Online Advertising Services

Subscriptions and Print Advertising Services

Global Transaction Software Services

Other Operations

Online Advertising Services

Consumer Electronics 0.3 1.2

Electronic Components 0.8 2.7

Fashion Accessories 0.9 2.3

Gifts & Home Products 1.2 3.4

Hardwares 0.6 1.8

Telecom Products 0.3 1.1

Timepieces 0.2 0.4

Other 0.2 --

Total $5.2 $14.6

Operating income in the online advertising services segment increased $2.0 million in 1998, as compared to 1997. This improvement reflected an increase in revenues and related economies of scale, offset partially by a $1.8 million increase in online services development expenditures to $3.2 million in 1998 from $1.4 million in 1997.

Revenues in our subscriptions and print advertising services segment declined from $96.6 million in 1997 to $76.8 million in 1998. As a result of the Asian economic crisis, the Taiwan NT dollar depreciated by about 15% causing a decline of $4.1 million in our revenues. The Asian economic crisis caused many exporting companies to reduce their advertising budgets. This caused a $2.3 million reduction in our subscriptions and print advertising services revenues, offset by a similar increase in subscriptions ces revenues in China. Subscriptions and print advertising services revenues from businesses located in United States and Europe also declined by $1.7 million due to reduced demand for American and European products in Asia. In addition, revenues from two magazines supported by advertisers in the hospitality, travel and luxury goods sectors decreased by $1.7 million. Revenues in Hong Kong and Taiwan declined by $6.0 million and $4.0 million, respectively, as a result of price driven competition.

Our subscriptions and print advertising services revenues were from the following:

Computer Products $ 13.2 $ 9.2

Consumer Electronics 8.7 7.3

Discontinued Magazines 3.1 2.5

Electronic Components 15.8 12.4

Electronics Engineer 11.3 10.3

Fashion Accessories 6.2 4.9

Gifts & Home Products 12.5 10.6

Hardwares 7.1 5.7

Subscription Revenue 3.7 3.7

Telecom Products 5.6 4.6

Timepieces 4.1 3.1

Other 5.3 2.5

Total $96.6 $76.8

Operating income in our subscriptions and print advertising services segment decreased 26% to $13.9 million in 1998, as compared to $18.9 million in 1997, as a result of the reduction in revenues.

Operating loss in our global transaction software services segment reduced to $1.9 million in 1998 from $4 million in 1997. The improvement was due to the effect of improved cost controls.

Other operations consist primarily of revenue derived from conferences and seminars. Revenues decreased $0.3 million in 1998, as compared to 1997. Operating income decreased $1.2 million in 1998, compared to 1997.

Our activities are financed out of the cash generated from our operations, supplemented by borrowings from our controlling shareholder, as necessary. We had commitments of $10.5 million and $11.4 million owing to our controlling shareholder as of December 31, 1998 and 1999, respectively. These commitments are net of advanced payments of $6.7 million and $NIL million as of December 31, 1998 and 1999, respectively. The amount owed is unsecured, has no fixed repayment terms and carries interest in the rang

Effective January 1, 2000, we executed an unsecured promissory note in the principal amount of $11.4 million to establish the repayment terms of amounts owed to the Parent Company. On January 1, 2005, we will begin repayment of this promissory note. We will make quarterly payments of principal and interest over the then following ten years. Interest will accrue beginning January 1, 2005 at the applicable U.S. Federal Funds rate.

Net cash provided by operating activities was $15.1 million and $14.6 million for the year 1999 and 1998, respectively. The primary source of cash for operating activities in 1999 was net income of $11 million and $2.4 million of non-cash adjustments to net income for depreciation and amortization expense, $2.1 million decrease in receivables from sales representatives and $1.6 million reduction in prepaid expenses and other current assets offset by a $1.1 million decrease in accounts payable. The primar

primary source of cash for operating activities in 1997 was $9.5 million of net income, $2.7 million of non-cash adjustments to net income for depreciation and amortization expense, a $1.5 million decrease in accounts receivable and a $2.0 million increase in accounts payable.

Net cash used for investing activities was $7.9 million in 1999, which included $8.3 million used for capital expenditures. This consisted of computers, software development and the renovation of a new office premises. Net cash used for investing activities in 1998 was $0.3 million and included $1.7 million of capital expenditures offset partially by $1.4 million received from the sale of fixed assets. Net cash used for investing activities in 1997 was $3.0 million, which included $3.1 million of capital

Net cash used for financing activities was $7.5 million in 1999, which resulted primarily from the payment of dividends. Net cash used for financing activities was $14.5 million, $20.0 million in 1998 and 1997, respectively, which primarily resulted from the payment of dividends.

During the year ended December 31, 1999, we entered into contracts with suppliers for the renovation of a new office premises. The outstanding commitment on these contracts as at December 31, 1999 was approximately $0.5 million. We expected to complete this project in early 2000.

During 1999, we budgeted approximately $4.8 million for the development of our online services software. As of December 31, 1999, we have incurred costs of approximately $4.6 million. In addition, we expect to incur costs of approximately $4.5 million for this project in 2000.

Trade receivables before the allowance for doubtful accounts as of December 31, 1998 were $10.2 million, which was reduced to $8.9 million by December 31, 1999. The trade receivables less than one year old as at December 31, 1998 was 80.7%, while the statistic as at December 31, 1999 was at 85.2%. This improvement reflected our implementation of a new billing and collection monitoring system to help us monitor closely the collection performances of our outside sales representatives. We are enforcing a p

Advance payments received from advertising customers as of December 31, 1998, and 1999 were $8.2 million and $11.5 million, respectively, improving our liquidity.

We anticipate that cash on hand and cash generated from operations will be adequate to satisfy working capital and capital expenditure requirements and commitments based on our current level of operation. However, in order to take full advantage of growth opportunities and provide for long-term increased investment in assets related to the development of online and software services segments, we expect to raise additional capital.

These investments may include:

• more and faster memory capacity for the Global Sources database;

• increased transmission bandwidth for information transfer;

• Software for enhanced transaction process management; and

• acquisitions of related operations and or technology providers.

On March 17, 2000, we entered into a credit facility with Bank of Bermuda (Isle of Man) Limited. The credit facility has a term of one year and provides a borrowing facility of up to $25.0 million, with minimum borrowings of $1.0 million. The lender may request us to secure our 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 credit facility can be used for investments, working capital and general

The loan may not be prepaid prior to the end of any quarter, but if the bank notifies us of its intention to charge a maintenance fee to cover its costs for the facility, we may prepay without penalty the amount outstanding within seven days of the bank's notice. When we entered into the credit facility, we paid the bank an arrangement fee of approximately twenty thousand dollars. Our largest shareholder, Hung Lay Si Co. Ltd., has guaranteed all of the obligations under the credit facility.

On March 22, 2000, we used a portion of the credit facility, in the amount of $5.3 million to cause our wholly owned subsidiary LER Corporation to repay and cancel the loan made on March 9, 2000 from Hung Lay Si Co. Ltd. to LER. The loan to LER was used to pay U.S. taxes on income of Merle Hinrichs, our chairman and chief executive officer. Mr. Hinrichs has executed a promissory note in the amount of $5.0 million, representing his portion of the U.S. taxes on income owed, that bears interest at the F

On May 19, 2000, we invested $1.0 million in an unaffiliated electronic commerce company. Under the terms of the agreement, we further agreed to provide an unsecured cash advance repayable within two years or upon three months notice from us, of $2.0 million to the investee company. We have an option to convert this unsecured advance into equity shares in the investee company.

We operate our business internationally and foreign exchange rate fluctuations could have a material impact on our results of operations. Historically, currency fluctuations have been minimal on a year to year basis in the currencies of the countries where we have operations. As a result, foreign exchange gains or losses in revenues and accounts receivable have been offset by corresponding foreign exchange losses or gains arising from expenses. However, during the Asian economic crisis of 1997 to 1998, b

This decline in revenues occurred due to some contracts being denominated and priced in foreign currencies prior to the devaluation of Asian currencies. The conversion of these contract proceeds in U.S. dollars resulted in losses and reflects the foreign exchange risk assumed by us between contract signing and the conversion of cash into U.S. dollars. We believe this risk is mitigated because historically a majority (ranging between 55% to 65%) of our revenues are denominated in U.S. dollars or are rece

As of December 31, 1999, we had not engaged in foreign currency hedging activities.

We have not experienced any material problems as a result of the Year 2000 turnover and in connection with February 29, 2000. We do not believe that any Year 2000 related issues will affect its business, results of operations or financial condition in the future.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 is effective for all fiscal quarters beginning with the quarter ending March 31, 2000. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instrume