LI & FUNG LIMITED

(Incorporated in Bermuda with limited liability)

TRADING SINCE 1906

Annual Report 1999

=
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CORPORATE

INFORMATION

CORPORATE
3

PROFILE

FINANCIAL 5Y E A R

HIGHLIGHTS

4
F IN A N CIA L SU M M A RY

C H A I R M A N S
7

STATEMENT

MANAGING REPORT RE P O R T CO N S O L I D A T E D

DIRECTOR S REPORT

10
OF THE DIRECTORS

13
OF THE AUDITORS

26
PROFIT AND LOSS ACCOUNT

27

CO N S O L I D A T E D

BALANCE SHEET

28

BALANCE
29

SHEET

CONSOLIDATED CONSOLIDATED

CASH FLOW STATEMENT

30
STATEMENT OF RECOGNISED GAINS AND LOSSES

34

NOTES

TO THE ACCOUNTS

35

G RO U P COORDINATED

STRU CTU R E

54
GLOBAL NETWORK

62
Li & Fung Limited

Annual Report 1999

C oo p o r o trea t n f o r I n f io n m( c o n t i no d ) C rr p a I e mat or a t i en

DIRECTORS
Victor FUNG Kwok King, Chairman William FUNG Kwok Lun, Managing Director Henry CHAN Danny LAU Sai Wing Paul Edward SELWAY-SWIFT* LAU Butt Farn Allan WONG Chi Yun* Franklin Warren McFARLAN* Leslie BOYD Steven Murray SMALL (alternate to Mr. Leslie BOYD)

COMPANY SECRETARY
Terry WAN Mei Chow

REGISTERED OFFICE
Cedar House, 41 Cedar Avenue Hamilton HM12, Bermuda

PRINCIPAL PLACE

OF

BUSINESS

11th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon, Hong Kong

LEGAL ADVISERS
Johnson Stokes & Master 17th Floor, Princes Building, 10 Chater Road, Hong Kong

AUDITORS
PricewaterhouseCoopers 22nd Floor, Princes Building, Central, Hong Kong

PRINCIPAL BANKERS
The Hongkong and Shanghai Banking Corporation Limited 1 Queens Road Central, Hong Kong Citibank, N.A. Citibank Tower, Citibank Plaza, 3 Garden Road, Central Hong Kong The Chase Manhattan Bank N.A. One Exchange Square 40th Floor, Central, Hong Kong

PRINCIPAL REGISTRAR & TRANSFER OFFICE

The Bank of Bermuda Limited 6 Front Street, Hamilton HM11, Bermuda

HONG KONG BRANCH REGISTRAR & TRANSFER OFFICE

Abacus Share Registrars Limited 2401 Princes Building, Central, Hong Kong * independent non-executive directors non-executive directors

Li & Fung Limited

Annual Report 1999

C C ro r r a o er aPtr e f i l e r ( oofn i i l e d ) o po p t o P c t ne

Li & Fung Limited is today one of the premier global consumer products trading companies managing the supply chain for high-volume, time-sensitive consumer goods. Garments make up a large part of our business and we also source fashion accessories, toys and games, sporting goods, home furnishings, handicrafts, shoes, travel goods and tableware. As a supply chain manager across many producers and countries, Li & Fung Limited provides the convenience of a one-stop shop for customers through a Total Value-Added Package: from product development, through raw material sourcing, production planning and management, quality assurance and export documentation to shipping consolidation. Founded in Canton in 1906, Li & Fung Limited is today headquartered in Hong Kong from where it co-ordinates the manufacture of goods through an extensive network of offices in more than 30 countries. Considerations of labour cost mean that most manufacturing has been concentrated in Asia. However, recent years have seen an expansion of our quick-response capabilities in areas like the Mediterranean, Eastern Europe and Central America closer to our customers in Europe and the US. Li & Fung Limited does not itself own any production facilities but instead manages a large number of quality-conscious, cost-effective producers who can deliver to a deadline for its customers. Li & Fung Limited is a member of the Li & Fung Group of companies which also includes privately-held Retailing and Distribution businesses. With an annual turnover of US$2.1 billion, Li & Fung Limited employs over 3,000 people worldwide.

Number of Staff
2,404 2,082 2,306 2,572 2,852

1995

1996

1997

1998

1999

Li & Fung Limited

Annual Report 1999

FCi o r a onr a t ie a l r oHi i e h cl oin gi n e d ) s n p c P f l g ( t h t

1999 HK$000 Turnover Operating profit As percentage of turnover Profit attributable to shareholders As percentage of turnover As percentage of shareholders funds Earnings per share Dividend per share Shareholders funds Net assets per share 16,297,501 636,715 3.91% 574,638 3.53% 70.58% 44.7 cents 34.0 cents 814,111 62.9 cents

1998 HK$000 14,312,618 525,594 3.67% 455,168 3.18% 41.60% 36.0 cents 28.5 cents 1,094,056 85.8 cents

Growth

13.9% 21.1%

26.2%

24.2% 19.3%

Sales by Geographical Location for 1999

Asia Pacific 2.5% Other countries 1.6%

USA 68.3%

European Union 27.6%

Li & Fung Limited

Annual Report 1999

5 Y e e ra rF i n F n c i a l n c u m m a r S u ( m n t i n u r dy Y a a i n a S i a l y co m a e )

CONSOLIDATED PROFIT & LOSS ACCOUNT

1999 HK$000 Turnover Operating profit Finance costs Share of profits less losses of associated companies Profit before taxation Taxation Profit after taxation Interest of minority shareholders Profit attributable to shareholders Earnings per share Dividend per share Interim Final 16,297,501 636,715 (32,243) 9,389 613,861 (36,638) 577,223 (2,585) 574,638 44.7 cents 1998 HK$000 14,312,618 525,594 (61,346) 6,850 471,098 (16,425) 454,673 495 455,168 36.0 cents 1997 HK$000 13,345,722 399,061 (6,270) 6,666 399,457 (25,326) 374,131 974 375,105 30.0 cents 1996 HK$000 12,513,857 339,238 (20,077) (120) 319,041 (22,096) 296,945 3,157 300,102 25.1 cents 1995 HK$000 9,213,099 278,834 (29,655) (7,838) 241,341 (24,648) 216,693 8,690 225,383 20.3 cents

9.0 cents 25.0 cents

7.5 cents 21.0 cents

6.5 cents 15.5 cents

5.0 cents 13.0 cents

4.5 cents 9.5 cents

Turnover HK$000
13,345,722 12,513,857 14,312,618 16,297,501 9,213,099

Profit HK$000
225,383 375,105 300,102 455,168 574,638

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

Li & Fung Limited

Annual Report 1999

5Year

Financial

Summary

(continued)

CONSOLIDATED BALANCE SHEET

1999 HK$000 Fixed assets Associated companies Investment securities Current assets Current liabilities Net current (liabilities)/assets 1,161,808 1,242 86,484 2,961,634 2,976,829 (15,195) 1,234,339 Financed by: Share capital Reserves Shareholders funds Minority interests Long term liabilities Deferred taxation 1998 HK$000 1,145,056 12,790 51,389 2,234,490 1,976,958 257,532 1,466,767 1997 HK$000 1,113,430 83,441 16,748 1,971,270 1,814,465 156,805 1,370,424 1996 HK$000 898,652 81,461 16,748 1,895,508 1,713,810 181,698 1,178,559 1995 HK$000 795,314 74,010 10,148 1,434,377 1,287,374 147,003 1,026,475

64,765 749,346 814,111 4,460 414,868 900 1,234,339

63,761 1,030,295 1,094,056 (24,595) 397,058 248 1,466,767

62,759 926,343 989,102 (20,486) 400,000 1,808 1,370,424

62,163 849,475 911,638 (18,531) 283,431 2,021 1,178,559

55,948 417,116 473,064 (15,198) 566,175 2,434 1,026,475

Return on equity

Operating cashflow HK$000

393,039 233,464 364,295 618,958 624,841 37.9% 41.6% 70.6%

47.6%

32.9%

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

Li & Fung Limited

Annual Report 1999

CC h i a m a n s n t a t e m etna t (e o n t e u e t ) ha r i r m a S s S t c m in n d

Victor Fung Kwok King

I am glad to report that 1999 was another year of good performance for the Group. The Groups turnover for the year was HK$16,298 million, representing an increase of 13.9%. Profit attributable to shareholders was HK$575 million, up from HK$455 million in 1998 or an increase of 26.2%. Earnings per share were 44.7 cents compared with 36 cents in 1998. The Directors recommended a final dividend of 25 cents or a total dividend pay-out for the year of 34 cents per share, including the interim dividend of 9 cents per share. During the year Li & Fung further strengthened its position as one of the premier global consumer products trading companies, managing the supply chain for high-volume, time-sensitive consumer goods. REVIEW OF THE ENVIRONMENT The United States and Western Europe remained our major markets. The US retail market continued steady growth whilst in Western Europe economic activity also staged a gradual recovery during the year.

Li & Fung Limited

Annual Report 1999

Chairmans

Statement

(continued)

We expect to see some consolidation in the US economy in 2000 after a decade of continuous growth. This would be healthy and conducive to a soft landing of the US economy. In the European Union, prices have become more transparent with the advent of the euro and price competition has intensified. This is likely to enforce efficiencies among European retailers and possibly lead to industry consolidation. As a result, we can foresee new opportunities and anticipate working for an expanding number of larger customers. Our acquisition of Swire & Maclaine and Camberley will broaden our customer base and our design capabilities to serve both the US and European markets in the years ahead. The economies of Asia have now largely stabilized which is good news for our sourcing network. Chinas accession to the World Trade Organization, which is expected to take place in 2000, will no doubt bring substantial benefits to the Group: on the one hand it will increase opportunities for sourcing goods from China and on the other hand it will mean that goods made in China will be less susceptible to trade interruptions. At the same time, the Indian sub-continent has rapidly developed as a major sourcing market and we expect exports from this area to increase substantially during the year. THE NEW ECONOMY Understanding in business and financial circles of the nature of Li & Fungs value-added package has, I believe, considerably increased over the last few years. However, more recent excitement about the Internet has led some commentators to suggest that Li & Fung could be disintermediated - with the Internet coming to take our place between customers and suppliers. I see things rather differently and believe that Li & Fung today is as much a part of the New Economy as of the old. Certainly, we deal in goods but the key to our business is not hardware but information and content. The core of our business is information and its application to the management of the supply chain. We are sure that the Internet and e-commerce offer vast opportunities to Li & Fung. The Internet will help us to drive further down the supply chain, integrating the management of that supply chain through information technology. We have already been working hard to prepare ourselves for wider application of the Internet in world trade. As we move further into the New Economy, we are continually strengthening our capabilities by use of the Intranet among Li & Fung offices worldwide and the Extranet on-line linkage with customers. At the core of our future operations will be a B2B strategy to open new markets and business opportunities. Our customers are rapidly shifting to an Internet setting and we are well poised to help them take advantage of new trends in sales and distribution channels. One particular emphasis of our B2B strategy will be to capture market segments that have previously been uneconomic for the Group to penetrate: for instance, small-and-medium retailers are now being attracted with private label programmes and efficient supply chain management. We are optimistic as to our prospects in this market segment, which is becoming increasingly important as private label becomes more and more essential as a means by which retailers establish a distinctive market niche. As e-tailers grow stronger, our aim is to become their fulfillment arm by meeting their criteria for smaller quantities delivered in a shorter time frame.

Li & Fung Limited

Annual Report 1999

Chairmans

Statement

(continued)

PROSPECTS We are confident that the Groups growth prospects in the coming years will be brighter than ever. Our early mastery of the Internet is vital to the continued expansion of our customer base. We are also proud that we are now richer than ever in terms of human capital, having combined the sourcing expertise of the old Li & Fung Trading, Inchcape Buying Services and the Swire trading entities. Externally, Chinas expected accession to the WTO on the one hand and the current economic stability in both the western and eastern worlds on the other hand will be beneficial to the Groups performance. For some, the globalization of trade may have a backlash as non-trade issues such as environmental protection and labor standards - appear more and more frequently on the agenda of trade negotiations. Li & Fung is fortunate to be ahead of many exporters in having long-established procedures for compliance by suppliers. Many customers are coming to us because they know we have a long tradition and the competence to deal with these issues. They share our standards and our commitment to compliance. As we move forward into the new century, we shall look at new ways to perform even more effectively in the New Economy and will pursue acquisitions that fill in the gaps in our position as one of the worlds leading trading companies for consumer products. CONCLUSION During the year, Sir Anthony Hayward, Mr Steven Murray Small and Mr Chung Po Yang retired as Non-executive Directors. We thank them for their past service and wish them all the best. Mr Leslie Boyd, Professor F Warren McFarlan and Mr Allan Wong Chi Yun were appointed Non-executive Directors during the year. I wish to thank the Board of Directors for their guidance and support and to express my appreciation to all the staff members for their hard work and devotion during the year.

Victor Fung Kwok King Chairman Hong Kong, 27 March 2000

Li & Fung Limited

Annual Report 1999

M a n a a ig i n D i r eD ti orr esc t o p o r t Ma n g ng g c Rer s

( Ro e t p oe r )t c n inu d

William Fung Kwok Lun

1999 was the first year of the Groups current three-year plan spanning the years 19992001. When we announced this new plan at the end of 1998, we were quite bold in setting forward another pledge to double profits again in these three years. This goal of doubling of profits in three years will be driven by a combination of top line growth of 50% in turnover and a 1% increase in margins over the period. 1999 turnover grew at a healthy 14% and margins continue to increase. This led to a profit growth in 1999 of 26.2% and the Group seems well on track to achieve the target of doubling profits in 3 years.

T RADING
The US economy was really the engine of growth for us in 1999. The continuing strong economy there augurs well for another year of double digit increase in turnover. The achievability of the 50% turnover increase target is further assured by the acquisition of the export arms of the Swire Group announced on 29 December 1999. The acquisition of Swire & Maclaine and Camberley will add another US$300 million or more to the Groups trading volume in the year 2000 and beyond.

Li & Fung Limited

10

Annual Report 1999

Managing

Directors

Report

(continued)

One significant shift in our trading pattern in 1999 was the rapid increase of sales in hardgoods. Our operating margins are better in the hardgoods area as opposed to our softgoods business. This trend, together with operating leverage from increased turnover volumes, will contribute to the achievement of our second objective in the current three-year that of increasing margins. In terms of geographical coverage of the sourcing markets, Li & Fung continues to expand globally and lead the market in coverage. We are now operating 47 offices in 31 countries. In particular, we are expanding in the quick response markets adjacent to or in our major markets of the United States and Europe. Two new offices in Italy, operations out of Canada and Mexico and expansion in Turkey are all effort to supply our customers from production bases closer to them. Expansion in some parts of Africa is also underway. Underpinning our expansion in business with all customers is our continued dedication to and improvement of our supply chain management techniques. Li & Fung remains at the forefront of the global supply chain management arena, in both practice and thought.

T HE I NTERNET
The internet represents a new and revolutionary communications medium that will impact fundamentally on our business. Li & Fung has not been slow to understand and adopt this technology in our business. The use of internet-based communications is an integral part of our organization. We have tied up our large network of offices with a sophisticated intranet since 1996. We now work with major customers on protected extranet sites, exchanging information, doing order tracking as well as product development and a multitude of other tasks in a very cost efficient way. All these efforts represent the further enhancement of our supply chain management role using the internet. On 27 March 2000, we announced our internet strategy. We feel that the internet now gives us a cost effective way to reach and service a whole new segment of small and medium-sized customers. These are customers who do not have the scale to justify the highly customized and rich service we give to our large customers. The formation of a new subsidiary, lifung.com, via our venture capital arm in San Francisco shall address this market segment. Management feel that we can build a very large business by leveraging the sourcing power of Li & Fung to become the ultimate resource for small and medium-sized retailers and wholesalers. Our initial target will be the U.S.A. with a year end launch. Geographical and product category expansion will follow in 2001.

Li & Fung Limited

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Annual Report 1999

Managing

Directors

Report

(continued)

ACQUISITIONS
Besides the acquisition of the two Swire units already announced, the Group is still actively seeking the right acquisitions to expand and reinforce our core business. As we embark on our e-commerce strategy, we will also be looking at acquisitions that will enhance this effort. This may include technology companies and internet related strategic partners previously not amongst our usual acquisition targets.

P ROSPECTS
In this three-year plan, as in the previous three-year plans, the Group intend to deliver on its projections. We take great pride in our ability to always meet or exceed our targets. This attitude will not change even as we embark on the uncharted course of the new economy. We will ground our new foray into the e-commerce arena in the same discipline of earnings and shareholder returns as we have always done in our core business. While we do not expect much impact on our financial performance in this current 3-year plan (1999-2001), we think that our new e-commerce strategy can be a significant profit contributor in the next plan (2002-2004).

William Fung Kwok Lun Managing Director Hong Kong, 27 March 2000

Li & Fung Limited

12

Annual Report 1999

R e o o o R e pp r t r t f

ohfe t

D hr e c t oD s r (e o n tti n u r d ) t i e r i c c o e s

The directors present herewith their report together with the audited accounts for the year ended 31 December 1999.

P RINCIPAL

ACTIVITIES

The principal activity of the Company is investment holding. Its subsidiaries are principally engaged in the export trading of consumer products. No analysis of the Groups turnover and contribution to operating profit for the year by principal activities is provided as over 90% of the Groups turnover and contribution to operating profit are attributable to the export trading of consumer products. An analysis of the Groups turnover for the year by principal markets is as follows: HK$000 Principal markets: USA European Union Asia Pacific Other countries

11,138,791 4,500,327 400,167 258,216 16,297,501

No analysis of contribution to operating profit by geographical location has been prepared as no contribution to operating profit from any of the above geographical locations is substantially out of line with the normal ratio of profit to turnover.

S HARE

CAPITAL

At a special general meeting of the Company held on 12 October 1999, an ordinary resolution was duly passed under which each of the existing issued and unissued shares of HK$0.1 each in the share capital of the Company as of that date was subdivided (the Share Subdivision) into two shares of HK$0.05 each (the Share). Details of movements in share capital and share options of the Company are set out in note 17 to the accounts.

RESULTS

AND APPROPRIATION

The results of the Group for the year are set out in the consolidated profit and loss account on page 27. The directors have declared an interim dividend of HK$0.09 per Share, as adjusted for the effect of the Share Subdivision, totalling HK$116,355,000 which was paid on 10 September 1999. The directors recommend the payment of a final dividend of HK$0.25 per Share, totalling HK$324,650,000.

Li & Fung Limited

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Annual Report 1999

Report

of

the

Directors

(continued)

RESERVES
Movements in the reserves of the Group and the Company during the year are set out in note 18 to the accounts.

DONATIONS
Donations made by the Group during the year amounted to HK$236,000.

F IXED

ASSETS

Details of the movements in fixed assets are set out in note 10 to the accounts.

F IVE

YEAR FINANCIAL SUMMARY

The following table summarises the results, assets and liabilities of the Group for the five years ended 31 December 1999. 1999 HK$000 Profit attributable to shareholders Total assets Total liabilities Minority interests Shareholders funds 574,638 4,211,168 (3,392,597) (4,460) 814,111 1998 HK$000 455,168 3,443,725 (2,374,264) 24,595 1,094,056 1997 HK$000 375,105 3,184,889 (2,216,273) 20,486 989,102 1996 HK$000 300,102 2,892,369 (1,999,262) 18,531 911,638 1995 HK$000 225,383 2,313,849 (1,855,983) 15,198 473,064

P RE -EMPTIVE

RIGHTS

There are no provisions for pre-emptive rights under the Companys bye-laws although there are no restrictions against such rights under the laws in Bermuda.

P URCHASE ,

SALE AND REDEMPTION OF THE

C OMPANYS

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 Companys listed securities during the year.

S UBSIDIARIES
Details of the Companys principal subsidiaries at 31 December 1999 are set out on pages 54 to 60.

ASSOCIATED

COMPANIES

Details of the Companys principal associated companies at 31 December 1999 are set out on page 61.

Li & Fung Limited

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Annual Report 1999

Report

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Directors

(continued)

B ANK

LOANS , OVERDRAFTS AND OTHER BORROWINGS

The Groups bank loans, overdrafts and other borrowings as at 31 December 1999 are repayable over the following periods: Bank loans and overdrafts HK$000 193,280 124,663 254,325 572,268

Other borrowings HK$000 On demand or not exceeding one year More than one year but not exceeding two years More than two years but not exceeding five years 8,970 26,910 35,880

ANALYSIS
to 12.

OF

GROUP S

PERFORMANCE

An analysis of the Groups performance is shown in the managing directors report on pages 10

M AJOR

CUSTOMERS AND SUPPLIERS

The percentage of sales for the year attributable to the Groups major customers are as follows: % Sales The largest customer Five largest customers combined

9.2 30.0

No directors, their associates or shareholders (which to the knowledge of the directors own more than 5% of the Companys issued share capital) had an interest in the customers noted above. The aggregate percentages of purchases for the year ended 31 December 1999 attributable to the Groups five largest suppliers are less than 30% of total purchases and therefore no additional disclosure with regard to major suppliers are made.

P ENSION

SCHEME ARRANGEMENTS

The Group operates a defined contribution provident scheme (the Scheme) for its employees. Under the Scheme, the contribution to the defined contribution provident funds is at 5% of the employees basic salaries. The Scheme is funded by the Group and cover all permanent full-time employees of the Group in Hong Kong and certain countries outside Hong Kong. The Scheme is administered by independent trustees. No employee contributions are required under the Scheme. Contribution forfeited by those employees who leave the Scheme prior to vesting fully in the contributions are used by the Group to reduce the existing level of contributions.

Li & Fung Limited

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Annual Report 1999

Report

of

the

Directors

(continued)

P ENSION

SCHEME ARRANGEMENTS

(C ONTD )

The provident fund schemes for staff of the Group in other countries follow the local statutory requirements of the respective countries. During the year, the Groups pension scheme contributions were as follows: 1999 HK$000 Contribution based on 5% of employees basic salaries under the defined contribution scheme Contribution forfeited by employees used to reduce the Groups existing level of contribution under the defined contribution scheme Contribution pursuant to overseas statutory requirements 1998 HK$000

15,697 (1,857) 8,176 22,016

14,027 (2,329) 6,709 18,407

At 31 December 1999 and 1998, the forfeited contributions available to offset future employers contributions to the Scheme are not material to the Groups results.

DISTRIBUTABLE

RESERVES

At 31 December 1999, the distributable reserves of the Company available for distribution as dividends amount to HK$327,541,000.

Li & Fung Limited

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Annual Report 1999

Report

of

the

Directors

(continued)

DIRECTORS
The directors during the year were: Dr Victor FUNG Kwok King, Chairman Mr William FUNG Kwok Lun, Managing Director Mr Henry CHAN Mr Danny LAU Sai Wing Mr Paul Edward SELWAY-SWIFT * Mr LAU Butt Farn Mr Allan WONG Chi Yun * Professor Franklin Warren McFARLAN * Mr Leslie BOYD Mr Steven Murray SMALL (alternate to Mr Leslie BOYD) Mr CHUNG Po Yang * Sir Anthony HAYWARD *

(appointed on 30 March 1999) (appointed on 19 August 1999) (appointed on 13 October 1999)

(resigned on 30 June 1999) (resigned on 18 May 1999)

Mr Paul Edward SELWAY-SWIFT and Mr LAU Butt Farn retire in accordance with bye-law 110 of the Companys bye-laws and, being eligible, offer themselves for re-election. Professor Franklin Warren McFARLAN and Mr Leslie BOYD retire in accordance with bye-law 101 of the Companys bye-laws and, being eligible, offer themselves for re-election.
* independent non-executive directors + non-executive directors

The biographical details of directors of the Company are set out as follows: Victor FUNG Kwok King Victor FUNG Kwok King, aged 54, brother of Mr William FUNG Kwok Lun, is the Group Chairman. He joined the Group in 1973 as a Manager and became the Managing Director of the Groups export trading business in 1977. He became Group Managing Director in 1981 and Group Chairman in 1989. He holds a bachelor of science and a master of science degree in electrical engineering from the Massachusetts Institute of Technology and a doctorate from Harvard University. Dr Fung is currently the Chairman of the Hong Kong Trade Development Council and the Hong Kong Airport Authority. He is active on a number of Government advisory boards including the Judicial Officers Recommendation Commission. He is also the Chairman of Prudential Asia Investments Limited.

Li & Fung Limited

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Report

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(continued)

DIRECTORS (CONT D)
William FUNG Kwok Lun William FUNG Kwok Lun, OBE, JP, aged 51, brother of Dr Victor FUNG Kwok King, is the Group Managing Director. He joined the Group in 1972 and became a Director of the Groups export trading business in 1976. He became the Group Managing Director in 1986. Mr 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 has been awarded the degree of Doctor of Business Administration, honoris causa by the Hong Kong University of Science & Technology. Mr Fung is a non-executive director of HSBC Holdings Plc and CLP Holdings Limited. He is a past Chairman of the Hong Kong General Chamber of Commerce and a past Chairman of the Hong Kong Exporters Association. He is the Chairman of the Hong Kong Committee for Pacific Economic Cooperation and is a member of the Economic Advisory Committee to the Financial Secretary. Mr Fung is a Hong Kong Special Administrative Region delegate to the Chinese Peoples Political Consultative Conference.

Henry CHAN Henry CHAN, aged 50, is an Executive Director of the Company and the Chairman of Toy Island Manufacturing Company Limited, a member of the Group. He has been with the Group since 1972 and has over 23 years of experience in the toy industry. 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.

Danny LAU Sai Wing Danny LAU Sai Wing, aged 48, is an Executive Director of the Company and is in charge of the Textiles (U.S.A.) product group. He has been with the Group since 1981. He has over 21 years of experience in the supply chain management of exporting textiles and apparel to the markets in North America. His current community work include being a ViceChairman of the Hong Kong Exporters Association, a director of the Government-funded Clothing Technology Demonstration Centre Co., Ltd. and a Steering Committee member of the Governments Workplace English Campaign. He graduated from the University of Kansas with a bachelor of science degree in business and accounting.

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DIRECTORS (CONT D)

Paul Edward SELWAY-SWIFT Paul Edward SELWAY-SWIFT, aged 55, is an independent nonExecutive Director of the Company. He is currently Chairman of SVB Holdings PLC, a specialist insurance group and a director of several other companies including Alba PLC. He was formerly Deputy Chairman of HSBC Investment Bank plc and a Director of The Hong Kong and Shanghai Banking Corporation Limited.

LAU Butt Farn LAU Butt Farn, aged 52, 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 the Operations Director for Li & Fung (Retailing) Limited (the retailing arm of the private group) with operations in Circle K, Fotomax, Toys R Us and Fun Fun World. He was also responsible for the investments of the private group. Since 1999, Mr Lau is the 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. Allan WONG Chi Yun Allan WONG Chi Yun, MBE, aged 49, is an independent nonExecutive Director of the Company. He is currently the 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 and a master of science degree in electrical and computer engineering from the University of Wisconsin in the U.S.A. Mr Wong serves on the Hong Kong Trade Development Council and the Board of the Industrial Technology Centre Corporation. He is also a council member of the University of Hong Kong and a director of both the Bank of East Asia Limited and China-HongKong Photo Products Holdings Limited.

Li & Fung Limited

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DIRECTORS (CONT D)
Franklin Warren McFARLAN Franklin Warren McFARLAN, aged 62, is an independent nonExecutive Director of the Company. Professor McFarlan is Senior Associate Dean, External Relations, of Harvard University. He has been a Professor of Business Administration of Harvard University 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.

Leslie BOYD Leslie BOYD, aged 63, 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 and mining industries in South Africa and is highly involved in the business community there. Mr Boyd is a Chartered Engineer and a Fellow of the Institution of Metallurgists UK. He is currently the Executive Vice Chairman of Anglo American plc and Deputy Chairman of Anglo American Corporation of South Africa Limited. He holds chairmanships and directorships in a number of mining, industrial and financial companies.

Steven Murray SMALL Steven Murray SMALL, aged 44, is an alternate director to Mr Leslie Boyd, non-Executive Director of the Company. Mr Small has been a Director of Consolidated Resources Limited since 1991 and sits on the boards of a number of companies in which Consolidated Resources Limited holds minority interests. He is also a director of King Lun Holdings Limited, Li & Fung (1937) Limited, the Companys substantial shareholder, and Li & Fung (Gemini) Limited, the holding company of the supply chain management business of the private group. 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 sits on the boards of a number of companies concentrated in South East Asia.

Li & Fung Limited

20

Annual Report 1999

Report

of

the

Directors

(continued)

DIRECTORS

SERVICE CONTRACTS

Under a service contract dated 2 June 1992 between the Company and Mr William FUNG Kwok Lun and a service contract dated 2 June 1992 between Li & Fung (B.V.I.) Limited and Mr William FUNG Kwok Lun, Mr 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 proposed for re-election has an unexpired service contract with the Group which is not terminable by the Group within one year without payment of compensation other than under normal statutory obligations.

DIRECTORS

INTERESTS IN CONTRACTS

No contracts of significance in relation to the Companys 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 1999, 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 HK$0.05 each Number of shares beneficially held Personal interest Dr Victor FUNG Kwok King Mr William FUNG Kwok Lun Mr Danny LAU Sai Wing Mr LAU Butt Farn Professor Franklin Warren McFARLAN 31,801,000 1,880,000 1,100,000 26,000 Corporate interest Note (1) Note (1) Family interest Other interest 25,375,000 Note (2)

Li & Fung Limited

21

Annual Report 1999

Report

of

the

Directors

(continued)

DIRECTORS
(a)
Note: (1)

INTERESTS IN EQUITY OR DEBT SECURITIES

(C ONTD )

Shares of HK$0.05 each (CONT D)

As at 31 December 1999, King Lun Holdings Limited (King Lun) through its wholly owned subsidiary, Li & Fung (1937) Limited, held 640,000,000 Shares in the Company. The following directors of the Company are deemed to have interests in the 640,000,000 Shares through their personal or other interests in King Lun as set out below: (a) 1,332,840 shares in King Lun, representing 36.25% of its issued share capital, are owned by Chase Bank & Trust Company (CI) Limited, the trustee of a trust established for the benefit of the family of Dr Victor FUNG Kwok King. 1,332,840 shares in King Lun, representing 36.25% of its issued share capital, are owned by Mr William FUNG Kwok Lun.

(b)

(2)

25,375,000 Shares in the Company are held by Chase Bank & Trust Company (CI) Limited, the trustee of a trust established for the benefit of the family of Dr Victor FUNG Kwok King.

In addition, Li & Fung (1937) Limited holds 100,000 non-voting deferred shares of HK$100 each in Li & Fung (Trading) Limited. Dr Victor FUNG Kwok King and Mr William FUNG Kwok Lun are deemed to have interests in the 100,000 non-voting deferred shares in Li & Fung (Trading) Limited through their holdings of interest in King Lun as mentioned above. Save as disclosed above, no directors, chief executives and associates have any beneficial or non-beneficial interests in the share capital of the Company or its associated corporations required to be disclosed pursuant to the SDI Ordinance and the Model Code. (b) Shares options

On 2 June 1992, a share option scheme (the Share Option Scheme) was approved by the shareholders of the Company under which its directors may, at their discretion, invite directors and employees of the Group to take up options (the Share Options) to subscribe for Shares in the Company subject to the terms and conditions stipulated therein. As a result of the Share Subdivision and in accordance with the terms of the Share Option Scheme, the number of Shares comprising the Share Options granted was increased by one Share for every share of HK$0.10 each then held comprising such Share Options.

Li & Fung Limited

22

Annual Report 1999

Report

of

the

Directors

(continued)

DIRECTORS
(b)

INTERESTS IN EQUITY OR DEBT SECURITIES

(C ONTD )

Shares options (CONTD )

During the year, Share Options to subscribe for 2,400,000 and 18,720,000 Shares, as adjusted for the effect of the Share Subdivision, were respectively granted to the directors of the Company and certain employees including directors of the subsidiaries who are not directors of the Company. Details of the outstanding Share Options held by the directors of the Company as at 31 December 1999 are as follows: Number of Share Options outstanding Name 24 June 1997 (note 2) 440,000 600,000 1,040,000
Note: (1) As a result of the Share Subdivision and in accordance with the terms of the Share Option Scheme, the subscription price per Share mentioned in notes (2), (3) and (4) below were adjusted from HK$7.02 to HK$3.51, HK$8.63 to HK$4.315 and HK$16.61 to HK$8.305 respectively. The Share Options granted on 24 June 1997 are exercisable at HK$3.51 per Share during the period from 18 July 1998 to 17 July 2000. The Share Options granted on 25 July 1998 are exercisable at HK$4.315 per Share during the period from 25 July 1999 to 24 July 2001. The Share Options granted on 16 July 1999 are exercisable at HK$8.305 per Share during the period from 16 July 2000 to 15 July 2002.

25 July 1998 (note 3) 600,000 600,000 1,200,000

16 July 1999 (note 4) 1,200,000 600,000 600,000 2,400,000

Mr William FUNG Kwok Lun Mr Henry CHAN Mr Danny LAU Sai Wing

(2)

(3)

(4)

During the year, a total of 740,000 Shares, 160,000 Shares and 1,200,000 Shares, as adjusted for the effect of the Share Subdivision, were issued to certain directors of the Company pursuant to the exercise of the Share Options granted on 18 July 1996, 24 June 1997 and 25 July 1998 respectively. Apart from the above, at no time during the year was the Company or its subsidiaries a party to any arrangement to enable the directors and chief executives of the Company to acquire benefits by means of acquisition of shares in or debentures of the Company or any other body corporate.

Li & Fung Limited

23

Annual Report 1999

Report

of

the

Directors

(continued)

S UBSTANTIAL

SHAREHOLDERS

At 31 December 1999, the register of substantial shareholders maintained under Section 161) of the SDI Ordinance shows that the Company had not been notified of any substantial shareholders interests, being 10% or more of the Companys issued share capital, other than those of Li & Fung (1937) Limited as disclosed above.

M ANAGEMENT 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.

COMPLIANCE

WITH THE CODE OF BEST PRACTICE

The Company has complied with Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited throughout the year ended 31 December 1999.

CORPORATE

GOVERNANCE

The Board of Directors is committed to principles of corporate governance consistent with prudent enhancement and management of shareholder value. The accounting systems and internal controls of the Group are designed to provide reasonable assurance that assets are safeguarded against losses from unauthorized use or disposition, that transactions are executed in accordance with managements authorization and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. Qualified personnel throughout the Group maintain and monitor these internal accounting controls on an ongoing basis. The Groups Corporate Governance Division, under the supervision of the Chief Compliance Officer, systematically reviews these controls, evaluates their adequacy and compliance and reports thereon.

AUDIT

COMMITTEE

An Audit Committee has been established since 1998 to act in an advisory capacity and make recommendations to the Board. Its members currently include: Dr Victor FUNG Kwok King Chairman Mr Paul Edward SELWAY-SWIFT Mr Allan WONG Chi Yun Professor Franklin Warren McFARLAN Mr Leslie BOYD Mr James SIU Kai Lau (Chief Compliance Officer) Secretary The Audit Committee met four times during the past 12 months to review with management the accounting principles and practices adopted by the Group and to discuss auditing, internal control and financial reporting matters in conjunction with the Companys auditors.

Li & Fung Limited

24

Annual Report 1999

Report

of

the

Directors

(continued)

COMPENSATION

COMMITTEE

A Compensation Committee has been formed since 1993 to approve senior executive remuneration including annual allocation of Share Options to employees under the Companys Employee Share Option Scheme. Its current members include Mr Allan WONG Chi Yun, an independent non-executive Director, Dr Victor FUNG Kwok King, the Groups non-executive Chairman and Mr William FUNG Kwok Lun, the Groups Managing Director.

Y EAR 2000
Details of the Groups assessment of the Year 2000 problem and progress of the compliance project have been disclosed in the interim report dated 18 August 1999. The total costs of the Year 2000 project amounted to approximately HK$5 million. The Group has no further commitments in respect of the Year 2000 project. To date, the Group has not experienced any Year 2000 non-compliance issue.

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, 27 March 2000

Li & Fung Limited

25

Annual Report 1999

R e pp ot r t f o hf e R e or o t

t h d i t o r s u (d o ntt io e ds Au e A c i n r )

TO

THE

S HAREHOLDERS

OF

L I & FUNG L IMITED

(incorporated in Bermuda with limited liability) We have audited the accounts set out on pages 27 to 61 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE

RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Companys 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.

B ASIS

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 Companys and the Groups circumstances, 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, in all material respects, of the state of affairs of the Company and the Group at 31 December 1999 and of the profit and cash flows of the Group 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, 27 March 2000

Li & Fung Limited

26

Annual Report 1999

C o n s o l i d a t e d For the Year

P r o f i t ended

& 31

L o s s

A c c o u n t 1999

December

1999 Note Turnover Cost of Sales Gross profit Other revenues Other income Selling expenses Administrative expenses Operating profit Finance costs Share of profits less losses of associated companies Profit before taxation Taxation Profit after taxation Minority interests Profit attributable to shareholders Basic earnings per share 7 & 18 9 5 3 4 2 2 HK$000 16,297,501 (14,585,881) 1,711,620 98,836 48,225 (354,124) (867,842) 636,715 (32,243) 9,389 613,861 (36,638) 577,223 (2,585) 574,638 44.7 cents

1998 HK$000 14,312,618 (12,891,709) 1,420,909 104,743 35,191 (287,524) (747,725) 525,594 (61,346) 6,850 471,098 (16,425) 454,673 495 455,168 36.0 cents

Li & Fung Limited

27

Annual Report 1999

C o n s o l i d a t e d As at 31

B a l a n c e December

S h e e t 1999

Note Fixed assets Associated companies Investment securities Current assets Inventories Due from related companies Trade and bills receivable Other receivable, prepayments and deposits Cash and bank balances 10 12 13

1999 HK$000 1,161,808 1,242 86,484

1998 HK$000 1,145,056 12,790 51,389

14 15

110,014 24,609 1,488,780 308,858 1,029,373 2,961,634

72,267 19,851 1,089,011 148,780 904,581 2,234,490

Current liabilities Due to related companies Trade and bills payable Balance of purchase consideration payable for acquisition of Swire & Maclaine Limited and Camberley Enterprises Limited Accrued charges and sundry payable Taxation Current portion of long-term bank loans Bank loans and overdrafts Secured Unsecured Proposed dividend

16

100 1,617,587

76 1,243,483

19

300,000 480,393 60,819 79,663 86,044 27,573 324,650 2,976,829 (15,195) 1,234,339

265,667 40,544 92,500 29,692 36,972 268,024 1,976,958 257,532 1,466,767

Net current (liabilities)/assets

Financed by: Share capital Reserves Shareholders funds Minority interests Long-term liabilities Deferred taxation 17 18 64,765 749,346 814,111 4,460 414,868 900 1,234,339 63,761 1,030,295 1,094,056 (24,595) 397,058 248 1,466,767

19 20

Victor FUNG Kwok King Director

Li & Fung Limited

William FUNG Kwok Lun Director

28

Annual Report 1999

B a l a n c e As at 31

S h e e t 1999

December

1999 Note Subsidiaries Current assets Due from related companies Other receivable, prepayments and deposits Dividend receivable Cash and bank balances 11 HK$000 111,210

1998 HK$000 111,210

15

1,612,687 135 440,011 71 2,052,904

1,129,455 229 368,009 61 1,497,754

Current liabilities Due to related companies Accured charges and sundry payable Proposed dividend

16

714,801 1,401 324,650 1,040,852 1,012,052 1,123,262

290,749 1,201 268,024 559,974 937,780 1,048,990

Net current assets

Financed by: Share capital Reserves 17 18 64,765 1,058,497 1,123,262 63,761 985,229 1,048,990

Victor FUNG Kwok King Director

William FUNG Kwok Lun Director

Li & Fung Limited

29

Annual Report 1999

C o n n s o ll i id d ta t e C a s h a s oh Co s o a ed d C Fl w For the Year ended

S t la o e m e nS t (a o n ei n u ee )n t F t w t c t t m d

31

December

1999

Note Net cash inflow from operating activities Returns on investments and servicing of finance Interest income Interest expenses Dividends received from associated companies Dividend paid to minority interests Dividend paid Net cash outflow from returns on investments and servicing of finance Taxation Hong Kong profits tax paid Overseas tax paid Total tax paid Investing activities Purchase of fixed assets Proceeds from disposal of fixed assets Acquisition of subsidiaries (net of cash and cash equivalents) Net cash inflow in respect of disposal of subsidiaries Premium paid in respect of acquisition of businesses Increase in interests in associated companies Repayment from an associated company Purchase of investment securities Proceeds from disposal of investment securities Loan to an investee company Net cash outflow from investing activities Net cash inflow before financing Financing Proceeds from issue of shares Bank loans raised Capital contribution from a minority shareholder Repayment of bank loans Advances from/(to) holding company and fellow subsidiaries Net cash inflow from financing Increase in cash and cash equivalents Cash and cash equivalents at 1 January Effect of foreign exchange rate changes Cash and cash equivalents at 31 December Analysis of the balances of cash and cash equivalents Cash and bank balances Short-term bank loans and overdrafts f) f) f) f) f) a)

1999 HK$000 624,841 43,830 (32,243) 576 (113) (385,146) (373,096) (10,614) (10,220) (20,834) (81,879) 5,530

1998 HK$000 618,958 56,093 (61,346) 7,404 (1,000) (290,679) (289,528) (4,511) (9,386) (13,897) (101,249) 5,002 26,878 (55,464) (242) 8,502 (116,573) 198,960 63,511 89,558 (81,521) (402) 71,146 270,106 564,532 3,279 837,917 904,581 (66,664) 837,917

f)

b) & c) d) & e)

(93,420) (253) 872 (229) 3,906 (38,772) (204,245) 26,666 79,058 250,000 232 (280,000) 768 50,058 76,724 837,917 1,115 915,756 1,029,373 (113,617) 915,756

Li & Fung Limited

30

Annual Report 1999

Consolidated

Cash

Flow

Statement

(continued)

Note: (a)

Reconciliation of profit before taxation to net cash inflow from operating activities 1999 HK$000 Profit before taxation Interest income Interest expense Share of profits less losses of associated companies Depreciation of fixed assets Profit on disposal of fixed assets Exchange reserve of an associated company realized upon disposal Increase in inventories (Increase)/decrease in trade and bills receivable, other receivable, prepayments and deposits including due from associated companies Increase in trade and bills payable, accounts payable, accrued charges and sundry payable including due to associated companies Net cash inflow from operating activities 613,861 (43,830) 32,243 (9,389) 78,376 (1,142) (23,855) 1998 HK$000 471,098 (56,093) 61,346 (6,850) 66,536 (1,733) (1,445) (33,293)

(402,231)

2,405

380,808 624,841

116,987 618,958

(b)

Acquisition of subsidiaries 1999 HK$000 Net assets acquired Fixed assets Inventories Debtors Cash at bank and in hand Creditors Bank loans and overdrafts Taxation Deferred taxation Minority interests Exchange reserve Goodwill on consolidation 1998 HK$000

18,619 13,892 163,163 105,711 (208,067) (13,451) (6,074) (463) (26,391) (182) 477,579 524,336

Satisfied by Purchase consideration Interests in associated companies Expenses incurred in respect of acquisition of subsidiaries and the related restructuring costs

488,350 2,776 33,210 524,336

Li & Fung Limited

31

Annual Report 1999

Consolidated

Cash

Flow

Statement

(continued)

Note: (Contd) (c) Analysis of the net outflow of cash and cash equivalents in respect of acquisition of subsidiary undertakings 1999 HK$000 Total purchase consideration Interests in associated companies Outstanding purchase consideration payable Cash consideration paid Cash at bank and in hand acquired Bank loans and overdrafts acquired Net outflow of cash and cash equivalents in respect of acquisition of subsidiary undertakings (d) Disposal of subsidiaries 1999 HK$000 Net assets disposed of Associated company Debtors Creditors 1998 HK$000 524,336 (2,776) (335,880) 185,680 (105,711) 13,451 1998 HK$000

93,420

24,830 2,062 (14) 26,878

Satisfied by Cash (e) Analysis of inflow of cash and cash equivalents in respect of disposal of subsidiaries

26,878

1999 HK$000 Cash consideration

1998 HK$000 26,878

Li & Fung Limited

32

Annual Report 1999

Consolidated

Cash

Flow

Statement

(continued)

Note: (Contd) (f) Analysis of changes in financing during the year 1999 Amounts due to/ (from) holding company and fellow subsidiaries HK$000 1998 Amounts due to/ (from) holding company and fellow subsidiaries HK$000

Share capital including share premium HK$000 Balance brought forward Non cash movement Share of profits less losses Acquisition of subsidiaries Premium paid on acquisition of subsidiaries/ business Exchange adjustment

Bank loans HK$000

Minority interests HK$000

Share capital including share premium HK$000

Bank loans HK$000

Minority interests HK$000

716,663

489,558

(768)

(24,595)

653,152

481,521

(366 )

(20,486)

2,585 123

(495 )

716,663

(907) 488,651

(768)

26,262 (34) 4,341

653,152

481,521

(366 )

(2,386) (228 ) (23,595)

Proceeds from issue of shares Bank loans raised Repayment of bank loans Advances from/(to) holding company and fellow subsidiaries Dividend paid Capital contribution from minority shareholder Balance carried forward

79,058

250,000 (280,000 )

63,511

89,558 (81,521)

768

(113)

(402 )

(1,000)

232

795,721

458,651

4,460

716,663

489,558

(768 )

(24,595)

Li & Fung Limited

33

Annual Report 1999

Consolidated Statement of Recognised Gains and Losses For the year ended 31 December 1999

1999 HK$000 Exchange adjustment on translation of the accounts of overseas subsidiaries and associated companies Exchange reserve of an associated company realized upon disposal Profit for the year Total recognised gains and losses Goodwill eliminated directly against reserves

1998 HK$000

1,919

4,473

574,638 576,557 (493,788) 82,769

(1,445) 455,168 458,196 (53,078) 405,118

Li & Fung Limited

34

Annual Report 1999

N oo e se s o N t t t

the t o

A c ce u nA sc c c o nu i nu t d ) t h o t ( o t n e s

31

December

1999

1.

P RINCIPAL

ACCOUNTING POLICIES

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. The accounts are prepared under the historical cost convention as modified by the revaluation of certain property, plant and equipment. As a result of the adoption of the revised Hong Kong Statement of Standard Accounting Practice (HKSSAP) 1 and 2 which became effective this year, certain comparative figures have been reclassified and extended accordingly. (a) Consolidation The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31 December. 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 inter-company 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 Groups share of its net assets together with any goodwill or capital reserve which was not previously charged or recognized 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 Companys balance sheet the investments in subsidiaries are stated at cost less provision, if necessary, for any permanent diminution in value. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. 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 Groups share of the results of associated companies for the year, and the consolidated balance sheet includes the Groups share of the net assets of the associated companies. In the Companys balance sheet the investments in associated companies are stated at cost less provision, if necessary, for any permanent diminution in value. The results of associated companies are accounted for by the Company on the basis of dividends received and receivable. Goodwill Goodwill represents the excess of purchase consideration over the fair values ascribed to the net assets of subsidiaries and associated companies acquired and is taken to reserves in the year of acquisition.

(b)

(c)

Li & Fung Limited

35

Annual Report 1999

Notes

to

the

Accounts

(continued)

1.

P RINCIPAL ACCOUNTING P OLICIES (CONT D)

(d) Property, plant and equipment Freehold land is stated at cost and is not amortized. Leasehold land and buildings at the balance sheet date are stated at cost or valuation less subsequent accumulated depreciation. Effective in 1994, no further revaluations of the Groups leasehold land and buildings in Hong Kong have been carried out. The Group places reliance on paragraph 72 of SSAP 17 which provides exemption from the need to make regular revaluations for such assets. Other tangible fixed assets are stated at cost less accumulated depreciation. Leasehold land is depreciated over the period of the lease while other tangible fixed assets are depreciated at rates sufficient to write off their cost over their estimated useful lives on a straight-line basis. The principal annual rates used for this purpose are: Buildings and leasehold improvements Furniture, fixtures and equipment Plant and machinery Motor vehicles and company boat 1 2/ 3 % 20% 10% 25% 10% 15% 20%

Major costs incurred in restoring fixed assets to their normal working condition are charged to the profit and loss account. Improvements are capitalized and depreciated over their expected useful lives to the Group. The carrying amounts of fixed assets are reviewed regularly to assess whether their recoverable amounts have declined below carrying amounts. Expected future cash flows have not been discounted in determining the recoverable amount. 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 recognized in the profit and loss account. Any revaluation reserve balance remaining attributable to the relevant asset is transferred to retained profits and is shown as a movement in reserves. (e) Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals applicable to such operating leases are credited or charged to the profit and loss account on a straight-line basis over the lease term. Investment securities Investment securities are stated at cost less any provision for diminution in value. The carrying amounts of individual investments are reviewed at each balance sheet date to assess whether the fair value have declined below the carrying amounts. When a decline other than temporary has occurred, the carrying amount of such securities should be reduced to its fair value. The amount of the reduction is recognized as an expense in the profit and loss account.

(f)

Li & Fung Limited

36

Annual Report 1999

Notes

to

the

Accounts

(continued)

1.

P RINCIPAL ACCOUNTING P OLICIES (CONT D)

(g) Inventories Inventories comprise merchandise, raw materials and finished goods and are stated at the lower of cost and net realizable value. Cost is determined on the first-in first-out basis on the purchase prices of inventories including direct expenses. Net realizable value is determined on the basis of anticipated sales proceeds less estimated selling expenses. Accounts receivable Provision is made against accounts receivable to the extent which they are considered to be doubtful. Accounts receivable in the balance sheet are stated net of such provision. 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 capitalized 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 utilized. 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. 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 accounts of subsidiaries and associated companies expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Exchange differences are dealt with as a movement in reserves. Revenue recognition Revenue from the sale of goods is recognized 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 passed. Operating lease rental income is recognised on a straight-line basis. Interest income is recognized 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 handling income are recognised when the services are rendered.

(h)

(i)

(j)

(k)

(l)

Li & Fung Limited

37

Annual Report 1999

Notes

to

the

Accounts

(continued)

1.

P RINCIPAL ACCOUNTING P OLICIES (CONT D)

(m) Retirement benefit cost The Groups contributions to the defined contribution retirement scheme, which cover all permanent full-time employees of the Group in Hong Kong and certain countries outside Hong Kong, are expensed as incurred and are reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully in the contributions. The assets of the scheme are held separately for those of the Group in an independently administered fund. The provident fund schemes for staff of the Group in other countries follow the local statutory requirements of the respective countries.

2.

REVENUE A ND TURNOVER
The Group is principally engaged in the export trading of consumer products. Revenue recognized during the year are as follows: The Group 1999 HK$000 Turnover Sales of goods Rental income 1998 HK$000

16,293,730 3,771 16,297,501

14,308,519 4,099 14,312,618 56,093 30,764 17,886 14,417,361

Other revenues Interest income Handling income Commission income

43,830 37,448 17,558 16,396,337

Li & Fung Limited

38

Annual Report 1999

Notes

to

the

Accounts

(continued)

3.

OPERATING P ROFIT
The Group 1999 HK$000 The operating profit is stated after crediting and charging the following: Crediting Net rental income from land and buildings Profit on disposal of fixed assets Net exchange gain Charging Auditors remuneration Depreciation of fixed assets Operating lease rental in respect of land and buildings Provision for doubtful debts Staff costs 1998 HK$000

3,062 1,142 8,308

3,262 1,733 6,362

2,758 78,376 29,220 12,523 646,071

3,115 66,536 24,873 22,250 557,710

4.

FINANCE C OSTS
The Group 1999 HK$000 Interest on bank loans and overdrafts 32,243 1998 HK$000 61,346

Li & Fung Limited

39

Annual Report 1999

Notes

to

the

Accounts

(continued)

5.

T AXATION
Hong Kong profits tax has been provided at the rate of 16% (1998:16%) 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 the Group operates. The Group 1999 HK$000 The amount of taxation charged to the consolidated profit and loss account represents: Hong Kong profits tax Overseas taxation (Over)/underprovision in previous years Deferred taxation 1998 HK$000

22,299 15,090 (1,795) 189 35,783

7,460 6,923 1,135 (1,560) 13,958

Share of taxation attributable to associated companies Hong Kong Overseas

(197) 1,052 855 36,638

1,037 1,430 2,467 16,425

At the date of approval of the accounts, the Inland Revenue Department has issued additional tax assessments for a total amount of approximately HK$117 million to certain subsidiaries of the Group. Such assessments relate to the non-taxable claim of certain non-Hong Kong sourced income and the deduction claim of marketing expenses for the six years of assessment from 1992/1993 to 1997/1998. Under professional advice, the directors do not agree to the assessments and believe that no additional tax liabilities will finally crystallize. The subsidiaries have submitted a full objection against these assessments. Accordingly, the directors consider that no additional provision is necessary.

Li & Fung Limited

40

Annual Report 1999

Notes

to

the

Accounts

(continued)

6.

DIRECTORS AND S ENIOR M ANAGEMENTS E MOLUMENTS

(a) Directors remuneration The aggregate amounts of the emoluments payable to directors of the Company during the year are as follows: The Group 1999 HK$000 Executive: Fees Basic salaries, housing allowances, other allowances and benefits in kind Performance bonuses Pension contributions for directors 165 5,259 14,119 157 19,700 Non-executive: Fees 309 20,009 1998 HK$000 165 5,330 11,914 157 17,566 309 17,875

In addition, certain directors of the Company were granted options under the Share Option Scheme to acquire 2,400,000 (1998: 2,400,000) Shares of the Company at HK$8.305 (1998: HK$4.315) per Share during the year, as adjusted for the effect of Share Subdivision as explained in note 17 to the accounts. The closing market price of the Shares as at 30 December 1999 was HK$19.50 per Share. The exercisable period of these options is from 16 July 2000 to 15 July 2002. Directors fees disclosed above included HK$150,000 (1998: HK$150,000) paid to independent non-executive directors. The number of directors whose emoluments fell within the following bands are set out as below. The emoluments represent the amount paid to or receivable by the directors of the Company in the respective financial year and are stated net of the benefits derived or to be derived from the Share Options granted under the Share Option Scheme. Number of directors Emolument bands Nil HK$1,000,000 HK$4,000,001 HK$4,500,000 HK$4,500,001 HK$5,000,000 HK$6,000,001 HK$6,500,000 HK$6,500,001 HK$7,000,000 HK$7,000,001 HK$7,500,000 HK$7,500,001 HK$8,000,000
* Included nine (1998: six) non-executive directors.

1999 9* 1 1 1

1998 6* 1 1 1

No directors waived their emoluments in respect of the years ended 31 December 1998 and 1999.

Li & Fung Limited

41

Annual Report 1999

Notes

to

the

Accounts

(continued)

6.

DIRECTORS AND S ENIOR M ANAGEMENTS E MOLUMENTS (C ONTD)

b) Five highest paid individuals The five individuals whose emoluments were the highest in the Group for the year include three (1998: three) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining two (1998: two) individuals during the year are as follows: The Group 1999 HK$000 Basic salaries, allowances and other benefits in kind Pension contributions Performance bonuses 1998 HK$000

4,664 105 4,372 9,141

4,537 114 3,507 8,158

The number of the remaining two highest paid individuals whose emoluments fell within the following bands are set out as below. The emoluments represent the amount paid to or receivable by the individuals of the Company in the respective financial year and are stated net of the benefits derived or to be derived from the Share Options granted under the Share Option Scheme. Number of individuals Emolument bands HK$3,500,001 HK$4,000,000 HK$4,000,001 HK$4,500,000 HK$5,000,001 HK$5,500,000 1999 1 1 1998 1 1

7.

P ROFIT ATTRIBUTABLE TO S HAREHOLDERS

The profit attributable to shareholders is dealt with in the accounts of the Company to the extent of HK$ 436,986,000 (1998: HK$364,991,000).

Li & Fung Limited

42

Annual Report 1999

Notes

to

the

Accounts

(continued)

8.

DIVIDENDS
Dividends declared or proposed for the year, as adjusted for the effect of the Share Subdivision, are as follows: The Group 1999 HK$000 Interim, paid, of HK$0.09 (1998: HK$0.075) per Share Final, proposed, of HK$0.25 (1998: HK$0.21) per Share 116,355 324,650 441,005 1998 HK$000 94,994 268,024 363,018

9.

E ARNINGS P ER SHARE T HE G ROUP

a) The calculation of basic earnings per share is based on the profit after taxation and minority interests of HK$574,638,000 (1998: HK$455,168,000) and on the weighted average number of 1,284,448,000 (1998: 1,263,486,000) shares in issue during the year, as adjusted for the effect of the Share Subdivision. In the event that Share Options outstanding at 31 December 1999 were exercised in full, the diluted earnings per share would not be significantly different from the earnings per share as disclosed in the consolidated profit and loss account.

b)

Li & Fung Limited

43

Annual Report 1999

Notes

to

the

Accounts

(continued)

10.

FIXED ASSETS THE GROUP

Land and buildings In Outside Hong Kong

Hong Kong under long leases HK$000 Cost or valuation Brought forward Acquisition of subsidiaries Additions Disposals Exchange adjustment Carried forward At cost At directors 1994 valuation 948,784 23,258

Freehold HK$000 28,594 4,271 (33)

Under Furniture, long Leasehold fixtures and leases improvements equipment HK$000 HK$000 HK$000 15,883 49 106,205 1,849 8,244 (5,683) (270) 167,045 45,875 40,924 (10,001) (856)

Motor vehicles and Plant and company machinery boats HK$000 HK$000 4,459 548 3,817 (3,144) (88)

Total HK$000

19,111 1,290,081 4,400 52,672 1,365 81,879 (1,330) (20,158) (521) (1,719)

626,630 345,412 972,042

32,832 32,832 1,130 362 28 1,520

15,932 15,932 3,047 772 11 3,830

110,345 110,345 22,675 1,035 14,637 (5,558) (166) 32,623

242,987 242,987 80,966 30,112 34,543 (8,502) (415) 136,704

5,592 5,592 1,196 290 1,081 (611) (19) 1,937

23,025 23,025 10,711 2,616 3,129 (1,099) (176) 15,181

1,057,343 345,412 1,402,755 145,025 34,053 78,376 (15,770) (737) 240,947

Aggregate depreciation Brought forward Acquisition of subsidiaries Charge for the year Disposals Exchange adjustment Carried forward Net book value at 31 December 1999 Net book value at 31 December 1998

25,300 23,852 49,152

922,890

31,312

12,102

77,722

106,283

3,655

7,844

1,161,808

923,484

27,464

12,836

83,530

86,079

3,263

8,400

1,145,056

At 31 December 1999, the net book value of fixed assets pledged as security for the Groups long-term loans amounted to HK$913,858,000 (1998: HK$919,749,000). The original cost and aggregate depreciation based on cost of leasehold land and buildings in Hong Kong are as follows: Land HK$000 Original cost Aggregate depreciation based on cost 517,658 (21,340) 496,318 Buildings HK$000 334,394 (22,933) 311,461 Total HK$000 852,052 (44,273) 807,779

Li & Fung Limited

44

Annual Report 1999

Notes

to

the

Accounts

(continued)

11.

S UBSIDIARIES
The Company 1999 HK$000 Unlisted shares, at cost Details of principal subsidiaries are set out on pages 54 to 60. 111,210 1998 HK$000 111,210

12.

ASSOCIATED COMPANIES
The Group 1999 HK$000 Share of net liabilities other than goodwill Loan to an associated company (15,768) 17,010 1,242 Details of principal associated companies are set out on page 61. 1998 HK$000 (5,092) 17,882 12,790

13.

INVESTMENT S ECURITIES
The Group 1999 HK$000 Unlisted shares, at cost Loan to an investee company 41,112 38,772 79,884 Club debentures, at cost 6,600 86,484 1998 HK$000 44,789 44,789 6,600 51,389

Loan to an investee company is interest bearing at prevailing market rates, unsecured and has no fixed terms of repayment.

Li & Fung Limited

45

Annual Report 1999

Notes

to

the

Accounts

(continued)

14.

INVENTORIES
The Group 1999 HK$000 Merchandise Finished goods Raw materials 79,280 1,985 28,749 110,014 1998 HK$000 50,914 7,676 13,677 72,267

At 31 December 1999, the carrying amount of inventories that are carried at net realizable value amounted to HK$383,000 (1998: HK$24,844,000).

15.

DUE FROM RELATED COMPANIES

The Group 1999 HK$000 Due from Holding company Subsidiaries Fellow subsidiaries Associated companies 1998 HK$000 The Company 1999 HK$000 1998 HK$000

24,609 24,609

473 316 19,062 19,851

1,612,687 1,612,687

1,129,455 1,129,455

Li & Fung Limited

46

Annual Report 1999

Notes

to

the

Accounts

(continued)

16.

DUE

TO

RELATED COMPANIES
The Group 1999 HK$000 1998 HK$000 The Company 1999 HK$000 1998 HK$000

Due to Subsidiaries Fellow subsidiaries Associated companies

100 100

21 55 76

714,801 714,801

290,749 290,749

17.

S HARE CAPITAL
1999 HK$000 Authorized 1,600,000,000 shares of HK$0.05 each (1998: 800,000,000 shares of HK$0.1 each) Issued and fully paid 1,295,296,000 shares of HK$0.05 each (1998: 637,610,000 shares of HK$0.1 each) (a) 1998 HK$000

80,000

80,000

64,765

63,761

At a special general meeting of the Company held on 12 October 1999, an ordinary resolution was duly passed under which each of the existing issued and unissued shares of HK$0.1 each in the share capital of the Company as of that date was subdivided (the Share Subdivision) into two shares of HK$0.05 each (the Share). During the year, 1,994,000 Shares, 6,216,000 Shares and 11,916,000 Shares were issued at a price of HK$2.995, HK$3.51 and HK$4.315 per Share respectively to the Share Option holders who exercised their subscription rights, as adjusted for the effect of the Share Subdivision as explained in note (a) above. In 1998, 100,000 shares, 1,146,000 shares, 3,848,000 shares and 4,928,000 shares of HK$0.1 each had been issued at a price of HK$4.24, HK$4.75, HK$5.99 and HK$7.02 respectively per share to the Share Option holders who exercised their subscription rights.

(b)

Li & Fung Limited

47

Annual Report 1999

Notes

to

the

Accounts

(continued)

17.

S HARE CAPITAL (CONT D)

(c) Details of Share Options granted by the Company pursuant to the Share Option Scheme and the Share Options outstanding at 31 December 1999, as adjusted for the effect of Share Subdivision, are as follows: Share Options outstanding at 31 December 1999

Date of grant 18 July 1996

Subscription price per Share HK$2.995

Exercisable period 18 July 1997 17 July 1999 18 July 1998 17 July 2000 25 July 1999 24 July 2001 16 July 2000 15 July 2002

Share Options exercised during the year 1,994,000

Share Options lapsed during the year

24 June 1997

HK$3.51

6,216,000

120,000

1,728,000

25 July 1998

HK$4.315

11,916,000

252,000

7,968,000

16 July 1999

HK$8.305

21,120,000

Subsequent to 31 December 1999, 3,304,000 Shares have been allotted and issued under the Share Option Scheme for a total cash consideration of HK$13,584,000.

Li & Fung Limited

48

Annual Report 1999

Notes

to

the

Accounts

(continued)

18.

RESERVES
The Group 1999 HK$000 Share premium account At 1 January Share premium arising from the issue of Shares pursuant to the exercise of Share Options At 31 December Capital reserve (note (a)) At 1 January Transferred from retained profits At 31 December Exchange reserve At 1 January Exchange reserve of an associated company realized upon disposal Transferred to retained profits Exchange adjustment on translation of the accounts of overseas subsidiaries and associated companies At 31 December Revaluation reserve At 1 January Goodwill on acquisition of subsidiaries/associated company/businesses written off At 31 December Contributed surplus account (note (b)) At 1 January and 31 December Retained profits At 1 January Profit for the year Goodwill on acquisition of subsidiaries/associated company/businesses written off Dividends (note 8) Transferred to capital reserve Transferred from exchange reserve Additional final dividend for previous year At 31 December 652,902 78,054 730,956 2,695 2,264 4,959 (40,809) 1,371 1998 HK$000 590,393 62,509 652,902 2,695 2,695 (43,837) (1,445 ) 1999 HK$000 652,902 78,054 730,956 The Company 1998 HK$000 590,393 62,509 652,902

1,919 (37,519) 119,990 (119,990) 295,517 574,638 (373,798) (441,005) (2,264) (1,371) (767) 50,950 749,346

4,473 (40,809) 119,990 119,990 257,102 455,168 (53,078) (363,018) (657) 295,517 1,030,295

111,010 221,317 436,986 (441,005) (767) 216,531 1,058,497

111,010 220,001 364,991 (363,018) (657) 221,317 985,229

Li & Fung Limited

49

Annual Report 1999

Notes

to

the

Accounts

(continued)

18.

RESERVES (CONT D)
Note: (a) Capital reserve amount set aside from the previous years profit of an overseas subsidiary of the Group in accordance with the local statutory requirement. The contributed surplus of the Company represents the difference between the nominal value of the Companys 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. Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus is distributable to the shareholders. At Group level, the contributed surplus is reclassified into its components of reserves of the underlying subsidiaries. Included in the Groups retained profits are accumulated losses of HK$16,188,000 (1998: accumulated losses of HK$13,264,000) attributable to associated companies.

(b)

(c)

19.

L ONG-T ERM L IABILITIES

The Group Note Long-term bank loans secured Other long-term liability (a) (b) 1999 HK$000 378,988 35,880 414,868 (a) Long-term bank loans secured The Group 1999 HK$000 Long-term bank loans secured Less: amount repayable within 12 months classified under current liabilities 458,651 79,663 378,988 Long-term bank loans are repayable in the following periods: On demand or not exceeding one year More than one year but not exceeding two years More than two years but not exceeding five years 79,663 124,663 254,325 458,651 92,500 100,000 297,058 489,558 1998 HK$000 489,558 92,500 397,058 1998 HK$000 397,058 397,058

Li & Fung Limited

50

Annual Report 1999

Notes

to

the

Accounts

(continued)

19.

L ONG-T ERM L IABILITIES (CONT D)

(b) Other long-term liability Other long-term liability represents consideration payable in respect of the acquisition of a subsidiary. The amount is unsecured, interest-free and is repayable within five years.

20.

DEFERRED TAXATION T HE G ROUP

1999 Full potential liabilities/ (assets) HK$000 Accelerated depreciation allowances Tax losses Other timing differences Full potential liabilities/ (assets) HK$000 1998

Provision made HK$000

Provision made HK$000

6,271 (24,770) 981 (17,518)

1,771 (1,852) 981 900

1,308 (59,765) 928 (57,529)

1,308 (1,988) 928 248

Movements on the provision for deferred taxation are as follows: 1999 HK$000 At 1 January Transferred to profit and loss account Acquisition of subsidiaries At 31 December 248 189 463 900 1998 HK$000 1,808 (1,560) 248

No provision has been made for deferred tax liability in respect of the timing differences relating to the surplus from the revaluation of certain leasehold land and buildings of the Group. The revaluation does not constitute a timing differences for taxation purposes because the management of the Group intend to operate these properties on a long-term basis.

Li & Fung Limited

51

Annual Report 1999

Notes

to

the

Accounts

(continued)

21.

CONTINGENT L IABILITIES
The Group 1999 HK$000 Bills discounted with recourse Guarantees in respect of banking facilities granted to: Subsidiaries Associated companies Investee company Other guarantees 469,931 1998 HK$000 628,830 The Company 1999 HK$000 1998 HK$000

52,460 11,000 533,391

40,677 38,740 11,000 719,247

6,441,380 23,315 6,464,695

6,232,904 23,244 38,740 6,294,888

22.

COMMITMENTS
(a) Operating lease commitments At 31 December 1999, the Group had commitments to make payments in the next twelve months in respect of land and buildings: The Group 1999 HK$000 Operating leases expiring: within one year in the second to fifth years inclusive after five years 1998 HK$000

15,385 22,064 147 37,596

6,306 16,554 281 23,141

(b)

Financial commitments At 31 December 1999, the Group had financial commitment in respect of the following: The Group 1999 HK$000 Capital contribution to: an associated company an investee company 1998 HK$000

98,582 98,582

1,937 103,888 105,825

Li & Fung Limited

52

Annual Report 1999

Notes

to

the

Accounts

(continued)

22.

COMMITMENTS (C ONTD )
(c) Capital commitments At 31 December 1999, the Group had capital commitments contracted but not provided for in respect of the following: The Group 1999 HK$000 Land and buildings and leasehold improvements contracted but not provided for Purchase of computer equipment 1998 HK$000

3,185 3,185

43 1,725 1,768

23.

CHARGE

OF ASSETS

At 31 December 1999, there were charges on all the assets and undertakings of two (1998: three) overseas subsidiaries in favour of banks to cover banking facilities granted to those subsidiaries to the extent of HK$168,863,000 (1998: HK$74,498,000) of which HK$124,768,000 (1998: HK$69,286,000) were utilized at the balance sheet date. In addition, there were long-term bank loans of HK$420,000,000 (1998: HK$450,000,000) which were secured by certain land and buildings held by the Group and the issued shares of two subsidiaries.

24.

RELATED

PARTY TRANSACTIONS

The Group had the following material transactions on normal commercial terms with its related companies: 1999 HK$000 Rental income from associated companies Sales to a related company 1,647 1,506 1998 HK$000 1,025

Related company represents a subsidiary of Li & Fung (1937) Limited, the substantial shareholder of the Company.

25.

APPROVAL

OF ACCOUNTS

The accounts were approved by the Board of Directors on 27 March 2000.

Li & Fung Limited

53

Annual Report 1999

G rG u p u p r u cS u rre u cc t n t i r u e d ) o r o St t t ( o u n e

31

December

1999

Place of incorporation and operation Principal subsidiaries ** Li & Fung (B.V.I.) Limited British Virgin Islands

Issued and fully paid share capital

Percentage of equity held by the Company Direct Indirect

Principal Activities

Ordinary US$400,010

100

Marketing services and investment holding Property investment

Albinina Limited

Hong Kong

Ordinary HK$20 Ordinary US$1 Ordinary HK$1,000,000 Common stock US$100 Ordinary HK$1,000,000 Ordinary GBP1,200,000 Ordinary HK$250,000 Ordinary A HK$300,000 Ordinary B HK$200,000 Common stock US$600,000

100

* Appleton Holdings Ltd Basic & More Trading Limited * Beldare Enterprises Inc.

British Virgin Islands Hong Kong

100

Investment holdings

100

Export trading

U.S.A.

100

General trading

Beldare Enterprises Limited * Black Cat Fireworks Limited Camberley Enterprises Limited Dodwell (Mauritius) Limited

Hong Kong

100

General trading

England

100

Wholesaling

Hong Kong

100

Apparel exporting

Hong Kong

60

Export trading

* Golden Gate Fireworks Inc.

U.S.A.

100

Commission agent and investment holding

Li & Fung Limited

54

Annual Report 1999

Group

Structure

(continued)

Place of incorporation and operation Principal subsidiaries Golden Horn Investments (Europe) Ltd Golden Horn Investments Inc. Golden Horn N.V. British Virgin Islands

Issued and fully paid share capital

Percentage of equity held by the Company Direct Indirect

Principal Activities

Ordinary US$100

75

Investment management

Cayman Islands Netherlands Antilles Hong Kong

Ordinary US$100 US$6,100

75

Investment management Investment holding

100

Golden Horn Venture Capital Limited Hillung Enterprises Limited Kwok Yue Limited

Ordinary HK$400,000 Ordinary HK$300,000 Ordinary HK$10,000 Ordinary US$1 Ordinary US$1 Ordinary US$1 Common stock US$30,002 Ordinary US$1 Ordinary US$1

100

Investment holding

Hong Kong

100

Export trading

Hong Kong

100

Export trading

* LF Capital Management Limited LF Corporate Capital I) Limited * LF Europe Limited

British Virgin Islands British Virgin Islands British Virgin Islands U.S.A.

100

Investment management Investment holding

100

100

Investment management Investment management Investment management Investment management

* LF International Inc.

100

LFCF Investment I (Europe) Limited LFCF Investment I (USA) Limited

British Virgin Islands British Virgin Islands

100

100

Li & Fung Limited

55

Annual Report 1999

Group

Structure

(continued)

Place of incorporation and operation Principal subsidiaries * Li & Fung Agencia De Compras em Portugal, Limitada * Li & Fung (Bangladesh) Limited Li & Fung Development Limited * Li & Fung Enterprise Development (Shenzhen) Company Limited Li & Fung (Exports) Limited Portugal

Issued and fully paid share capital

Percentage of equity held by the Company Direct Indirect

Principal Activities

Quotas PTE 20,000,000

100

Export trading

England

Ordinary GBP 100

100

Investment holding

Hong Kong

Ordinary HK$20 HK$10,000,000

100

Property investment Provision of inspection services

The Peoples Republic of China

100

Hong Kong

Ordinary HK$10,000 Non-voting deferred HK$8,600,000 Ordinary A HK$300,000 Ordinary B HK$300,000 Common shares Q5,000 Nominative common shares Lps25,000 Equity shares Rupee 64,000,200

100

Export trading

Li & Fung (Fashion Accessories) Limited

Hong Kong

100

Export trading

* Li & Fung (Guatemala) S.A. * Li & Fung (Honduras) Limited

Guatemala

100

Export trading

Honduras

100

Export trading

* Li & Fung (India) Private Limited

India

100

Export trading

Li & Fung Limited

56

Annual Report 1999

Group

Structure

(continued)

Place of incorporation and operation Principal subsidiaries * Li & Fung (Italia) S.r.l. (formerly known as International Buying Service Italia S.r.l.) * Li & Fung (Korea) Limited * Li & Fung (Mauritius) Limited Italy

Issued and fully paid share capital

Percentage of equity held by the Company Direct Indirect

Principal Activities

Units Lire 90,000,000

100

Export trading

Korea

Common stock Won 200,000,000 A Shares Rupees 750,000 B Shares Rupees 500,000 TL600,000,000

100

Export trading

Mauritius

60

Export trading

* Li & Fung Mumessillik, Pazarlama Limited Sirketi * Li & Fung (Philippines) Inc. * Li & Fung (Portugal) Limited Li & Fung (Properties) Limited * Li & Fung (Singapore) Private Limited * Li & Fung South Africa (Proprietary) Limited

Turkey

100

Export trading

Philippines

Peso 500,000

100

Export trading

England

Ordinary GBP 100 Ordinary HK$1,000,000 Ordinary S$25,000

100

Investment holding

Hong Kong

100

Property investment

Singapore

100

Export trading

South Africa

Ordinary Rand 100

100

Export trading

Li & Fung Limited

57

Annual Report 1999

Group

Structure

(continued)

Place of incorporation and operation Principal subsidiaries * Li & Fung Taiwan Holdings Limited Li & Fung Taiwan Investments Limited * Li & Fung (Taiwan) Limited * Li & Fung (Thailand) Limited Li & Fung (Trading) Limited Taiwan

Issued and fully paid share capital

Percentage of equity held by the Company Direct Indirect

Principal Activities

NT$287,996,000

100

Investment holding

British Virgin Islands Taiwan

Ordinary US$4,912,180 NT$40,000,000

100

Investment holding

100

Export trading

Thailand

Baht 6,000,000

100

Export trading

Hong Kong

Ordinary HK$200 Non-voting deferred HK$10,000,000 US$1,999,055

100

Export trading and investment holding

* Li & Fung (Zhanjiang) Limited

The Peoples Republic of China Hong Kong

100

Packaging

Lifung Express Limited

Ordinary A HK$10 Ordinary B HK$10 Ordinary HK$20 Ordinary HK$1,000,000 Ordinary HK$100 Ordinary US$1

100

Export trading

Lifung Structure Limited Lloyd Textile Trading Limited Luma Trading Limited * Mercury (BVI) Holdings Limited

Hong Kong

100

Export trading

Hong Kong

100

Export trading

Hong Kong

60

Export trading

British Virgin Islands

100

Investment holding

Li & Fung Limited

58

Annual Report 1999

Group

Structure

(continued)

Place of incorporation and operation Principal subsidiaries * Neptune Pacific Limited * Perfect Trading Inc. * P.T. Lifung Indonesia * Ratners Enterprises Limited Shiu Fung Fireworks Company Limited British Virgin Islands Egypt Indonesia

Issued and fully paid share capital

Percentage of equity held by the Company Direct Indirect

Principal Activities

Ordinary US$1 LE 250,000 US$250,000

100

Investment holding

60 100

Export trading Export trading

British Virgin Islands Hong Kong

Ordinary US$1 Ordinary A HK$1,100,000 Ordinary B HK$1,100,000 Ordinary Baht 4,000,000 Ordinary HK$5,570,150 Ordinary S$25,000 Ordinary US$1 Common stock US$1,331,000 9.5% Preferred Stock US$0.17 Ordinary HK$62,000,000

100

Investment holding

100

Export trading

* Swire & Maclaine Company Limited Swire & Maclaine Limited * Swire & Maclaine Pte Limited * Tantallon Enterprises Limited * The Millwork Trading Co., Ltd

Thailand

90

Export trading

Hong Kong

100

General trading and investment holding Export trading

Singapore

100

British Virgin Islands U.S.A.

100

Investment holding

100

Distribution and wholesaling

Toy Island Manufacturing Company Limited

Hong Kong

100

Design and marketing

Li & Fung Limited

59

Annual Report 1999

Group

Structure

(continued)

Place of incorporation and operation Principal subsidiaries Verity Enterprises Limited

* **

Issued and fully paid share capital

Percentage of equity held by the Company Direct Indirect

Principal Activities

Hong Kong

Ordinary HK$2,000,000

100

Export trading

Subsidiaries not audited by PricewaterhouseCoopers, Hong Kong. Li & Fung (B.V.I.) Limited provides the subsidiaries with promotional and marketing activities outside Hong Kong.

The above table lists out the principal subsidiaries of the Company as at 31 December 1999 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

60

Annual Report 1999

Group

Structure

(continued)

Place of incorporation Principal associated companies Blue Work Trading Company Limited # EC Basic S.r.l. Hong Kong

Issued and fully paid share capital

Percentage of equity indirectly held by the Company

Principal activities

Ordinay HK$4,000,000 Units Lire20,000,000 Capital contribution US$171,466 Common stock US$60,000 Capital contribution US$665,126 Capital contribution US$170,382 Ordinary HK$1,560,000 Ordinary US$2 Capital contribution US$44,564 Common stock US$2,000 Capital contribution US$1,475,100 Capital contribution US$290,938 Capital contribution US$264,283

50

Export trading

Italy

50

Export trading

# Eagleville Fireworks, L.P. # Fireworks Management, Inc # Gulf Coast Fireworks Sales LLC # Harrisonville Fireworks, L.P. LF Basic Limited

U.S.A.

25

Retailing

U.S.A.

25

Investment holding

U.S.A.

25

Fireworks distribution Retailing

U.S.A.

25

Hong Kong

50

Export trading

LF Capital Limited

British Virgin Islands U.S.A.

50

Investment holding

# Lone Jack Fireworks LLC # MBC Enterprises, Inc. # Winco Fireworks International LLC # Winco Fireworks Utah LLC # Zenith Specialties, L.P.
#

25

Retailing

U.S.A.

25

Retailing

U.S.A.

25

Wholesaling

U.S.A.

25

Fireworks distribution Fireworks manufacturing

U.S.A.

25

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 1999 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.

Li & Fung Limited

61

Annual Report 1999

Coordinated

Global

Network

THE MEDITERRANEAN
Cairo Cairo Denizli Denizli Florence Florence Istanbul Istanbul Izmir Izmir Oporto Oporto Tunis Tunis Turin Turin ! ! ! ! ! ! !

SOUTH AFRICA
Durban Madagascar Mauritius ! !

SOUTH ASIA
Bangalore Bangalore Bombay Bombay Chittagong Chittagong Colombo Colombo Dhaka Dhaka Karachi Karachi Katmandu Katmandu Madras Madras New Dehli New Dehli Sharjah Sharjah ! ! ! ! !

NORTH ASIA NORTH ASIA

Beijing Beijing Dalian Dalian Guangzhou Guangzhou Hong Kong Hong Kong Liuyang Liuyang Nanjing Nanjing Qingdao Qingdao Seoul Seoul Shanghai Shanghai Shantou Shantou Shenzhen Shenzhen Taipei Taipei Zhanjiang Zhanjiang

THE AMERICAS
Guatemala Guatemala Honduras Honduras Mexico City Mexico City ! ! ! !

SOUTHEAST ASIA SOUTHEAST ASIA

Bangkok Bangkok Ho Chi Minh City Ho Chi Minh City Jakarta Jakarta Johor Bahru Johor Bahru Manila Manila Phnom Penh Phnom Penh Saipan Saipan Singapore Singapore !

New York New York Vancouver Vancouver