Contents
2 Corporate Information
3 Business Profile
4 Coordinated Global Network
6 Key Financial Highlights
7 Management Discussion & Analysis
7 Chairman’s Statement
10 Managing Director’s Report
15 Corporate Governance
22 Directors and Senior Management
28 Information for Investors
29 Report of the Directors
38 Auditors’ Report
39 Statement of Accounts
90 Ten-Year Financial Summary
91 History and Milestones Corporate Information
Non-executive Directors Executive Directors Victor FUNG Kwok King, Chairman William FUNG Kwok Lun, Managing Director Paul Edward SELWAY-SWIFT * Henry CHAN Allan WONG Chi Yun * Danny LAU Sai Wing Franklin Warren McFARLAN * Annabella LEUNG Wai Ping Makoto YASUDA * Bruce Philip ROCKOWITZ LAU Butt Farn Leslie BOYD (Steven Murray SMALL — alternate to Mr Leslie BOYD)
* independent non-executive directors
Chief Compliance Officer Chief Financial Officer James SIU Kai Lau Frank LEONG Kwok Yee
Company Secretary Terry WAN Mei Chow
Legal Advisors Principal Bankers Johnson Stokes & Master The Hongkong and Shanghai 17th Floor, Prince’s Building, 10 Chater Road Banking Corporation Limited Hong Kong Citibank, N.A. Registered Office
Cedar House, 41 Cedar Avenue JP Morgan Chase Bank Hamilton HM12, Bermuda
Principal Place of Business Auditors 11th Floor, LiFung Tower PricewaterhouseCoopers 888 Cheung Sha Wan Road Certified Public Accountants Kowloon, Hong Kong 22nd Floor, Prince’s Building, Central, Hong Kong
Li & Fung Limited Annual Report 2002 2 Business Profile
Li & Fung Limited and its subsidiaries (“Li & Fung”) is a premier global trading group managing the supply chain for high-volume, time-sensitive consumer goods. Garments make up a large part of the Li & Fung business which also covers the sourcing of hard goods such as fashion accessories, gifts, handicrafts, home products, promotional merchandise, toys, sporting goods, footwear and travel goods.
As a Supply Chain Manager across many producers and countries, Li & Fung provides the convenience of a one-stop shop for customers through a Total Value-Added Package: from product design and development, through raw material and factory sourcing, production planning and management, quality assurance and export documentation to shipping consolidation.
Founded in Guangzhou in 1906, Li & Fung is today headquartered in Hong Kong from where it co-ordinates the manufacture of goods through a network of 65 sourcing offices in 38 countries. While cost considerations have resulted in the concentration of manufacturing activities in Asia, recent years have seen an expansion of Li & Fung’s quick-response capabilities in areas like the Mediterranean, Eastern Europe and Central
America that are closer to customers in Europe and the US. Instead of owning any production facilities, Li
& Fung manages a large number of quality-conscious, cost-effective producers who can deliver to a deadline for its customers.
Li & Fung is a member of the Li & Fung Group of companies which also includes privately-held Retailing and
Distribution businesses. With an annual turnover of around US$4.8 billion, Li & Fung employs about 5,300 people worldwide.
3 Li & Fung Limited Annual Report 2002 NORTH ASIA Beijing EUROPE & THE Dalian MEDITERRANEAN Dongguan Amsterdam Guangzhou Cairo Hepu Denizli Hong Kong Florence Huizhou Istanbul Liuyang Izmir Longhua Leeds Macau Manchester Nanjing Oporto Ningbo Romania Qingdao Tunis Seoul Turin Shanghai Shantou SOUTH ASIA Shenzhen Bahrain Karachi Taipei Bangalore Kathmandu Tokyo Chennai Lahore Zhanjiang Colombo Mumbai Zhongshan Dhaka New Dehli Jordan Sharjah
SOUTHEAST ASIA Bangkok Ho Chi Minh City Jakarta Johor Bahru Manila Phnom Penh Saipan Singapore Yangon
SOUTH AFRICA Durban Madagascar Mauritius
Li & Fung Offices
Li & Fung Limited Annual Report 2002 4 THE AMERICAS Boston Dominican Republic Florida Guadalajara Guatemala Honduras New York Nicaragua
5 Li & Fung Limited Annual Report 2002 Key Financial Highlights
2002 2001 Growth HK$’000 HK$’000
Turnover Continuing operations 37,281,360 32,941,392 13.2% Discontinued operations — 87,183 37,281,360 33,028,575 12.9% Operating profit Continuing operations 1,134,605 904,520 25.4% Discontinued operations — (237,955) 1,134,605 666,565 70.2% As percentage of turnover Continuing operations 3.04% 2.75% Group total 3.04% 2.02% Profit attributable to shareholders Continuing operations 1,080,468 951,307 13.6% Discontinued operations — (168,996) 1,080,468 782,311 38.1% As percentage of turnover Continuing operations 2.90% 2.89% Group total 2.90% 2.37% As percentage of shareholders’ funds 28.4% 22.72% Earnings per share Basic 37.4 cents 27.3 cents37.0% Continuing operations 37.4 cents 33.1 cents13.0% Dividend per share 30.5 cents 26.5 cents15.1% Shareholders’ funds 3,798,020 3,443,051 Net assets per share HK$1.31 HK$1.20
Turnover* by Export Markets HK$ million
76% 19% 3% 2% 02 37,281 1st Yr
75% 21% 1% 3% 01 32,941
70% 26% 1% 3% 00 24,992 North America 3-Year Plans Europe 69% 27% 1% 3% East Asia 99 16,298 S Hemisphere
0 10,000 20,000 30,000 40,000 * Continuing operations
Turnover* by Product HK$ million
68% 32% 02 37,281 1st Yr
72% 28% 01 32,941
78% 22% 00 24,992 3-Year Plans
75% 25% Softgoods 99 16,298 Hardgoods
0 10,000 20,000 30,000 40,000 * Continuing operations
Li & Fung Limited Annual Report 2002 6 Management Discussion & Analysis
Chairman’s Statement
Victor FUNG Kwok King
Introduction
I am pleased to report that 2002 was a year of progress for Li & Fung Limited (the “Group”) and significant growth was achieved despite a slow first half. A bigger and stronger Li & Fung emerged as a result of several initiatives including the successful Janco acquisition, effective business alliances and major operational improvements during the course of the year. In particular, the Group’s efforts to expand the hard goods business is yielding the expected benefits.
Performance
In 2002, Group turnover rose by 13% to HK$37.3 billion. Profit attributable to shareholders amounted to HK$1.08 billion, passing the billion dollar mark for the first time and representing a 38% increase over the HK$782 million of 2001. Earnings per share on continuing operations were 37.4 HK cents, compared to 33.1 HK cents in 2001.
7 Li & Fung Limited Annual Report 2002 Management Discussion & Analysis (continued)
The Board of Directors has proposed a commensurate increase in final dividend to 22 HK Earnings per share* Dividend per share cents per share. That, together with an interim dividend of 8.5 HK cents, will give a total HK cents dividend of 30.5 HK cents per share for the whole year (2001 total: 26.5 HK cents per
40 share). 37.4
35 33.1
33.0 Market & Business 30.5 30
26.5 In the early part of 2002, the global economy faced uncertainties arising from the events of 25.0 25 September 11, and economic recovery was affected. Consumer propensity to spend was 22.4
20 weakened and that in turn had an adverse impact on global demand for consumer goods. 17.0
15 The Group therefore experienced a slow start in the first half of 2002 but saw a strong recovery in the second half, supported in large part by the Group’s position as a leading 10 global Supply Chain Management partner in competitive retail markets. 5 With the successful acquisition and integration of Janco, today’s enlarged Li & Fung Group 0 99 00 0102 is more diversified in terms of product mix, geographical coverage and customer base, and 1st Yr 3-Year Plans enjoys substantial economies of scale. The Group’s list of successful acquisitions to date
Earnings per share* includes Inchcape Buying Services, Swire & Maclaine and Camberley. Of major significance Dividend per share was the acquisition and integration of the Colby business in 2000/2001. With the Janco * Continuing operations acquisition last year, all these acquisitions are contributing substantially to the Group’s turnover and profit growth. Janco’s strengths in the hard goods sector and its emphasis on large food retailers who are rapidly expanding their non-food offerings, provides impetus for growth.
Dividend Payout* The Group will continue with its diversification strategy in order to further open up new % customer segments and opportunities that, in turn, allow for turnover growth.
100 The Group has had a consistent policy of embracing information technology for greater 82
80 efficiencies across all aspects of the Group’s business and operations. Information technology 79 79 80 • • • • • • • • provides critical connectivity in the Group’s extensive supply chain network and provides • • • • • • • • • • • • customized, quality support for our customers and their time-sensitive needs. To this end, • • • • • • • • 60 • • • • the Group’s collaboration with Microsoft, started in July 2002, has already brought about • • • • • • • • • • • • tangible benefits. The Group will therefore continue to invest in new technologies so as to • • • • • • • • 40 • • • • enhance its supply chain services and further extend its leadership position in global Supply • • • • • • • • • • • • Chain Management. • • • • • • • • • • • • 20 • • • • • • • • The Group’s continuing strong financial position, with cash on hand of HK$2.4 billion, will • • • • • • • • • • • • allow for further investments across all fronts. • • • • 0 • • • • 99• 00• 01• 02• 1st Yr 3-Year Plans Looking Ahead * Continuing operations The Middle East conflict could have a dampening effect on consumer sentiment, and business activity may be affected across the globe. Given these difficult circumstances, the Group will actively try to minimize any resultant negative impact.
Li & Fung Limited Annual Report 2002 8 Management Discussion & Analysis (continued)
Conflict aside, major opportunities continue to exist in the US and European markets, and the Group’s growing presence in Asia and Australia also means the creation of new opportunities. The Group has consciously been stepping up activities in its East Asia and Southern Hemisphere regions so as to open up additional possibilities and to maximize the Group’s potential.
Two decisive trends also spell continuing growth possibilities for the Group: globalization and its attendant competitive pressures, as well as China’s WTO membership and the nation’s increasing economic importance on the global stage, serve to underpin the criticality of Supply Chain Management. As producers and end-users further demand efficiency and competitiveness across the entire manufacturing value chain, the Group’s track record as a global SCM leader helps to generate confidence and reassurance.
2002 marked the first year of the Group’s Three-Year Plan 2002 - 2004. While prospects for the Group remain encouraging, the challenge will be to achieve significant turnover growth and profit improvements in order for the Group to pursue its target of doubling its profits from continuing operations over this three-year period.
The Group is cautiously optimistic, given its successful diversification and expansion strategies over the past years on which it has remained focused.
Corporate Governance
Over the past year, the Board has reinforced the qualitative aspects of the Group’s various controls and procedures in order to ensure the practice of good corporate governance. The overall approach has also been consistent with the need to ensure prudent enhancement and management of shareholder value. The Group’s operating principles emphasize transparency and accountability with two key committees; namely, an Audit Committee comprising six non-executive directors and a Risk Management Committee that reviews risk management and internal control systems; and a Chief Compliance Officer overseeing a Corporate Governance Division.
In conclusion, I would like to thank the members of the Board for their continued guidance and support, and to express my appreciation to the Group’s management and staff for their diligence and dedication.
Victor FUNG Kwok King Chairman
Hong Kong, 24 March 2003
9 Li & Fung Limited Annual Report 2002 Management Discussion & Analysis (continued)
Managing Director’s Report
William FUNG Kwok Lun
Results Review
2002 is the first year of the Group’s Three-Year Plan 2002 - 2004. Despite a slow start to the plan in the first half of the year, we are pleased to report that Group performance in the second half of 2002 was strong and in line with the Three-Year Plan growth targets.
During the year, business suffered initially from poor sentiment and uncertainty following the terrorist events of 2001 but business recovery was robust in the second half of 2002.
For the year 2002 as a whole, Group turnover increased 13%. The Group’s total margin continued to improve, moving up from 9% in 2001 to 9.2% in 2002. This was a result of an increase in contribution from our hard goods business, as well as growth in higher-margin businesses. Through prudent cost control and improved efficiencies, the Group’s core operating profits on its continuing operations before provision for investments and amortization of intangible assets showed a healthy increase of 23%, reflecting an increase in margin from 2.8% to 3.1%.
Li & Fung Limited Annual Report 2002 10 Management Discussion & Analysis (continued)
However, non-trading income declined compared to 2001 primarily due to a large decrease Turnover* in interest income generated from our cash reserves, and increased amortization of goodwill HK$ million from acquisitions. Taking into account provisions, net interest income, associated companies’ performance, taxation, minority interest, and the absence of losses from a discontinued 40,000 Internet operation in 2001, the Group’s net profit increased 38.1% to HK$1,080.5 million, 37,281 35,000 passing the billion dollar mark for the first time. The increase on a continuing operations 32,941 basis was 13.6%. 30,000
25,000 24,992 Segmental Analysis 20,000
The hard goods business was a key growth area in 2002. It accounted for 32% of Group 16,298 15,000 turnover, up from 28% in 2001. Turnover increased by 29%, with a significant increase of 70% in operating profits as we start to reap the benefits from earlier investments in product 10,000 development capabilities. Part of the increase was also due to the contribution of the Janco 5,000 business, which was acquired in July 2002. The soft goods business saw a 7% increase in 0 turnover whilst operating profits grew by 11%, reflecting the growth in higher margin businesses. 99 00 01 02 1st Yr 3-Year Plans North America continues to be the Group’s major market, accounting for 76% of the Group’s * Continuing operations turnover in 2002. Turnover and operating profits on a continuing operations basis increased by 14% and 22% respectively for this market. Although consumer sentiment remained cautious, we continued to increase market share due to our comprehensive office network and strong sourcing capabilities. The structural trend towards big US companies outsourcing its buying Total Margin* function also remains strong, adding to the Group’s growth in turnover and customer base. Core Operating Profits Margin** In Europe, turnover saw a steady growth of 5%. With prudent cost control and additional % higher margin businesses, led to an increase of 27% in operating profits. 9.5
In early 2002, the Group entered into a Business Alliance with Nichimen Corporation to 9.2 open up the Japanese market. This led to a big jump in turnover for our East Asia region, 9.0 9 Total Margin which exceeded HK$1 billion and accounted for approximately 3% of the Group’s total turnover. However, the operation incurred some small start up losses, which led to a decrease in 8.5 profits for that region. •••
Turnover for our operations in the Southern Hemisphere registered a slight decline of 1% 3.5 because of economic turmoil in many markets in Latin America. However, the Group had 3.1 satisfactory results in Australia as new customers were added. Because of our prudence 3 2.8 and focus on good quality customers in the Southern Hemisphere, operating profits there Core Operating were up 19%. Profits Margin 2.5 01 02
* Gross Profit plus other revenues, as percentage of turnover ** On continuing operations, before provision for investments and amortization of intangible assets, as percentage of turnover
11 Li & Fung Limited Annual Report 2002 Management Discussion & Analysis (continued)
Acquisitions Net Profit* HK$ million In July 2002, the Group announced an agreement to acquire Janco Overseas Limited (“Janco”), a Hong Kong based buying agent, for a total cash consideration of HK$250 million. The 1,200 acquisition was completed in August 2002 and was funded by internal cash resources. 1,080
1,000 951 Janco sources mainly hard goods for customers in the US and Canada, and has particular 893 strengths in supplying the supermarket and hypermarket sector. The acquisition fits into 800 the Group’s strategy of accelerating growth in the hard goods area and it expanded the Group’s penetration into the supermarket and hypermarket sector, where significant growth
600 575 opportunities in the private label, non food business exist.
400 Janco has delivered satisfactory results so far, generating a turnover of HK$1.4 billion during its first six months of contribution to the Group’s results. Work has been underway to 200 combine the back office operations to derive economies of scale. That, together with expanded capabilities of the combined group, will bring about significant sales and margin improvement 0 99 00 01 02 opportunities in the future. 1st Yr 3-Year Plans * Continuing operations The acquisition resulted in a goodwill of HK$225 million, which will be amortized over 15 years, leading to a charge of approximately HK$15 million per annum. Reflecting a six month impact on the Group’s results, the amortization charges related to this acquisition amounted to HK$7.5 million in 2002.
Financial Position and Liquidity Operating Cash Inflow The Group is in a strong financial position, with cash and cash equivalents of HK$2.4 billion HK$ million at the end of 2002. Normal trading operations are well supported by over HK$10 billion 1,200 bank trading facilities. In addition, the Group has available bank loans and overdraft facilities of HK$424 million, out of which only HK$137 million has been utilized. 1,010 1,000 945 At the end of 2002, charges on asset amounted to HK$115 million to cover banking facilities 855
800 in the ordinary course of business.
604 The Group has adopted defined benefit pension schemes in certain of its overseas operations, 600 mainly because of local statutory requirements. Pursuant to the requirements of the revised
400 SSAP 34 (Employee benefits), the Group has transitional pension liability on initial adoption of the SSAP of approximately HK$16 million. The Group chooses to recognize the transitional
200 pension liability on a straight-line basis over five years from the date of adoption of this SSAP at 1 January 2002. For the year ended 31 December 2002, amortization of the
0 transitional liability of approximately HK$3.2 million was charged to the profit and loss 99 00 01 02 1st Yr account. As at 31 December 2002, transitional liability of approximately HK$12.8 million 3-Year Plans remains unrecognized.
Li & Fung Limited Annual Report 2002 12 Management Discussion & Analysis (continued)
The Group has a low gearing ratio of 0.8%, based on long term liabilities of HK$30 million Current Ratio and shareholders’ equity of HK$3.8 billion. At the end of 2002, the current ratio was 1.5, based on current assets of HK$6.3 billion and current liabilities of HK$4.2 billion. 1.59
1.6 1.54 1.51
1.4 Capital Commitments & Contingent Liabilities 1.2 During the year, the Group made commitments to purchase 300 thousand square feet of 1.12 additional office space near its headquarters in Hong Kong. The total consideration was 1.0 HK$297 million out of which HK$94.5 million has been paid in 2002. The balance of HK$202.5 0.8 million was subsequently settled in January 2003. The Group has expanded rapidly in recent years and now rents substantial outside space. This purchase will reduce the Group’s future 0.6 rental expenses by an estimated HK$13 million on an annualized basis. It will also improve 0.4 overall operational efficiency. 0.2
Save for the above, the Group has no material contingent liabilities and off balance sheet 0 obligations other than those including trade bills discounted in the ordinary course of business 99 00 01 02 1st Yr as noted in the accounts. 3-Year Plans
Foreign Exchange Risk Management
Most of the Group’s cash balances are deposited in HK$ or US$ with major banks in Hong Kong. The Group has a HK$35 million short term revolving loan denominated in Yen as a currency hedge against shares held in Nichimen Corporation, a strategic investment made in the Business Alliance to open up the Japanese market.
In the United Kingdom, the Group has a HK$10 million loan that is denominated in GBP and is related to a previous acquisition. The loan is expected to be repaid in full by 2003.
Apart from the above, most of the Group’s asset and liabilities, revenues and payments are either in HK$ or US$. Therefore, we consider our exposure to foreign currency fluctuations minimal.
Post Balance-Sheet Date Development
There are no significant post balance sheet date events.
Human Resources
At the end of December 2002, the Group had a total of 5,313 staff, of which 1,847 were based at our Hong Kong headquarters, and 3,466 were located overseas throughout our network of offices in 38 countries. As human capital is key to the growth and profitability of the Group, heavy emphasis is placed on staff training and development. The Group offers competitive remuneration schemes to its employees. In addition, share options and discretionary bonuses are also granted to eligible staff based on individual and Group performance. Total staff cost in 2002 was HK$1,375 million, compared to HK$1,268 million in 2001.
13 Li & Fung Limited Annual Report 2002 Management Discussion & Analysis (continued)
Prospects
Judging from orders on hand and shipments made since the beginning of the year, the momentum experienced in the second half of 2002 seems to be carrying through to 2003. The competitive retail markets in the US and Europe have created great opportunities for the Group. Brand owners and retailers see the increased need for a competitive Supply Chain Management partner who can cater to their needs globally. We shall continue to strengthen our presence in sourcing markets such as China and Vietnam in order to capture the growth opportunities brought about by changing global trade patterns.
However, we remain wary of the economic impact of the war in the Middle East. Its effect on consumer sentiment is yet to be determined, and management shall therefore continue to implement prudent measures in running the business, with a focus on reducing costs and increasing operational efficiency.
Progress on Three-Year Plan 2002 - 2004
Owing to the slow start in the first half of 2002, the Group is about a half year behind on achieving our Three-Year Plan to double profits by 2004. However, management remains committed to pursue the Group’s targets for the remainder of the plan, such as building more higher margin businesses. In addition, the Group is continuing to evaluate and pursue acquisition opportunities to accelerate our growth. In this respect, the Group is still holding an acquisition war chest of US$300 million for use in possible acquisitions.
William FUNG Kwok Lun Managing Director
Hong Kong, 24 March 2003
Li & Fung Limited Annual Report 2002 14 Corporate Governance
The Board of Directors is committed to principles of corporate governance consistent with prudent enhancement and management of shareholder value. These principles emphasize transparency, accountability and independence. Set out below are those principles of corporate governance as adopted by the Company:
The Board
The Board is composed of the Group Non-Executive Chairman, the Group Executive Managing Director, four executive directors and six non-executive directors (of whom four are independent). In order to reinforce their respective independence, accountability and responsibility, the role of the Group Chairman is separate from that of the Group Managing Director.
The Group Chairman is responsible for overseeing the functioning of the Board whilst the Group Managing Director, supported by the executive directors, is responsible for managing the Group’s business, including the implementation of major strategies and initiatives adopted by the Board.
The Non-Executive Directors (the majority of whom being independent) with diversified industry expertise serve the important function of advising the management on strategy development and ensure that the Board maintains high standards of financial and other mandatory reporting as well as providing adequate checks and balances for safeguarding the interests of shareholders and the Company as a whole.
The Board meets regularly throughout the year to discuss the overall strategy as well as the operation and financial performance of the Group. Matters that require decision by the Board normally include overall group strategy, major acquisitions and disposals, annual budgets, annual and interim results, recommendation on directors’ appointment or re-appointment, approval of major capital transactions and any other significant operational and financial matters. All directors are kept informed on a timely basis of major changes that may affect the Group’s businesses, including relevant rules and regulations. Procedures are also in place for directors to seek independent professional advice in performing their duties.
The Group’s Chief Compliance Officer and Chief Financial Officer also attend all Board meetings to advise on corporate governance, risk management, statutory compliance, and accounting and financial matters. The Board held three meetings in year 2002 and the average attendance rate was 97%.
All directors, apart from the Group Chairman and Group Managing Director, are subject to retirement by rotation at the Annual General Meeting.
15 Li & Fung Limited Annual Report 2002 Corporate Governance (continued)
Management’s commitment to excellence has continued to gain market recognition from different stakeholders including bankers, analysts and institutional investors.
The Company was awarded the Directors of the Year Awards in 2001 and it was further:
• Awarded Gold Award in the Hang Seng Index Category and first time Significant Improvement Award of the Best Corporate Governance Disclosure Awards 2002 organised by the Hong Kong Society of Accountants.
• Voted as one of the best Hong Kong companies in the category of “Asia’s Best Company 2002" by Euromoney magazine, and
• Voted as one of the “Best Managed Company 2002” and as a “Company most committed to Corporate Governance” by Finance Asia magazine.
Directors of the Year Board Committees Awards 2001 The Board has established the following committees (all chaired by non-executive directors) with defined terms of reference: the Nomination Committee, the Audit Committee, the Risk Management Committee and the Compensation Committee.
Nomination Committee
The Nomination Committee was established in August 2001 to make recommendations to the Board on the appointment of directors and the management of board succession. During the last 12 months, the Nomination Committee met once (with an attendance rate of 100%) and its current members include:
Best Corporate Governance Dr Victor FUNG Kwok King - Committee Chairman Disclosure Awards 2002 Mr Paul Edward SELWAY-SWIFT * Dr William FUNG Kwok Lun
Audit Committee
The Audit Committee has been established since 1998 to provide advice and recommendations to the Board. Its current members include:
Dr Victor FUNG Kwok King - Committee Chairman Mr Paul Edward SELWAY-SWIFT * Mr Allan WONG Chi Yun * Professor Franklin Warren McFARLAN * Mr Leslie BOYD Mr Makoto YASUDA * Mr James SIU Kai Lau (Chief Compliance Officer) - Secretary
The majority of the Committee members are independent non-executive directors. All Committee members possess unique industry and financial experience to advise on Company’s matters.
Li & Fung Limited Annual Report 2002 16 Corporate Governance (continued)
During the last 12 months, the Audit Committee met three times (with an average attendance rate of 90%) to review with senior management and the Company’s internal and external auditors the internal and external audit findings, the accounting principles and practices adopted by the Group, and to discuss auditing, internal control, risk management and financial reporting matters (including the interim and annual financial statements for 2002 before recommending them to the Board for approval).
In order to further enhance independent reporting by external auditors, part of the aforementioned meetings was attended only by independent non-executive directors and external auditors. In addition, the external audit engagement partner is subject to periodical rotation and the ratio of annual fees for external auditors for non-audit services and for audit services is subject to close scrutiny by the Audit Committee (refer fee disclosure in page 58 of the accounts).
Risk Management Committee
The Risk Management Committee was established in August 2001 to review and make recommendations to the Board on the Group’s risk management and internal control systems. During the last 12 months, the Risk Management Committee met twice (with an average attendance rate of 88%). It reports to the Board in conjunction with the Audit Committee. Its current members include:
Dr Victor FUNG Kwok King - Committee Chairman Dr William FUNG Kwok Lun Mr James SIU Kai Lau (Chief Compliance Officer) Mr Frank LEONG Kwok Yee (Chief Financial Officer)
Compensation Committee
The Compensation Committee has been formed since 1993 with the responsibility of approving the remuneration policy for all directors and senior executives, including annual allocation of Share Options to employees under the Company’s Employee Share Option Scheme. During the last 12 months, the Compensation Committee met twice (with an average attendance rate of 100%). In one of the aforementioned meetings, the Committee approved a new share option scheme to be adopted by shareholders at the forthcoming Annual General Meeting. It annually reviews the existing remuneration policy. Its current members include:
Mr Allan WONG Chi Yun * - Committee Chairman Dr Victor FUNG Kwok King Dr William FUNG Kwok Lun
* independent non-executive director
Remuneration Policy for Executive Directors
The primary goal of the remuneration policy on executive remuneration packages is to enable Li & Fung to retain and motivate executive directors by linking their compensation with performance as measured against corporate objectives. Under the policy, director is not allowed to approve his own remuneration.
17 Li & Fung Limited Annual Report 2002 Corporate Governance (continued)
The principal elements of Li & Fung’s executive remuneration package include basic salary, discretionary bonus without capping and share option. In determining guidelines for each compensation element, Li & Fung refers to remuneration surveys conducted by independent external consultants on companies operating in similar businesses.
Basic Salary
The Group Managing Director annually reviews and approves the basic salary of each executive director in accordance with the Group’s remuneration policy. Under the service contracts between the Group and the Group Managing Director as disclosed under Directors’ Service Contracts in this report, the Group Managing Director is entitled to an aggregate fixed basic salary which is subject to the annual review by the Committee without his attendance.
Discretionary Bonus
Li & Fung implements a performance-based discretionary bonus scheme for each executive director (excluding the Group Managing Director). Under this scheme, the computation of discretionary bonus (without capping) is based on measurable performance contribution of business units headed by the respective executive directors. The Group Managing Director is entitled to a profit share of the Company’s consolidated results after adjustment of interest, tax and minority interests under the above service contracts between the Group and the Group Managing Director.
Share Option
The Committee approves all grants of share options under the Company’s approved share option scheme to executive directors, having regard to their individual performance and achievement of business targets in accordance with the Company’s objectives of maximizing long-term shareholder value.
Remuneration Policy for Non-Executive Directors
The remuneration, comprising directors’ fee, of non-executive directors is subject to annual assessment and recommendation by the Committee for shareholders’ approval at the Annual General Meeting. Reimbursement is allowed for out-of-pocket expenses incurred in connection with the performance of their duties including attendance at Company’s meetings.
Internal Control
The internal control and accounting systems of the Group are designed to provide reasonable assurance that assets are safeguarded against unauthorized use or disposition, that transactions are executed in accordance with management’s authorization and that the accounting records are reliable for preparing financial information used within the business or for publication and maintaining accountability for assets and liabilities. Qualified personnel throughout the Group maintain and monitor these internal accounting controls on an ongoing basis. The Group’s Corporate Governance Division, under the supervision of the Group’s Chief Compliance Officer, independently reviews these controls, evaluates their adequacy, effectiveness and compliance, and reports directly to the Audit Committee.
Li & Fung Limited Annual Report 2002 18 Corporate Governance (continued)
Code of Best Practice
The Company complied with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules”) throughout the year ended 31 December 2002.
Corporate Social Responsibility and Sustainability
Li & Fung has developed a Supplier Code of Conduct to be observed by all its approved vendors around the globe. The Code is a set of rigorous labor, health and environmental standards based on national labor laws, International Labor Organisation (ILO)’s conventions and treaties, and international best practices. For example, vendors are prohibited from hiring child or involuntary labor. They are also prohibited from practicing corporal punishment or any form of discrimination. The importance of environmental protection, occupational health and safety standards as well as compliance with the law are also highlighted in the Code.
Aside from conducting supplier inspections and ongoing supplier verification audits, Li & Fung also provides systematic training both internally to its employees and externally to its vendors to equip them with the awareness, knowledge and the necessary skills to meet compliance requirements.
Li & Fung is a member of Business for Social Responsibility (BSR), an international organization based in the US that promotes the respect for ethical values, people, community and the environment. In conjunction with a BSR labor rights project in 2002, Li & Fung together with several other US branded companies created a labor rights pocket guide along with a labor law protection & aid poster specifically targeted for migrant factory workers of Guangdong, China.
At the 2002 BSR Annual Conference held in the US, Li & Fung was honored to be the corporate sponsor of the Welcoming Reception at the Conference.
Li & Fung is also a participant of the United Nation’s Global Compact initiative that forms a platform for the promotion of human rights, labor welfare and the environment through the dissemination of good practices based on certain universal principles - the Nine Principles. These cover the respect and support for the protection of human rights, abstinence from human rights abuses, freedom of association, elimination of all forms of forced and child labor, elimination of discrimination in employment, and promotion of environmental responsibility.
In 2002, Li & Fung was again included, for the second consecutive year since 2001, as a component of the Dow Jones Sustainability World Indexes, the world’s first global indexes tracking the performance of companies worldwide that lead their industry in terms of corporate sustainability criteria. The inclusion acknowledges Li & Fung’s continuing effort and consistent performance in three main dimensions of corporate sustainability: social, economic and environmental responsibilities.
Li & Fung is committed to assuring a healthy and clean working environment for employees by declaring its headquarter building a non-smoking office.
19 Li & Fung Limited Annual Report 2002 Corporate Governance (continued)
Investor Relations and Communication
The Company continues to pursue a proactive policy of promoting investor relations and communication by maintaining regular meetings with institutional shareholders and analysts. All shareholders have 21 days’ notice of the Annual General Meeting at which directors and Committee members are available to answer questions on the business. In order to further promote effective communication, the Company maintains a website (www.lifung.com) to disseminate shareholder information electronically on a timely basis.
In 2002, Li & Fung’s continuing commitment to enhancing investor relations and communication has gained further recognition from the wider business community by winning the first place in the category of “Best Investor Relations by an Asian Company in International Markets” and “Best Investor Relations in Hong Kong” as surveyed by Investor Relations magazine (in association with The Asian Wall Street Journal) and Asiamoney magazine respectively.
Corporate Communication
The Company holds monthly Policy Committee Meetings for senior executives to formulate company-wide policies and practices, and to report and discuss significant issues affecting the Group.
As part of Li & Fung’s entrepreneurial corporate culture and business policy, semi-annual retreats, with active participation of the Group Chairman, the Group Managing Director, executive directors and senior managers of all business streams worldwide as well as guest speakers, are held in Hong Kong to create a sense of staff ownership of the Company’s strategic objectives and to foster effective communication across the Group.
Senior executives also travel frequently to different country offices to reinforce staff commitment to Li & Fung’s business culture and the Group’s established corporate initiatives. The Group’s Corporate Governance Division conducts regular interactive forum with staff members in Hong Kong and overseas to ensure that good corporate governance and company practices are reinforced and embedded in the Group’s operations.
The Company also publishes a regular newsletter to provide staff with reports on the Group’s latest directives and initiatives and staff recreational activities.
Information Technology
Li & Fung adopts the latest practicable information technology for enhancing efficiency and effectiveness in its external and internal communication. The IT infrastructure established by the Group includes the sharing of dedicated Extranet sites with technologically advanced customers and other key partners of the supply chain network, such as vendors and freight forwarders, to facilitate speedy dissemination of business information and better management of supply chain activities.
Li & Fung Limited Annual Report 2002 20 Corporate Governance (continued)
Li & Fung’s global sourcing network is inter-linked electronically through the Intranet for prompt sharing of information among employees worldwide. The Company has also established direct electronic linkage with regulatory bodies through the Internet to disseminate corporate information in a timely manner.
The IT Division of Li & Fung (Trading) Limited has obtained certificate of the ISO 9001:2000 quality management system standard applicable to provision of in-house IT products and services since end 2001.
Staff and Community
As a global Supply Chain Management service provider, Li & Fung fully recognizes that human capital is a key asset to the growth and profitability of the Company. The Group therefore places due emphasis on staff development and implements a policy of sponsoring staff to attend job-related training and self- improvement programs. Management development programs are also in place for senior employees. Contents of these Group’s programs cover general competency training, technical training, management skills, compliance and social ethics, business etiquette, occupational health and safety, language skills, and self- growth and development. In 2002, a total of 1,930 participants took part in programs organized for the Group’s Hong Kong and overseas offices.
Li & Fung and its offices, as an integral part of various communities where the businesses operate, contribute to the well-being of the societies and provide support to people in need. The Group endorses senior executives in accepting public offices which currently include various government and non-government advisory boards and professional associations promoting Hong Kong’s exports, advance of international trade, community’s quality-housing solutions and best corporate governance practices. Executives’ participation includes serving on the Committee of the Hong Kong Exporters’ Association, Hong Kong Housing Society and on the Corporate Governance Committee of the Hong Kong Society of Accountants.
Li & Fung further provides institutional support in the form of sponsorships for universities and charitable support by direct donation or direct employee involvement in fundraising activities organized by leading charitable organizations. Activities in year 2002 included the Standard Chartered Hong Kong Marathon and blood donation for Hong Kong Red Cross. These genuine efforts and contribution to a better society were recognized by the ‘Caring Company Award’ presented in 2002 by The Hong Kong Council of Social Service for the Group’s caring culture and good corporate citizenship.
21 Li & Fung Limited Annual Report 2002 Directors and Senior Management
Victor FUNG Kwok King Group Non-Executive Chairman
Victor FUNG Kwok King, aged 57, brother of Dr William FUNG Kwok Lun, is Group Chairman. He joined the Group in 1973 as Manager and became Managing Director of the Group’s export trading business in 1977. He became Group Managing Director in 1981 and Group Chairman in 1989. Dr Fung holds a Bachelors and a Masters degree in Electrical Engineering from the Massachusetts Institute of Technology, and a Doctorate in Business Economics from Harvard University. Dr Fung is currently Chairman of the Hong Kong Airport Authority and the Hong Kong University Council. He was appointed by Government to serve as the Hong Kong Representative on the APEC Business Advisory Council (ABAC) in 1996. From 1991 to 2000, he was Chairman of the Hong Kong Trade Development Council. Dr Fung is also active on a number of Government advisory boards including the Judicial Officers Recommendation Commission.
William FUNG Kwok Lun Group Managing Director
William FUNG Kwok Lun, OBE, JP, aged 54, brother of Dr Victor FUNG Kwok King, is Group Managing Director. He joined the Group in 1972 and became a Director of the Group’s export trading business in 1976. He became Group Managing Director in 1986. Dr Fung graduated from Princeton University with a Bachelor of Science degree in Engineering and holds an MBA degree from the Harvard Graduate School of Business. He was conferred the degree of Doctor of Business Administration, honoris causa, by the Hong Kong University of Science & Technology. Dr Fung is a non-executive director of HSBC Holdings PLC, CLP Holdings Limited, chinadotcom corporation and VTech Holdings Limited. He is a past Chairman of the Hong Kong General Chamber of Commerce, the Hong Kong Exporters’ Association and the Pacific Economic Cooperation Committee.
Li & Fung Limited Annual Report 2002 22 Directors and Senior Management (continued)
Paul Edward SELWAY-SWIFT Independent Non-Executive Director
Paul Edward SELWAY-SWIFT, aged 58, is an independent non-Executive Director of the Company. He is currently Chairman of SVB Holdings PLC, a specialist insurance group. He is also a director of several other companies including Alba PLC, Singer & Friedlander Group PLC, Temenos Group AG, BIL International Limited and Atlantis China Fund PLC. Mr Selway-Swift was formerly Deputy Chairman of HSBC Investment Bank PLC and a Director of The Hong Kong and Shanghai Banking Corporation Limited.
Allan WONG Chi Yun Independent Non-Executive Director
Allan WONG Chi Yun, MBE, aged 52, is an independent non-Executive Director of the Company. He is currently Chairman and Chief Executive of VTech Holdings Limited. He co-founded VTech Group in 1976. He holds a Bachelor of Science degree in Electrical Engineering from the University of Hong Kong, a Master of Science degree in Electrical and Computer Engineering from the University of Wisconsin and an honorary degree of Doctor of Technology from the Hong Kong Polytechnic University. Mr Wong serves on the Hong Kong Trade Development Council. He is also Chairman of Hong Kong Applied Science & Technology Research Institute Company Limited, a member of the Council of Advisors on Innovation and Technology and a council member of the University of Hong Kong. Mr Wong is a director of both the Bank of East Asia Limited and China-Hongkong Photo Products Holdings Limited.
Franklin Warren McFARLAN Independent Non-Executive Director
Franklin Warren McFARLAN, aged 65, is an independent non-Executive Director of the Company. Professor McFarlan is Senior Associate Dean, Director Asia Pacific of Harvard University. He has been a Professor at the Harvard Graduate School of Business Administration since 1973 and was Faculty Chairman of Advanced Management Program and Chairman of Executive Education Programs. Professor McFarlan graduated from the Harvard Business School with a doctorate. He is currently a director of Computer Sciences Corporation and Providian Financial Corporation.
23 Li & Fung Limited Annual Report 2002 Directors and Senior Management (continued)
Makoto YASUDA Independent Non-Executive Director
Makoto YASUDA, aged 65, is an independent non-Executive Director of the Company. He is Chairman and Chief Executive of international advisory firm Yasuda and Pama Limited, which is a joint venture of PAMA Group Inc. (previously known as Prudential Asset Management Asia Limited). He has been engaged in private equity investment and management activities in Asia for more than 32 years. He is well experienced in cross-border corporate advisory, merger & acquisition, project development, and other merchant banking activities. Currently, he sits on the board of several companies, including Yamatake Corporation, Atlas Copco K K and SV Interactive Communications Inc. He is also an advisor to HSBC Japan and Interface Asia Pacific.
LAU Butt Farn Non-Executive Director
LAU Butt Farn, aged 55, is a non-Executive Director of the Company. Mr Lau joined the Li & Fung Group in 1981 as financial controller. Between 1985 and 1998, he was Operations Director for Li & Fung (Retailing) Limited (the retailing arm of the private group) that operates in Circle K and Toys “R” Us. He is a non-executive director of Convenience Retail Asia Limited. He was also responsible for the investments of the private group. Since 1999, Mr Lau has been Chief Financial Officer of Li & Fung (Distribution) Limited, the Supply Chain Management business of the private group. Mr Lau graduated from the University of London with a Bachelor of Science degree in Physics and is a Fellow of the Institute of Chartered Accountants in England and Wales.
Leslie BOYD Non-Executive Director
Leslie BOYD, aged 66, is a non-Executive Director of the Company. Mr Boyd was a Works Manager in the British steel industry before moving to South Africa in 1970. Since then, he has dedicated his entire career in the steel, engineering, mining and finance industries in South Africa and is a leading member of the business community there. Mr Boyd is a Chartered Engineer and a Fellow of the Institution of Metallurgists UK. He was formerly Executive Vice Chairman of Anglo American PLC and a Director of Anglo American Corporation of South Africa Limited. He holds chairmanships and directorships in a number of mining, industrial and financial companies.
Li & Fung Limited Annual Report 2002 24 Directors and Senior Management (continued)
Steven Murray SMALL (As Alternate Director to Mr Leslie Boyd)
Steven Murray SMALL, aged 47, is an alternate director to Mr Leslie Boyd, non-Executive Director of the Company. Mr Small is a director of Consolidated Resources Limited, a subsidiary of Anglo American PLC which has an equity interest in Li & Fung. Mr Small graduated from the University of Durham with a Bachelor of Arts degree in Economics and is a Fellow of the Institute of Chartered Accountants in England and Wales. Mr Small also has a consultancy practice, Dimension S Capital, and manages a private equity portfolio. He sits on the boards of a number of Asian based companies.
Henry CHAN Executive Director
Henry CHAN, aged 53, is an Executive Director of the Company and is in charge of the Hardgoods business stream. Mr Chan has been with the Group since 1972 and has over 26 years of experience in the hardgoods area. He graduated from the University of Hong Kong with a Bachelor of Social Science degree. He also holds an MBA degree from the Chinese University of Hong Kong. He is currently a member of the Hong Kong Institute of Directors.
Danny LAU Sai Wing Executive Director
Danny LAU Sai Wing, aged 51, is an Executive Director of the Company and is in charge of the TG USA business stream. He graduated from the University of Kansas with a Bachelor of Science Degree in Business and Accounting. His first job was in garment manufacturing before joining Li & Fung in 1981. He has over 24 years of solid experience in the textile and clothing Supply Chain Management business. His involvement in community work includes having served as a director of the Clothing Technology Demonstration Centre Co. Ltd. and as a committee member of the Government’s Workplace English Campaign, the Hong Kong Exporters’ Association, Clothing Industry Training Authority, and Textile and Clothing Committee of Industry Technology Development Council.
25 Li & Fung Limited Annual Report 2002 Directors and Senior Management (continued)
Annabella LEUNG Wai Ping Executive Director
Annabella LEUNG Wai Ping, aged 50, is an Executive Director of the Company and is in charge of the European Apparel business stream. Before joining the Group, she was the Regional Director of North Asia Apparel for Inchcape, a global sourcing network acquired by the Company in 1995. Ms Leung holds a Master of Science degree in Biology from Northeastern University and has over 15 years of experience in the textile industry. She is also involved in work of the Hong Kong Exporters’ Association and the Clothing Industry Training Authority.
Bruce Philip ROCKOWITZ Executive Director
Bruce Philip ROCKOWITZ, aged 44, is an Executive Director of the Company and the President and Chief Executive Officer of Colby International Limited, a member of the Li & Fung Group. He joined the Company at the time of the Colby group becoming part of the Li & Fung Group in December 2000. Mr Rockowitz joined Colby in 1981 as Vice President in charge of merchandising and became President and Chief Executive Officer of Colby in 1986. Since 1986, he has been responsible for the growth and development and day-to-day operations of Colby. He has over 21 years of experience in Supply Chain Management of apparel and consumer hardgoods for markets worldwide.
Thomas Morton HAUGEN Executive Director, Li & Fung (Trading) Limited
Thomas Morton Haugen, aged 61, is an Executive Director of Li & Fung (Trading) Limited, a wholly-owned subsidiary of the Company and is in charge of the Value Retailers & Brands (U.S.A.) business stream. Before joining the Group, he was the President of Dodwell Apparel North America for Inchcape, a global sourcing network acquired by the Company in 1995. Mr Haugen has over 30 years of experience in retail buying and merchandising, as well as product development and sourcing based both in the U.S. and in Hong Kong. He is also actively involved in the work of Business for Social Responsibility, a U.S.A. based organization providing training and other assistance to help companies ensure their products are being manufactured in fully compliant factories.
Li & Fung Limited Annual Report 2002 26 Directors and Senior Management (continued)
Frank LEONG Kwok Yee
Chief Financial Officer
Frank LEONG Kwok Yee, aged 52, is the Chief Financial Officer of the Company since 1995. He is responsible for the Finance and Accounting, Human Resources and Information Technology of the Company. Before joining the Group, he was the Finance Director of Dodwell buying office, a global sourcing network acquired by the Company in 1995. Mr Leong is a member of the Australian Institute of Chartered Accountants. He has a Bachelor of Commerce degree from the New Zealand Otago University as well as an MBA degree from the MacQuarie University in Sydney. Mr Leong’s experience covered a number of industries such as global sourcing, manufacturing, direct sales and marketing as well as auditing and accounting services with one of the Big 4 accounting firms.
James SIU Kai Lau
Chief Compliance Officer
James SIU Kai Lau, aged 58, joined the Group in 1993 as Chief Financial Officer until 1996 when he assumed his present position as the Group’s Chief Compliance Officer. He is in charge of Corporate Governance Division and Corporate Secretarial Division. Prior to joining Li & Fung Group, Mr Siu was the partner-in-charge (1981-1989) of the Hong Kong audit practice of Coopers & Lybrand (currently PricewaterhouseCoopers) specializing in advising corporate clients on mergers, acquisitions, finance and on public listings. His current community work includes serving as member of the Supervisory Board of the Hong Kong Housing Society and Chairman of its Audit Committee. Mr Siu is also a member of the Corporate Governance Committee of the Hong Kong Society of Accountants. He is a Fellow of both the Institute of Chartered Accountants in Australia and the Hong Kong Society of Accountants. He is also a Fellow member of the Hong Kong Institute of Directors. Mr Siu holds a Bachelor of Economics degree from the University of Tasmania in Australia.
27 Li & Fung Limited Annual Report 2002 Information for Investors
Listing Information Share Information Listing: Hong Kong Exchange Board lot size: 2,000 shares Stock code: 494 Shares outstanding as at 31 December 2002: Ticker Symbol 2,890,012,000 shares Reuters: 0494.HK
Bloomberg: 494 HK Equity Market Capitalization as at 31 December 2002: HK$21,386,088,800 Key Dates 15 August 2002 Earnings per share for 2002 Announcement of 2002 Interim Results Interim 11.8 HK cents Full year 37.4 HK cents 6 September 2002 Payment of 2002 Interim Dividend Dividend per share for 2002 Interim 8.5 HK cents 24 March 2003 Final 22 HK cents Announcement of 2002 Final Results Enquiries Contact 5 May 2003 to 12 May 2003 Ms Nancy Chen (both days inclusive) Investor Relations Manager Closure of Register of Shareholders
Telephone: (852) 2300 2333 12 May 2003 Fax: (852) 2300 2020 Proposed Payment of 2002 Final Dividend e-mail: [email protected] 12 May 2003 Li & Fung Limited Annual General Meeting 11th Floor, LiFung Tower
Registrar & Transfer Offices 888 Cheung Sha Wan Road Kowloon, Hong Kong Principal: The Bank of Bermuda Limited Website 6 Front Street, Hamilton HM11, Bermuda www.lifung.com www.irasia.com/listco/hk/lifung Hong Kong Branch: Abacus Share Registrars Limited Ground Floor Bank of East Asia Harbour View Centre 56 Gloucester Road, Wanchai, Hong Kong
A Chinese version of this Annual Report is available from the Company upon request and can also be downloaded from our website.
Li & Fung Limited Annual Report 2002 28 Report of the Directors
The directors submit their report together with the audited accounts for the year ended 31 December 2002.
Principal Activities and Geographical Analysis of Operations The principal activity of the Company is investment holding. The activities of its principal subsidiaries are set out in the Principal Subsidiaries and Associated Companies section on pages 81 to 89.
Details of the analysis of the Group’s turnover and contribution to operating profit for the year by principal activities and geographical location are set out in note 2 to the accounts.
Share Capital Details of the movements in share capital of the Company are set out in note 21 to the accounts.
Results and Appropriations The results for the year are set out in the consolidated profit and loss account on page 40.
The directors declared an interim dividend of HK$0.085 per ordinary share, totalling HK$245,651,000, which was paid on 6 September 2002.
The directors recommend the payment of a final dividend of HK$0.22 per ordinary share, totalling HK$635,803,000.
Reserves Movements in the reserves of the Group and the Company during the year are set out in note 22 to the accounts.
Distributable Reserves At 31 December 2002, the distributable reserves of the Company available for distribution as dividends amounted to HK$2,950,713,000, comprising retained earnings of HK$890,040,000 and contribution surplus arising from the exchange of shares for the acquisition of Li & Fung (B.V.I.) Limited and the issuance of shares for the acquisition of Colby Group Holdings Limited, as set out in note 22(b) to the accounts, amounting to HK$2,060,673,000.
Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus shall not be distributed to the shareholders if there are reasonable grounds for believing that:
(i) the Company is, or would after the payment be, unable to pay its liabilities as they become due; or
(ii) the realisable value of the Company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium account.
29 Li & Fung Limited Annual Report 2002 Report of the Directors (continued)
Donations Charitable and other donations made by the Group during the year amounted to HK$1,210,000.
Fixed Assets Details of the movements in fixed assets of the Group are set out in note 12 to the accounts.
Ten-Year Financial Summary A summary of the results for the year end and of the assets and liabilities of the Group as at 31 December 2002 and for the previous nine financial years are set out in the Ten-Year Financial Summary section on page 90.
Pre-emptive Rights There are no provisions for pre-emptive rights under the Company’s bye-laws though there are no restrictions against such rights under the laws of Bermuda.
Purchase, Sale or Redemption of the Company’s Listed Securities The Company has not redeemed any of its listed securities during the year. Neither the Company nor any of its subsidiaries has purchased or sold any of the Company’s listed securities during the year.
Share Options Currently, the Company has no share option scheme. The previous share option scheme (the “Scheme”) of the Company was adopted on 2 June 1992 and expired on 1 June 2002. As at 31 December 2002, there are options (“Share Options”) relating to 31,196,000 Shares granted by the Company pursuant to the Scheme which are valid and outstanding and which will remain valid under the Scheme.
Details of the Scheme are as follows:
(i) Purpose
The Scheme was designed to give executive directors and senior employees holding an executive, managerial or supervisory position in the Company or any of its wholly-owned subsidiaries an equity interest in the Company in order to enhance long-term shareholder value. The granting of options would also help the Company to attract and motivate individuals with experience and ability and to reward individuals for past and future performance.
(ii) Qualifying participants
Any employee including any executive director of the Company or any of its wholly-owned subsidiaries.
Li & Fung Limited Annual Report 2002 30 Report of the Directors (continued)
(iii) Maximum number of shares
The maximum number of shares subject to the Scheme must not when aggregated with any shares subject to any other share option schemes exceed 10% of the shares in issue from time to time (excluding any shares which have been duly allotted and issued upon the exercise of options granted pursuant to the Scheme and any other schemes). No share will be available for issue under the Scheme as at the date of the annual report as the Scheme has expired on 1 June 2002.
No qualifying participant were granted an option which, if exercised in full, would result in such person’s maximum entitlement exceeding 25% of the aggregate number of shares for the time being issued and issuable under the Scheme.
(iv) Option period
In respect of any particular option, such period the Board might in its absolute discretion determine, save that such period should not commence earlier than one year nor more than 10 years from the date on which an option was granted and accepted by the grantee.
(v) Amount payable on application or acceptance
An offer of the grant of an option should remain open for acceptance for a period of 28 days from the date on which an option was offered to the grantee (the “Offer Date”). An offer of the grant of the option should be deemed to have been accepted and to have taken effect when the duplicate letter comprising acceptance of the option duly signed by the grantee together with a remittance in favour of the Company of HK$1 by way of consideration of the grant thereof was received by the Company.
(vi) Exercise price
The exercise price in respect of any particular option should be (i) not more than 20% less than the average closing price of the Shares for the five business days immediately preceding the Offer Date on which there were dealings in Shares on the Stock Exchange or (ii) the nominal value of a Share (whichever is the greater).
Effective from 1 September 2001, the exercise price must be at least the higher of (i) the closing price of the Shares on the date of grant, which must be a business day, and (ii) the average closing price of the Shares for the five business days immediately preceding the date of grant in accordance with the rule 17.03 of the Listing Rules.
31 Li & Fung Limited Annual Report 2002 Report of the Directors (continued)
(vii) The remaining life of the Scheme
The Board was entitled at any time within 10 years between 2 June 1992 and 1 June 2002 to offer the grant of an option to any qualifying participants.
Details of the Share Options granted under the Scheme and remain outstanding as at 31 December 2002 are as follows:
Options Options held at Options Options Options held at Exercise 1 January granted exercised lapsed 31 December Price Exercisable Exercisable 2002 during the year during the year during the year 2002 HK$ Grant date from until
Dr William FUNG 480,000 — — — 480,000 15.26 7 July 2000 7 July 2001 6 July 2003 Kwok Lun 480,000 — — — 480,000 10.50 18 July 2001 18 July 2002 17 July 2004 480,000 — — — 480,000 7.98 28 August 2001 28 August 2003 27 August 2005
Mr Henry CHAN 1,200,000 — 1,200,000 1 — — 4.1525 16 July 1999 16 July 2000 15 July 2002 240,000 — — — 240,000 15.26 7 July 2000 7 July 2001 6 July 2003 240,000 — — — 240,000 10.50 18 July 2001 18 July 2002 17 July 2004 240,000 — — — 240,000 7.98 28 August 2001 28 August 2003 27 August 2005
Mr Danny LAU240,0001 — 240,000— — 4.1525 16 July 1999 16 July 2000 15 July 2002 Sai Wing 240,000 — — — 240,000 15.26 7 July 2000 7 July 2001 6 July 2003 240,000 — — — 240,000 10.50 18 July 2001 18 July 2002 17 July 2004 240,000 — — — 240,000 7.98 28 August 2001 28 August 2003 27 August 2005
Ms Annabella 240,000 — — — 240,000 15.26 7 July 2000 7 July 2001 6 July 2003 LEUNG Wai Ping 240,000 — — — 240,000 10.50 18 July 2001 18 July 2002 17 July 2004 240,000 — — — 240,000 7.98 28 August 2001 28 August 2003 27 August 2005
Mr Bruce Philip 240,000 — — — 240,000 7.98 28 August 2001 28 August 2003 27 August 2005 ROCKOWITZ
Continuous contract 9,594,000 — 9,594,000 1 — — 4.1525 16 July 1999 16 July 2000 15 July 2002 employees 8,056,000 — — 184,000 7,872,000 15.26 7 July 2000 7 July 2001 6 July 2003 9,468,000 — — 148,000 9,320,000 10.50 18 July 2001 18 July 2002 17 July 2004 10,404,000 — — 240,000 10,164,000 7.98 28 August 2001 28 August 2003 27 August 2005
Note:
(1) The weighted average closing market price per Share immediately before the dates on which the Share Options were exercised was HK$11.77.
Li & Fung Limited Annual Report 2002 32 Report of the Directors (continued)
Subsidiaries Details of the Company’s principal subsidiaries at 31 December 2002 are set out in the Principal Subsidiaries and Associated Companies section on pages 81 to 89.
Associated Companies Details of the Company’s principal associated companies at 31 December 2002 are set out in the Principal Subsidiaries and Associated Companies section on pages 81 to 89.
Major Customers and Suppliers During 2002, the Group purchased less than 30% of its goods and services from its five largest suppliers. The percentage of sales attributable to the Group’s largest customer and the five largest customers combined were 16.5% and 33.8% respectively. None of the directors, their associates or any shareholders (which to the knowledge of the directors own more than 5% of the Company’s issued share capital) had an interest in the customers noted.
During 2001, the Group purchased less than 30% of its goods and services from its five largest suppliers. The percentage of sales attributable to the Group’s largest customer and the five largest customers combined were 13.4% and 33.5% respectively.
Pension Scheme Arrangements With effect from 1 December 2000, the mandatory provident fund (the “MPF Scheme”) was set up by the Mandatory Provident Fund Authority of Hong Kong. The MPF Scheme is a defined contribution retirement benefit scheme and administered by independent trustees. Both the employer and the employees have to contribute an amount equal to 5% of the relevant income of such employee to the MPF Scheme. Contributions from the employer are 100% vested in the employees as soon as they are paid to the MPF Scheme and subject to certain conditions being met, all benefits derived from the mandatory contributions must be preserved until the employee either reaches the normal retirement age of 65 or meets certain specified conditions whichever is the earlier.
In Taiwan, the Group operates a defined contribution provident scheme for its employees with the contribution set at 6% of the employees’ basic salaries. In addition, the Group also participates in a retirement benefit plan in accordance with local statutory requirements. Under this plan, the Group recognises pension cost monthly at 2% of the employees’ salaries, which is contributed monthly to an independent fund.
In the United Kingdom, the Group participates in a defined benefit scheme for its employees. Under which, the Group and its employees made monthly contributions to the scheme based on 12% to 19.5% and 5% to 7% of the employees’ salary respectively.
In Korea, the Group and each of its employees are required to contribute 4.5% of the employee’s monthly salary to a government established pension corporation pursuant to the statutory requirement. Upon retirement, an employee is entitled to receive a lump sum payment.
The provident fund schemes for staff of the Group in other regions follow the local requirements.
33 Li & Fung Limited Annual Report 2002 Report of the Directors (continued)
The Group’s pension scheme contributions charged to the consolidated profit and loss account for the year are as follows:
HK$’000
Contributions to the MPF Scheme 22,854 Contributions forfeited by employees (1,043) Contributions to the defined contribution provident scheme and defined benefit plan in Taiwan 7,615 Contributions to the defined benefit scheme in the United Kingdom 4,535 Contributions pursuant to the statutory requirements in Korea 9,242 Contributions pursuant to local requirements in other overseas regions 17,869
61,072
Directors The directors during the year were:
Non-Executive Directors: Executive Directors: Dr Victor FUNG Kwok King, Chairman Dr William FUNG Kwok Lun, Managing Director Mr Paul Edward SELWAY-SWIFT * Mr Henry CHAN Mr Allan WONG Chi Yun * Mr Danny LAU Sai Wing Professor Franklin Warren McFARLAN * Ms Annabella LEUNG Wai Ping Mr Makoto YASUDA * Mr Bruce Philip ROCKOWITZ Mr LAU Butt Farn Mr Leslie BOYD (Mr Steven Murray SMALL — alternate to Mr Leslie BOYD)
* independent non-executive directors
In accordance with bye-law 110 of the Company’s bye-laws, Mr Henry CHAN, Professor Franklin Warren McFARLAN and Mr Leslie BOYD retire and, being eligible, offer themselves for re-election.
Independent non-executive directors are subject to retirement by rotation in Annual General Meetings in accordance with bye-law 110 of the Company’s bye-laws.
The biographical details of the directors as at the date of this Report are set out in the Directors and Senior Management section on pages 22 to 27.
Li & Fung Limited Annual Report 2002 34 Report of the Directors (continued)
Directors’ Service Contracts Under a service contract dated 2 June 1992 between the Company and Dr William FUNG Kwok Lun and a service contract dated 2 June 1992 between Li & Fung (B.V.I.) Limited and Dr William FUNG Kwok Lun, Dr William FUNG Kwok Lun has been appointed to act as Managing Director of the Company, Li & Fung (Trading) Limited, Li & Fung (Properties) Limited and Li & Fung (B.V.I.) Limited, in each case for an initial period of five years from 1 April 1992 and thereafter unless terminated by not less than 12 calendar months’ notice in writing expiring at the end of such initial period or any subsequent month.
Apart from the above, none of the directors who are proposed for re-election at the forthcoming annual general meeting has a service contract with the Group which is not determinable within one year without payment of compensation other than statutory compensation.
Directors’ Interests in Contracts No contracts of significance in relation to the Group’s business to which the Company or its subsidiaries was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.
Directors’ Interests in Equity or Debt Securities As at 31 December 2002, the directors, chief executives and their associates had the following interests in the share capital and Share Options of the Company and its associated corporations (within the meaning of the Securities (Disclosure of Interests) Ordinance (“SDI Ordinance”)) which require notification pursuant to Section 28 of the SDI Ordinance or the Model Code for Securities Transactions by Directors of Listed Companies (“the Model Code”) or as recorded in the register maintained pursuant to Section 29 of the SDI Ordinance:
(A) Shares of the Company of HK$0.025 each
Number of Shares Personal Corporate Family Other Total interest interest interest interest interests
Dr Victor FUNG Kwok King — 1,180,500,0001 — 50,750,0002 1,231,250,000 Dr William FUNG Kwok Lun 68,502,300 1,180,500,0001 4,000 — 1,249,006,300 Mr Henry CHAN 3,280,000 — — — 3,280,000 Mr Danny LAU Sai Wing 7,240,000 — — — 7,240,000 Ms Annabella LEUNG Wai Ping 3,200,000 — — — 3,200,000 Mr Bruce Philip ROCKOWITZ 8,000 — — 50,374,1003 50,382,100 Mr LAU Butt Farn 2,200,000 — — — 2,200,000 Professor Franklin Warren McFARLAN — — — 52,0004 52,000 Mr Leslie BOYD — — — 10,0005 10,000
35 Li & Fung Limited Annual Report 2002 Report of the Directors (continued)
Notes:
(1) As at 31 December 2002,
(a) King Lun Holdings Limited (“King Lun”), a private company incorporated in the British Virgin Islands, held 49,950,800 Shares.
(b) King Lun through its wholly-owned Hong Kong incorporated subsidiary, Li & Fung (1937) Limited, held 996,000,000 Shares.
(c) Li & Fung (1937) Limited, through Orient Ocean Holdings Limited (“Orient Ocean”), a private company incorporated in the British Virgin Islands, held 134,549,200 Shares. Li & Fung (1937) Limited held 50% voting rights with no beneficial interest in Orient Ocean.
Dr Victor FUNG Kwok King and Dr William FUNG Kwok Lun are deemed to have interests in the 1,180,500,000 Shares, i.e. the total number of Shares mentioned in notes (1)(a), (b) and (c) above, through their personal or other interests in King Lun as set out below :-
(i) 1,332,840 shares in King Lun, representing 50% of its issued share capital, are owned by J.P. Morgan Trust Company (Jersey) Limited (formerly known as: Chase Bank & Trust Company (C.I.) Limited), the trustee of a trust established for the benefit of the family of Dr Victor FUNG Kwok King.
(ii) 1,332,840 shares in King Lun, representing 50% of its issued share capital, are owned by Dr William FUNG Kwok Lun.
(2) 50,750,000 Shares in the Company are held by J.P. Morgan Trust Company (Jersey) Limited (formerly known as: Chase Bank & Trust Company (C.I.) Limited), the trustee of a trust established for the benefit of the family of Dr Victor FUNG Kwok King.
(3) 50,374,100 Shares in the Company are held by Hurricane Millennium Holdings Limited, a company beneficially owned by a trust which has been set up for the benefit of family members of Mr Bruce Philip ROCKOWITZ.
(4) 52,000 Shares in the Company are held by a trust established for the benefit of Professor Franklin Warren McFARLAN and managed by Fleet Bank, Boston.
(5) 10,000 Shares in the Company are held by Maitland Trustees Limited, the trustee of a trust, in respect of which the family of Mr Leslie BOYD are potential discretionary beneficiaries.
(B) Share Options
The interests of the directors and chief executives in the Share Options of the Company are detailed in the Share Options section stated above.
Save as disclosed above, at no time during the year, the directors and chief executives (including their spouse and children under 18 years of age) had any interest in, or had been granted, or exercised, any rights to subscribe for shares (or warrants or debentures, if applicable) of the Company or its associated corporations required to be disclosed pursuant to the SDI Ordinance and the Model Code.
Li & Fung Limited Annual Report 2002 36 Report of the Directors (continued)
Substantial Shareholders At 31 December 2002, the register of substantial shareholders maintained under Section 16(1) of the SDI Ordinance shows that the Company had been notified of the following substantial shareholders’ interests, being 10% or more of the Company’s issued share capital:-
Number of Shares
Li & Fung (1937) Limited 996,000,000 The Capital Group Companies, Inc. 348,961,945
Senior Management The biographical details of the senior management as at the date of this Report are set out in the Directors and Senior Management section on pages 22 to 27.
Management Contracts No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year.
Corporate Governance Principal corporate governance practices as adopted by the Company are set out in the Corporate Governance section on pages 15 to 21.
Directors’ Responsibilities for the Accounts The Directors are responsible for the preparation of accounts for each financial period which give a true and fair view of the state of affairs of the Group and of the results and cash flows for that period. In preparing these accounts for the year ended 31 December 2002, the Directors have selected suitable accounting policies and applied them consistently; made judgements and estimates that are prudent and reasonable; and have prepared the accounts on the going concern basis. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group.
Auditors The accounts have been audited by PricewaterhouseCoopers who retire and, being eligible, offer themselves for re-appointment.
On behalf of the Board Victor FUNG Kwok King Chairman
Hong Kong, 24 March 2003
37 Li & Fung Limited Annual Report 2002 Auditors’ Report
PricewaterhouseCoopers 22nd Floor Prince's Building Central, Hong Kong Telephone (852) 2289 8888 Facsimile (852) 2810 9888
AUDITORS’ REPORT TO THE SHAREHOLDERS OF LI & FUNG LIMITED (incorporated in Bermuda with limited liability)
We have audited the accounts on pages 40 to 89 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.
Respective responsibilities of directors and auditors The Company’s directors are responsible for the preparation of accounts which give a true and fair view. In preparing accounts which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.
It is our responsibility to form an independent opinion, based on our audit, on those accounts and to report our opinion to you.
Basis of opinion We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the accounts are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. We believe that our audit provides a reasonable basis for our opinion.
Opinion In our opinion the accounts give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2002 and of the Group’s profit and cash flows for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.
PricewaterhouseCoopers Certified Public Accountants
Hong Kong, 24 March 2003
Li & Fung Limited Annual Report 2002 38 Statement of Accounts
40 Consolidated Profit & Loss Account
41 Consolidated Balance Sheet
43 Balance Sheet
44 Consolidated Statement of Changes in Equity
45 Consolidated Cash Flow Statement
Notes to the Accounts 47 1. Principal accounting policies 54 2. Turnover, revenues and segment information 58 3. Operating profit 58 4. Interest expenses 59 5. Taxation 59 6. Profit attributable to shareholders 60 7. Dividends 60 8. Earnings per Share 60 9. Staff costs including directors’ emoluments 61 10. Directors’ and senior management’s emoluments 63 11. Intangible assets 64 12. Fixed assets 65 13. Investments in subsidiaries 66 14. Associated companies 66 15. Investments 66 16. Inventories 67 17. Due from related companies 67 18. Trade and bills receivable 67 19. Due to related companies 68 20. Trade and bills payable 68 21. Share capital and options 70 22. Reserves 73 23. Long-term liabilities 73 24. Pension obligations 75 25. Deferred taxation 76 26. Notes to the consolidated cash flow statement 79 27. Contingent liabilities 80 28. Commitments 80 29. Charge of assets 80 30. Approval of accounts
81 Principal Subsidiaries and Associated Companies
39 Li & Fung Limited Annual Report 2002 Consolidated Profit and Loss Account
For the year ended 31 December 2002
2002 2001 Note HK$’000 HK$’000
Turnover Continuing operations 37,281,360 32,941,392 Discontinued operations — 87,183
2 37,281,360 33,028,575
Cost of sales (33,998,139) (30,116,489)
Gross profit 3,283,221 2,912,086 Other revenues 2 135,887 62,099
Total margin 3,419,108 2,974,185 Selling expenses (496,986) (485,342) Merchandising expenses (1,529,451) (1,546,663) Administrative expenses (241,659) (244,215) Amortisation of intangible assets (16,407) (7,178) Provision for investments — (24,222)
Operating profit Continuing operations 1,134,605 904,520 Discontinued operations — (237,955)
3 1,134,605 666,565 Interest income 2 49,581 112,837 Interest expenses 4 (8,987) (12,464) Share of profits less losses of associated companies 393 1,443
Profit before taxation 1,175,592 768,381 Taxation 5 (94,896) (55,637)
Profit after taxation 1,080,696 712,744 Minority interests (228) 69,567
Profit attributable to shareholders Continuing operations 1,080,468 951,307 Discontinued operations — (168,996)
6 & 22 1,080,468 782,311
Earnings per share 8 Basic 37.4 HK cents 27.3 HK cents Continuing operations 37.4 HK cents 33.1 HK cents
Li & Fung Limited Annual Report 2002 40 Consolidated Balance Sheet
As at 31 December 2002
2002 2001 Note HK$’000 HK$’000
Intangible assets 11 326,696 79,585 Fixed assets 12 1,263,838 1,224,354 Associated companies 14 22,255 34,288 Investments 15 139,932 71,348
Current assets Inventories 16 118,082 130,388 Due from related companies 17 22,155 19,825 Trade and bills receivable 18 3,152,836 2,407,048 Other receivables, prepayments and deposits 499,943 364,335 Cash and bank balances 2,478,434 2,698,395
6,271,450 5,619,991
Current liabilities Due to related companies 19 97 809 Trade and bills payable 20 3,369,701 2,745,771 Accrued charges and sundry payables 502,457 534,784 Taxation 143,984 90,258 Current portion of long-term liabilities 23 51,496 50,300 Bank loans and overdrafts Secured 29 53,037 77,766 Unsecured 38,691 29,174
4,159,463 3,528,862
Net current assets 2,111,987 2,091,129
Total assets less current liabilities 3,864,708 3,500,704
41 Li & Fung Limited Annual Report 2002 Consolidated Balance Sheet (continued)
2002 2001 Note HK$’000 HK$’000
Financed by:
Share capital 21 72,250 71,974
Reserves 22 3,089,967 2,838,190 Proposed final dividend 22 635,803 532,887
3,725,770 3,371,077
Shareholders’ funds 3,798,020 3,443,051 Minority interests 27,248 25,965 Non-current liabilities Long-term liabilities 23 30,400 27,720 Pension obligations 24 4,029 — Deferred taxation 25 5,011 3,968
3,864,708 3,500,704
Victor FUNG Kwok King William FUNG Kwok Lun Director Director
Li & Fung Limited Annual Report 2002 42 Balance Sheet
As at 31 December 2002
2002 2001 Note HK$’000 HK$’000
Investments in subsidiaries 13 2,063,703 2,063,703
Current assets Due from related companies 17 5,713,162 4,871,768 Other receivables, prepayments and deposits 450 431 Dividend receivable 900,023 800,020 Cash and bank balances 129 164
6,613,764 5,672,383
Current liabilities Due to related companies 19 2,773,306 1,993,881 Accrued charges and sundry payables 1,858 1,788 Bank overdrafts 10 —
2,775,174 1,995,669
Net current assets 3,838,590 3,676,714
Total assets less current liabilities 5,902,293 5,740,417
Financed by:
Share capital 21 72,250 71,974
Reserves 22 5,194,240 5,135,556 Proposed final dividend 22 635,803 532,887
5,830,043 5,668,443
Shareholders’ funds 5,902,293 5,740,417
Victor FUNG Kwok King William FUNG Kwok Lun Director Director
43 Li & Fung Limited Annual Report 2002 Consolidated Statement of Changes in Equity
For the year ended 31 December 2002
2002 2001 Note HK$’000 HK$’000
Total shareholders’ funds as at 1 January 3,443,051 3,342,055 Exchange adjustments on translation of the accounts of overseas subsidiaries and associated companies 22 8,398 (12,515) Goodwill released upon disposal of a subsidiary 22 — 5,637 Profit for the year 22 1,080,468 782,311 Dividends 22 (779,716) (746,151) Issue of shares 21 & 22 45,819 71,714
Total shareholders’ funds as at 31 December 3,798,020 3,443,051
Li & Fung Limited Annual Report 2002 44 Consolidated Cash Flow Statement
For the year ended 31 December 2002
Restated 2002 2001 Note HK$’000 HK$’000
Operating activities Net cash inflow generated from operations 26(a) 981,839 897,918 Hong Kong profits tax paid (17,567) (30,726) Overseas taxation paid (19,730) (12,544)
Net cash inflow from operating activities 944,542 854,648
Investing activities Purchase of fixed assets (142,845) (117,211) Sale of fixed assets 3,711 6,372 Payment for development costs (10,140) (35,225) Disposal of subsidiaries (net of cash and cash equivalents) 26(b) — (2,071) Purchase of subsidiaries (net of cash and cash equivalents) 26(c) (257,004) (50,369) Settlement of consideration payable for the acquisition of subsidiaries — (123,750) Premium paid in respect of acquisition of businesses — (452) Investment in associated companies (1,698) (27,273) Purchase of investments (68,605) (37,210) Loan to associated companies (4,028) (8,796) Repayment from associated companies 3,158 — Repayment from an investee company 26 — Interest received 49,581 112,837 Dividends received from associated companies 11,725 11,996
Net cash outflow from investing activities (416,119) (271,152)
Net cash inflow before financing 528,423 583,496
45 Li & Fung Limited Annual Report 2002 Consolidated Cash Flow Statement (continued)
Restated 2002 2001 Note HK$’000 HK$’000
Financing activities 26(d) Net proceeds from issue of shares 45,819 71,714 New bank loans — 31,993 Capital contribution from a minority shareholder 286 63,542 Repayment of bank loans (7,049) (84,464) Repayment of other loans (3,549) (5,975) Repayment of loan from minority shareholders — (3,449) Repayment of obligations under finance leases — (5,195) Loans from minority shareholders 10,831 15,908 Interest paid (8,987) (12,464) Dividends paid to minority shareholders (532) (4,843) Dividends paid (779,716) (746,151)
Net cash outflow from financing (742,897) (679,384)
Decrease in cash and cash equivalents (214,474) (95,888) Cash and cash equivalents at 1 January 2,591,455 2,696,746 Effect of foreign exchange rate changes 9,725 (9,403)
Cash and cash equivalents at 31 December 2,386,706 2,591,455
Analysis of the balances of cash and cash equivalents Cash and bank balances 2,478,434 2,698,395 Short-term bank loans and overdrafts (91,728) (106,940)
2,386,706 2,591,455
Li & Fung Limited Annual Report 2002 46 Notes to the Accounts
As at 31 December 2002
1 Principal accounting policies The principal accounting policies adopted in the preparation of these accounts are set out below:
(a) Basis of preparation The accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the Hong Kong Society of Accountants (“HKSA”). They have been prepared under the historical cost convention as modified by the revaluation of certain leasehold land and buildings as disclosed in the accounting policies below.
In the current year, the Group adopted the following Statements of Standard Accounting Practice (“SSAPs”) issued by the HKSA which are effective for accounting periods commencing on or after 1 January 2002:
SSAP 1 (revised) : Presentation of financial statements SSAP 15 (revised) : Cash flow statements SSAP 34 (revised) : Employee benefits
The effect of adopting these revised standards is set out in the accounting policies detailed below.
(b) Group accounting
(i) Consolidation The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31 December. Subsidiaries are those entities in which the Group controls the composition of the board of directors, controls more than half of the voting power or holds more than half of the issued share capital or has power to govern the financial and operating policies. The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from the effective date of acquisition or up to the effective date of disposal, as appropriate.
All significant intercompany transactions and balances within the Group are eliminated on consolidation.
The gain or loss on disposal of a subsidiary represents the difference between the proceeds of the sale and the Group’s share of its net assets together with any unamortised goodwill or negative goodwill or goodwill/negative goodwill taken to reserves and which was not previously charged or recognised in the consolidated profit and loss account.
Minority interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries.
In the Company’s balance sheet the investments in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.
47 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
1 Principal accounting policies (continued)
(b) Group accounting (continued)
(ii) Associated companies An associated company is a company, not being a subsidiary, in which an equity interest is held for the long- term and significant influence is exercised in its management.
The consolidated profit and loss account includes the Group’s share of the results of associated companies for the year, and the consolidated balance sheet includes the Group’s share of the net assets of the associated companies and also goodwill/negative goodwill (net of accumulated amortisation) on acquisition.
Equity accounting is discontinued when the carrying amount of the investment in an associated company reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated company.
(iii) Translation of foreign currencies Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the profit and loss account.
The balance sheet of subsidiaries and associated companies expressed in foreign currencies are translated at rates of exchange ruling at the balance sheet date whilst the profit and loss is translated at an average rate. Exchange differences are dealt with as a movement in reserves.
(c) Fixed assets
(i) Properties Freehold land is stated at cost.
Leasehold land and buildings are stated at cost or valuation less accumulated depreciation and accumulated impairment losses. Effective from 1994, no further revaluation of the Group’s leasehold land and buildings in Hong Kong have been carried out. The Group places reliance on paragraph 80 of SSAP 17 which provides exemption from the need to make regular revaluation for such assets.
Li & Fung Limited Annual Report 2002 48 Notes to the Accounts (continued)
1 Principal accounting policies (continued)
(c) Fixed assets (continued)
(ii) Other fixed assets Other fixed assets, comprising leasehold improvements, furniture, fixtures, computer and other equipment, plant and machinery, motor vehicles and company boats are stated at cost less accumulated depreciation and accumulated impairment losses.
(iii) Depreciation Freehold land is not amortised. Leasehold land is depreciated over the period of the lease while other fixed assets are depreciated at rates sufficient to write off their cost less accumulated impairment losses over their estimated useful lives on a straight-line basis. The principal annual rates are as follows:
Buildings and leasehold improvements 2% - 20%
1 Furniture, fixtures, computer and other equipment 10% - 33 /3% Plant and machinery 10% - 15% Motor vehicles and company boats 15% - 20%
Major costs incurred in restoring fixed assets to their normal working condition are charged to the profit and loss account. Improvements are capitalised and depreciated over their expected useful lives to the Group.
(iv) Impairment and gain or loss on sale At each balance sheet date, both internal and external sources of information are considered to assess whether there is any indication that assets included in properties and other fixed assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit and loss account except where the asset is carried at valuation and the impairment loss does not exceed the revaluation surplus for that same asset, in which case it is treated as a revaluation decrease.
The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the profit and loss account. Any revaluation reserve balance remaining attributable to the relevant asset is transferred to retained earnings and is shown as a movement in reserves.
(d) Assets under leases
(i) Finance leases Leases that substantially transfer to the Group all the risks and rewards of ownership of assets are accounted for as finance leases. Finance leases are capitalised at the inception of the leases at the lower of the fair value of the leased assets or the present value of the minimum lease payments. Each lease payment is allocated between the capital and finance charges so as to achieve a constant rate on the capital balances outstanding. The corresponding rental obligations, net of finance charges, are included in long-term liabilities. The finance charges are charged to the profit and loss account over the lease periods.
Assets held under finance leases are depreciated over the shorter of their estimated useful lives or the lease periods.
49 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
1 Principal accounting policies (continued)
(d) Assets under leases (continued)
(ii) Operating leases Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases net of any incentives received from the leasing company are charged to the profit and loss account on a straight-line basis over the lease periods.
(e) Intangibles
(i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary/associated company at the date of acquisition.
Goodwill on acquisitions occurring on or after 1 January 2001 is included in intangible assets and is amortised using the straight-line method over its estimated useful life. Goodwill is generally amortised over a period of 15 years.
Goodwill on acquisitions that occurred prior to 1 January 2001 was taken to reserves. Any impairment arising on such goodwill is accounted for in profit and loss account.
The gain or loss on disposal of an entity includes the unamortised balance of goodwill relating to the entity disposed of or, for pre 1 January 2001 acquisitions, the related goodwill written off against reserves to the extent it has not previously been realised in the profit and loss account.
(ii) Research and development costs Research costs are expensed as incurred. Costs incurred on system development projects relating to the design and testing of new or improved systems for internal use are recognised as an intangible asset where the technical feasibility and intention of completing the system under development has been demonstrated and the resources are available to do so, costs are identifiable and there is an ability to use the asset that will generate probable future economic benefits. Such development costs are recognised as an asset and amortised on a straight-line basis over their estimated useful lives of 3 - 5 years from the date on which the system commences operations to reflect the pattern in which the related economic benefits are recognised. Development costs that do not meet that above criteria are expensed as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.
Li & Fung Limited Annual Report 2002 50 Notes to the Accounts (continued)
1 Principal accounting policies (continued)
(e) Intangibles (continued)
(iii) Impairment of intangible assets Where an indication of impairment exists, the carrying amount of any intangible asset, including goodwill previously written off against reserves, is assessed and written down immediately to its recoverable amount. Any impairment loss is recognised as an expense in the profit and loss account.
(f) Investments Investments are stated at cost less any provision for impairment losses.
The carrying amounts of individual investments are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. When a decline other than temporary has occurred, the carrying amount of such investments will be reduced to its fair value. The impairment loss is recognised as an expense in the profit and loss account. This impairment loss is written back to profit and loss account when the circumstances and events that led to the write-downs or write-offs cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future.
(g) Inventories Inventories comprise merchandise, raw materials and finished goods and are stated at the lower of cost and net realisable value. Cost, calculated on the first-in, first-out basis, comprises purchase prices of inventories including direct expenses. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.
(h) Accounts receivable Provision is made against accounts receivable to the extent they are considered to be doubtful. Accounts receivable in the balance sheet are stated net of such provision.
(i) Export quota entitlements Purchased permanent export quota entitlements are charged to the profit and loss account immediately upon acquisition.
Export quota entitlements allocated by the authorities in Hong Kong are not capitalised and are not included as assets in the balance sheet.
Temporary export quota entitlements acquired are charged to the profit and loss account in the year in which such quota entitlements are utilised.
(j) Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash and bank balances which represent cash on hand and demand deposits at banks, net of short-term bank loans and bank overdrafts which are repayable on demand.
51 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
1 Principal accounting policies (continued)
(k) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.
(l) Employee benefits The Group participates in a number of defined contribution plans and defined benefit plans throughout the world, the assets of which are generally held in separate trustee - administrated funds. The pension plans are generally funded by payments from employees and by the relevant Group companies, taking account of the recommendations of qualified actuaries.
The Group’s contributions to the defined contribution retirement scheme are charged to the profit and loss account in the year to which the contributions relate.
For defined benefit plans, pension costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the profit and loss account so as to spread the regular cost over the service lives of employees in accordance with the advice of the actuaries who carry out a full valuation of the plans on an annual basis. The pension obligation is measured as the present value of the estimated future cash outflows, discounted by reference to market yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liabilities. Plan assets are measured at fair value. Actuarial gains and losses are recognised over the average remaining service lives of employees. Past service costs are recognised as an expense on a straight-line basis over the average period until the benefits become vested. This is a change in accounting policy, as in previous years, pension costs in respect of the defined benefit plans were charged to the profit and loss account to the extent of contributions paid to the funds.
Pursuant to the requirements of SSAP 34, the Group has transitional pension liability on initial adoption of the SSAP of approximately HK$16,048,000. The Group chooses to recognise the transitional pension liability on a straight-line basis over five years from the date of adoption of this SSAP at 1 January 2002. For the year ended 31 December 2002, the transitional pension liability of approximately HK$3,208,000 was charged to the consolidated profit and loss account (note 24(b)). As at 31 December 2002, transitional pension liability of approximately HK$12,840,000 remained unrecognised.
(m) Contingent liabilities and contingent assets A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.
A contingent liability is not recognised but is disclosed in the notes to the accounts. When a change in the probability of an outflow occurs so that outflow is probable, they will then be recognised as a provision.
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group.
Li & Fung Limited Annual Report 2002 52 Notes to the Accounts (continued)
1 Principal accounting policies (continued)
(m) Contingent liabilities and contingent assets (continued) Contingent assets are not recognised but are disclosed in the notes to the accounts when an inflow of economic benefits is probable. When inflow is virtually certain, an asset is recognised.
(n) Deferred taxation Deferred taxation is accounted for at the current taxation rate in respect of timing differences between profit as computed for taxation purposes and profit as stated in the accounts to the extent that a liability or an asset is expected to be payable or recoverable in the foreseeable future.
(o) Revenue recognition Revenue from the sale of goods is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has been passed.
Operating lease rental income is recognised on a straight-line basis.
Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.
Dividend income is recognised when the right to receive payment is established.
Commission and value added services income are recognised when the services are rendered.
(p) Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset.
All other borrowing costs are charged to the profit and loss account in the year in which they are incurred.
(q) Segment reporting In accordance with the Group’s internal financial reporting the Group has determined that geographical segments be presented as the primary reporting format and business as the secondary reporting format.
Segment assets consist primarily of intangible assets, fixed assets, inventories, receivables and operating cash, and mainly exclude investments. Segment liabilities comprise operating liabilities and exclude items such as taxation and certain corporate borrowings. Capital expenditure comprises additions to intangible assets (note 11) and fixed assets (note 12).
In respect of geographical segment reporting, sales, total assets and capital expenditure are based on the destination country to which goods are shipped.
53 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
1 Principal accounting policies (continued)
(r) Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.
2 Turnover, revenues and segment information (a) The Group is principally engaged in the export trading of consumer products. Turnover comprises sales at invoiced value to customers outside the Group less discounts and returns, and gross rental revenue derived from properties in and outside Hong Kong. Revenues recognised during the year are as follows:
2002 2001 HK$’000 HK$’000
Turnover Sales at invoiced value 37,279,725 33,026,382 Rental income 1,635 2,193
37,281,360 33,028,575
Other revenues Value added services income 126,747 53,539 Commission income 3,655 2,910 Others 5,485 5,650
135,887 62,099
Interest income 49,581 112,837
Total revenues 37,466,828 33,203,511
Li & Fung Limited Annual Report 2002 54 Notes to the Accounts (continued)
2 Turnover, revenues and segment information (continued) (b) Primary reporting format - geographical segments
North Southern America Europe Hemisphere East Asia Group 2002 2002 2002 2002 2002 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Turnover Continuing operations 28,156,018 7,061,902 994,554 1,068,886 37,281,360
Segment results Continuing operations 864,456 236,962 29,258 3,929 1,134,605
Interest income 49,581 Interest expenses (8,987) Share of profits less losses of associated companies 393
Profit before taxation 1,175,592 Taxation (94,896)
Profit after taxation 1,080,696 Minority interests (228)
Profit attributable to shareholders 1,080,468
Continuing operations Segment assets 4,614,410 1,206,748 143,232 128,732 6,093,122 Unallocated assets 1,931,049
Total assets 8,024,171
Continuing operations Segment liabilities 3,073,403 667,369 90,905 87,583 3,919,260 Unallocated liabilities 279,643
Total liabilities 4,198,903
Capital expenditure Continuing operations 61,552 13,084 1,670 76,679 152,985
Depreciation Continuing operations 59,364 16,056 2,299 28,788 106,507
Amortisation charge Continuing operations 10,069 5,667 328 343 16,407
55 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
2 Turnover, revenues and segment information (continued) (b) Primary reporting format - geographical segments (continued) North Southern America Europe Hemisphere East Asia Group 2001 2001 2001 2001 2001 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Turnover Continuing operations 24,762,981 6,731,966 1,003,023 443,422 32,941,392 Discontinued operations 87,183 — — — 87,183
24,850,164 6,731,966 1,003,023 443,422 33,028,575
Segment results Continuing operations 707,405 187,017 24,487 9,833 928,742 Discontinued operations (237,955) — — — (237,955)
469,450 187,017 24,487 9,833 690,787
Provision for investments (24,222)
Operating profit 666,565 Interest income 112,837 Interest expenses (12,464) Share of profits less losses of associated companies 1,443
Profit before taxation 768,381 Taxation (55,637)
Profit after taxation 712,744 Minority interests 69,567
Profit attributable to shareholders 782,311
Continuing operations Segment assets 3,833,154 1,055,481 131,099 76,613 5,096,347 Unallocated assets 1,933,219
Total assets 7,029,566
Continuing operations Segment liabilities 2,579,213 624,790 94,443 49,237 3,347,683 Unallocated liabilities 212,867
Total liabilities 3,560,550
Capital expenditure Continuing operations 94,807 27,938 3,386 1,712 127,843 Discontinued operations 24,593 — — — 24,593
Total 119,400 27,938 3,386 1,712 152,436
Depreciation Continuing operations 76,197 26,230 3,415 1,879 107,721 Discontinued operations 5,479 — — — 5,479
Total 81,676 26,230 3,415 1,879 113,200
Amortisation charge Continuing operations 3,438 3,500 134 106 7,178
Li & Fung Limited Annual Report 2002 56 Notes to the Accounts (continued)
2 Turnover, revenues and segment information (continued) (c) Secondary reporting format - business segments
Segment Total Capital Turnover results assets expenditure 2002 2002 2002 2002 HK$’000 HK$’000 HK$’000 HK$’000
Softgoods 25,497,622 841,245 4,421,444 97,791 Hardgoods 11,783,738 293,360 1,671,678 55,194
37,281,360 6,093,122 152,985
Operating profit 1,134,605
Unallocated assets 1,931,049
Total assets 8,024,171
Segment Total Capital Turnover results assets expenditure 2001 2001 2001 2001 HK$’000 HK$’000 HK$’000 HK$’000
Softgoods 23,804,901 756,289 3,858,558 90,816 Hardgoods 9,136,491 172,453 1,237,789 37,027 Discontinued operations 87,183 (237,955) — 24,593
33,028,575 690,787 5,096,347 152,436
Provision for investments (24,222)
Operating profit 666,565
Unallocated assets 1,933,219
Total assets 7,029,566
57 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
3 Operating profit Operating profit is stated after crediting and charging the following:
2002 2001 HK$’000 HK$’000
Crediting
Net exchange gains 15,549 19,809 Net rental income from land and buildings 1,032 1,806
Charging
Amortisation of intangible assets Goodwill 12,258 3,256 Development costs 4,149 3,922 Depreciation of fixed assets 106,507 113,200 Loss on disposal of fixed assets 1,367 4,372 Operating leases rental in respect of land and buildings 84,869 65,822 Provision for doubtful debts 14,440 26,168 Staff costs, including directors’ emoluments (note 9) 1,375,444 1,267,779
The remuneration to the auditors for audit and non-audit services is as follows:
Audit services 5,069 5,195 Non-audit services – due diligence on acquisition 1,400 — – taxation services 1,991 1,819 – others 170 71
Total remuneration to the auditors 8,630 7,085
Less: non-audit service fee capitalised (1,400) —
Net remuneration to auditors charged to consolidated profit and loss account 7,230 7,085
4 Interest expenses
2002 2001 HK$’000 HK$’000
Interest on bank loans and overdrafts 8,987 12,464
Li & Fung Limited Annual Report 2002 58 Notes to the Accounts (continued)
5 Taxation Hong Kong profits tax has been provided for at the rate of 16% (2001: 16%) on the estimated assessable profit for the year. Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rates of taxation prevailing in the countries in which subsidiaries of the Group operates.
The amount of taxation charged to the consolidated profit and loss account represents:
2002 2001 HK$’000 HK$’000
Hong Kong profits tax 79,990 35,693 Overseas taxation 15,048 21,439 Overprovision in prior years (3,524) (35) Deferred taxation (note 25) 1,351 (3,248)
92,865 53,849
Share of taxation attributable to associated companies - Hong Kong 1,982 1,727 - Overseas 49 61
2,031 1,788
94,896 55,637
Deferred taxation (credit) / charge for the year has not been provided in respect of the following:
2002 2001 HK$’000 HK$’000
Tax losses (7,478) 7,892
At the date of approval of the accounts, certain subsidiaries of the Group have disputes with the Hong Kong Inland Revenue involving additional assessments of tax of approximately HK$372 million on the non-taxable claim of certain non-Hong Kong sourced income and the deduction claim of marketing expenses for the years of assessment from 1992/1993 to 2001/ 2002. Under professional advice, the subsidiaries are pursuing objection against the additional assessments and the directors believe that no material tax liabilities will finally crystallise. Accordingly, the directors consider that sufficient tax provision has been made in this regard.
6 Profit attributable to shareholders The profit attributable to shareholders is dealt with in the accounts of the Company to the extent of HK$895,773,000 (2001: HK$1,515,948,000).
59 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
7 Dividends
2002 2001 HK$’000 HK$’000
Interim, paid, of HK$0.085 (2001: HK$0.08) per Share 245,651 229,848 Final, proposed, of HK$0.22 (2001: HK$0.185) per Share 635,803 532,887
881,454 762,735
8 Earnings per Share (a) The calculation of basic earnings per Share and earnings per Share from continuing operations are based on the Group’s profit attributable to shareholders and profit from continuing operations of HK$1,080,468,000 (2001: HK$782,311,000 and HK$951,307,000 respectively) and on the weighted average number of 2,886,524,000 (2001: 2,870,679,000) Shares in issue during the year.
(b) In the event that Share Options outstanding at 31 December 2002 and 2001 respectively were exercised in full, the diluted earnings per Share would not be significantly different from the basic earnings per Share as disclosed in the consolidated profit and loss account.
9 Staff costs including directors’ emoluments
2002 2001 HK$’000 HK$’000
Salaries and bonuses 1,244,139 1,170,001 Other staff-related expenses 70,233 62,080 Pension costs of defined benefits plans (note 24(b)) 12,471 6,686 Pension costs of defined contribution plans 48,601 29,012
1,375,444 1,267,779
Li & Fung Limited Annual Report 2002 60 Notes to the Accounts (continued)
10 Directors’ and senior management’s emoluments
(a) Directors’ remuneration The aggregate amounts of the emoluments payable to directors of the Company during the year are as follows:
2002 2001 HK$’000 HK$’000
Executive: Fees 418 418 Basic salaries, housing allowances, other allowances and benefits in kind 12,125 12,344 Discretionary bonuses 23,897 28,931 Contributions to pension scheme 60 60
36,500 41,753
Non-executive: Fees 582 582
37,082 42,335
As at 31 December 2002, certain directors held options to acquire 1,200,000 (2001: 1,200,000), 1,200,000 (2001: 1,200,000) and 1,440,000 (2001: 1,440,000) Shares of the Company at an exercise price of HK$15.26, HK$10.5 and HK$7.98 per Share respectively. The closing market price of the Shares as at 31 December 2002 was HK$7.4.
During the year, a total of 1,440,000 (2001: 360,000) Shares were issued to certain directors of the Company at an exercise price of HK$4.1525 under the Share Option Scheme. The weighted average closing market price per Share immediately before the dates on which the Share Options were exercised was HK$11.77.
Directors’ fees disclosed above include HK$320,000 (2001: HK$320,000) paid to independent non-executive directors.
61 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
10 Directors’ and senior management’s emoluments (continued)
(a) Directors’ remuneration (continued) The emoluments of the directors fell within the following bands. The emoluments represent the amount paid to or receivable by the directors of the Company for the year and exclude the benefits derived or to be derived from the Share Options granted under the Share Option Scheme.
Number of directors Emolument bands 2002 2001
Nil - HK$1,000,000 7*7* HK$4,000,001 - HK$4,500,000 1 1 HK$5,000,001 - HK$5,500,000 1 — HK$5,500,001 - HK$6,000,000 — 1 HK$6,500,001 - HK$7,000,000 — 1 HK$7,500,001 - HK$8,000,000 1 — HK$9,000,001 - HK$9,500,000 1 — HK$10,000,001 - HK$10,500,000 1 — HK$11,500,001 - HK$12,000,000 — 1 HK$13,000,001 - HK$13,500,000 — 1
* Represents non-executive directors.
No directors waived their emoluments in respect of the years ended 31 December 2001 and 2002.
(b) Five highest paid individuals The five individuals whose emoluments were the highest in the Group for the year include three (2001: four) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining two individuals (2001: one) during the year are as follows:
2002 2001 HK$’000 HK$’000
Basic salaries, housing allowances, other allowances and benefits in kind 3,791 1,998 Discretionary bonuses 8,746 3,849 Contributions to pension scheme 82 12
12,619 5,859
Number of individuals Emolument bands 2002 2001
HK$5,500,001 - HK$6,000,000 — 1 HK$6,000,001- HK$6,500,000 2 —
Li & Fung Limited Annual Report 2002 62 Notes to the Accounts (continued)
11 Intangible assets
The Group System development Goodwill costs Total HK$’000 HK$’000 HK$’000
Cost At 1 January 2002 61,053 30,319 91,372 Goodwill on acquisitions 253,806 — 253,806 Development costs recognised as assets — 10,140 10,140 Written off (452) — (452)
At 31 December 2002 314,407 40,459 354,866
Accumulated amortisation At 1 January 2002 3,256 8,531 11,787 Amortisation charge 12,258 4,149 16,407 Written off (24) — (24)
At 31 December 2002 15,490 12,680 28,170
Net book value At 31 December 2002 298,917 27,779 326,696
At 31 December 2001 57,797 21,788 79,585
63 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
12 Fixed assets
The Group Furniture, Motor fixtures, vehicles computer and Land and Leasehold and other Plant and company buildings improvements equipment machinery boats Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Cost or valuation At 1 January 2002 1,132,266 135,336 292,798 8,608 31,733 1,600,741 Acquisition of subsidiaries — 1,832 5,664 — 1,288 8,784 Additions 75,122 15,355 46,842 1,616 3,910 142,845 Disposals — (4,620) (12,145) (1,130) (4,885) (22,780) Exchange adjustment 2,579 1,131 3,323 820 521 8,374
At cost 864,555 149,034 336,482 9,914 32,567 1,392,552 At directors’ 1994 valuation 345,412 ————345,412
At 31 December 2002 1,209,967 149,034 336,482 9,914 32,567 1,737,964
Accumulated depreciation At 1 January 2002 108,348 61,531 184,546 4,174 17,788 376,387 Acquisition of subsidiaries — 1,467 2,641 — 852 4,960 Charge for the year 27,251 22,761 49,672 1,909 4,914 106,507 Disposals — (3,368) (9,276) (1,083) (3,975) (17,702) Exchange adjustment 133 942 2,201 408 290 3,974
At 31 December 2002 135,732 83,333 229,784 5,408 19,869 474,126
Net book value At 31 December 2002 1,074,235 65,701 106,698 4,506 12,698 1,263,838
At 31 December 2001 1,023,918 73,805 108,252 4,434 13,945 1,224,354
Li & Fung Limited Annual Report 2002 64 Notes to the Accounts (continued)
12 Fixed assets (continued) The Group’s interests in land and buildings at their net book values are analysed as follows:
The Group 2002 2001 HK$’000 HK$’000
In Hong Kong, held on: Leases over 50 years 104,065 106,189 Leases of between 10 to 50 years 921,330 870,541
Outside Hong Kong, held on: Freehold 37,402 34,985 Leases over 50 years 10,034 10,765 Leases of between 10 to 50 years 1,404 1,438
1,074,235 1,023,918
The original cost and accumulated depreciation based on cost of leasehold land and buildings in Hong Kong are as follows:
The Group 2002 2001 HK$’000 HK$’000
Original cost 1,032,314 957,628 Accumulated depreciation based on cost (111,955) (91,123)
920,359 866,505
At 31 December 2002, the net book value of fixed assets pledged as security for the Group’s long-term loans amounted to HK$30,477,000 (2001: HK$27,927,000).
13 Investments in subsidiaries
The Company 2002 2001 HK$’000 HK$’000
Unlisted shares, at cost 111,210 111,210 Loan to a subsidiary 1,952,493 1,952,493
2,063,703 2,063,703
The loan to a subsidiary is interest free, unsecured and has no fixed terms of repayment.
Details of principal subsidiaries are set out on pages 81 to 88.
65 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
14 Associated companies
The Group 2002 2001 HK$’000 HK$’000
Share of net assets 11,097 8,482 Loans to associated companies 11,158 25,806
22,255 34,288
The loans to associated companies are interest free and unsecured, except for amounts of HK$7,247,000 (2001: HK$9,654,000) which are secured and interest bearing.
Details of principal associated companies are set out on page 89.
15 Investments
The Group 2002 2001 HK$’000 HK$’000
Shares listed overseas, at cost 37,861 32,647 Unlisted shares, at cost 125,483 62,113 Less: provision for diminution in value (30,012) (30,012)
133,332 64,748 Club debentures, at cost 6,600 6,600
139,932 71,348
Market value of listed shares 19,327 17,998
16 Inventories
The Group 2002 2001 HK$’000 HK$’000
Merchandise 85,509 100,313 Finished goods 3,837 3,420 Raw materials 28,736 26,655
118,082 130,388
At 31 December 2002, inventories that are carried at net realisable value amounted to HK$543,000 (2001: HK$1,148,000).
At 31 December 2002, inventories pledged as security for banking facilities amounted to HK$36,684,000 (2001: HK$53,884,000).
Li & Fung Limited Annual Report 2002 66 Notes to the Accounts (continued)
17 Due from related companies
The Group The Company 2002 2001 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000
Due from: Subsidiaries — — 5,713,162 4,871,768 Associated companies 22,155 19,825 — —
22,155 19,825 5,713,162 4,871,768
The amounts are unsecured, interest free and repayable on demand, except for amounts due from associated companies amounting to HK$2,418,000 (2001: HK$2,414,000) which are secured and interest bearing.
18 Trade and bills receivable Majority of the Group’s business are on sight letter of credit, usance letter of credit up to a tenor of 120 days, documents against payment or customers’ letter of credit to suppliers. The remaining balances of the business are on open account terms payable against deliveries of shipments which are mostly covered by customers’ standby letters of credit or bank guarantees. The ageing analysis of trade and bills receivable is as follows:
The Group 2002 2001 HK$’000 HK$’000
Current to 90 days 3,039,277 2,261,347 91 to 180 days 87,477 127,956 181 to 360 days 19,835 15,166 Over 360 days 6,247 2,579
3,152,836 2,407,048
19 Due to related companies
The Group The Company 2002 2001 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000
Due to: A subsidiary — — 2,773,306 1,993,881 Associated companies 97 809 — —
97 809 2,773,306 1,993,881
The amounts are unsecured, interest free and repayable on demand.
67 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
20 Trade and bills payable The ageing analysis of the trade and bills payable is as follows:
The Group 2002 2001 HK$’000 HK$’000
Current to 90 days 3,218,305 2,605,208 91 to 180 days 108,140 95,320 181 to 360 days 31,718 28,648 Over 360 days 11,538 16,595
3,369,701 2,745,771
21 Share capital and options
2002 2001 Number of Number of shares shares (in thousand) HK$’000 (in thousand) HK$’000
Authorised
At 1 January and 31 December, ordinary HK$0.025 each 3,200,000 80,000 3,200,000 80,000
Issued and fully paid
At 1 January, ordinary HK$0.025 each 2,878,978 71,974 2,750,990 68,775 Exercise of share options (note a) 11,034 276 10,200 254 Issue of shares on a share exchange transaction (note b) ——4,600 115
Issue of shares for the acquisition of Colby (note c) ——113,188 2,830
At 31 December, ordinary of HK$0.025 each 2,890,012 72,250 2,878,978 71,974
Shares to be allotted and issued
At 1 January, ordinary HK$0.025 each ——113,188 2,830 Issue of shares during the year ——(113,188) (2,830)
At 31 December, ordinary of HK$0.025 each —— ——
2,890,012 72,250 2,878,978 71,974
Li & Fung Limited Annual Report 2002 68 Notes to the Accounts (continued)
21 Share capital and options (continued) (a) Details of Share Options granted by the Company pursuant to the Share Option Scheme and the Share Options outstanding at 31 December 2002 are as follows:
Share Share options options Subscription At exercised lapsed At 31 price Exercisable 1 January during during December Date of grant per Share period 2002 the year the year 2002
16 July 1999 HK$4.1525 16 July 2000 - 11,034,000 (11,034,000) — — 15 July 2002
7 July 2000 HK$15.26 7 July 2001 - 9,256,000 — (184,000) 9,072,000 6 July 2003
18 July 2001 HK$10.50 18 July 2002 - 10,668,000 — (148,000) 10,520,000 17 July 2004
28 August 2001 HK$7.98 28 August 2003 - 11,844,000 — (240,000) 11,604,000 27 August 2005
Subsequent to 31 December 2002, no Shares have been allotted and issued under the Share Option Scheme.
(b) In November 2001 the Company entered into a share exchange agreement with Nichimen Corporation (“Nichimen”) of Japan, which is listed on the Tokyo Stock Exchange. Pursuant to the agreement, the Company issued and allotted 4,600,000 new Shares at HK$7.3974 per Share to Nichimen in exchange for 4,000,000 shares in Nichimen.
(c) Pursuant to the sale and purchase agreement with the ex-shareholders of Colby Group Holdings Limited (“Colby”), the Company issued 113,188,000 new Shares to satisfy the remaining balance of the share consideration for the acquisition of Colby.
69 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
22 Reserves
Share Capital Exchange Retained premium reserve reserve earnings Total The Group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 January 2002 2,833,787 5,630 (65,905) 597,565 3,371,077 2001 final dividend paid — — — (534,065) (534,065) Share premium on issue of new shares 45,543 — — — 45,543 Exchange adjustment on translation of the accounts of overseas subsidiaries and associated companies — — 8,398 — 8,398 Transfer to capital reserve — 181 — (181) — Profit for the year — — — 1,080,468 1,080,468 2002 interim dividend paid — — — (245,651) (245,651)
Reserves 2,879,330 5,811 (57,507) 262,333 3,089,967 Proposed dividend — — — 635,803 635,803
At 31 December 2002 2,879,330 5,811 (57,507) 898,136 3,725,770
Company and subsidiaries 2,879,330 5,811 (56,108) 893,861 3,722,894 Associated companies — — (1,399) 4,275 2,876
At 31 December 2002 2,879,330 5,811 (57,507) 898,136 3,725,770
Li & Fung Limited Annual Report 2002 70 Notes to the Accounts (continued)
22 Reserves (continued)
Share Capital Exchange Retained premium reserve reserve earnings Total The Group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 January 2001 2,762,442 4,959 (53,390) 556,439 3,270,450 2000 final dividend paid — — — (516,303) (516,303) Share premium on issue of new shares 71,345 — — — 71,345 Exchange adjustment on translation of the accounts of overseas subsidiaries and associated companies — — (12,515) — (12,515) Profit for the year — — — 782,311 782,311 Transfer to capital reserve — 671 — (671) — Goodwill released upon disposal of a subsidiary — — — 5,637 5,637 2001 interim dividend paid — — — (229,848) (229,848)
Reserves 2,833,787 5,630 (65,905) 64,678 2,838,190 Proposed dividend — — — 532,887 532,887
At 31 December 2001 2,833,787 5,630 (65,905) 597,565 3,371,077
Company and subsidiaries 2,833,787 5,630 (65,900) 603,166 3,376,683 Associated companies — — (5) (5,601) (5,606)
At 31 December 2001 2,833,787 5,630 (65,905) 597,565 3,371,077
71 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
22 Reserves (continued)
Contributed Share surplus Retained premium account earnings Total The Company HK$’000 HK$’000 HK$’000 HK$’000
At 1 January 2002 2,833,787 2,060,673 773,983 5,668,443 Share premium on issue of new shares 45,543 — — 45,543 Profit for the year — — 895,773 895,773 2001 final dividend paid — — (534,065) (534,065) 2002 interim dividend paid — — (245,651) (245,651)
Reserves 2,879,330 2,060,673 254,237 5,194,240 Proposed dividend — — 635,803 635,803
At 31 December 2002 2,879,330 2,060,673 890,040 5,830,043
At 1 January 2001 2,762,442 2,060,673 4,186 4,827,301 Share premium on issue of new shares 71,345 — — 71,345 Profit for the year — — 1,515,948 1,515,948 2000 final dividend paid — — (516,303) (516,303) 2001 interim dividend paid — — (229,848) (229,848)
Reserves 2,833,787 2,060,673 241,096 5,135,556 Proposed dividend — — 532,887 532,887
At 31 December 2001 2,833,787 2,060,673 773,983 5,668,443
(a) Capital reserve represents amount set aside from the profit of an overseas subsidiary of the Group in accordance with the local statutory requirement.
(b) The contributed surplus account of the Company represents:-
(i) the difference between the nominal value of the Company’s shares issued in exchange for the issued ordinary shares of Li & Fung (B.V.I.) Limited and the value of net assets of the underlying subsidiaries acquired as at 2 June 1992 amounting to HK$111,010,000. At Group level, the amount is reclassified into its components of reserves of the underlying subsidiaries.
(ii) the difference between the issue price and the nominal value of the Company’s shares issued in connection with the acquisition of Colby in 2000 amounting to HK$1,949,663,000. At Group level, the amount is set off against goodwill arising from the acquisition.
Li & Fung Limited Annual Report 2002 72 Notes to the Accounts (continued)
23 Long-term liabilities
The Group 2002 2001 HK$’000 HK$’000
Long-term bank loans, secured (note 29) 45,274 48,115 Other loans 36,622 29,905
81,896 78,020 Current portion of long-term liabilities (51,496) (50,300)
30,400 27,720
At 31 December 2002, the Group’s long-term bank loans and other borrowings (excluding finance lease liabilities) are repayable as follows:
Long-term bank loans Other loans 2002 2001 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000
Within one year 45,274 41,330 6,222 8,970 In the second year — 6,785 6,175 8,970 In the third to fifth year — — 24,225 11,965
45,274 48,115 36,622 29,905
24 Pension obligations The Group participates in a number of defined benefit plans in certain countries. Most of the pension plans are final salary defined benefit plans. The assets of the funded plans are held independently of the Group’s assets in separate trustee administered funds. The Group’s major plans are valued by qualified actuaries annually using the projected unit credit method.
(a) The amount recognised in the consolidated balance sheet is determined as follows:
The Group 2002 HK$’000
Present value of funded obligations 111,160 Fair value of plan assets (79,977)
31,183 Unrecognised actuarial gains (14,314) Unrecognised liability on initial adoption of SSAP34 paragraph 155 (b) (12,840)
Pension obligations 4,029
73 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
24 Pension obligations (continued) (b) The amount recognised in the consolidated profit and loss account is as follows:
The Group 2002 HK$’000
Current service cost 9,438 Interest cost 4,962 Expected return on plan assets (5,137) Amortisation of unrecognised liability on initial adoption of SSAP34 3,208
Total, included in staff costs (note 9) 12,471
(c) Movement in the pension obligations recognised in the consolidated balance sheet:
The Group 2002 HK$’000
At 1 January — Total expense - as shown above 12,471 Contributions paid (8,442)
At 31 December 4,029
(d) The principal actuarial assumptions used are as follows:
The Group 2002 %
Discount rate 4 – 5.5
Expected rate of return on plan assets 3.25 – 7.5
Expected rate of future salary increases 2 – 4.5
Expected rate of future pension increases 2.5
Li & Fung Limited Annual Report 2002 74 Notes to the Accounts (continued)
25 Deferred taxation
The Group 2002 2001 Full Full potential potential liabilities/ Provision liabilities/ Provision (assets) made (assets) made HK$’000 HK$’000 HK$’000 HK$’000
Accelerated depreciation allowances 5,238 5,238 5,609 5,609 Tax losses (31,546) — (24,068) — Other timing differences (227) (227) (1,641) (1,641)
(26,535) 5,011 (20,100) 3,968
Movements in the provision for deferred taxation are as follows:
The Group 2002 2001 HK$’000 HK$’000
At 1 January 3,968 7,216 Transferred from/(to) profit and loss account (note 5) 1,351 (3,248) Acquisition of subsidiaries (note 26(c)) (308) —
At 31 December 5,011 3,968
No provision has been made for deferred tax liability in respect of the timing differences relating to the revaluation of certain leasehold land and buildings of the Group. The revaluation does not constitute timing differences for taxation purposes because management of the Group intend to operate these properties on a long-term basis.
75 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
26 Notes to the consolidated cash flow statement (a) Reconciliation of profit before taxation to net cash inflow from operations
2002 2001 HK$’000 HK$’000
Profit before taxation 1,175,592 768,381 Interest income (49,581) (112,837) Interest expenses 8,987 12,464 Share of profits less losses of associated companies (393) (1,443) Depreciation 106,507 113,200 Amortisation of goodwill 12,258 3,256 Amortisation of development costs 4,149 3,922 Write off of development costs — 89,150 Write off of goodwill 428 — Write off of fixed assets — 43,425 Provision for investments — 24,222 Profit on disposal of subsidiaries — (2,588) Profit on disposal of associated companies (161) — Loss on disposal of fixed assets 1,367 4,372 Decrease in inventories 12,306 16,107 (Increase)/decrease in trade and bills receivable, other receivables, prepayments and deposits including amounts due from associated companies (871,722) 62,454 Decrease/(increase) in trade and bills payable, accrued charges and sundry payables, and pension obligations including amounts due to associated companies 582,102 (126,167)
Net cash inflow generated from operations 981,839 897,918
Li & Fung Limited Annual Report 2002 76 Notes to the Accounts (continued)
26 Notes to the consolidated cash flow statement (continued) (b) Disposal of subsidiaries
2002 2001 HK$’000 HK$’000
Net assets disposed of: Fixed assets — 2,862 Inventories — 20,485 Trade and other receivables — 8,880 Cash and bank balances — 2,320 Trade and other payables — (23,674) Minority interests — (14,384) Exchange reserve — 88
— (3,423) Profit on disposal of subsidiaries — 2,588 Goodwill realised upon disposal of subsidiaries — 5,637
— 4,802
Satisfied by: Cash consideration — 249 Investments — 4,553
— 4,802
Analysis of outflow of cash and cash equivalents in respect of disposal of subsidiaries:
2002 2001 HK$’000 HK$’000
Cash consideration — 249 Cash and cash equivalents disposed — (2,320)
Net outflow of cash and cash equivalents in respect of disposal of subsidiaries — (2,071)
77 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
26 Notes to the consolidated cash flow statement (continued) (c) Purchase of subsidiaries
2002 2001 HK$’000 HK$’000
Net assets acquired: Fixed assets 3,824 — Investment securities 5 — Deferred taxation (note 25) 308 — Trade and other receivables 12,004 812 Cash and bank balances 36,973 26,882 Trade and other payables (12,825)(85) Taxation (118) — Minority interests — 6,945
40,171 34,554 Goodwill on consolidation 253,806 56,742
293,977 91,296
Satisfied by: Cash consideration 271,653 77,251 Expenses incurred in respect of acquisition of subsidiaries 22,324 — Interests in associated companies — 14,045
293,977 91,296
Analysis of the net outflow of cash and cash equivalents in respect of the acquisition of subsidiaries:
2002 2001 HK$’000 HK$’000
Cash consideration paid 271,653 77,251 Expenses incurred in respect of acquisition of subsidiaries 22,324 — Cash and cash equivalents acquired (36,973) (26,882)
Net outflow of cash and cash equivalents in respect of acquisition of subsidiaries 257,004 50,369
Li & Fung Limited Annual Report 2002 78 Notes to the Accounts (continued)
26 Notes to the consolidated cash flow statement (continued) (d) Analysis of changes in financing during the year
2002 2001 Share Share capital Long- Other capital Long- Obligations Other including term loans and including term under loans and share bank minority share bank finance minority premium loans interests premium loans leases interests HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 January 2,905,761 48,115 55,870 2,834,047 101,404 5,195 81,517 Non cash movement Share of losses — — 228 — — — (69,567) Further acquisition of subsidiaries ———— — — (6,945) Disposal of subsidiaries ———— — — (14,384) Exchange adjustment — 4,208 736 — (818) — 66
2,905,761 52,323 56,834 2,834,047 100,586 5,195 (9,313)
Proceeds from issue of shares 45,819 — — 71,714 — — — Bank and other loans raised — — 10,831 — 31,993 — 15,908 Repayment of bank loans — (7,049) — — (84,464) — — Capital element of finance lease payments ———— — (5,195) — Dividends paid — — (532) — — — (4,843) Repayment of other loans — — (3,549) — — — (9,424) Capital contribution from a minority shareholder — — 286 — — — 63,542
At 31 December 2,951,580 45,274 63,870 2,905,761 48,115 — 55,870
27 Contingent liabilities
The Group The Company 2002 2001 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000
Bills of exchange discounted with recourse 1,069,929 645,008 — — Guarantees in respect of banking facilities granted to: Subsidiaries — — 11,303,180 10,483,212 Associated companies 99,437 99,418 46,794 46,785 Other guarantees 9,600 9,600 — —
1,178,966 754,026 11,349,974 10,529,997
79 Li & Fung Limited Annual Report 2002 Notes to the Accounts (continued)
28 Commitments (a) Operating lease commitments At 31 December 2002, the Group had total future aggregate minimum lease payments under non-cancellable operating leases as follows:
2002 2001 Land and Land and buildings Others buildings Others HK$’000 HK$’000 HK$’000 HK$’000
Within one year 56,827 1,522 49,671 1,458 In the second to fifth year inclusive 111,969 2,320 47,708 1,811 After the fifth year 123,023 — 10,179 —
291,819 3,842 107,558 3,269
(b) Capital commitments
The Group 2002 2001 HK$’000 HK$’000
Contracted but not provided for: Property, plant and equipment 203,688 2,226 Capital contribution to an associated company — 1,677
203,688 3,903
29 Charge of assets At 31 December 2002, there were charges on the assets and undertakings of two (2001: one) overseas subsidiaries with net book value amounting to HK$114,530,000 (2001: HK$142,883,000) in favour of banks to cover banking facilities granted to the subsidiaries.
30 Approval of accounts The accounts were approved by the Board of Directors on 24 March 2003.
Li & Fung Limited Annual Report 2002 80 Principal Subsidiaries and Associated Companies
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Note Principal subsidiaries
Held directly (1) Li & Fung (B.V.I.) British Virgin Ordinary US$400,010 100 Marketing Limited Islands services and investment holding
Held indirectly Albinina Limited Hong Kong Ordinary HK$20 100 Property investment
(2) Appleton Holdings British Virgin Ordinary US$1 100 Investment holdings Ltd. Islands
Bacarolle Limited Hong Kong Ordinary HK$20 100 Property investment
Basic & More Hong Kong Ordinary HK$1,000,000 100 Export trading Fashion Limited
(2) Black Cat Fireworks England Ordinary GBP1,200,000 100 Wholesaling Limited
Camberley Enterprises Hong Kong Ordinary HK$250,000 100 Apparel exporting Limited
(2) Clear Lake Group Hong Kong Ordinary HK$2 100 Property investment Limited
(2) Colby Group Holdings British Virgin Ordinary US$45,000 100 Investment holding Limited Islands
Colby International Hong Kong Ordinary HK$1,500,000 100 Exporting of Limited garments and sundry goods
(2) Colby Property British Virgin Ordinary US$1 100 Investment holding Holdings Limited Islands
(2) Colby Tekstil ve Dis Turkey TL50,000,000,000 100 Export trading Ticaret Limited Sirketi (formerly known as LF Europe Sourcing Tekstil ve Dis Ticaret Limited Sirketi)
81 Li & Fung Limited Annual Report 2002 Principal Subsidiaries and Associated Companies (continued)
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Note Principal subsidiaries
Costume Limited Hong Kong Ordinary HK$2 100 Export trading
(2) CS Asia Limited British Virgin Ordinary US$1 100 Provision of export Islands assistance service
CS International Hong Kong Ordinary 100 Provision of export Limited HK$1,000,000 assistance service
(2) CS International British Virgin Ordinary US$1 100 Provision of export (Offshore) Limited Islands assistance service
Cuore Limited Hong Kong Ordinary HK$20 100 Property investment
Dodwell (Mauritius) Hong Kong Ordinary “A” 60 Export trading Limited HK$300,000 Ordinary “B” HK$200,000
(2) Eclat Properties Inc. British Virgin Ordinary US$100 100 Property investment Islands
(2) Epiquest Limited England Ordinary GBP100 100 Investment holding
Eurosports Trading Hong Kong Ordinary HK$2 100 Export trading Limited
(2) Golden Gate U.S.A. Common stock 100 Commission agent Fireworks Inc. US$600,000 and investment holding
(2) Golden Horn (III) L. P. Cayman Capital contribution 66 Investment holding Islands US$100
Golden Horn N.V. Netherlands US$6,100 100 Investment holding Antilles
GSCM (HK) Limited Hong Kong Ordinary HK$140,000 100 Export trading
Li & Fung Limited Annual Report 2002 82 Principal Subsidiaries and Associated Companies (continued)
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Note Principal subsidiaries
(2) G.S.C.M. (Marketing) England Ordinary GBP50,000 100 Supply Chain Limited Management
Hillung Enterprises Hong Kong Ordinary HK$300,000 100 Export trading Limited
(2) Holport II-Texteis e Portugal Quotas Euro 5,000 100 Export trading Decoracao, Limitada
(2) Homeworks (Europe) The Ordinary Euro 18,000 100 Export trading B.V. Netherlands
Homeworks Limited Hong Kong Ordinary HK$2 100 Export trading
Interfocus Holdings British Virgin Ordinary US$1 100 Property investment Limited Islands
(2) International Sourcing U.S.A. Capital contribution 66.67 Trading of ladies Group, LLC US$300,000 apparel
Janco Overseas Limited Hong Kong Ordinary HK$760,000 100 Buying agent
Kwok Yue Limited Hong Kong Ordinary HK$10,000 100 Export trading
(2) LF Capital (II) Limited British Virgin Class “A” US$185 75 Investment Islands Class “B” US$115 holding
(2) LF Capital Management British Virgin Ordinary US$1 100 Investment Limited Islands management
(2) LF Corporate Capital (I) British Virgin Ordinary US$1 100 Investment holding Limited Islands
(2) LF Europe Limited British Virgin Ordinary US$1 100 Investment Islands management
LF Europe Sourcing Hong Kong Ordinary HK$100 100 Export trading Limited
(2) LF European Capital British Virgin Ordinary US$1 75 Investment Limited Islands holding
(2) LF International Inc. U.S.A. Common stock 100 Investment US$30,002 management
83 Li & Fung Limited Annual Report 2002 Principal Subsidiaries and Associated Companies (continued)
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Note Principal subsidiaries
(2) LF Maclaine (Thailand) Thailand Ordinary 100 Export trading Limited Baht 4,000,000
(2) LFCF Investment I British Virgin Ordinary US$1 100 Investment (Europe) Limited Islands management
(2) LFCF Investment I British Virgin Ordinary US$1 100 Investment (USA) Limited Islands management
(2) Li & Fung Agencia Portugal Quotas 100 Export trading De Compras em PTE 20,000,000 Portugal, Limitada
Li & Fung Hong Kong Ordinary HK$20 100 Property Development Limited investment
(2) Li & Fung Enterprise The People’s HK$10,000,000 100 Provision of Development Republic of foreign- inspection services (Shenzhen) Company China owned Limited enterprise
Li & Fung (Exports) Hong Kong Ordinary HK$10,000 100 Export trading Limited Non-voting deferred HK$8,600,000
Li & Fung (Europe) England Ordinary GBP 100 100 Export trading Holding Limited (formerly known as Li & Fung (Bangladesh) Limited)
Li & Fung (Fashion Hong Kong Ordinary “A” 100 Export trading Accessories) Limited HK$300,000 Ordinary “B” HK$300,000
(2) Li & Fung (Guatemala) Guatemala Common shares 100 Export trading S.A. Q5,000
(2) Li & Fung (Honduras) Honduras Nominative common 100 Export trading Limited shares Lps25,000
Li & Fung Limited Annual Report 2002 84 Principal Subsidiaries and Associated Companies (continued)
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Note Principal subsidiaries
(2) Li & Fung (India) India Equity shares 100 Export trading Private Limited Rupee 64,000,200
(2) Li & Fung (Italia) S.r.l. Italy Units Lire 90,000,000 100 Export trading
(2) Li & Fung (Korea) Korea Common stock 100 Export trading Limited Won 200,000,000
(2) Li & Fung (Mauritius) Mauritius “A” Shares 60 Export trading Limited Rupees 750,000 “B” Shares Rupees 500,000
(2) Li & Fung Mumessillik, Turkey TL25,000,000,000 100 Export trading Pazarlama Limited Sirketi
(2) Li & Fung (Philippines) The Peso 500,000 100 Export trading Inc. Philippines
(2) Li & Fung (Portugal) England Ordinary GBP 100 100 Investment holding Limited
Li & Fung (Properties) Hong Kong Ordinary 100 Property investment Limited HK$1,000,000
(2) Li & Fung (Singapore) Singapore Ordinary S$25,000 100 Export trading Pte Limited
(2) Li & Fung South Africa South Africa Ordinary Rand 100 100 Export trading (Proprietary) Limited
(2) Li & Fung Taiwan Taiwan NT$287,996,000 100 Investment holding Holdings Limited
Li & Fung Taiwan British Virgin Ordinary 100 Investment holding Investments Limited Islands US$4,912,180
(2) Li & Fung (Taiwan) Taiwan NT$63,000,000 100 Export trading Limited
85 Li & Fung Limited Annual Report 2002 Principal Subsidiaries and Associated Companies (continued)
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Note Principal subsidiaries
(2) Li & Fung (Thailand) Thailand Baht 6,000,000 100 Export trading Limited
Li & Fung (Trading) Hong Kong Ordinary HK$200 100 Export trading and Limited Non-voting deferred investment holding HK$10,000,000
(2) Li & Fung (Zhanjiang) The People’s US$1,999,055 100 Packaging Limited Republic of foreign- China owned enterprise
Lifung Express Limited Hong Kong Ordinary “A” HK$10 100 Export trading Ordinary “B” HK$10
Lifung Structure Hong Kong Ordinary HK$20 100 Export trading Limited
(2) Livring Limited Mauritius Ordinary Rs250,000 60 Export trading
Lloyd Manufacturing Hong Kong Ordinary HK$2 100 Export trading Limited
Lloyd Textile Trading Hong Kong Ordinary 100 Export trading Limited HK$1,000,000
Luma Trading Limited Hong Kong Ordinary HK$100 60 Export trading
Maclaine Limited Hong Kong Ordinary 100 Export trading HK$5,570,150
(2) Mercury (BVI) British Virgin Ordinary US$1 100 Investment holding Holdings Limited Islands
(2) Mighty Hurricane U.S.A. Common shares of 100 Investment holding Holdings Inc. US$100 Preference shares of US$100
Li & Fung Limited Annual Report 2002 86 Principal Subsidiaries and Associated Companies (continued)
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Note Principal subsidiaries
(2) N.E.A.L. Incorporated Netherlands Ordinary B US$6,000 100 Export trading N.V. Antilles
Ocean Choice British Virgin Ordinary US$1 100 Property investment Properties Limited Islands
Paco Trading Hong Kong Ordinary HK$2 100 Export trading (International) Limited
(2) Perfect Trading Inc. Egypt LE 2,480,000 60 Export trading
(2) Pinstripe Sourcing England Ordinary GBP1 100 Export trading Limited
Product Development Hong Kong Ordinary HK$2 100 Export trading Partners Limited
(2) P.T. Lifung Indonesia Indonesia US$250,000 100 Export trading
(2) Ratners Enterprises British Virgin Ordinary US$1 100 Investment holding Limited Islands
Shiu Fung Fireworks Hong Kong Ordinary “A” 100 Export trading Company Limited HK$1,100,000 Ordinary “B” HK$1,100,000
Sky Million Hong Kong Ordinary HK$2 100 Property investment International Limited
(2) Tantallon Enterprises British Virgin Ordinary US$1 100 Investment holding Limited Islands
(2) Texnorte II-Industrias Portugal Quotas Euro 5,000 100 Export trading Texteis, Limitada
Texnorte Industrial Hong Kong Ordinary HK$2 100 Export trading Limited
87 Li & Fung Limited Annual Report 2002 Principal Subsidiaries and Associated Companies (continued)
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Note Principal subsidiaries
(2) The Millwork Trading U.S.A. Common stock 100 Distribution and Co., Ltd US$1,331,000 wholesaling 9.5% Preferred Stock US$0.17
Toy Island Hong Kong Ordinary 100 Design and Manufacturing HK$62,000,000 marketing Company Limited
(2) Toy Island (U.S.A.) Inc. U.S.A. Common stock US$100 100 Marketing
(2) Ultimate Quest Limited Hong Kong Ordinary HK$2 100 Property Investment
Verity Enterprises Hong Kong Ordinary 100 Export trading Limited HK$2,000,000
W S Trading Limited Hong Kong Ordinary 100 Export trading HK$1,000,000
Notes:-
(1) Li & Fung (B.V.I.) Limited provides the subsidiaries with promotional and marketing services outside Hong Kong.
(2) Subsidiaries not audited by PricewaterhouseCoopers, Hong Kong. The aggregate net assets of subsidiaries not audited by PricewaterhouseCoopers, Hong Kong amounted to approximately 5% of the Group’s total net assets.
The above table lists out the principal subsidiaries of the Company as at 31 December 2002 which, in the opinion of the directors, principally affected the results for the year or form a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.
Li & Fung Limited Annual Report 2002 88 Principal Subsidiaries and Associated Companies (continued)
Place of Percentage of incorporation Issued and fully equity held by Principal and operation paid share capital the Company activities
Principal associated companies
# Asia Direct Corporation U.S.A. Common stock 40 Distribution and US$1,000,000 wholesaling
Asia Direct Trading Hong Kong Ordinary HK$1,000 40 Export trading Limited
# Asia Directo Limited British Virgin Ordinary US$50,000 40 Investment holding Islands
Blue Work Trading Hong Kong Ordinary 50 Export trading Company Limited HK$4,000,000
# Fireworks U.S.A. Common stock 25 Investment holding Management, Inc. US$60,000
# Gulf Coast Fireworks U.S.A Capital contribution 30 Fireworks Sales, L.L.C. US$1,289,416 distribution
# Kosiuko International British Virgin Ordinary US$50,000 30 Investment holding Limited Islands
# LF Basic Europe S.r.l. Italy Units 50 Export trading Lire20,000,000
LF Basic Limited Hong Kong Ordinary 50 Export trading HK$1,560,000
# MBC Enterprises, Inc. U.S.A. Common stock 25 Retailing US$1,500
# Winco Fireworks U.S.A. Capital contribution 30 Wholesaling International, L.L.C. US$2,639,794
# The associated companies are not audited by PricewaterhouseCoopers, Hong Kong.
The above table lists out the principal associated companies of the Company as at 31 December 2002 which, in the opinion of the directors, principally affected the results for the year or form a substantial portion of the net assets of the Group. To give details of other associated companies would, in the opinion of the directors, result in particulars of excessive length.
89 Li & Fung Limited Annual Report 2002 Ten-Year Financial Summary
CONSOLIDATED PROFIT & LOSS ACCOUNT 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Turnover Continuing operations 37,281,360 32,941,392 24,992,227 16,297,501 14,312,618 13,345,722 12,513,857 9,213,099 6,125,459 5,382,818 Discontinued operations — 87,183 791 — — — — — — —
37,281,360 33,028,575 24,993,018 16,297,501 14,312,618 13,345,722 12,513,857 9,213,099 6,125,459 5,382,818
Operating profit Continuing operations 1,134,605 904,520 830,223 592,885 469,501 361,289 302,075 241,806 554,612 185,487 Discontinued operations — (237,955 ) (39,375 ) — — — — — — —
1,134,605 666,565 790,848 592,885 469,501 361,289 302,075 241,806 554,612 185,487 Interest income 49,581 112,837 140,330 43,830 56,093 37,772 37,163 37,028 21,717 19,492 Interest expenses (8,987 ) (12,464 ) (20,585 ) (32,243 ) (61,346 ) (6,270 ) (20,077 ) (29,655 ) (11,681 ) (7,754 ) Share of profits less losses of associated companies 393 1,443 13,677 9,389 6,850 6,666 (120 ) (7,838 ) 7,073 28,952
Profit before taxation 1,175,592 768,381 924,270 613,861 471,098 399,457 319,041 241,341 571,721 226,177 Taxation (94,896 ) (55,637 ) (64,178 ) (36,638 ) (16,425 ) (25,326 ) (22,096 ) (24,648 ) (19,012 ) (30,384 )
Profit after taxation 1,080,696 712,744 860,092 577,223 454,673 374,131 296,945 216,693 552,709 195,793 Minority interests (228 ) 69,567 10,296 (2,585 ) 495 974 3,157 8,690 107 1,766
Profit attributable to shareholders Continuing operations 1,080,468 951,307 893,118 574,638 455,168 375,105 300,102 225,383 552,816 197,559 Discontinued operations — (168,996 ) (22,730 ) — — — — — — —
1,080,468 782,311 870,388 574,638 455,168 375,105 300,102 225,383 552,816 197,559
Earnings per share (HK cents) Basic 37.4 27.3 32.2 22.4 18.0 15.0 12.6 10.1 25.1 9.0 Continuing operations 37.4 33.1 33.0 22.4 18.0 15.0 12.6 10.1 25.1 9.0 Dividend per share (HK cents) 30.5 26.5 25.0 17.0 14.3 11.0 9.0 7.0 12.5 6.3
CONSOLIDATED BALANCE SHEET 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Intangible assets 326,696 79,585 79,625 6,274 6,228 — — — — — Fixed assets 1,263,838 1,224,354 1,281,810 1,155,534 1,138,828 1,113,430 898,652 795,314 754,422 382,626 Associated companies 22,255 34,288 28,564 1,242 12,790 83,441 81,461 74,010 36,493 88,277 Investments 139,932 71,348 53,807 86,484 51,389 16,748 16,748 10,148 10,148 4,745 Current assets 6,271,450 5,619,991 5,853,106 2,961,634 2,234,490 1,971,270 1,895,508 1,434,377 1,275,346 913,643 Current liabilities 4,159,463 3,528,862 3,790,138 2,652,179 1,708,934 1,619,437 1,552,023 1,180,692 847,597 652,382 Net current assets 2,111,987 2,091,129 2,062,968 309,455 525,556 351,833 343,485 253,685 427,749 261,261
3,864,708 3,500,704 3,506,774 1,558,989 1,734,791 1,565,452 1,340,346 1,133,157 1,228,812 736,909
Financed by : Share capital 72,250 71,974 71,605 64,765 63,761 62,759 62,163 55,948 55,110 50,000 Reserves 3,725,770 3,371,077 3,270,450 1,073,996 1,298,319 1,121,371 1,011,262 523,798 937,014 574,333
Shareholders’ funds 3,798,020 3,443,051 3,342,055 1,138,761 1,362,080 1,184,130 1,073,425 579,746 992,124 624,333 Minority interests 27,248 25,965 19,861 4,460 (24,595 ) (20,486 ) (18,531 ) (15,198 ) (7,456 ) (2,263 ) Long-term liabilities 30,400 27,720 137,642 414,868 397,058 400,000 283,431 566,175 243,893 113,531 Pension obligations 4,029 ————————— Deferred taxation 5,011 3,968 7,216 900 248 1,808 2,021 2,434 251 1,308
3,864,708 3,500,704 3,506,774 1,558,989 1,734,791 1,565,452 1,340,346 1,133,157 1,228,812 736,909
Li & Fung Limited Annual Report 2002 90 History and Milestones Li & Fung Limited is a member of the Li & Fung Group of companies (“LF Group”) which was founded in Guangzhou, China in 1906 as an export trading business. In 1937, LF Group established its presence in Hong Kong as Li & Fung (1937) Limited which remains the major shareholder of the Group. LF Group was firstly listed in Hong Kong in 1973. In 1989, LF Group was privatised in order to reorganise its core businesses. The export trading business of LF Group was re-listed in 1992 on The Stock Exchange of Hong Kong Limited in its present form as Li & Fung Limited. Since the 1970s, the management of LF Group has been headed by the third generation of the Fung family - Dr. Victor Fung and Dr. William Fung who remain at its helm today.
• The Group accomplished its 1999-2001 three-year plan target of doubling continuing operating profits during this period
• Integration of Colby business has further strengthened the Group’s customer base to include value retailers
• The Company’s shares were included in the Morgan Stanley Capital International (MSCI) Index and the Hang Seng Index
• The Group acquired Swire & Maclaine Limited and Camberley Enterprises Limited, thereby significantly enlarging its customer base and strengthening its virtual manufacturing capabilities for markets in the UK, US and Japan
• The Group relocated its headquarters and Hong Kong operations to its new wholly- owned building with a floor area of approximately 213,000 sq. ft. in Hong Kong • The Group achieved its goal of doubling profits from the 1995 level over a three- year period
• The Group acquired Inchcape Buying Services (also known as Dodwell), thereby doubling its size and expanding its customer base in Europe to complement its US business
• The export trading business of LF Group was re-listed on The Stock Exchange of Hong Kong Limited in its present form as Li & Fung Limited 91 Li & Fung Limited Annual Report 2002