related costs in the financial statements and provide more
information about future cash outflows, leverage and liquidity regarding
retirement obligations and the gross investment in long-lived assets. The
Company will be required to implement SFAS No. 143 on January 1, 2003 and
believes that the adoption of this standard will not have a material
impact on the Company's financial statement of position, results of
operations, or cash flows.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets, superseding SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
statement also supersedes the accounting and reporting provisions of APB
Opinion No. 30,
Page 12
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions , for segments of a business to be
disposed. The Company is required to adopt this statement on January 1,
2002 and believes that the adoption of this standard will not have a
material impact on the Company's financial statement of position, results
of operations, or cash flows.
3. Current Assets:
At December 31,
----------------------
2000 2001
-------- -------
Accounts receivable:
Gross trade receivables ............................... $ 10,203 $ 7,842
Less: Allowance for doubtful debts ................... (2,400) (2,132)
-------- -------
$ 7,803 $ 5,710
======== =======
Movements in Allowance for Doubtful Accounts:
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- ------
Balance at beginning of year ..................... $ 2,376 $ 1,854 $2,400
Charged to bad debt expenses ..................... 1,123 1,188 765
Write-off of bad debts ........................... (1,645) (642) (1,033)
-------- -------- ------
Balance at end of year ........................... $ 1,854 $ 2,400 $2,132
======== ======== ======
At December 31,
----------------------
2000 2001
-------- -------
Prepaid expenses and other current assets:
Unsecured employee loans and other debtors ............ $ 318 $ 117
Prepaid expenses ...................................... 313 399
Other current assets .................................. 1,137 606
-------- -------
$ 1,768 $ 1,122
======== =======
Page 13
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
4. Property and Equipment, net:
At December 31,
----------------------
2000 2001
-------- -------
Capital work-in progress .............................. $ 89 $ 33
Leasehold improvements ................................ 6,398 6,635
Motor vehicles ........................................ 73 72
Computers, fixtures, fittings and office equipment .... 20,114 21,781
Software development costs ............................ 9,316 11,821
-------- -------
Property and equipment, at cost ....................... 35,990 40,342
Less: Accumulated depreciation ........................ (12,785) (21,284)
-------- -------
$ 23,205 $19,058
======== =======
Depreciation expense for the years ended December 31, 1999, 2000 and 2001
were $2,070, $3,051 and $5,458, respectively and the amortization of
Software development cost for the years ended December 31, 1999, 2000 and
2001 were $ NIL, $647 and $3,106, respectively.
5. Intangible Assets, net:
At December 31,
----------------------
2000 2001
-------- -------
Goodwill .............................................. $ 654 $ 654
Copyrights ............................................ 3,706 3,706
-------- -------
4,360 4,360
Less: Accumulated amortization ....................... (3,987) (4,357)
-------- -------
$ 373 $ 3
======== =======
6. Long-term Investments and Bonds held to maturity:
(i) As at December 31, 2001, the Company holds equity instruments
carried at $100 in a privately held unaffiliated electronic commerce
company for business and strategic purposes. The investment is
accounted for under the cost method since the ownership is less than
20% and the Company does not have ability to exercise significant
influence over the investee. The investment is shown under long term
investments in consolidated balance sheets.
The Company's policy is to regularly review the carrying values of
the non-quoted investments and to identify and provide for
impairment when circumstances indicate impairment other than
temporary decline in the carrying values of such assets.
During the fourth quarter of year 2000, the Company recorded $11,750
impairment loss for other than temporary decline in the carrying
value of the investments based on the financial position of the
investees and other information, which became available in the
fourth
Page 14
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
quarter of year 2000 and developments in the technology and internet
sectors in fourth quarter of year 2000. During the year 2001, the
Company recorded a further $1,150 impairment loss for other than
temporary decline in the carrying value of the investment based on
current economic events and other factors. The net carrying value of
the long term investment as at December 31, 2001 was $100. The
Company will continue to evaluate this investment.
(ii) U.S. Treasury strips zero % coupon
At December 31,
----------------------
2000 2001
-------- -------
The amortized cost classified by date of contractual
maturity is as follows:
Due within one year ................................... $ 420 $ 430
Due after one year through five years ................. 1,260 1,059
Due after five years through ten years ................ 347 220
-------- -------
$ 2,027 $ 1,709
======== =======
The fair value classified by date of contractual
maturity is as follows:
Due within one year ................................... $ 424 $ 444
Due after one year through five years ................. 1,306 1,137
Due after five years through ten years ................ 362 230
-------- -------
$ 2,092 $ 1,811
======== =======
At December 31,
----------------------
2000 2001
-------- -------
Gross unrealized holding gains ........................ $ 65 $ 102
======== =======
7. Other Assets:
At December 31,
----------------------
2000 2001
-------- -------
Employee housing loans ................................ $ 786 $ 378
Rental and utility deposits ........................... 560 821
-------- -------
$ 1,346 $ 1,199
======== =======
Page 15
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
8. Current Liabilities:
At December 31,
----------------------
2000 2001
-------- -------
Deferred income and customer prepayments:
Advertising ........................................... $ 12,229 $13,963
Subscription and others ............................... 3,659 3,159
-------- -------
$ 15,888 $17,122
======== =======
At December 31,
----------------------
2000 2001
-------- -------
Accrued liabilities:
Salaries, wages and commissions ............................... $ 1,251 $ 1,442
Retirement benefit plans ...................................... 493 435
Current portion of liabilities for incentive and bonus plans... 2,848 1,168
Others ........................................................ 1,236 2,082
Equity in loss of affiliate ................................... 51 --
-------- -------
$ 5,879 $ 5,127
======== =======
9. Liabilities for Incentive and Bonus Plans:
At December 31,
----------------------
2000 2001
-------- -------
Liability for long term discretionary bonus program ........... $ 1,794 $ 1,434
======== =======
10. Related Party Transactions
The Company has extended loans to certain members of its senior management
to finance their purchase or lease of residences. The loans for the
purchase of a residence are secured by the subject residence, bear
interest at a rate of LIBOR plus 2 to 3%, generally have a term of ten
years and become due and payable immediately under certain circumstances,
including their termination of employment with the Company. The loans for
the lease of a residence are unsecured, interest free and are repayable in
equal monthly installments over the period of the lease, typically less
than or equal to twelve months. Loans due from employees for purchase of
residences were $786 and $378 as of December 31, 2000 and 2001
respectively. Loans due from employees for lease of residences were $219
and $114 as of December 31, 2000 and 2001, respectively.
The Company leases certain office facilities from subsidiaries of the
Parent Company under cancelable and non-cancelable operating leases that
include both rental and building maintenance services. During the years
ended December 31, 1999, 2000 and 2001, the
Page 16
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
Company incurred rental and building management services expenses of
$1,406, $950 and $1,044, respectively, with respect to these office
facilities.
The Company also receives legal and secretarial services from subsidiaries
of the Parent Company. During the year ended December 31, 1999, 2000 and
2001, the Company incurred such legal and secretarial services expenses of
$64, $455 and $464, respectively.
The Company had $11,404 and $11,404 amounts due to the Parent Company as
of December 31, 2000 and 2001, respectively. The amount due to the Parent
Company is unsecured and has no fixed repayment terms prior to January 1,
2000. Interest was charged in the range of 2 to 3%. During the year ended
December 31, 1999, the Company incurred interest expense of $337, with
respect to amounts due to the Parent Company. During the years 2000 and
2001, the Company did not incur any such interest expenses with respect to
amounts due to the Parent Company.
Effective January 1, 2000, the Company executed an unsecured promissory
note in the principal amount of $11,404 to establish the repayment terms
of amounts owed to the Parent Company. On January 1, 2005, the Company
will begin repayment of this promissory note. The Company will make
quarterly payments of principal and interest over the following ten years.
Interest will accrue beginning January 1, 2005 at the applicable U.S.
Federal Funds rate.
During the year ended December 31, 1999, the Company incurred operating
expenses of $640, allocated from the Parent Company. The Company believes
that the methods used in the allocation of expenses were reasonable and
that the consolidated statements of income include all costs directly and
indirectly attributable to the Company. The amounts related to the Company
have been determined by segregating amounts related to the operations of
the Company from those related to the Parent Company. The determination of
such amounts was made by reference to individual records for costs
specifically relating to the Company or by allocation based on number of
personnel, time spent by personnel, usage of facilities or similar
references. During the years 2000 and 2001 there were no such allocated
expenses from the Parent Company.
Effective May 1, 2000, the Company engaged The Fairchild Corporation to
provide financial, legal and certain other services to the Company for a
fee of $42 per month. The Company terminated this arrangement effective
December 31, 2000. The Company incurred $333 expenses for these services
during the year ended December 31, 2000.
In addition to the transactions with related party sales representatives
discussed in note 2 (j), the Company provided technical services to these
sales representatives and to a subsidiary of the Parent Company, for a
fee. During the year ended December 31, 1999, 2000 and 2001, the Company
received such services fee of $242, $167 and $259, respectively.
Page 17
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
11. Liabilities for Incentive and Bonus Plans
Before the commencement of the Equity Compensation Plans the Company
rewarded its senior management staff based on their current performance
through long term discretionary bonus awards. These awards are payable
approximately at the end of five or ten years from the date of the award,
even in the event of termination of employment unless certain non-compete
provisions have been violated. Amounts expensed related to these awards
for the years ended December 31, 1999, 2000 and 2001, were $143, $NIL and
$NIL, respectively. The required funds are set aside for payment of the
discretionary bonuses by purchasing U.S. Treasury strips zero % coupon
maturing in either five or ten years. These investments are held until
maturity and the proceeds are used for payment of the discretionary
bonuses.
Certain sales representatives of the Company are eligible for incentive
awards under plans administered by the Company. Amounts expensed related
to incentive awards under plans administered by the Company for the years
ended December 31, 1999, 2000 and 2001 were $45, $116 and $78,
respectively. Amounts under liabilities for incentive plans include
amounts owed under plans previously administered by the Company.
12. Retirement Benefit Plans
The Company operates a number of defined contribution retirement benefit
plans. Employees working in a jurisdiction where there is no statutory
provision for retirement benefits are covered by the Company's plans.
The two principal defined contribution plans are plans where employees are
not required to make contributions. One of these two plans is separately
administered by an independent trustee and the plan assets are held
independent of the Company. The other one is not independently
administered and is currently unfunded. The Company's liabilities under
this unfunded plan as of December 31, 2000 and 2001 were $381 and $376,
respectively.
The Company incurred costs of $823, $1,039 and $1,085 with respect to the
retirement plans in the years ended December 31, 1999, 2000 and 2001,
respectively.
Page 18
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
13. Income Taxes
The Company and certain of its subsidiaries operate in the Cayman Islands
and other jurisdictions where there are no taxes imposed on companies.
Certain of the Company's subsidiaries operate in Hong Kong and Singapore
and are subject to income taxes in their respective jurisdictions. Also,
the Company is subject to withholding taxes for revenues earned in certain
other countries.
Income / (loss) before income taxes consists of:
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- ------
Cayman Islands ................................... $ 11,470 $ (3,593) $ 401
Foreign .......................................... 934 (63,263) 1,549
-------- -------- ------
$ 12,404 $(66,856) $1,950
======== ======== ======
The provision for income taxes consists of:
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- ------
Current tax expense:
Cayman Islands ................................... $ -- $ -- $ --
Foreign .......................................... 1,435 1,277 1,143
-------- -------- ------
Total provision .................................. $ 1,435 $ 1,277 $1,143
======== ======== ======
The provision for income taxes for the years ended December 31, 1999, 2000
and 2001 differed from the amount computed by applying the statutory
income tax rate of 0% as follows:
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- ------
Income taxes at statutory rate ................... $ -- $ -- $ --
Foreign income and revenues taxed at higher rates 1,435 1,277 1,143
-------- -------- ------
Total ............................................ $ 1,435 $ 1,277 $1,143
======== ======== ======
Effective tax rate ............................... 11.57% (1.91)% 58.62%
======== ======== ======
Deferred tax assets consist of the following:
At December 31,
----------------------
2000 2001
-------- -------
Net operating loss carry forwards ..................... $ 7,525 $ 7,434
Less: valuation allowance ............................ (7,525) (7,434)
-------- -------
Deferred tax assets ................................... $ -- $ --
======== =======
Page 19
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
The Company recorded a full valuation allowance for the deferred tax
assets due to the uncertainty as to their ultimate realization.
As of December 31, 2001, a United States subsidiary has net operating loss
carry forwards of approximately $17.3 million. These losses can be
utilised to reduce future taxable income of the subsidiary subject to
compliance with the taxation legislation and regulations in the relevant
jurisdiction.
14. Share Capital
On April 14, 2000, in conjunction with the Share Exchange Agreement
discussed in Note 21, Fairchild (Bermuda) Ltd. issued 25,051,380 ordinary
shares to the shareholders of Trade Media Holdings Ltd., predecessor to
Global Sources Ltd., in exchange for all of its 10,000 ordinary shares
outstanding at that date. All share and per share amounts in these
consolidated financial statements have been restated for the year ended
December 31, 1999 in a manner similar to a 2,505 to 1 stock split. In
addition, Fairchild (Bermuda) Ltd. issued 62,628 ordinary shares and
1,189,941 ordinary shares to The Fairchild Corporation and the
shareholders of the Fairchild Corporation respectively. After the share
exchange Fairchild (Bermuda) Ltd was renamed Global Sources Ltd. The
authorized share capital of the Company as at December 31, 2000 and 2001
is 50,000,000 ordinary shares of $0.01 par value. As at December 31, 2000
and at December 31, 2001, the Company has 26,303,949 ordinary shares
issued and outstanding.
15. Fair Value of Financial Instruments
The carrying amounts of the Company's cash equivalents, accounts
receivable, related party receivables, accounts payable and accrued
liabilities approximate fair value due to their short maturities. The fair
value of related party payables cannot be determined due to the related
party nature. The information with respect to long term related party
payables is disclosed in Note 10. The carrying amount and market value of
long term investments are discussed in Note 6.
16. Concentration of Credit Risk and Other Risks
Financial instruments, which potentially subject the Company to
concentration of credit risk consist primarily of investment in checking
and money market accounts, investment in U.S. Treasury strips zero %
coupon, trade accounts receivable and receivables from sales
representatives. The Company maintains checking and money market accounts
with high quality institutions. The Company has a number of customers,
operates in different geographic areas and generally does not require
collateral on accounts receivable or receivables from sales
representatives. In addition, the Company is continuously monitoring the
credit transactions and maintains reserves for credit losses where
necessary. No customer accounted for more than 10% of the Company's
revenues for each of the years ended December 31, 1999, 2000 and 2001. No
customer accounted for more than 10% of the accounts receivable as of
December 31, 2000 and 2001.
Page 20
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
In 2001, the Company derived approximately 93% of its revenue from
customers in the Asia-Pacific region. The Company expects that a majority
of its future revenue will continue to be generated from customers in this
region. Future political or economic instability in the Asia-Pacific
region could negatively impact the business.
17. Operating Leases
The Company leases office facilities under cancelable and non-cancelable
operating leases that expire in two to five years. During the years ended
December 31, 1999, 2000 and 2001, the Company's operating lease rental
expenses were $1,898, $1,502 and $1,897, respectively. The estimated
future minimum lease payments under non-cancelable operating leases as of
December 31, 2001 are as follows:
Year Ending December 31, Operating Leases
------------------------ ----------------
2002 ......................................... $ 471
2003 ......................................... 471
2004 ......................................... 414
------
$1,356
======
18. Segment and Geographic Information
The Company has three reportable segments: online marketplace services,
transaction software and services and complementary media services.
Revenues by geographic location are based on the location of the customer.
(a) Segment Information
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- ------
Revenues:
Online marketplace services ...................... $ 25,463 $ 55,121 $55,468
Transaction software and services ................ 584 733 305
Complementary media services ..................... 60,846 42,602 34,964
Other ............................................ 3,379 4,597 4,548
-------- -------- -------
Consolidated ..................................... $ 90,272 $103,053 $95,285
======== ======== =======
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- -------
Income/(loss) from Operations:
Online marketplace services ...................... $ 3,607 $(23,276) $12,308
Transaction software and services ................ (1,562) (3,469) (8,288)
Complementary media services ..................... 9,392 (27,106) (1,360)
Other ............................................ 319 (1,791) 725
-------- -------- -------
Consolidated ..................................... $ 11,756 $(55,642) $ 3,385
======== ======== =======
Page 21
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
At December 31,
----------------------
2000 2001
-------- -------
Identifiable Assets:
Online marketplace services ........................... $ 24,376 $26,413
Transaction software and services ..................... 10,564 8,368
Complementary media services .......................... 18,780 16,655
Other ................................................. 1,986 2,166
-------- -------
Consolidated .......................................... $ 55,706 $53,602
======== =======
(b) Foreign Operations
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- ------
Revenues:
Asia ............................................. $ 83,755 $ 95,388 $88,427
United States .................................... 4,613 5,235 5,255
Europe ........................................... 1,159 1,083 908
Other ............................................ 745 1,347 695
-------- -------- -------
Consolidated ..................................... $ 90,272 $103,053 $95,285
======== ======== =======
At December 31,
----------------------
2000 2001
-------- -------
Long-Lived Assets:
Asia .................................................. $ 26,060 $20,247
United States ......................................... 114 113
-------- -------
Consolidated .......................................... $ 26,174 $20,360
======== =======
19. Contingencies
From time to time the Company is involved in litigation in the normal
course of business. While the results of such litigation and claims cannot
be predicted with certainty, the Company believes that it is remote that
the outcome of the outstanding litigation and claims as of the current
date will have a material adverse effect on the Company's consolidated
financial position and results of operations.
Page 22
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
20. Capital Commitments
The commitments as at December 31, 2001 for the renovation work to be
carried out on the leasehold office facilities amount to $91.
21. Share Exchange Agreement
On December 6, 1999, a Share Exchange Agreement was executed by The
Fairchild Corporation, Fairchild (Bermuda), Ltd., Trade Media Holdings
Ltd. and the shareholders of Trade Media Holdings Ltd. (the "Share
Exchange"). Under the Share Exchange, Fairchild (Bermuda), Ltd. issued
additional common shares in exchange for all of the issued and outstanding
shares of the Company.
After the Share Exchange, The Fairchild Corporation and shareholders of
The Fairchild Corporation hold less than 5% and the shareholders of Trade
Media Holdings Ltd. hold the remainder of the combined companies. After
the Share Exchange, Fairchild (Bermuda), Ltd. was renamed Global Sources
Ltd. Global Sources Ltd. recorded the Share Exchange as a
recapitalization. This reflected a private operating company, Trade Media
Holdings Ltd., as the acquirer combining into Fairchild (Bermuda), Ltd., a
non-operating public shell corporation with nominal net assets. As of, and
subsequent to, the Share Exchange, the historical consolidated financial
statements of Trade Media Holdings Ltd. are being presented as the
continuing accounting entity, similar to a reverse acquisition.
Thereafter, all of the historical consolidated financial statements
presented represent that of Trade Media Holdings Ltd.
In the Share Exchange, the Company issued 25,051,380 ordinary shares to
the shareholders of Trade Media Holdings Ltd. in exchange for all of its
10,000 ordinary shares outstanding at that date. The shareholders' equity
of Trade Media Holdings Ltd. has been restated to reflect the effect of
the 2,505 to 1 exchange ratio. The authorized share capital of the Company
following the Share Exchange is 50,000,000 ordinary shares. In addition,
the Company issued 62,628 ordinary shares and 1,189,941 ordinary shares to
The Fairchild Corporation and The Fairchild Corporation's shareholders,
respectively.
On April 3, 2000, the Form F-1 was declared effective, and on April 14,
2000, the above Share Exchange Agreement was consummated. As of April 14,
2000, the Company was publicly listed on NASDAQ.
The transaction costs associated with the Share Exchange Agreement,
amounting to $750, $609 and $NIL have been expensed during the year ended
December 31, 1999, 2000 and 2001, respectively. This expense is included
under general and administrative cost for the year ended December 31, 1999
and 2000 in the Consolidated Statements of Income.
Page 23
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
22. Restricted Share Award Plan
On February 4, 2000, the Company established a restricted share award plan
for the benefit of its chairman and chief executive officer in recognition
of services to the Company. In conjunction with the restricted share award
plan, the Parent Company assigned 4,008,221 ordinary shares of the
Company, representing a 16% equity interest in the Company, to the
Company. The Company then awarded these shares to its chairman and chief
executive officer. The chairman and chief executive officer's entitlement
to 501,028 of these shares is subject to an employment agreement with one
of the Company's United States subsidiaries and entitlement to such shares
vested immediately. The chairman and chief executive officer's entitlement
to 3,507,193 of these shares is subjected to employment, non-compete and
vesting terms under an employment agreement with one of the Company's
United States subsidiaries. The 3,507,193 shares were to vest ratably over
10 years, 10% each year. However, effective August 30, 2000, the Company's
Board of Directors approved the accelerated vesting of all the restricted
shares granted to the chairman and chief executive officer resulting in
immediate vesting of all the shares. The Company recorded total $64,000
and $NIL non-cash compensation expense associated with these awards in the
year ending December 31, 2000 and 2001, respectively.
23. Equity Compensation Plans
On December 30, 1999, the Company established the Global Sources Employee
Equity Compensation Trust (the "Trust") for the purpose of administering
monies and other assets to be contributed by the Company to the Trust for
the establishment of equity compensation and other benefit plans. The
Trust is administered by Harrington Trust Limited (the "Bermuda Trustee").
The Bermuda Trustee in the exercise of its power under the Declaration of
Trust may be directed by the plan committee, including the voting of
securities held in the Trust. The Board of Directors of a subsidiary of
the Company will select the members of the plan committee.
On February 4, 2000, in conjunction with the establishment of the Trust
and the Share Exchange, the Parent Company assigned 2,505,138 ordinary
shares of the Company, representing a 10% equity interest in the Company,
to the Company for the establishment of share option plans and/or share
award plans, known as ECP I, ECP II and ECP III. Subsequently, share
option plans and/or share award plans, known as ECP IV, ECP V and ECP VI
were established.
Eligible employees, directors and consultants under ECP I are entitled to
purchase common shares of Global Sources Ltd. at a price determined by the
plan committee at the time of the grant. The exercise price of these
options may be below the fair market value of the Company's ordinary
shares. The plan committee determines who will receive, and the terms of,
the options.
Page 24
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
Optionees may pay for ordinary shares purchased upon exercise of options
by check or by the delivery of other securities of the Company. Payment
shall made to the Trust.
Eligible employees, directors and consultants under ECP II were entitled
to purchase common shares of Global Sources Ltd. at an exercise price
determined by the plan committee at the time of the grant. There are two
types of options under this plan. The exercise price of both of these
options were below the fair market value of the Company's ordinary shares
at that time. The plan committee determines who will receive, and the
terms of, the options. Employees could decide whether to take up the
options for a period of 95 days ending June 29, 2000. All the options
granted were exercised. Optionees were able to pay for ordinary shares
purchased upon exercise of options by check or by the delivery of other
securities of the Company. Payment has been made to the Trust. Entitlement
of the employees, directors and consultants to these common shares is
subject to employment and vesting terms.
Eligible employees and directors under ECP III were awarded a defined
amount of compensation payable in Global Sources Ltd. common shares the
number of which were determined by dividing the amount of compensation
awarded by an amount determined by the plan committee prior to the Share
Exchange.
Entitlement of the employees to these common shares is subject to
employment and vesting terms.
The non-cash compensation expense associated with awards in accordance
with APB 25 and SFAS 123, under ECP II and ECP III of approximately $2,907
and $2,521, respectively, are recognised ratably over the three year
vesting term.
Eligible employees directors and consultants under ECP IV are awarded a
defined amount of compensation payable in Global Sources Ltd. common
shares the number of which are determined by the plan committee
periodically.
Entitlement of the employees, directors and consultants to these common
shares is subject to employment and vesting terms.
Eligible employees, directors and consultants under ECP V were awarded a
one-time grant of shares the number of which was determined by the plan
committee.
Entitlement of the employees to these common shares is subject to
employment and vesting terms.
The Equity Compensation Plan committee approved the awards of common
shares under ECP IV and ECP V on January 23, 2001 and approved additional
awards of common shares under ECP IV on April 1, 2001 and July 1, 2001.
The non-cash compensation expenses associated with the above awards in
accordance with APB 25 and SFAS 123, under ECP IV and ECP V of
approximately $3,337 and $1,983, respectively, are recognized over the
five year vesting term from the respective award date.
Page 25
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
The Equity Compensation Plan committee approved further awards of common
shares under ECP IV and ECP V in January 2002. The non-cash compensation
expenses associated with the above awards in accordance with APB 25 and
SFAS 123, under ECP IV and ECP V of approximately $537 and $120 will be
recognized over the five year vesting term.
Eligible employees, directors and consultants under ECP VI are awarded a
one time grant of Global Sources Ltd. common shares the number of which is
determined by the plan committee.
Entitlement of the employees, directors and consultants to these common
shares is subject to non-compete and vesting terms.
The Equity Compensation Plan committee approved the ECP VI on March 13,
2001 and made awards of common shares under the plan on various dates
during the year 2001.
The non-cash compensation expenses associated with the awards in
accordance with APB 25 and SFAS 123, under ECP VI totaling to
approximately $313, are recognized over the five year vesting term from
the respective award date.
The Company expensed $1,689 and $2,501 non-cash compensation costs
associated with the awards under the above ECP plans in the years ended
December 31, 2000 and 2001 respectively.
Page 26
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
ECP II ECP III ECP IV ECP V ECP VI
------ ------- ------ ----- ------
Purchase Gift Grant Grant Grant Gift
Plan Plan Plan Plan Plan Plan
---- ---- ---- ---- ---- ----
Plan Inception ............................. March, 2000 March, 2000 March, 2000 January, 2001 January, 2001 March, 2001
=========== =========== =========== ============= ============= ===========
Number of Shares:
At December 31, 1999 ......................... -- -- -- -- -- --
Original restricted shares granted in
year 2000 ................................ 80,887 212,526 104,184 -- -- --
Shares forfeited to beneficial trustee ..... -- (11,442) (1,334) -- -- --
----------- ----------- ----------- ------------- ------------- -----------
Balance at December 31, 2000 ................. 80,887 201,084 102,850 -- -- --
Original restricted shares granted in
year 2001 ................................ -- -- -- 522,354 303,000 78,300
Shares forfeited to beneficial trustee ..... -- (24,468) (19,839) (87,837) (91,500) --
----------- ----------- ----------- ------------- ------------- -----------
Balance at December 31, 2001 ................. 80,887 176,616 83,011 434,517 211,500 78,300
=========== =========== =========== ============= ============= ===========
Grant Price Per Share ........................ $24.00 $ NIL $ NIL $ NIL $ NIL $ NIL
=========== =========== =========== ============= ============= ===========
Weighted average fair value of the
shares granted ............................. $ 2.50 $ 26.50 $ 26.50 $ 8.67 $ 9.22 $ 4.14
=========== =========== =========== ============= ============= ===========
Weighted average fair value of the shares granted is estimated to be the
average market value of the shares at the time of the grant.
Page 27
GLOBAL SOURCES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars Thousands, Except Number of Shares and Per Share Data)
24. Directors Stock Option Plan
A Non-executive Director Option Plan was approved on October 26, 2000 by
the shareholders of the Company. Each eligible Director on the date of the
first board meeting of each calendar year, commencing in 2001, receives
the grant of an option to purchase 20,000 common shares on that date. The
Options granted are subject to such terms and conditions as determined by
the Board of Directors at the grant.
The option price, per share, payable before the end of each February, is
fifteen percent less than the average closing price of the shares for the
last five trading days of the previous calendar year. The non-executive
Directors may decline all or part of the award, which is non-transferable.
Board granted the first awards under the above plan in 2001. The award
vests over four years with one quarter of the shares vesting each year.
Full payment must be made while exercising the option. Upon resignation of
an eligible Director, all unvested shares are forfeited and the option
price received for the forfeited unvested shares is refunded.
Only one director accepted on February 10, 2001 the offer for the 20,000
shares granted under option. The $164 received as proceeds of this plan
was included in additional paid-in capital.
As per the terms of the plan, Board granted options to all eligible
directors again in February 2002. These awards will vest after four years.
Optionees must pay 15% of the option price, which is the average closing
price of the shares for the last five trading days of year 2001, at the
time of exercising the option. The balance 85% must be paid on or before
the vesting date. The resignation of a Director following his or her
exercise of the Grant of Options and payment of the Option Price shall not
cause a forfeiture of the unvested shares. All the eligible non-executive
Directors accepted the offer before February 28, 2002.
25. Credit Facility
On March 17, 2000, the Company entered into a credit facility with the
Bank of Bermuda (Isle of Man) Limited. The credit facility has a term of
one year and provides for borrowings of up to $25,000, with minimum
borrowings of $1,000. The lender may request security from time to time to
secure borrowings under the credit facility. The credit facility bears
interest, payable quarterly in arrears, at the London Inter-Bank Market
Rate plus 0.5%. The Parent Company has guaranteed all of the Company's
obligations under the credit facility.
As of December 31, 2000 and 2001, $4,000 and $NIL, respectively of
principal was outstanding under this credit facility.
On March 13, 2002, the credit facility will be re-newed for $10,000 for
one year subject to the same terms and conditions as applicable to the
original facility.
Page 28