li & fung limiteda one-stop shop for customers through a total value-added package: from product...

LI & FUNG LIMITED(Incorporated in Bermuda with limited liability)

Contents

2 Corporate Information

3 Business Profile

4 Coordinated Global Network

6 Key Financial Highlights

7 Management Discussion & Analysis

7 Chairman’s Statement

11 Managing Director’s Report

16 Corporate Governance

26 Directors and Senior Management

32 Information for Investors

33 Report of the Directors

48 Auditors’ Report

49 Statement of Accounts

104 Ten-Year Financial Summary

Li & Fung Limited Annual Report 2003 2

Corporate Information

Non-executive Directors

Victor FUNG Kwok King, Chairman

Paul Edward SELWAY-SWIFT *

Allan WONG Chi Yun *

Franklin Warren McFARLAN *

Makoto YASUDA *

LAU Butt Farn

Leslie BOYD

(Steven Murray SMALL —

alternate to Mr Leslie BOYD)

* independent non-executive directors

Chief Compliance Officer

James SIU Kai Lau

Company Secretary

Terry WAN Mei Chow

Legal Advisors

Johnson Stokes & Master

17th Floor, Prince’s Building, 10 Chater Road

Hong Kong

Registered Office

Canon’s Court, 22 Victoria Street

Hamilton HM12, Bermuda

Principal Place of Business

11th Floor, LiFung Tower

888 Cheung Sha Wan Road

Kowloon, Hong Kong

Executive Directors

William FUNG Kwok Lun, Managing Director

Henry CHAN

Danny LAU Sai Wing

Annabella LEUNG Wai Ping

Bruce Philip ROCKOWITZ

Chief Financial Officer

Frank LEONG Kwok Yee

Principal Bankers

The Hongkong and Shanghai

Banking Corporation Limited

Citibank, N.A.

JP Morgan Chase Bank

Auditors

PricewaterhouseCoopers

Certified Public Accountants

22nd Floor, Prince’s Building, Central, Hong Kong

Business Profile

Li & Fung Limited Annual Report 20033

The Supply Chain

Consumer Needs Product Design

Raw Material Sourcing

Product Development

Factory Sourcing

Manufacturing Control

Shipping Control

Forwarder Consolidation

Consumer Wholesaler

Local

Forwarding Consolidation

Customs Clearance

Li & Fung Limited and its subsidiaries (“Li & Fung”) is a premier global trading group managing the supply

chain for high-volume, time-sensitive consumer goods. Garments make up a large part of the Li & Fung

business which also covers the sourcing of hard goods such as fashion accessories, gifts, handicrafts,

home products, promotional merchandise, toys, sporting goods, footwear and travel goods.

As a Supply Chain Manager across many producers and countries, Li & Fung provides the convenience of

a one-stop shop for customers through a Total Value-Added Package: from product design and development,

through raw material and factory sourcing, production planning and management, quality assurance and

export documentation to shipping consolidation.

Founded in Guangzhou in 1906, Li & Fung is today headquartered in Hong Kong from where it co-ordinates

the manufacture of goods through a network of 65 sourcing offices in 38 countries and territories. While

cost considerations have resulted in the concentration of manufacturing activities in Asia, recent years

have seen an expansion of Li & Fung’s quick-response capabilities in areas like the Mediterranean, Eastern

Europe and Central America that are closer to customers in Europe and the US. Instead of owning any

production facilities, Li & Fung manages a large number of quality-conscious, cost-effective producers who

can deliver to a deadline for its customers.

Li & Fung is a member of the Li & Fung Group of companies which also includes privately-held Retailing and

Distribution businesses. With an annual turnover of around US$5.5 billion, Li & Fung employs about 6,000

people worldwide.


EUROPE & THEMEDITERRANEANAmsterdamBucharestCa i roDen iz l iF lorenceHuddersf ie ldIs tanbu lIzmirLondonOpor toTun isTur in

65 offices in 38 countries and territories

SOUTH ASIAAmman DhakaBahra in Karach iBanga lore LahoreChenna i MumbaiCo lombo Shar jahDeh l i

NORTH ASIABei j ingDal ianDongguanGuangzhouHepuHong KongHuizhouL iuyangLonghuaMacauNan j ingNingboQingdaoSeou lShangha iShantouShenzhenTa ipe iTokyoZhan j iangZhongshan

SOUTHEAST ASIABangkokHano iHo Ch i Minh C i tyJakar taMakat iPhnom PenhSa ipanShah A lamSingapore

SOUTH AFRICADurbanMadagascarMaur i t ius

Li & Fung Offices


THE AMERICASBostonGuada la jaraGuatemala C i tyManaguaMex ico C i tyNew York C i tySan Franc iscoSan Pedro Su laSanto Domingo

Key Financial Highlights


* Continuing operations

Turnover* by Export Markets

3-Ye

arPl

ans

Turnover* by Product

3-Ye

arPl

ans

1stY

r2n

dYr

1stY

r2n

dYr

03

02

01

00

99

42,631

North America

Europe

East Asia

S Hemisphere

37,281

32,941

24,992

16,298

75% 19% 3% 3%

76% 19% 3% 2%

75% 21% 1% 3%

70% 26% 1% 3%

69% 27% 1%3%

HK$ million

HK$ million

03

02

01

00

99

42,631

37,281

32,941

24,992

16,298

67% 33%

68% 32%

72% 28%

78% 22%

75% 25% Softgoods

Hardgoods

2003 2002 GrowthHK$’000 HK$’000

Turnover 42,630,510 37,281,360 14.3%

Total Margin 3,943,420 3,419,108 15.3%

As percentage of turnover 9.3% 9.2%

Core operating profit* 1,320,216 1,146,863 15.1%


Profit attributable to shareholders 1,223,118 1,080,468 13.2%


Earnings per share 42.3 HK cents 37.4 HK cents 13.1%

Dividend per share 35 HK cents 30.5 HK cents 14.8%

Shareholders’ funds 4,221,902 3,798,020

Net assets per share HK$1.45 HK$1.31

* Before amortisation of goodwill and net investment loss

Management Discussion & Analysis (continued)


Introduction

I am pleased to report that 2003 was a year of measured growth for Li & Fung Limited (the “Group”). The

Group was able to increase turnover by 26% in the first half despite the dampening effects of the Gulf War

and the SARS epidemic but U.S. orders in the second half were a little less than expected. The Group made

another strategic acquisition, and continued to build out higher margin business, secure licensing arrangements

and expanded selectively its sourcing networks.

At the end of 2003, the Group had become one of very few global consumer products export trading

companies with the geographic flexibility and depth of expertise that will be conducive to success in the

future.

Performance

In 2003, Group turnover increased by 14.3% to HK$42.6 billion. Profit attributable to shareholders amounted

to HK$1.22 billion, representing a 13.2% increase over the HK$1.08 billion of 2002. Earnings per share

were 42.3 HK cents, an increase of 4.9 HK cents in 2002.

Management Discussion & Analysis

Chairman’s Statement

Victor FUNG Kwok King



The Board of Directors has proposed an increase in final dividend to 25 HK cents per share

which, together with an interim dividend of 10 HK cents per share, will give a total dividend

of 35 HK cents per share for the whole year (2002 total: 30.5 HK cents per share).

Market and Business

Market uncertainty continued to be a challenge in 2003. Orders remained positive throughout

the Iraq War and SARS in the first half of the year, but US demand was softer than expected

in the latter part of the year, especially for the festive seasons.

The Group’s strategy to increase its share of higher margin business led to the signing of a

licensing agreement with Levi Strauss & Co and the signing of a memorandum of understanding

that covered the principal terms of a license with Official Pillowtex L.L.C. The latter marks

the Group’s entry, with the established Royal Velvet brand, into the US home textiles’ US$18

billion market. This fits well with the needs of the Group’s existing and target customers,

and the growth potential is substantial.

In August 2003, the Group acquired the remaining one-third of the equity interest in US

garment importer International Sourcing Group, LLC (“ISG”) for a total consideration of

US$5.22 million. This was done through a share transaction. ISG is now a wholly owned

subsidiary of the Group, offering a more comprehensive service to mass-market retailers in

the US.

In December 2003, the Group acquired the sourcing business of Firstworld Garments Limited

and International Porcelain, Inc. for a total consideration of US$27 million. The two companies,

which together operate under the trade name of “International Sources”, provide the Group

with the opportunity to increase its hard goods business and grow its non-US business,

specifically in Mexico.

The Group has also become the first wholly owned foreign trading company in China to be

issued a wholly owned license granting direct export rights. This enables the Group to

directly export products from China to its customers worldwide, thereby offering an even

more complete supply chain service. The Group currently has 16 offices throughout the

Chinese Mainland, where its annual sourcing volume exceeds US$2 billion.

Strategies for Further Growth

The Group’s drive for growth remains a key focus for 2004 and beyond, and several initiatives

are already in place to ensure sustainable growth:

Selective and opportunistic acquisitions remain a focus for the Group, and efforts to identify

and secure value-enhancing acquisitions will continue.

Broader geographic reach has already been created with the acquisition of International

Sources. This has opened up new potential in Mexico and paved the way for other geographic

regions to be pursued.

99 00 01 02 03

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Dividend Payout*%


3-Year Plans1st Yr 2nd Yr

Earnings per share*Dividend per shareHK cents

Earnings per share*Dividend per share

3-Year Plans


1st Yr 2nd Yr



Higher margin business, especially arising from licensing agreements such as those with Levi Strauss

Signature™ and Royal Velvet, will allow the Group to add financial quality to its operations. The brand-value

benefits of such agreements, to the Group and to its licensors, are also noteworthy. The direct contribution

to earnings from the branding and licensing business is unlikely to be immediate but the potential beyond

2004 is significant.

New opportunities from China goes beyond just sourcing and manufacturing. The Group’s export company

license from the Ministry of Commerce of the People’s Republic of China delivers a complete supply-chain

service advantage that the Group intends to maximize. The Group is now able to import raw materials and

export under its own name, as well as benefit from VAT rebates.

Diversification of customer base through an expanding product mix will also continue to provide fresh

momentum for growth. The Group’s global role in managing the supply chain for high-volume, time-sensitive

consumer goods such as garments, fashion accessories, toys, sporting goods, promotional merchandise,

handicrafts, shoes, travel goods and household items will be further enhanced as more brand names and

more products are added.

The above in fact reflects the Group’s constant evaluation of growth opportunities and impetuses that

already sit adjacent to the core business of the Group, and which make good business sense to consider.

The Group refers to this as its ‘Adjacency Strategy’ – one that is designed to open up possibilities that the

Group’s various businesses readily offer; from the on-shore business development and marketing opportunities

that companies such as International Sources and ISG represent, to the design and branding initiatives

involving licensing agreements as well as the overall extension of the Group’s agency role within a global

market.

One final word on change. Although economic recovery and growth is the prevailing theme that is currently

echoing around the commercial capitals of the world, unpredictability and volatility are likely to remain

permanent features of the global landscape. It is against this backdrop that the Group will be positioning

its future growth and identifying the opportunities that come with some degree of risk. Here too, the

Group’s significant global presence and operations offer the kind of flexibility and critical mass that is even

more relevant in today’s global economy.

Looking further ahead, the Group has already started to examine its internal synergies and assess the

external environment in preparing for the Group’s next Three-Year Plan, from 2005 to 2007. Global outsourcing

and licensing trends are being taken into account in the Group’s scenario building and response strategies,

as are factors such as trade and competitiveness issues, geographic opportunities, channel shifts in

marketing and branding trends, and behavioral changes in the retail sector.



Corporate Governance

The Board constantly seeks to advance its commitment to the practice of good corporate governance,

and it is with this as the catalyst that a number of changes took place in 2003.

To further reinforce independence, three committees were restructured to comprise a majority of Independent

Non-executive directors: the Nomination, Audit and Compensation Committees. In addition, I have retired

as Chairman of the Audit Committee in favour of Mr Paul Selway-Swift, while remaining as a member of the

committee.

In overall terms, the Audit Committee, Risk Management Committee and Corporate Governance Division

provide continuous monitoring of the Group’s risk management and internal control systems.

Last but not least, I wish to express my gratitude to the members of the Board for their diligent guidance

and support, and to thank the Group’s management team and staff for their unstinting efforts and dedication

in ensuring the continued success of the Group.


Chairman

Hong Kong, 24 March 2004



Results Review

2003 was a year of steady progress for Li & Fung. Our business has continued to grow amidst a sluggish

retail environment in our major markets. With our extensive sourcing network, the Group has experienced

good market share gains within our customers base by helping them stay competitive in a tough market

space. Leveraging on our core expertise in the supply chain we have also embarked on new initiatives to

build a higher-margin business model with sustainable, high growth prospects.

During the year, turnover increased by 14.3% to HK$42.6 billion. Although this increase is in line with our

Three-Year Plan target growth rate, it is not as strong as what management has expected earlier in the

year. While generally the Group has been able to increase market share, poor holiday season performance

amongst a few large customers led to lower than expected turnover growth for the second half of 2003.

The Group’s Total Margin improved from 9.2% to 9.3%, reflecting our continuous move into building more

higher-margin businesses. Core Operating Profit Margin also saw an improvement from 3.08% to 3.1%. As

a result, the Group’s Core Operating Profit saw a slightly higher rate of growth of 15.1%.

William FUNG Kwok Lun

Managing Director’s Report



Despite a solid operating performance, a drop in non-trading income had an unfavorable

effect on Group results. Due to the downward trend in interest rates, interest income generated

from cash reserves declined to HK$38 million, from HK$50 million. Net loss from our venture

capital investments amounted to HK$8 million. Goodwill amortisation charges increased

from HK$12 million to HK$26 million, reflecting the full year impact of the Janco acquisition,

the acquisition of International Sources, as well as the increase in our stake in ISG, our

wholesale operation in the US.

Taking into account the above, profit attributable to shareholders grew 13.2% to HK$1,223

million.

Segmental Analysis

The Group’s hardgoods business continued to see good growth momentum, with turnover

and operating profit jumping by 21% and 28% respectively. The full year inclusion of the

Janco business contributed partly to this increase. Our original hardgoods business has

also benefited from a growing list of anchor customers. Hardgoods now account for 33% of

Group turnover, up from 32% in 2002 and 28% from 2001, the end of our last Three-Year

Plan.

Softgoods business accounted for 67% of total turnover. Due to the poor performance of a

few key customers in the holiday season, turnover and operating profit increased by a less

than expected rate of 11%.

Geographically, North America is still the Group’s largest export market, accounting for

75% of turnover. The retail market has yet to see signs of pick up and turnover and operating

profit there increased by 13% and 9% respectively. Benefiting from a stronger Euro the

Group saw better performance in Europe with turnover and operating profit increasing by

16%, and 33%. Other markets like East Asia and Southern Hemisphere are small but building

steadily.

New Ventures

During the year, the Group has entered into a licensing agreement with Levi Strauss & Co to

design, manufacture and market fashion tops under the Levi Strauss SignatureTM label in

the US and is our first major venture into the brands arena. Leveraging on our sourcing

network, product development capability and diverse customer base, we see a good opportunity

to build a higher margin business model to augment our core business. The Group will

adopt a prudent approach, licensing only well-known brand names with mass appeal. On the

sales side, we seek to partner with leading retailers with scale, to build substantial business

and minimize risk in the supply chain. The brand strategy will enable us to increase market

share with existing customers and also penetrate new customers in the mass market channel

such as Wal-Mart and Target.

3

3.1

3.1

••

•

%

3.08

9.3

9.2

9.2

9.3

* Gross Profit plus other revenues, as percentageof turnover

** Before amortisation of goodwill and netinvestment loss, as percentage of turnover

Total Margin*Core Operating Profits Margin**

Total Margin

Core OperatingProfits Margin

0302

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32,9

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5,000

10,000

15,000

20,000

25,000

30,000

40,000

35,000

45,000

Turnover*HK$ million

3-Year Plans* Continuing operations

1st Yr 2nd Yr



In early 2004, the Group has been granted another license by the Official Pillowtex LLC to

manufacture and distribute home textiles and home décor items under the well-known Royal

Velvet brand name. With high consumer recognition, a very broad product range and the

rights to distribute globally, this license is expected to contribute significantly to future

profits.

Acquisitions

In September 2003, the Group has increased the stake in a US subsidiary ISG, from 67% to

100%. The consideration of HK$41 million was satisfied by an issue of 3.8 million new

shares. This move helps to consolidate our product development and marketing capabilities

in the US in order to better implement the brand strategy.

In December 2003, the Group acquired International Sources for a total consideration of

US$27 million. International Sources is an apparel trading company that specializes in supplying

a number of leading retailers in Mexico and will dramatically increase the Group’s share of

this growing market. Our extensive sourcing capabilities and expertise with similar customers

worldwide will help grow International Sources’ business substantially.

Financial Results and Liquidity

The Group continues to be in a strong financial position, with cash and cash equivalents

amounting to HK$2.4 billion at the end of 2003. Normal trading operations are further

supported by HK$13 billion in bank trade finance. In addition, the Group has available bank

loans and overdraft facilities of HK$512 million out of which only HK$243 million has been

utilized. As at 31 December 2003, the Group’s gearing ratio stood low at 0.6%, based on

long term liabilities of HK$25 million and shareholder’s equity of HK$4.2 billion. The current

ratio was 1.4, based on current asset of HK$7 billion and current liabilities of HK$5 billion.

At the end of 2003, charges on asset amounted to HK$234 million to cover banking facilities

in the ordinary course of business.

There were no material changes to the Group’s borrowings since 31 December 2002.

The Hong Kong Society of Accountants has issued a revised Statement of Standard Accounting

Practice No. 12 (revised) “Income Taxes” (“SSAP 12 (revised)”) which is effective for accounting

periods commencing on or after 1 January 2003. The SSAP 12 (revised) has introduced a

new basis of accounting for income taxes (including both current and deferred tax) and

additional disclosure requirements to the financial statements. With the adoption of the

SSAP 12 (revised), there was a net deferred tax of HK$6 million credit to the profit and loss

account for 2003.

604

1,01

0

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5

99 00 01 02 03

1,27

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Operating CashInflowHK$ million


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200

400

600

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1,200

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* Continuing Operations

Net Profit*HK$ million


99 00 01 02 03

1,400

600

800

400

200

0

1,000

1,200



Foreign Exchange Risk Management

Most of the Group’s cash balances are deposited in HK$ or US$ with major international

banks in Hong Kong. The Group has a HK$39 million short term revolving loan denominated

in Yen as a currency hedge against shares held in Nissho Iwai-Nichimen Holdings Corporation,

a strategic investment made in 2001 in a business alliance to develop the Japanese market.

Save from the above, most of the Group’s asset, liabilities, revenues and payments are

either in HK$ or US$. Therefore, we consider our risk exposure to foreign exchange rate

fluctuations minimal.

Contingent Liabilities and Off-Balance Sheet Obligations

There are no material contingent liabilities or off-balance sheet obligations other than trade

bills discounted in the ordinary course of business as stated in the accounts.

Human Resources

At the end of 2003, the Group had a total work force of 5,956, of which 2,055 were based

in our Hong Kong headquarters and 3,901 were located overseas throughout our sourcing

network across 38 countries and territories.

The Group offers its staff competitive remuneration schemes. In addition, discretionary

bonuses and share options are granted to eligible staff based on individual and Group

performance. The Group is committed to nurturing a learning culture in the organisation.

Heavy emphasis is placed on training and development, as the Group’s success is dependent

on a skilled motivated work force. Total staff costs for 2003 amounted to HK$1,546 million,

compared against HK$1,375 million in 2002.

Prospects and Progress on Three-Year Plan 2002 – 2004

2004 is the final year of our current Three-Year Plan and management is committed to

pursue the plan targets in the remainder of the year. Owing to a slow start to the plan in

2002 and slower than expected growth in the second half of 2003, the Group is currently

behind the plan targets. We will continue to pursue additional acquisition opportunities to

accelerate our growth.

1.51

1.12

1.54 1.

59

1.4

Current Ratio


99 00 01 02 03

1.6

1.2

0.8

1.0

0.6

0.2

0

1.4

0.4



Looking forward to the rest of the year, orders on hand are pointing towards an acceleration in earnings

growth compared to 2003. The Group is also continuing to maintain a tight control on costs to bring about

more efficiency in the business.

Shipments for the Levi Strauss SignatureTM and the Royal Velvet licenses will commence towards the end

of the year. Although the impact of this brand strategy is limited in the current Three-Year Plan, it is

expected to be an important growth driver for the next Three-Year Plan and beyond. In this regard, the

Group is currently in discussions to pursue other licensing opportunities for well-known brand names.

William FUNG Kwok Lun

Managing Director




The Board of Directors is committed to principles of corporate governance consistent with prudent enhancement

and management of shareholder value. These principles emphasize transparency, accountability and

independence. Set out below are those principles of corporate governance as adopted by the Company:

The Board

The Board is composed of the Group Non-Executive Chairman, the Group Executive Managing Director,

four executive directors and six non-executive directors (of whom four are independent) whose biographical

details are set out in the Directors and Senior Management section on pages 26 to 31.

In order to reinforce their respective independence, accountability and responsibility, the role of the

Group Chairman is separate from that of the Group Managing Director. The Group Chairman is

responsible for overseeing the functioning of the Board whilst the Group Managing Director, supported by

the executive directors, is responsible for managing the Group’s business, including the implementation of

major strategies and initiatives adopted by the Board.

The non-executive Directors (the majority of whom are independent) with diversified industry expertise

serve the important function of advising the management on strategy development and ensure that the

Board maintains high standards of financial and other mandatory reporting as well as providing adequate

checks and balances for safeguarding the interests of shareholders and the Company as a whole.

The Board meets regularly throughout the year to discuss the overall strategy as well as the operation and

financial performance of the Group. Matters that require a decision by the Board normally include overall

group strategy, major acquisitions and disposals, annual budgets, annual and interim results, recommendation

on directors’ appointment or re-appointment, approval of major capital transactions and other significant

operational and financial matters. Board meetings are scheduled one year in advance to facilitate maximum

directors’ attendance. The meeting agenda is set by the Non-Executive Chairman in consultation with

members of the Board. All directors are kept informed on a timely basis of major changes that may affect

the Group’s businesses, including relevant rules and regulations. Procedures are also in place for directors

to seek independent professional advice in performing their duties.

Corporate Governance (continued)


The Group’s Chief Compliance Officer and Chief Financial Officer also attend all Board meetings to advise

on corporate governance, risk management, statutory compliance, mergers and acquisitions, and accounting

and financial matters. The Board held three meetings in 2003 and the average attendance rate was 89%.

Attendance at regular Board Meetings No. of meetings

for Year 2003 attended

Non-executive Directors

Dr Victor FUNG Kwok King (Chairman) 2

Mr LAU Butt Farn 3

Mr Leslie BOYD 2

Independent Non-executive Directors

Mr Paul Edward SELWAY-SWIFT 2

Mr Allan WONG Chi Yun 3

Professor Franklin Warren McFARLAN 3

Mr Makoto YASUDA 3

Executive Directors

Dr William FUNG Kwok Lun (Managing Director) 3

Mr Henry CHAN 2

Mr Danny LAU Sai Wing 3

Ms Annabella LEUNG Wai Ping 3

Mr Bruce Philip ROCKOWITZ 3

Note: Three regular Board Meetings were held on 24 March 2003, 13 August 2003 and 14 November 2003 respectively.

All directors, apart from the Group Chairman and Group Managing Director, are subject to retirement by

rotation at the Annual General Meeting. To further enhance accountability, the Company’s bye-laws are

being amended to include the Group Chairman and Group Managing Director under the rotation plan at the

forthcoming Annual General Meeting.

Management’s commitment to excellence and high standards in corporate governance practices has achieved

following market recognition from different stakeholders including bankers, analysts and institutional investors

in recent years.

Year 2003:

• Gold Award in the Hang Seng Index Category of the Best Corporate Governance Disclosure Awards

2003 organised by the Hong Kong Society of Accountants (“HKSA”); and



• “Best in Corporate Governance, Hong Kong and Pan-Asia” The Asset Benchmark 2003 Survey

Year 2002:

• Gold Award in the Hang Seng Index Category and first time Significant Improvement Award

of the Best Corporate Governance Disclosure Awards 2002 organised by HKSA

• One of the best Hong Kong companies in the category of “Asia’s Best Company 2002” by

Euromoney magazine; and

• One of the “Best Managed Company 2002” and as a “Company most committed to Corporate

Governance” by Finance Asia magazine

Year 2001:

• “Directors of the Year Awards 2001” by the Hong Kong Institute of Directors

Board Committees

The Board has established the following committees (all chaired by non-executive directors) with

defined terms of reference: the Nomination Committee, the Audit Committee, the Risk Management

Committee and the Compensation Committee. To further reinforce independence, the Nomination,

Audit and Compensation Committees were restructured in 2003 to comprise a majority of independent

non-executive directors.

Nomination Committee

The Nomination Committee was established in August 2001 to make recommendations to the

Board on the appointment of directors and the management of board succession with

reference to certain guidelines as endorsed by the Committee. These guidelines include the

professional knowledge and industry experience, personal ethics, integrity and personal skills

of members. During the last 12 months, the Nomination Committee met once (with an attendance

rate of 100%).

Nomination Committee meeting No. of meeting attended

attendance in the last 12 months (1 meeting in total)

Dr Victor FUNG Kwok King – Committee Chairman 1

Mr Paul Edward SELWAY-SWIFT* 1Dr William FUNG Kwok Lun –– retired on 15 November 2003Mr Makoto YASUDA* 1– appointed on 15 November 2003

Note: Nomination Committee meeting was held on 24 March 2004.

Best Corporate Governance

Disclosure Awards 2003

Best Corporate Governance

Disclosure Awards 2002

Directors of the Year Awards

2001



Audit Committee

The Audit Committee has been established since 1998 to provide advice and recommendations to the

Board. The majority of the Committee members are independent non-executive directors. To further reinforce

independence, the Audit Committee was restructured in 2003 to be chaired by an independent non-executive

director. All Committee members possess appropriate industry and financial experience to advise on Company’s

strategy and other matters.

The Audit Committee met three times in 2003 (with an average attendance rate of 81%) to review with

senior management and the Company’s internal and external auditors the internal and external audit findings,

the accounting principles and practices adopted by the Group, listing rules and statutory compliance, and

to discuss auditing, internal control, risk management and financial reporting matters (including the interim

and annual financial statements for each financial year before recommending them to the Board for approval).

In order to further enhance independent reporting by external auditors, part of the aforementioned

meetings was attended only by independent non-executive directors and external auditors. In addition, the

external audit engagement partner is subject to periodical rotation and the ratio of annual fees to external

auditors for non-audit services and for audit services is subject to close scrutiny by the Audit Committee

(refer fee disclosure in page 69 of the accounts).

Audit Committee meeting No. of meetings attended

attendance for Year 2003 (3 meetings in total)

Mr Paul Edward SELWAY-SWIFT* – Committee Chairman 2– appointed as Committee Chairman on 15 November 2003

Dr Victor FUNG Kwok King 2– retired as Committee Chairman on 15 November 2003

Mr Allan WONG Chi Yun* 2

Professor Franklin Warren McFARLAN* 3

Mr Leslie BOYD 2

Mr Makoto YASUDA* 3

Mr James SIU Kai Lau (Chief Compliance Officer) – Secretary 3– retired as a member on 15 November 2003

Note: Audit Committee meetings were held on 24 March 2003, 13 August 2003 and 14 November 2003.



Risk Management Committee

The Risk Management Committee was established in August 2001 to review and make recommendations

to the Board on the Group’s risk management and internal control systems. The Risk Management

Committee met once in 2003 (with an attendance rate of 100%). It reports to the Board in conjunction with

the Audit Committee.

Risk Management Committee meeting No. of meeting attended

attendance for Year 2003 (1 meeting in total)

Dr Victor FUNG Kwok King – Committee Chairman 1

Dr William FUNG Kwok Lun 1

Mr James SIU Kai Lau (Chief Compliance Officer) 1

Mr Frank LEONG Kwok Yee (Chief Financial Officer) 1

Note: Risk Management Committee meeting was held on 19 March 2003.

Compensation Committee

The Compensation Committee has been formed since 1993 with the responsibility of approving the remuneration

policy for all directors and senior executives, including annual allocation of Share Options to employees

under the Company’s Employee Share Option Scheme. It annually reviews the existing remuneration policy.

The Compensation Committee met once in 2003 (with an attendance rate of 100%).

Compensation Committee meeting No. of meeting attended

attendance for Year 2003 (1 meeting in total)

Mr Allan WONG Chi-Yun * – Committee Chairman 1

Dr Victor FUNG Kwok King 1

Dr William FUNG Kwok Lun 1– retired on 15 November 2003

Professor Franklin Warren McFARLAN * –– appointed on 15 November 2003

Note: Compensation Committee meeting was held on 24 March 2003.

* independent non-executive director



Remuneration Policy for Executive Directors

The primary goal of the remuneration policy on executive remuneration packages is to enable Li & Fung to

retain and motivate executive directors by linking their compensation with performance as measured against

corporate objectives. Under the policy, a director is not allowed to approve his own remuneration.

The principal elements of Li & Fung’s executive remuneration package include basic salary, discretionary

bonus without capping and share option. In determining guidelines for each compensation element, Li &

Fung refers to remuneration surveys conducted by independent external consultants on companies operating

in similar businesses.

Basic Salary

The Group Managing Director annually reviews and approves the basic salary of each executive director in

accordance with the Group’s remuneration policy. Under the service contracts between the Group and the

Group Managing Director as disclosed under Directors’ Service Contracts section on page 42, the Group

Managing Director is entitled to an aggregate fixed basic salary which is subject to annual review by the

Committee without his attendance.

Discretionary Bonus

Li & Fung implements a performance-based discretionary bonus scheme for each executive director (excluding

the Group Managing Director). Under this scheme, the computation of discretionary bonus (without capping)

is based on measurable performance contribution of business units headed by the respective executive

directors. The Group Managing Director is entitled to a profit share of the Company’s consolidated results

after adjustment of interest, tax and minority interests under the above service contracts between the

Group and the Group Managing Director.

Share Option

The Committee approves all grants of share options under the Company’s approved share option scheme

to executive directors, having regard to their individual performance and achievement of business targets

in accordance with the Company’s objectives of maximizing long-term shareholder value.

Remuneration Policy for Non-Executive Directors

The remuneration, comprising directors’ fee, of non-executive directors is subject to annual assessment

and recommendation by the Committee for shareholders’ approval at the Annual General Meeting. Reimbursement

is allowed for out-of-pocket expenses incurred in connection with the performance of their duties including

attendance at Company’s meetings.



Code of Conduct and Business Ethics

The Group’s reputation capital is built on its long established standards of ethics in conducting business.

Guidelines of the Group’s core business ethical practices as endorsed by the Board are set out in the

Company’s Code of Conduct and Business Ethics for all directors and staff. For ease of reference, a copy

of the latest guidelines is posted in the Company’s internal electronic Bulletin Board to be accessible by all

staff.

Internal Control

The Board is responsible for maintaining an adequate system of internal controls in Li & Fung and reviewing

its effectiveness through the Audit Committee. It has delegated to executive management the implementation

of such system of internal controls and reviewing of relevant financial, operational and compliance controls

and risk management procedures.

The Group maintains a tailored governance structure with defined lines of responsibility and appropriate

delegation of authority. It is characterized by establishing an operation support group, under the supervision

of the Group’s Chief Financial Officer, to centralize the function and control exercised over global treasury

activities, financial and management reporting, human resources functions and computer systems, and

supplemented by policies and guidelines tailored to the need of respective business units in the countries

where the Group operates.

Qualified personnel throughout the Group maintain and monitor these systems of controls on an ongoing

basis. The Group’s Corporate Governance Division, under the supervision of the Group’s Chief Compliance

Officer, independently reviews these controls, and evaluates their adequacy, effectiveness and compliance,

and reports directly to the Audit Committee on a regular basis.

Based on the assessment made by senior management and the internal and external auditors for 2003

and up to the approval date of this report, the Audit Committee is satisfied that the internal controls and

accounting systems of the Group are designed to provide reasonable assurance for assets to be safeguarded

against unauthorized use or disposition, transactions are executed in accordance with management’s

authorization and the accounting records are reliable for preparing financial information used within the

business or for publication.

Code of Best Practice

The Company complied with the Code of Best Practice as set out in Appendix 14 of the Rules Governing

the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules”) throughout the year

ended 31 December 2003.



Corporate Social Responsibility and Sustainability

Li & Fung has developed a Supplier Code of Conduct to be observed by all its approved vendors around the

globe. The Code is a set of rigorous labor, health and environmental standards based on national labor

laws, International Labor Organisation (ILO)’s conventions and treaties, and international best practices.

For example, vendors are prohibited from hiring child or involuntary labor. They are also prohibited from

practicing corporal punishment or any form of discrimination. The importance of environmental protection,

occupational health and safety standards as well as compliance with the law are also highlighted in the

Code.

Aside from conducting supplier inspections and ongoing supplier verification audits, Li & Fung also provides

systematic training both internally to its employees and externally to its vendors to equip them with awareness,

knowledge and the necessary skills to meet compliance requirements.

Li & Fung is a member of Business for Social Responsibility (BSR), an international organization based in

the US that promotes respect for ethical values, people, community and the environment.

Li & Fung is a founding member of the Global Labor Law Database, organized by BSR, and funded by the

member companies. This project has translated labor laws and regulations of over 60 countries and posted

them on-line to ensure that the member’s compliance staff have ready access to the most current data

when auditing production facilities around the world.

Li & Fung, in partnership with several well-known US branded companies, continued its association in 2003

with China based Institute for Contemporary Observation on a workers right’s guide entitled Guangdong

Labor Law Manual. The manual explains the law provisions on working hours, wages and compensation,

and gives migrant workers guidance on what to do in the event of labor dispute or the occurrence of an

industrial injury or accident.

In 2003, Li & Fung also collaborated with the U.K. based Ethical Trading Initiative (ETI) on a social development

project in Tamil Nadu, India. The project aims to seek solutions on how to tackle child labor within the

Indian textile and garment industry supply chain. In September 2003, a formal project was launched in

Tamil Nadu and a local tripartite group was established to carry this project forward.

Li & Fung is also a participant of the United Nation’s Global Compact initiative that forms a platform for the

promotion of human rights, labor welfare and the environment through the dissemination of good practices

based on certain universal principles – the Nine Principles. These cover the respect and support for the

protection of human rights, abstinence from human rights abuses, freedom of association, elimination of

all forms of forced and child labor, elimination of discrimination in employment, and promotion of environmental

responsibility.



In 2003, Li & Fung was again included, for the third consecutive year since 2001, as a component

of the Dow Jones Sustainability World Indexes, the world’s first global indexes tracking the

performance of companies worldwide that lead their industry in terms of corporate sustainability

criteria. The inclusion acknowledges Li & Fung’s continuing effort and consistent performance

in three main dimensions of corporate sustainability: social, economic and environmental

responsibilities.

Li & Fung is committed to assuring a healthy and clean working environment for employees by

declaring its headquarters building non-smoking office.

Investor Relations and Communication

The Company continues to pursue a proactive policy of promoting investor relations and communication

by maintaining regular meetings with institutional shareholders and analysts. All shareholders

have 21 days’ notice of the Annual General Meeting at which directors and Committee members

are available to answer questions on the business. In order to further promote effective communication,

the Company maintains a website (www.lifung.com) to disseminate shareholder information

electronically on a timely basis.

In 2003, Li & Fung’s continuing commitment to enhancing investor relations and communication

has gained further recognition from the wider business community. For the fourth consecutive

year, the Company has been awarded “Best Investor Relations in Hong Kong” by Asiamoney

magazine. A survey by Investor Relations magazine also ranked the Company first place in the

category of “Best Communications During a Takeover”.

Corporate Communication

The Company holds monthly Policy Committee Meetings for senior executives to formulate company-

wide policies and practices, and to report and discuss significant issues affecting the Group.

As part of Li & Fung’s entrepreneurial corporate culture and business policy, semi-annual retreats,

with active participation of the Group Chairman, the Group Managing Director, executive directors

and senior managers of all business streams worldwide as well as guest speakers, are held in

Hong Kong to create a sense of staff ownership of the Company’s strategic objectives and to

foster effective communication across the Group.

Senior executives also travel frequently to different country offices to reinforce staff commitment

to Li & Fung’s business culture and the Group’s established corporate initiatives. The Group’s

Corporate Governance Division conducts regular interactive forum with staff members

in Hong Kong and overseas to ensure that good corporate governance and company practices

are reinforced and embedded in the Group’s operations.

The Company also publishes a regular newsletter to provide staff with reports on the Group’s

latest directives and initiatives and staff recreational activities.

Best Investor Relations in

Hong Kong 2003

Best Communications During

a Takeover 2003



Information Technology

Li & Fung adopts the latest mature information technology for enhancing efficiency and effectiveness in its

external and internal communication. The IT infrastructure established by the Group includes the sharing of

dedicated Extranet sites with technologically advanced customers and other key partners of the supply

chain network, such as vendors and freight forwarders, to facilitate speedy dissemination of business

information and better management of supply chain activities.

Li & Fung’s global sourcing network is inter-linked electronically through the Intranet for prompt sharing of

information among employees worldwide. The Company has also established direct electronic linkage with

regulatory bodies through the Internet to disseminate corporate information in a timely manner.

The IT Division of Li & Fung (Trading) Limited has obtained certification in ISO 9001:2000 quality management

system standard applicable to provision of in-house IT products and services since end 2001.

Staff and Community

As a global Supply Chain Management service provider, Li & Fung fully recognizes that human capital is a

key asset to the growth and profitability of the Company. The Group therefore places due emphasis on

staff development and implements a policy of sponsoring staff to attend job-related training and self-

improvement programs. Management development programs are also in place for senior employees. Contents

of these Group’s programs cover general competency training, technical training, management skills,

compliance and social ethics, business etiquette, occupational health and safety, language skills, and self-

growth and development. In 2003, a total of 3,740 participants took part in programs organized for the

Group’s Hong Kong and overseas offices.

Li & Fung and its offices, as an integral part of various communities where the businesses operate, contribute

to the well-being of the societies and provide support to people in need. The Group endorses senior

executives in accepting public offices which currently include various government and non-government

advisory boards and professional associations promoting Hong Kong’s exports, advance of international

trade, community’s quality-housing solutions and best corporate governance practices. Executives’ participation

includes serving on the Committee of the Hong Kong Exporters’ Association, Hong Kong Housing Society

and on the Corporate Governance Committee of the Hong Kong Society of Accountants.

Li & Fung further provides institutional support in the form of sponsorships for universities and charitable

support by direct donation or direct employee involvement in fundraising activities organized by leading

charitable organizations. Activities in year 2003 included the Standard Chartered Hong Kong Marathon,

blood donation for Hong Kong Red Cross, elderly home visits for St. James’ Settlement, and gift donation

for Heep Hong Society. In 2003, for the second consecutive year since 2002, these efforts and contribution

to a better society were recognized by the “Caring Company Award” presented by The Hong Kong Council

of Social Service for the Group’s caring culture and good corporate citizenship.

26Li & Fung Limited Annual Report 2003 26

Directors and Senior Management

Victor FUNG Kwok KingGroup Non-Executive ChairmanChairman of Nomination Committee and Risk Management Committee

Victor FUNG Kwok King, aged 58, brother of Dr William FUNG KwokLun, is Group Chairman. He joined the Group in 1973 as Manager andbecame Managing Director of the Group’s export trading business in1977. He became Group Managing Director in 1981 and Group Chairmanin 1989. Dr Fung holds a Bachelors and a Masters degree in ElectricalEngineering from the Massachusetts Institute of Technology, and aDoctorate in Business Economics from Harvard University. Dr Fung isan independent non-executive director of Bank of China (Hong Kong)Limited, PCCW Limited, Sun Hung Kai Properties Limited and OrientOverseas (International) Limited. He is also the non-executive Chairmanof Convenience Retail Asia Limited. Dr Fung is currently Chairman ofthe Hong Kong Airport Authority, the Hong Kong University Counciland the Greater Pearl River Delta Business Council. Dr Fung holds anumber of civic and professional appointments. He is a member ofChinese People’s Political Consultative Conference and the Hong KongGovernment Judicial Officers Recommendation Committee. From 1991to 2000, Dr Fung was Chairman of the Hong Kong Trade DevelopmentCouncil and from 1996 to 2003, he was the Hong Kong representativeon the APEC Business Advisory Council. In 2003, the Governmentawarded Dr Fung the Gold Bauhinia Star for distinguished service tothe community.

William FUNG Kwok LunGroup Managing Director

William FUNG Kwok Lun, OBE, JP, aged 55, brother of Dr Victor FUNGKwok King, is Group Managing Director. He joined the Group in 1972and became a Director of the Group’s export trading business in 1976.He became Group Managing Director in 1986. Dr Fung graduatedfrom Princeton University with a Bachelor of Science degree in Engineeringand holds an MBA degree from the Harvard Graduate School of Business.He was conferred the degree of Doctor of Business Administration,honoris causa, by the Hong Kong University of Science & Technology.Dr Fung is an independent non-executive director of HSBC HoldingsPLC, CLP Holdings Limited, chinadotcom corporation and VTech HoldingsLimited. He is also a non-executive director of Convenience Retail AsiaLimited. He currently serves as a member of the Economic and EmploymentCouncil of the Hong Kong Special Administrative Region. Dr Fung is apast Chairman of the Hong Kong General Chamber of Commerce, theHong Kong Exporters’ Association and the Pacific Economic CooperationCommittee.


Directors and Senior Management (continued)

Franklin Warren McFARLANIndependent Non-Executive Director

Franklin Warren McFARLAN, aged 66, is an independent non-ExecutiveDirector of the Company since 1999. Professor McFarlan is SeniorAssociate Dean, Director Asia Pacific of Harvard University. He hasbeen a Professor at the Harvard Graduate School of Business Administrationsince 1973 and was Faculty Chairman of Advanced Management Programand Chairman of Executive Education Programs. Professor McFarlangraduated from the Harvard Business School with a doctorate. He iscurrently a non-executive director of Computer Sciences Corporationand Providian Financial Corporation.

Allan WONG Chi YunIndependent Non-Executive DirectorChairman of Compensation Committee

Allan WONG Chi Yun, JP, aged 53, is an independent non-ExecutiveDirector of the Company since 1999. He is currently Chairman andGroup Chief Executive Officer of VTech Holdings Limited. He co-foundedVTech Group in 1976. He holds a Bachelor of Science degree in ElectricalEngineering from the University of Hong Kong, a Master of Sciencedegree in Electrical and Computer Engineering from the University ofWisconsin and an honorary degree of Doctor of Technology from theHong Kong Polytechnic University. Mr Wong is the Chairman of HongKong Applied Science & Technology Research Institute Company Limitedand a member of the Council of Advisors on Innovation and Technology.He is also a council member of the University of Hong Kong, an independentnon-executive director of both the Bank of East Asia Limited and China-Hongkong Photo Products Holdings Limited.

Paul Edward SELWAY-SWIFTIndependent Non-Executive DirectorChairman of Audit Committee

Paul Edward SELWAY-SWIFT, aged 59, is an independent non-ExecutiveDirector of the Company since 1992. He is currently Chairman ofSinger & Friedlander Group PLC, a financial services and banking groupand of SVB Holdings PLC, a specialist insurance group, both of whichare quoted on the London Stock Exchange. He is also a director ofAlba PLC and Chairman of The Atlantis China Fund PLC. Mr Selway-Swift was formerly Deputy Chairman of HSBC Investment Bank PLCand a director of The Hong Kong and Shanghai Banking CorporationLimited in Hong Kong.



Makoto YASUDAIndependent Non-Executive Director

Makoto YASUDA, aged 66, is an independent non-Executive Directorof the Company since 2001. He is Chairman and Chief Executive ofinternational advisory firm Yasuda and Pama Limited, which is a jointventure of PAMA Group Inc. (previously known as Prudential AssetManagement Asia Limited). He has been engaged in private equityinvestment and management activities in Asia for more than 33 years.He is well experienced in cross-border corporate advisory, merger &acquisition, project development, and other merchant banking activities.He is currently a non-executive Chairman of Atlas Copco KK and anon-executive director of both Yamatake Corporation and SV InteractiveCommunications Inc. He is also an advisor to HSBC Japan and InterfaceAsia Pacific.

LAU Butt FarnNon-Executive Director

LAU Butt Farn, aged 56, is a non-Executive Director of the Companysince 1995. Mr Lau joined the Li & Fung Group in 1981 as financialcontroller. Between 1985 and 1998, he was Operations Director forLi & Fung (Retailing) Limited (the retailing arm of the private group)that operates in Circle K and Toys “R” Us. He is a non-executive directorof Convenience Retail Asia Limited. He was also responsible for theinvestments of the private group. Since 1999, Mr Lau has been ChiefFinancial Officer of Li & Fung (Distribution) Limited, the Supply ChainManagement business of the private group. Mr Lau graduated fromthe University of London with a Bachelor of Science degree in Physicsand is a Fellow of the Institute of Chartered Accountants in Englandand Wales.

Leslie BOYDNon-Executive Director

Leslie BOYD, aged 67, is a non-Executive Director of the Companysince 1999. Mr Boyd was a Works Manager in the British steel industrybefore moving to South Africa in 1970. Since then, he has dedicatedhis entire career in the steel, engineering, mining and finance industriesin South Africa and is a leading member of the business communitythere. Mr Boyd is a Chartered Engineer and a Fellow of the Institutionof Metallurgists UK. He was formerly Executive Vice Chairman of AngloAmerican PLC and a Director of Anglo American Corporation of SouthAfrica Limited. He holds chairmanships and directorships in a numberof mining, industrial and financial companies.



Henry CHANExecutive Director

Henry CHAN, aged 54, is an Executive Director of the Company since

1992 and is in charge of the Hardgoods business stream. Mr Chan

has been with the Group since 1972 and has over 27 years of experience

in the hardgoods area. He graduated from the University of Hong Kong

with a Bachelor of Social Science degree. He also holds an MBA degree

from the Chinese University of Hong Kong. He is currently a member

of the Hong Kong Institute of Directors.

Steven Murray SMALL(As Alternate Director to Mr Leslie Boyd)

Steven Murray SMALL, aged 48, is an alternate director to Mr Leslie

Boyd, non-Executive Director of the Company, since 1999. 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 has a consultancy practice, Dimension

S Capital, and manages a private equity portfolio. He sits on the boards

of a number of Asian based companies.

Danny LAU Sai WingExecutive Director

Danny LAU Sai Wing, aged 52, is an Executive Director of the Company

since 1992 and is in charge of the Textile Group USA business stream.

He graduated from the University of Kansas with a Bachelor of Science

Degree in Business and Accounting. His first job was in garment

manufacturing before joining Li & Fung in 1981. He has over 25 years

of solid experience in the textile and clothing Supply Chain Management

business. From 1995 to 2003, he was a director of the Clothing Technology

Demonstration Centre Co Ltd. His past community work includes having

served as a committee member of the Government’s Workplace English

Campaign, the Hong Kong Exporters’ Association and Clothing Industry

Training Authority.



Annabella LEUNG Wai PingExecutive Director

Annabella LEUNG Wai Ping, aged 51, is an Executive Director of the

Company since 2000 and is in charge of the European Apparel business

stream. Before joining the Group, she was the Regional Director of

North Asia Apparel for Inchcape, a global sourcing network acquired

by the Company in 1995. Ms Leung holds a Master of Science degree

in Biology from Northeastern University and has over 16 years of experience

in the textile industry. She is also involved in work of the Hong Kong

Exporters’ Association and the Clothing Industry Training Authority.

Bruce Philip ROCKOWITZExecutive Director

Bruce Philip ROCKOWITZ, aged 45, is an Executive Director of the

Company since 2001 and the President and Chief Executive Officer of

Colby International Limited, a member of the Li & Fung Group. He

joined the Company at the time of the Colby group becoming part of

the Li & Fung Group in December 2000. Mr Rockowitz joined Colby in

1981 as Vice President in charge of merchandising and became President

and Chief Executive Officer of Colby in 1986. Since 1986, he has

been responsible for the growth and development and day-to-day operations

of Colby. He has over 22 years of experience in Supply Chain Management

of apparel and consumer hardgoods for markets worldwide.

Thomas Morton HaugenExecutive Director, Li & Fung (Trading) Limited

Thomas Morton Haugen, aged 62, is an Executive Director of Li &

Fung (Trading) Limited, a wholly-owned subsidiary of the Company and

is in charge of the Value Retailers & Brands (U.S.A.) business stream.

Before joining the Group, he was the President of Dodwell Apparel

North America for Inchcape, a global sourcing network acquired by

the Company in 1995. Mr Haugen has over 30 years of experience in

retail buying and merchandising, as well as product development and

sourcing based both in the US and in Hong Kong. He is also actively

involved in the work of Business for Social Responsibility, a USA based

organization providing training and other assistance to help companies

ensure their products are being manufactured in fully compliant factories.



James SIU Kai LauChief Compliance Officer

James SIU Kai Lau, aged 59, joined the Group in 1993 as Chief Financial

Officer until 1996 when he assumed his present position as the Group’s

Chief Compliance Officer. He is in charge of Corporate Governance

Division and Corporate Secretarial Division. Prior to joining Li & Fung

Group, Mr Siu was the partner-in-charge (1981-1989) of the Hong Kong

audit practice of Coopers & Lybrand (currently PricewaterhouseCoopers)

specializing in advising corporate clients on mergers, acquisitions,

finance and on public listings. His current community work includes

serving as member of the Supervisory Board of the Hong Kong Housing

Society and Chairman of its Audit Committee. Mr Siu is also a member

of the Corporate Governance Committee and Professional Accountants

in Business Committee of the Hong Kong Society of Accountants. He

is a Fellow of both the Institute of Chartered Accountants in Australia

and the Hong Kong Society of Accountants. He is also a Fellow member

of the Hong Kong Institute of Directors. Mr Siu holds a Bachelor of

Economics degree from the University of Tasmania in Australia.

Frank LEONG Kwok YeeChief Financial Officer

Frank LEONG Kwok Yee, aged 53, is the Chief Financial Officer of the

Company since 1995. He is responsible for the Finance and Accounting,

Human Resources and Information Technology of the Company. Before

joining the Group, he was the Finance Director of Dodwell buying office,

a global sourcing network acquired by the Company in 1995. Mr Leong

is a member of the Australian Institute of Chartered Accountants. He

has a Bachelor of Commerce degree from the New Zealand Otago

University as well as an MBA degree from the MacQuarie University in

Sydney. Mr Leong’s experience covered a number of industries such

as global sourcing, manufacturing, direct sales and marketing as well

as auditing and accounting services with one of the Big 4 accounting

firms.

Information for Investors


Listing Information

Listing: Hong Kong Exchange

Stock code: 494

Ticker Symbol

Reuters: 0494.HK

Bloomberg: 494 HK Equity

Key Dates

13 August 2003

Announcement of 2003 Interim Results

5 September 2003

Payment of 2003 Interim Dividend

24 March 2004

Announcement of 2003 Final Results

4 May 2004 to 11 May 2004

(both days inclusive)

Closure of Register of Shareholders

11 May 2004

Proposed Payment of 2003 Final Dividend

11 May 2004

Annual General Meeting

Registrar & Transfer Offices

Principal:

The Bank of Bermuda Limited

6 Front Street, Hamilton HM11, Bermuda

Hong Kong Branch:

Abacus Share Registrars Limited

Ground Floor

Bank of East Asia Harbour View Centre

56 Gloucester Road, Wanchai, Hong Kong

Share Information

Board lot size: 2,000 shares

Shares outstanding as at 31 December 2003:

2,902,038,191 shares

Market Capitalization as at 31 December 2003:

HK$38,597,107,940

Earnings per share for 2003

Interim 14.3 HK cents

Full year 42.3 HK cents

Dividend per share for 2003

Interim 10 HK cents

Final 25 HK cents

Enquiries Contact

Ms Nancy Chen

Investor Relations Manager

Telephone: (852) 2300 2333

Fax: (852) 2300 2020

e-mail: [email protected]

Li & Fung Limited

11th Floor, LiFung Tower

888 Cheung Sha Wan Road

Kowloon, Hong Kong

Website

www.lifung.com

www.irasia.com/listco/hk/lifung

A Chinese version of this Annual Report is available from the Company upon request and can also be downloaded from

our website.

本年報中文版可向本公司索取及從本公司網址下載。

Report of the Directors (continued)


Report of the Directors

The directors submit their report together with the audited accounts for the year ended 31 December

2003.

Principal Activities and Analysis of Operations

The principal activity of the Company is investment holding. The activities of its principal subsidiaries are

set out in the Principal Subsidiaries and Associated Companies section on pages 95 to 103.

Details of the analysis of the Group’s turnover and contribution to operating profit for the year by geographical

segments and business segments are set out in note 2 to the accounts.

Share Capital

Details of the movements in share capital of the Company are set out in note 21 to the accounts.

Results and Appropriations

The results for the year are set out in the consolidated profit and loss account on page 50.

The directors declared an interim dividend of HK$0.1 per ordinary share, totalling HK$289,343,000, which

was paid on 5 September 2003.

The directors recommend the payment of a final dividend of HK$0.25 per ordinary share, totalling HK$726,977,000.

Reserves

Movements in the reserves of the Group and the Company during the year are set out in note 22 to the

accounts.

Distributable Reserves

At 31 December 2003, the distributable reserves of the Company available for distribution as dividends

amounted to HK$3,060,667,000, comprising retained earnings of HK$999,994,000 and contribution surplus

arising from the exchange of shares for the acquisition of Li & Fung (B.V.I.) Limited and the issuance of

shares for the acquisition of Colby Group Holdings Limited, as set out in note 22(b) to the accounts,

amounting to HK$2,060,673,000.

Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus shall not be distributed

to the shareholders if there are reasonable grounds for believing that:

(i) the Company is, or would after the payment be, unable to pay its liabilities as they become due; or

(ii) the realisable value of the Company’s assets would thereby be less than the aggregate of its liabilities

and its issued share capital and share premium account.



Donations

Charitable and other donations made by the Group during the year amounted to HK$1,036,000.

Fixed Assets

Details of the movements in fixed assets of the Group are set out in note 12 to the accounts.

Ten-Year Financial Summary

A summary of the results for the year ended and of the assets and liabilities of the Group as at 31

December 2003 and for the previous nine financial years are set out in the Ten-Year Financial Summary

section on page 104.

Pre-emptive Rights

There are no provisions for pre-emptive rights under the Company’s bye-laws though there are no restrictions

against such rights under the laws of Bermuda.

Purchase, Sale or Redemption of the Company’s Listed Securities

The Company has not redeemed any of its listed securities during the year. Neither the Company nor any

of its subsidiaries has purchased or sold any of the Company’s listed securities during the year.

Share Options

Old Share Option Scheme

The share option scheme of the Company being adopted on 2 June 1992 (the “Old Scheme”) has expired

on 1 June 2002. Despite the fact that no further options may be granted under the Old Scheme, all its

terms will remain in force to govern the exercise of all the options previously granted. As at 31 December

2003, there are options relating to 13,471,000 shares of HK$0.025 each (“Shares”) granted by the Company

pursuant to the Old Scheme which are valid and outstanding.

Details of the Old Scheme are as follows:

(i) Purpose

The Old Scheme was designed to give executive directors and senior employees holding an executive,

managerial or supervisory position in the Company or any of its wholly-owned subsidiaries an equity

interest in the Company in order to enhance long-term shareholder value. The granting of options

would also help the Company to attract and motivate individuals with experience and ability and to

reward individuals for past and future performance.

(ii) Qualifying participants

Any employee including any executive director of the Company or any of its wholly-owned subsidiaries.



(iii) Maximum number of shares

The maximum number of shares subject to the Old Scheme must not when aggregated with any

shares subject to any other share option schemes exceed 10% of the shares in issue from time to

time (excluding any shares which have been duly allotted and issued upon the exercise of options

granted pursuant to the Old Scheme and any other schemes). No further option may be granted

under the Old Scheme as it has expired on 1 June 2002.

No qualifying participant was granted an option which, if exercised in full, would result in such person’s

maximum entitlement exceeding 25% of the aggregate number of shares for the time being issued

and issuable under the Old Scheme.

(iv) Option period

In respect of any particular option, such period the Board might in its absolute discretion determine,

save that such period should not commence earlier than one year nor more than 10 years from the

date on which an option was granted and accepted by the grantee.

(v) Amount payable on application or acceptance

An offer of the grant of an option should remain open for acceptance for a period of 28 days from the

date on which an option was offered to the grantee (the “Offer Date”). An offer of the grant of the

option should be deemed to have been accepted and to have taken effect when the duplicate letter

comprising acceptance of the option duly signed by the grantee together with a remittance in favour

of the Company of HK$1 by way of consideration of the grant thereof was received by the Company.

(vi) Exercise price

The exercise price in respect of any particular option should be (i) not more than 20% less than the

average closing price of the shares for the five business days immediately preceding the Offer Date

on which there were dealings in shares on The Stock Exchange of Hong Kong Limited (“Stock Exchange”)

or (ii) the nominal value of a share (whichever is the greater).

Effective from 1 September 2001, the exercise price must be at least the higher of (i) the closing

price of the shares on the date of grant, which must be a business day, and (ii) the average closing

price of the shares for the five business days immediately preceding the date of grant in accordance

with the rule 17.03 of the Listing Rules.



(vii) The remaining life of the Old Scheme

The Board was entitled at any time within 10 years between 2 June 1992 and 1 June 2002 to offer

the grant of an option to any qualifying participants.

Details of the share options granted under the Old Scheme and remain outstanding as at 31 December

2003 are as follows:

Options Options Options Options Optionsheld at granted exercised lapsed held at Exercise

1 January during during during 31 December Price Exercisable Exercisable2003 the year the year the year 2003 HK$ Grant date from until

Dr William FUNG 480,000 – – 480,000 – 15.26 7 July 2000 7 July 2001 6 July 2003

Kwok Lun 480,000 – 480,0001 – – 10.50 18 July 2001 18 July 2002 17 July 2004

480,000 – 480,0001 – – 7.98 28 August 2001 28 August 2003 27 August 2005

Mr Henry CHAN 240,000 – – 240,000 – 15.26 7 July 2000 7 July 2001 6 July 2003

240,000 – – – 240,000 10.50 18 July 2001 18 July 2002 17 July 2004

240,000 – – – 240,000 7.98 28 August 2001 28 August 2003 27 August 2005

Mr Danny LAU 240,000 – – 240,000 – 15.26 7 July 2000 7 July 2001 6 July 2003Sai Wing 240,000 – – – 240,000 10.50 18 July 2001 18 July 2002 17 July 2004


Ms Annabella LEUNG 240,000 – – 240,000 – 15.26 7 July 2000 7 July 2001 6 July 2003

Wai Ping 240,000 – – – 240,000 10.50 18 July 2001 18 July 2002 17 July 2004


Mr Bruce Philip 240,000 – – – 240,000 7.98 28 August 2001 28 August 2003 27 August 2005

ROCKOWITZ

Continuous contract 7,872,000 – – 7,872,000 – 15.26 7 July 2000 7 July 2001 6 July 2003

employees 9,320,000 – 2,882,0001 288,000 6,150,000 10.50 18 July 2001 18 July 2002 17 July 2004

10,164,000 – 4,387,0001 136,000 5,641,000 7.98 28 August 2001 28 August 2003 27 August 2005



New Share Option Scheme

At the 2003 Annual General Meeting of the Company held on 12 May 2003, a new share option scheme

(the “New Scheme”) of the Company was adopted by the shareholders of the Company to comply with the

new requirements of Chapter 17 of the Listing Rules of the Stock Exchange. As at 31 December 2003,

there are options relating to 51,092,000 Shares granted by the Company pursuant to the New Scheme

which are valid and outstanding.

Details of the New Scheme are as follows:

(i) Purpose

The purpose of the New Scheme is to attract and retain the best quality personnel for the development

of the Company’s businesses: to provide additional incentive to the employees including any executive

or non-executive director and officer of the Company or any affiliate, consultants, agents, representatives,

advisers, customers, contractors, business allies and joint venture partners; and to promote the long

term financial success of the Company by aligning the interests of the option holders to the shareholders

of the Company.

(ii) Qualifying participants

Any employee including any executive or non-executive director and officer of the Company or any

affiliate, any consultant, agent, representative, adviser, customer, contractor, business ally or joint

venture partner of the Company or any affiliate.

(iii) Maximum number of shares

The total number of shares which may be issued upon exercise of all options to be granted under the

New Scheme must not in aggregate exceed 10% of the issued share capital of the Company at the

date of approval of the New Scheme or 30% of the issued share capital of the Company from time to

time. No options may be granted under the New Scheme if this will result in such limit exceeded. As

at 31 December 2003, the number of Shares available for issue in respect thereof is 238,454,200

Shares.

(iv) Limit for each participant

The total number of shares of the Company issued and to be issued upon exercise of options (whether

exercised or outstanding) granted in any 12-month period to each participant must not exceed 1% of

the shares of the Company in issue.



(v) Option period

The period within which the shares must be taken up an option shall be determined by the Board in its

absolute discretion at the time of grant, but such period must not exceed 10 years from the date of

grant of the relevant option.

The Board has the authority to determine the minimum period for which an option must be held before

it can vest. The New Scheme itself does not specify any minimum holding period.

(vi) Acceptance and payment on acceptance

An offer of the grant of an option shall remain open for acceptance for a period of 28 days from the

date of offer (or such longer period as the Board may specify in writing).

HK$1.00 is payable by the grantee to the Company on acceptance of the offer.

(vii) Subscription price

The exercise price must be at least the higher of (i) the closing price of the shares as stated in the

Stock Exchange’s daily quotations sheet on the date of grant; (ii) the average closing prices of the

shares as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately

preceding the date of grant; and (iii) the nominal value of a share.

(viii) Remaining life of the New Scheme

The Board is entitled at any time within 10 years between 12 May 2003 and 11 May 2013 to offer the

grant of an option to any qualifying participants.



Details of the share options granted under the New Scheme and remain outstanding as at 31 December

2003 are as follows:

Options Options Options Options Options Optionsheld at granted exercised lapsed cancelled held at Exercise

1 January during during during during 31 December Price Exercisable Exercisable2003 the year the year the year the year 2003 HK$ Grant date from until

Dr William FUNG – 800,0002 – – – 800,000 9.20 23 May 2003 23 May 2004 22 May 2007

Kwok Lun – 800,0002 – – – 800,000 9.20 23 May 2003 23 May 2005 22 May 2008

– 800,0002 – – – 800,000 9.20 23 May 2003 23 May 2006 22 May 2009

Mr Henry CHAN – 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2004 22 May 2007

– 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2005 22 May 2008

– 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2006 22 May 2009

Mr Danny LAU – 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2004 22 May 2007

Sai Wing – 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2005 22 May 2008

– 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2006 22 May 2009

Ms Annabella LEUNG – 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2004 22 May 2007

Wai Ping – 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2005 22 May 2008

– 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2006 22 May 2009

Mr Bruce Philip – 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2004 22 May 2007

ROCKOWITZ – 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2005 22 May 2008

– 400,0002 – – – 400,000 9.20 23 May 2003 23 May 2006 22 May 2009

Continuous contract – 14,390,0002 – 45,000 673,000 13,672,000 9.20 23 May 2003 23 May 2004 22 May 2007

Employees – 15,360,0002 – 250,000 – 15,110,000 9.20 23 May 2003 23 May 2005 22 May 2008

– 15,360,0002 – 250,000 – 15,110,000 9.20 23 May 2003 23 May 2006 22 May 2009

Notes:

(1) The weighted average closing market price per Share immediately before the dates on which the share options were

exercised was HK$13.17.

(2) The closing market price per Share at the date preceding the date on which the share options were granted was

HK$9.00.

(3) The above options granted are not recognised in the accounts until they are exercised. Rule 17.08 of the Listing

Rules stipulates that the listed issuer is encouraged to disclose in its annual report and interim report the value of

options granted to participants as referred to in (i) to (v) of Rule 17.07 during the financial year. The Directors

consider it inappropriate to value the share options as a number of factors critical for the valuation cannot be

determined accurately. Any valuation of the share options based on various speculative assumptions would be

meaningless and could be misleading to the shareholders. The Directors therefore consider the disclosure of only

the relevant market price and exercise price, which are readily ascertainable, will be appropriate.



Subsidiaries

Details of the Company’s principal subsidiaries at 31 December 2003 are set out in the Principal Subsidiaries

and Associated Companies section on pages 95 to 103.

Associated Companies

Details of the Company’s principal associated companies at 31 December 2003 are set out in the Principal

Subsidiaries and Associated Companies section on pages 95 to 103.

Major Customers and Suppliers

During 2003, the Group purchased less than 30% of its goods and services from its five largest suppliers.

The percentage of sales attributable to the Group’s largest customer and the five largest customers combined

were 16.2% and 32.2% respectively. None of the directors, their associates or any shareholders (which to

the knowledge of the directors own more than 5% of the Company’s issued share capital) had an interest in

the customers noted.

During 2002, the Group purchased less than 30% of its goods and services from its five largest suppliers.

The percentage of sales attributable to the Group’s largest customer and the five largest customers combined

were 16.5% and 33.8% respectively.

Pension Scheme Arrangements

With effect from 1 December 2000, the mandatory provident fund (the “MPF Scheme”) was set up by the

Mandatory Provident Fund Authority of Hong Kong. The MPF Scheme is a defined contribution retirement

benefit scheme and administered by independent trustees. Both the employer and the employees have to

contribute an amount equal to 5% of the relevant income of such employee to the MPF Scheme. Contributions

from the employer are 100% vested in the employees as soon as they are paid to the MPF Scheme and

subject to certain conditions being met, all benefits derived from the mandatory contributions must be

preserved until the employee either reaches the normal retirement age of 65 or meets certain specified

conditions whichever is the earlier.

In Taiwan, the Group operated a defined contribution provident scheme for its employees with the contribution

set at 6% of the employees’ basic salaries. In addition, the Group also participated in a retirement benefit

plan in accordance with local statutory requirements. Under this plan, the Group recognised pension cost

monthly at 3% of the employees’ salaries, which is contributed monthly to an independent fund.

In the United Kingdom, the Group participated in a defined benefit scheme for its employees. Under which,

the Group and its employees made monthly contributions to the scheme based on 12.5% to 19% and 5%

to 7% of the employees’ salary respectively.

In Korea, the Group and each of its employees are required to contribute 4.5% of the employee’s monthly

salary to a government established pension corporation pursuant to the statutory requirement. Upon retirement,

an employee is entitled to receive a lump sum payment.

The provident fund schemes for staff of the Group in other regions follow the local requirements.



The Group’s pension scheme contributions charged to the consolidated profit and loss account for the

year are as follows:

HK$’000

Contributions to the MPF Scheme 22,632

Contributions forfeited by employees (1,482)

Contributions to the defined contribution provident scheme

and defined benefit plan in Taiwan 8,221

Contributions to the defined benefit scheme in the United Kingdom 6,272

Contributions pursuant to the statutory requirements in Korea 9,747

Contributions pursuant to local requirements in other overseas regions 20,766

66,156

Directors

The directors during the year were:

Non-Executive Directors: Executive Directors:

Dr Victor FUNG Kwok King, Chairman Dr William FUNG Kwok Lun, Managing Director

Mr Paul Edward SELWAY-SWIFT* Mr Henry CHAN

Mr Allan WONG Chi Yun* Mr Danny LAU Sai Wing

Professor Franklin Warren McFARLAN* Ms Annabella LEUNG Wai Ping

Mr Makoto YASUDA* Mr Bruce Philip ROCKOWITZ

Mr LAU Butt Farn

Mr Leslie BOYD

(Mr Steven Murray SMALL –

alternate to Mr Leslie BOYD)

* independent non-executive directors

In accordance with bye-law 110 of the Company’s bye-laws, Mr Danny LAU Sai Wing, Ms Annabella LEUNG

Wai Ping and Mr Paul Edward SELWAY-SWIFT retire and, being eligible, offer themselves for re-election.

Independent non-executive directors are subject to retirement by rotation in Annual General Meetings in

accordance with bye-law 110 of the Company’s bye-laws.

The biographical details of the directors as at the date of this Report are set out in the Directors and

Senior Management section on pages 26 to 31.



Directors’ Service Contracts

Under a service contract dated 2 June 1992 between the Company and Dr William FUNG Kwok Lun and a

service contract dated 2 June 1992 between Li & Fung (B.V.I.) Limited and Dr William FUNG Kwok Lun,

Dr William FUNG Kwok Lun has been appointed to act as Managing Director of the Company, Li & Fung

(Trading) Limited, Li & Fung (Properties) Limited and Li & Fung (B.V.I.) Limited, in each case for an initial

period of five years from 1 April 1992 and thereafter unless terminated by not less than 12 calendar

months’ notice in writing expiring at the end of such initial period or any subsequent month.

Apart from the above, none of the directors who are proposed for re-election at the forthcoming annual

general meeting has a service contract with the Group which is not determinable within one year without

payment of compensation other than statutory compensation.

Directors’ Interests in Contracts

No contracts of significance in relation to the Group’s business to which the Company or its subsidiaries

was a party and in which a director of the Company had a material interest, whether directly or indirectly,

subsisted at the end of the year or at any time during the year except as disclosed under Connected

Transactions stated below.

Connected Transactions

(i) During the year, the Group had ongoing connected transactions on normal commercial terms with

certain subsidiaries and associates of Li & Fung (Distribution) Limited (“Li & Fung Distribution”). Li &

Fung Distribution is an indirect non-wholly owned subsidiary of Li & Fung (1937) Limited (“Li & Fung

1937”) which owns approximately 51.4% of Li & Fung Distribution in terms of attributable beneficial

interest. As Li & Fung 1937 is the controlling shareholder of the Company, Li & Fung Distribution is a

connected person of the Company for purposes of the Listing Rules.

The nature and reasons for the above connected transactions have previously been disclosed in the

Company’s announcements dated 14 April 2003 and 23 September 2003. Details of the transactions

are disclosed as below:

2003Notes HK$’000

Commission income 1 1,930

Service fee 2 1,417



Notes:

(1) The Group, since September 2002, acted as a buying agent for Li & Fung Distribution Group in the purchase of

consumer goods for a commission income calculated as a percentage of the purchase price. The terms of the

transactions were negotiated on an arm’s length basis and were no less favourable than those to or from

existing customers of the Group.

(2) The Group has in the ordinary and usual course of its business, since September 2001, requested Li & Fung

Distribution Group to export consumer goods sourced by the Group from the PRC to overseas customers of the

Group at a service fee calculated as a percentage of the purchase price. Such percentage was arrived at after

consulting independent professional advisers. The terms of the transactions were negotiated on an arm’s length

basis and were no less favourable than those available from existing service providers of the Group.

All of the independent non-executive directors of the Company have reviewed the above transactions

and confirmed that these were conducted in the manners as stated in the two waivers granted by the

Stock Exchange on 17 April 2003 and 7 October 2003.

(ii) On 18 August 2003, the Group entered into a sale and purchase agreement with Mr Alan Chartash to

acquire from him the remaining one-third of the equity interest in International Sourcing Group, LLC

(“ISG”), a New York limited liability company and a non-wholly owned subsidiary of the Company at a

consideration of HK$40,695,000. Two-third of the equity interest of this non-wholly owned subsidiary

is already indirectly owned by the Company. Mr Alan Chartash, the Chief Executive Officer and a substantial

shareholder of ISG, was a connected person as defined under Chapter 14 of the Listing Rules at the

time of the acquisition.

The nature and reasons for the above connected transaction have previously been disclosed in the

Company’s announcement dated 18 August 2003.

Directors’ Interests and Short Positions in Shares, Underlying Shares and Debentures

As at 31 December 2003, the directors and chief executives of the Company and their associates had the

following interests in the Shares and underlying shares and debentures of the Company and its associated

corporations (within the meaning of Part XV of the Securities and Futures Ordinance (“SFO”)) as recorded

in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company

and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed

Companies (“Model Code”):



(A) Long Position in Shares and Underlying Shares of the Company

Number ofunderlying

Number of Shares shares under PercentageTrust/ derivatives of issued

Personal Corporate Family similar equity shareinterest interest interest interest (share options) Total interests capital

Dr Victor FUNG Kwok King – 1,045,950,8001 – 50,750,0002 – 1,096,700,800 37.79%

Dr William FUNG Kwok Lun 69,462,300 1,045,950,8001 4,000 – 2,400,000 1,117,817,100 38.51%

Mr Henry CHAN 3,280,000 – – – 1,680,000 4,960,000 0.17%

Mr Danny LAU Sai Wing 7,240,000 – – – 1,680,000 8,920,000 0.30%

Ms Annabella LEUNG Wai Ping 3,200,000 – – – 1,680,000 4,880,000 0.16%

Mr Bruce Philip ROCKOWITZ 8,000 – – 50,374,1003 1,440,000 51,822,100 1.78%

Mr LAU Butt Farn 2,200,000 – – – – 2,200,000 0.07%

Professor Franklin Warren McFARLAN – – – 52,0004 – 52,000 0.00%

Mr Leslie BOYD – – – 10,0005 – 10,000 0.00%

Notes:

(1) As at 31 December 2003,

(a) King Lun Holdings Limited (“King Lun”), a private company incorporated in the British Virgin Islands, held

49,950,800 Shares.

(b) King Lun through its wholly-owned Hong Kong incorporated subsidiary, Li & Fung (1937) Limited, held

996,000,000 Shares.

Dr Victor FUNG Kwok King and Dr William FUNG Kwok Lun are deemed to have interests in the 1,045,950,800

Shares, i.e. the total number of Shares mentioned in notes (1)(a) and (b) above, through their personal or other

interests in King Lun as set out below:

(i) 1,332,840 shares in King Lun, representing 50% of its issued share capital, are owned by J.P. Morgan Trust

Company (Jersey) Limited, the trustee of a trust established for the benefit of the family of Dr Victor FUNG

Kwok King.

(ii) 1,332,840 shares in King Lun, representing 50% of its issued share capital, are owned by Dr William FUNG

Kwok Lun.



(2) 50,750,000 Shares in the Company are held by J.P. Morgan Trust Company (Jersey) Limited, the trustee of a

trust established for the benefit of the family of Dr Victor FUNG Kwok King.

(3) 50,374,100 Shares in the Company are held by Hurricane Millennium Holdings Limited, a company beneficially

owned by a trust which has been set up for the benefit of family members of Mr Bruce Philip ROCKOWITZ.

(4) 52,000 Shares in the Company are held by a trust established for the benefit of Professor Franklin Warren

McFARLAN and managed by Fleet Bank, Boston.

(5) 10,000 Shares in the Company are held by Maitland Trustees Limited, the trustee of a trust, in respect of which

the family of Mr Leslie BOYD are potential discretionary beneficiaries.

(B) Short Positions in Shares and Underlying Shares of the Company

None of the directors and chief executive of the Company or their associates had any short position in

the Shares, underlying shares and debentures of the Company or any of its associated corporation

(within the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section

352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model

Mode.

(C) Share Options

The interests of the directors and chief executives in the share options (being regarded as unlisted

physically settled equity derivatives) of the Company are detailed in the Share Options section stated

above.

Save as disclosed above, at no time during the year, the directors and chief executives (including their

spouse and children under 18 years of age) had any interest in, or had been granted, or exercised, any

rights to subscribe for shares (or warrants or debentures, if applicable) of the Company or its associated

corporations required to be disclosed pursuant to the SFO.



Interests and Short Positions of Substantial Shareholders

At 31 December 2003, other than the interests of the directors or chief executive of the Company as

disclosed above, the following persons had interests in the Shares of the Company which fall to be disclosed

to the Company under Section 336 of the SFO:–

(A) Long Positions in Shares of the Company

Percentage ofissued share

Capacity Number of Shares capital

King Lun Holdings Limited Beneficial owner (49,950,800) 1,045,950,8002 36.04%

Interest of controlled corporation(996,000,000)1

J.P. Morgan Trust Company Trustee (50,750,000) 1,096,700,8003 37.79%

(Jersey) Limited Interest of controlled corporation(1,045,950,800)2

The Capital Group Companies, Inc. Investment manager 348,203,691 11.99%

J.P. Morgan Chase & Co. Beneficial owner (3,504,000) 170,097,996 5.86%

Investment manager (42,146,101)

Lending pool (124,447,895)

Notes:

(1) 996,000,000 Shares are held by Li & Fung (1937) Limited which is a wholly owned subsidiary of King LunHoldings Limited.

(2) (i) 50% of issued share capital of King Lun Holdings Limited is owned by J.P. Morgan Trust Company (Jersey)Limited and its interests in 1,045,950,800 Shares of the Company is duplicated in the interests of J.P.Morgan Trust Company (Jersey) Limited.

(ii) By virtue of the SFO, each of Dr Victor FUNG Kwok King and Dr William FUNG Kwok Lun is deemed to beinterested in 1,045,950,800 Shares of the Company held by King Lun Holdings Limited as described inNote (1) under the above section of Directors’ Interests and Short Positions in Shares, Underlying Sharesand Debentures.

(3) By virtue of the SFO, Dr Victor FUNG Kwok King is deemed to be interested in 1,096,700,800 Shares held byJ.P. Morgan Trust Company (Jersey) Limited, the trustee of a trust established for the benefit of the family ofDr Victor FUNG Kwok King.



(B) Short Positions in Shares and Underlying Shares of the Company

As at 31 December 2003, the Company had not been notified of any short positions being held by any

substantial shareholder in the Shares or underlying shares of the Company.

Senior Management

The biographical details of the senior management as at the date of this Report are set out in the Directors

and Senior Management section on pages 26 to 31.

Management Contracts

No contracts concerning the management and administration of the whole or any substantial part of the

business of the Company were entered into or existed during the year.


Principal corporate governance practices as adopted by the Company are set out in the Corporate Governance

section on pages 16 to 25.

Directors’ responsibilities for the Accounts

The Directors are responsible for the preparation of accounts for each financial period which give a true

and fair view of the state of affairs of the Group and of the results and cash flows for that period. In

preparing these accounts for the year ended 31 December 2003, the Directors have selected suitable

accounting policies and applied them consistently; made judgements and estimates that are prudent and

reasonable; and have prepared the accounts on the going concern basis. The Directors are responsible for

keeping proper accounting records which disclose with reasonable accuracy at any time the financial

position of the Group.

Auditors

The accounts have been audited by PricewaterhouseCoopers who retire and, being eligible, offer themselves

for re-appointment.

On behalf of the Board


Chairman


Auditors’ Report


PricewaterhouseCoopers22nd Floor Prince’s BuildingCentral Hong KongTelephone (852) 2289 8888Facsimile (852) 2810 9888

AUDITORS’ REPORT TO THE SHAREHOLDERS OF LI & FUNG LIMITED

(incorporated in Bermuda with limited liability)

We have audited the accounts on pages 50 to 103 which have been prepared in accordance with accountingprinciples generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

The Company’s directors are responsible for the preparation of accounts which give a true and fair view. Inpreparing accounts which give a true and fair view it is fundamental that appropriate accounting policiesare selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those accounts and to reportour opinion to you, as a body, in accordance with Section 90 of the Companies Act 1981 of Bermuda, andfor no other purpose. We do not assume responsibility towards or accept liability to any other person forthe contents of this report.

Basis of opinion

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong KongSociety of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amountsand disclosures in the accounts. It also includes an assessment of the significant estimates and judgementsmade by the directors in the preparation of the accounts, and of whether the accounting policies areappropriate to the circumstances of the Company and the Group, consistently applied and adequatelydisclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considerednecessary in order to provide us with sufficient evidence to give reasonable assurance as to whether theaccounts are free from material misstatement. In forming our opinion we also evaluated the overall adequacyof the presentation of information in the accounts. We believe that our audit provides a reasonable basisfor our opinion.

OpinionIn our opinion the accounts give a true and fair view of the state of affairs of the Company and of the Groupas at 31 December 2003 and of the Group’s profit and cash flows for the year then ended and have beenproperly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

PricewaterhouseCoopersCertified Public Accountants



Statement of Accounts

50 Consolidated Profit & Loss Account

51 Consolidated Balance Sheet

53 Balance Sheet

54 Consolidated Statement of Changes in Equity

55 Consolidated Cash Flow Statement

Notes to the Accounts

57 1. Principal accounting policies

65 2. Turnover, revenues and segment information

69 3. Operating profit

69 4. Interest expenses

70 5. Taxation

71 6. Profit attributable to shareholders

71 7. Dividends

71 8. Earnings per Share

71 9. Staff costs including directors’ emoluments

72 10. Directors’ and senior management’s emoluments

74 11. Intangible assets

75 12. Fixed assets

76 13. Investments in subsidiaries

77 14. Associated companies

77 15. Investments

77 16. Inventories

78 17. Due from related companies

78 18. Trade and bills receivable

78 19. Due to related companies

79 20. Trade and bills payable

79 21. Share capital and options

81 22. Reserves

84 23. Long-term liabilities

85 24. Post-employment benefit obligations

87 25. Deferred taxation

88 26. Notes to the consolidated cash flow statement

93 27. Contingent liabilities

93 28. Commitments

93 29. Charge of assets

94 30. Connected transactions under the Listing Rules andrelated party transaction

94 31. Approval of accounts

95 Principal Subsidiaries and Associated Companies


Consolidated Profit and Loss AccountFor the year ended 31 December 2003

2003 2002Note HK$’000 HK$’000

Turnover 2 42,630,510 37,281,360

Cost of sales (38,853,585) (33,998,139)

Gross profit 3,776,925 3,283,221

Other revenues 2 166,495 135,887

Total margin 3,943,420 3,419,108

Selling expenses (585,111) (496,986)

Merchandising expenses (1,756,875) (1,529,451)

Administrative expenses (281,218) (245,808)

Core operating profit 1,320,216 1,146,863

Amortisation of goodwill (26,210) (12,258)

Net investment loss (8,054) –

Operating profit 3 1,285,952 1,134,605

Interest income 2 38,373 49,581

Interest expenses 4 (9,813) (8,987)

Share of profits less losses of associated companies 2,015 393

Profit before taxation 1,316,527 1,175,592

Taxation 5 (105,513) (94,896)

Profit after taxation 1,211,014 1,080,696

Minority interests 12,104 (228)

Profit attributable to shareholders 6 & 22 1,223,118 1,080,468

Basic earnings per share 8 42.3 HK cents 37.4 HK cents


Consolidated Balance SheetAs at 31 December 2003

2003 2002Note HK$’000 HK$’000

Non-current assets

Intangible assets 11 612,849 326,696

Fixed assets 12 1,511,897 1,263,838

Associated companies 14 4,223 22,255

Investments 15 115,183 139,932

Deferred tax assets 25 19,150 –

2,263,302 1,752,721

Current assets

Inventories 16 218,275 118,082

Due from related companies 17 28,505 22,155

Trade and bills receivable 18 3,503,312 3,152,836

Other receivables, prepayments and deposits 636,431 499,943

Cash and bank balances 2,594,746 2,478,434

6,981,269 6,271,450

Current liabilities

Due to related companies 19 97 97

Trade and bills payable 20 3,649,359 3,369,701

Accrued charges and sundry payables 859,895 502,457

Taxation 202,954 143,984

Current portion of long-term liabilities 23 44,668 51,496

Bank loans and overdrafts

Secured 29 156,754 53,037

Unsecured 47,169 38,691

4,960,896 4,159,463

Net current assets 2,020,373 2,111,987

Total assets less current liabilities 4,283,675 3,864,708


Consolidated Balance Sheet (continued)

2003 2002Note HK$’000 HK$’000

Financed by:

Share capital 21 72,551 72,250

Reserves 22 3,422,374 3,089,967

Proposed final dividend 22 726,977 635,803

4,149,351 3,725,770


Minority interests 7,925 27,248

Non-current liabilities

Long-term liabilities 23 24,740 30,400

Post-employment benefit obligations 24 10,827 4,029

Deferred taxation 25 18,281 5,011

4,283,675 3,864,708

Victor FUNG Kwok King William FUNG Kwok Lun

Director Director


Balance SheetAs at 31 December 2003

2003 2002Note HK$’000 HK$’000

Investments in subsidiaries 13 2,063,703 2,063,703

Current assets

Due from related companies 17 6,723,311 5,713,162

Other receivables, prepayments and deposits 475 450

Dividend receivable 1,040,026 900,023

Cash and bank balances 123 129

7,763,935 6,613,764

Current liabilities

Due to related companies 19 3,698,396 2,773,306

Accrued charges and sundry payables 2,159 1,858

Bank overdrafts – 10

3,700,555 2,775,174

Net current assets 4,063,380 3,838,590

Total assets less current liabilities 6,127,083 5,902,293

Financed by:

Share capital 21 72,551 72,250

Reserves 22 5,327,555 5,194,240

Proposed final dividend 22 726,977 635,803

6,054,532 5,830,043


Victor FUNG Kwok King William FUNG Kwok Lun

Director Director


Consolidated Statement of Changes in EquityFor the year ended 31 December 2003

2003 2002Note HK$’000 HK$’000

Total shareholders’ funds as at 1 January 3,798,020 3,443,051

Exchange adjustments on translation of the accounts of

overseas subsidiaries and associated companies 22 10,939 8,398

Exchange reserve realised upon disposal of subsidiaries 22 135 –

Profit for the year 22 1,223,118 1,080,468

Dividends 22 (925,146) (779,716)

Issue of shares 21 & 22 114,836 45,819

Total shareholders’ funds as at 31 December 4,221,902 3,798,020


Consolidated Cash Flow StatementFor the year ended 31 December 2003

2003 2002Note HK$’000 HK$’000

Operating activities

Net cash inflow generated from operations 26(a) 1,331,922 981,839

Hong Kong profits tax paid (36,751) (17,567)

Overseas taxation paid (17,484) (19,730)

Net cash inflow from operating activities 1,277,687 944,542

Investing activities

Purchase of fixed assets (371,168) (142,845)

Sale of fixed assets 6,923 3,711

Payment for development costs (2,156) (10,140)

Disposal of subsidiaries 26(b) 312 –

Purchase of subsidiaries 26(c) (71,384) (257,004)

Purchase of business 26(d) (34,099) –

Purchase of additional interests in a subsidiary 26(e) (552) –

Disposal of investments 71,573 –

Investment in associated companies (585) (1,698)

Purchase of investments (54,878) (68,605)

Loan to associated companies – (4,028)

Repayment from associated companies 2,466 3,158

Repayment from an investee company – 26

Interest received 38,373 49,581

Dividends received from associated companies 16,576 11,725

Net cash outflow from investing activities (398,599) (416,119)

Net cash inflow before financing 879,088 528,423


Consolidated Cash Flow Statement (continued)

2003 2002Note HK$’000 HK$’000

Financing activities 26(f)

Net proceeds from issue of shares 74,141 45,819

Capital contribution from a minority shareholder – 286

Repayment of bank loans (10,315) (7,049)

Repayment of other loans (6,222) (3,549)

Loans from minority shareholders 553 10,831

Interest paid (9,813) (8,987)

Dividends paid to minority shareholders (9,378) (532)

Dividends paid (925,146) (779,716)

Net cash outflow from financing (886,180) (742,897)

Decrease in cash and cash equivalents (7,092) (214,474)

Cash and cash equivalents at 1 January 2,386,706 2,591,455

Effect of foreign exchange rate changes 11,209 9,725

Cash and cash equivalents at 31 December 2,390,823 2,386,706

Analysis of the balances of cash and cash equivalents

Cash and bank balances 2,594,746 2,478,434

Short-term bank loans and overdrafts (203,923) (91,728)

2,390,823 2,386,706


Notes to the Accounts (continued)Notes to the Accounts

1 Principal accounting policies

The principal accounting policies adopted in the preparation of these accounts are set out below:

(a) Basis of preparationThe accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong and

comply with accounting standards issued by the Hong Kong Society of Accountants (“HKSA”). They have been prepared

under the historical cost convention as modified by the revaluation of certain leasehold land and buildings as disclosed

in the accounting policies below.

In the current year, the Group adopted the revised Statement of Standard Accounting Practice (“SSAP”) 12 “Income

Taxes” issued by the HKSA which are effective for accounting periods commencing on or after 1 January 2003.

The change to Group’s accounting policies and the effect of adopting this revised standard is set out below.

(b) Group accounting

(i) Consolidation

The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31 December.

Subsidiaries are those entities in which the Group controls the composition of the board of directors, controls

more than half of the voting power or holds more than half of the issued share capital. The results of subsidiaries

acquired or disposed of during the year are included in the consolidated profit and loss account from the

effective date of acquisition or up to the effective date of disposal, as appropriate.

All significant intercompany transactions and balances within the Group are eliminated on consolidation.

The gain or loss on disposal of a subsidiary represents the difference between the proceeds of the sale and the

Group’s share of its net assets together with any unamortised goodwill or negative goodwill or goodwill/negative

goodwill taken to reserves and which was not previously charged or recognised in the consolidated profit and

loss account, and any related accumulated foreign currency translation reserve.

Minority interests represent the interests of outside shareholders in the operating results and net assets of

subsidiaries.

In the Company’s balance sheet the investments in subsidiaries are stated at cost less provision for impairment

losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and

receivable.

As at 31 December 2003


Notes to the Accounts (continued)

1 Principal accounting policies (continued)

(b) Group accounting (continued)

(ii) Associated companies

An associated company is a company, not being a subsidiary, in which an equity interest is held for the long-

term and significant influence is exercised in its management.

The consolidated profit and loss account includes the Group’s share of the results of associated companies for

the year, and the consolidated balance sheet includes the Group’s share of the net assets of the associated

companies and also goodwill/negative goodwill (net of accumulated amortisation) on acquisition.

Equity accounting is discontinued when the carrying amount of the investment in an associated company reaches

zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated company.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the

Group’s interest in the associates; unrealised losses are eliminated unless the transaction provides evidence of

an impairment of the asset transferred.

(iii) Translation of foreign currencies

Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary

assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of

exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the

profit and loss account.

The balance sheet of subsidiaries and associated companies expressed in foreign currencies are translated at

rates of exchange ruling at the balance sheet date whilst the profit and loss is translated at an average rate.

Exchange differences are dealt with as a movement in reserves.

(c) Fixed assets

(i) Properties

Freehold land is stated at cost.

Leasehold land and buildings are stated at cost or valuation less accumulated depreciation and accumulated

impairment losses. Effective from 1994, no further revaluation of the Group’s leasehold land and buildings in

Hong Kong have been carried out. The Group places reliance on paragraph 80 of SSAP 17 which provides

exemption from the need to make regular revaluation for such assets.

(ii) Other fixed assets

Other fixed assets, comprising leasehold improvements, furniture, fixtures, computer and other equipment,

plant and machinery, motor vehicles and company boats are stated at cost less accumulated depreciation and

accumulated impairment losses.




(c) Fixed assets (continued)

(iii) Depreciation

Freehold land is not amortised. Leasehold land is depreciated over the period of the lease while other fixed

assets are depreciated at rates sufficient to write off their cost less accumulated impairment losses over their

estimated useful lives on a straight-line basis. The principal annual rates are as follows:

Buildings and leasehold improvements 2% – 20%

Furniture, fixtures, computer and other equipment 10% – 331/3%

Plant and machinery 10% – 15%

Motor vehicles and company boats 15% – 20%

Major costs incurred in restoring fixed assets to their normal working condition are charged to the profit and

loss account. Improvements are capitalised and depreciated over their expected useful lives to the Group.

(iv) Impairment and gain or loss on sale

At each balance sheet date, both internal and external sources of information are considered to assess whether

there is any indication that assets included in properties and other fixed assets are impaired. If any such

indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is

recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit

and loss account except where the asset is carried at valuation and the impairment loss does not exceed the

revaluation surplus for that same asset, in which case it is treated as a revaluation decrease.

The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying

amount of the relevant asset, and is recognised in the profit and loss account. Any revaluation reserve balance

remaining attributable to the relevant asset is transferred to retained earnings and is shown as a movement in

reserves.

(d) Assets under leases

(i) Finance leases

Leases that substantially transfer to the Group all the risks and rewards of ownership of assets are accounted

for as finance leases. Finance leases are capitalised at the inception of the leases at the lower of the fair value

of the leased assets or the present value of the minimum lease payments. Each lease payment is allocated

between the capital and finance charges so as to achieve a constant rate on the capital balances outstanding.

The corresponding rental obligations, net of finance charges, are included in long-term liabilities. The finance

charges are charged to the profit and loss account over the lease periods.

Assets held under finance leases are depreciated over the shorter of their estimated useful lives or the lease

periods.




(d) Assets under leases (continued)

(ii) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company

are accounted for as operating leases. Payments made under operating leases net of any incentives received

from the leasing company are charged to the profit and loss account on a straight-line basis over the lease

periods.

(e) Intangibles

(i) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net

assets of the acquired subsidiary/associated company at the date of acquisition.

Goodwill on acquisitions occurring on or after 1 January 2001 is included in intangible assets and is amortised

using the straight-line method over its estimated useful life. Goodwill is generally amortised over a period of 15

years.

Goodwill on acquisitions that occurred prior to 1 January 2001 was taken to reserves. Any impairment arising

on such goodwill is accounted for in profit and loss account.

The gain or loss on disposal of an entity includes the unamortised balance of goodwill relating to the entity

disposed of or, for pre 1 January 2001 acquisitions, the related goodwill written off against reserves to the

extent it has not previously been realised in the profit and loss account.

(ii) Research and development costs

Research costs are expensed as incurred. Costs incurred on system development projects relating to the

design and testing of new or improved systems for internal use are recognised as an intangible asset where the

technical feasibility and intention of completing the system under development has been demonstrated and the

resources are available to do so, costs are identifiable and there is an ability to use the asset that will generate

probable future economic benefits. Such development costs are recognised as an asset and amortised on a

straight-line basis over their estimated useful lives of 3 – 5 years from the date on which the system commences

operations to reflect the pattern in which the related economic benefits are recognised. Development costs

that do not meet that above criteria are expensed as incurred. Development costs previously recognised as an

expense are not recognised as an asset in a subsequent period.

(iii) Impairment of intangible assets

Where an indication of impairment exists, the carrying amount of any intangible asset, including goodwill previously

written off against reserves, is assessed and written down immediately to its recoverable amount.




(f) InvestmentsInvestments are stated at cost less any provision for impairment losses.

The carrying amounts of individual investments are reviewed at each balance sheet date to assess whether the fair

values have declined below the carrying amounts. When a decline other than temporary has occurred, the carrying

amount of such investments will be reduced to its fair value. The impairment loss is recognised as an expense in the

profit and loss account. This impairment loss is written back to profit and loss account when the circumstances and

events that led to the write-downs or write-offs cease to exist and there is persuasive evidence that the new circumstances

and events will persist for the foreseeable future.

(g) InventoriesInventories comprise merchandise, raw materials and finished goods and are stated at the lower of cost and net

realisable value. Cost, calculated on the first-in, first-out basis, comprises purchase prices of inventories and direct

expenses. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.

(h) Accounts receivableProvision is made against accounts receivable to the extent they are considered to be doubtful. Accounts receivable

in the balance sheet are stated net of such provision.

(i) Export quota entitlementsPurchased permanent export quota entitlements are charged to the profit and loss account immediately upon acquisition.

Export quota entitlements allocated by the authorities in Hong Kong are not capitalised and are not included as

assets in the balance sheet.

Temporary export quota entitlements acquired are charged to the profit and loss account in the year in which such

quota entitlements are utilised.

(j) Cash and cash equivalentsCash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement,

cash and cash equivalents comprise cash on hand and demand deposits at banks, net of short-term bank loans and

bank overdrafts which are repayable on demand.

(k) ProvisionsProvisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it

is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount

can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate

asset but only when the reimbursement is virtually certain.




(l) Employee benefits

(i) Employee leave entitlements

Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for

the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet

date.

Employee entitlements to sick leave and maternity are not recognised until the time of leave.

(ii) Discretionary bonus

The expected cost of discretionary bonus payments are recognised as a liability when the Group has a present

legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the

obligation can be made.

Liabilities for discretionary bonus are expected to be settled within 12 months and are measured at the amounts

expected to be paid when they are settled.

(iii) Post-employment benefit obligations

The Group participates in a number of defined contribution plans and defined benefit plans throughout the

world, the assets of which are generally held in separate trustee – administrated funds. The pension plans are

generally funded by payments from employees and by the relevant Group companies, taking account of the

recommendations of independent qualified actuaries.

The Group’s contributions to the defined contribution retirement scheme are charged to the consolidated profit

and loss account in the year to which the contributions relate.

For defined benefit plans, pension costs are assessed using the projected unit credit method. Under this

method, the cost of providing pensions is charged to the consolidated profit and loss account so as to spread

the regular cost over the service lives of employees in accordance with the advice of the actuaries who carry

out a full valuation of the plans on an annual basis. The pension obligation is measured as the present value of

the estimated future cash outflows, discounted by reference to market yields on high quality corporate bonds

which have terms to maturity approximating the terms of the related liabilities. Actuarial gains and losses are

recognised over the average remaining service lives of employees. Past service costs are recognised as an

expense on a straight-line basis over the average period until the benefits become vested.

The Group’s contributions to defined benefit plans are charged to the consolidated profit and loss account in

the year to which the contributions relate.




(l) Employee benefits (continued)

(iii) Post employment benefit obligations (continued)The Group’s net obligation in respect of long service payments on cessation of employment in certain circumstancesunder the Hong Kong Employment Ordinance is the amount of future benefit that employees have earned inreturn for their service in the current and prior periods; that benefit is discounted to determine the presentvalue and reduced by entitlements accrued under the Group’s retirement plans that are attributable to contributionsmade by the Group. The obligation is calculated using the projected unit credit method by a qualified actuary.The discount rate is determined by reference to market yields on high quality corporate bonds which haveterms to maturity approximating the terms of the related liabilities.

Pursuant to the requirements of SSAP 34 (revised), the Group has transitional pension and long service paymentliabilities on initial adoption of the SSAP of approximately HK$16,048,000 and HK$6,000,000 respectively.The Group chooses to recognise the transitional pension and long service payment liabilities on a straight-linebasis over five years. For the year ended 31 December 2003, the transitional pension and long service paymentliabilities of approximately HK$3,208,000 and HK$1,200,000 respectively were charged to the consolidatedprofit and loss account (note 24(a)(ii) and 24(b)). As at 31 December 2003, transitional pension and longservice payment liabilities of approximately HK$9,632,000 and HK$4,800,000 respectively remainedunrecognised.

(iv) Equity compensation benefitsShare options are granted to any employee including any executive or non-executive director of the Companyand its subsidiaries at an exercise price which is at least the higher of (i) the closing price of the shares asstated in the Stock Exchange’s daily quotations sheet on the date of grant; (ii) the average closing prices of theshares as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately precedingthe date of grant; and (iii) the nominal value of a share. No compensation cost is recognised in the consolidatedprofit and loss account. When the options are exercised, the proceeds received net of any transaction costsare credited to share capital (nominal value) and share premium.

(m) Deferred taxationDeferred taxation is provided in full, using the liability method, on temporary differences arising between the taxbases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantivelyenacted by the balance sheet date are used to determine deferred taxation.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available againstwhich the temporary differences can be utilised.

Deferred taxation is provided on temporary differences arising on investments in subsidiaries, associated companiesexcept where the timing of the reversal of the temporary differences can be controlled and it is probable that thetemporary differences will not reverse in the foreseeable future.

In prior year, deferred taxation was accounted for at the current taxation rate in respect of timing differences betweenprofit as computed for taxation purposes and profit as stated in the accounts to the extent that a liability or an assetwas expected to be payable or recoverable in the foreseeable future. The adoption of the new SSAP 12 represents achange in accounting policy, which has been applied retrospectively. Since the adoption of this revised SSAP had nomaterial impact on the Group’s accounts in prior years, comparative figures have not been restated.




(n) Contingent liabilities and contingent assetsA contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed

by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the

Group. It can also be a present obligation arising from past events that is not recognised because it is not probable

that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the accounts. When a change in the probability

of an outflow occurs so that outflow is probable, they will then be recognised as a provision.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the

occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group.

Contingent assets are not recognised but are disclosed in the notes to the accounts when an inflow of economic

benefits is probable. When inflow is virtually certain, an asset is recognised.

(o) Revenue recognitionRevenue from the sale of goods is recognised on the transfer of risks and rewards of ownership, which generally

coincides with the time when the goods are delivered to customers and title has been passed.

Operating lease rental income is recognised on a straight-line basis.

Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and

the interest rates applicable.

Dividend income is recognised when the right to receive payment is established.

Commission and value added services income are recognised when the services are rendered.

(p) Borrowing costsBorrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily

takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that

asset.

All other borrowing costs are charged to the profit and loss account in the year in which they are incurred.

(q) Segment reportingIn accordance with the Group’s internal financial reporting the Group has determined that geographical segments be

presented as the primary reporting format and business as the secondary reporting format.

Segment assets consist primarily of intangible assets, fixed assets, inventories, receivables and operating cash, and

mainly exclude investments. Segment liabilities comprise operating liabilities and exclude items such as taxation and

certain corporate borrowings. Capital expenditure comprises additions to system development costs (note 11) and

fixed assets (note 12), including additions resulting from acquisitions through purchases of subsidiaries.




(q) Segment reporting (continued)

In respect of geographical segment reporting, sales, total assets and capital expenditure are based on the destination

country to which goods are shipped.

(r) ComparativesWhere necessary, comparative figures have been adjusted to conform with changes in presentation in the current

year.

2 Turnover, revenues and segment information

(a) The Group is principally engaged in the export trading of consumer products. Turnover comprises sales at invoiced

value to customers outside the Group less discounts and returns, and gross rental revenue derived from properties

in and outside Hong Kong. Revenues recognised during the year are as follows:

2003 2002HK$’000 HK$’000

Turnover

Sales at invoiced value 42,623,074 37,279,725

Rental income 7,436 1,635

42,630,510 37,281,360

Other revenues

Value added services income 137,535 126,747

Commission income 923 3,655

Others 28,037 5,485

166,495 135,887

Interest income 38,373 49,581

Total revenues 42,835,378 37,466,828



2 Turnover, revenues and segment information (continued)

(b) Primary reporting format – geographical segments

North SouthernAmerica Europe Hemisphere East Asia Group

2003 2003 2003 2003 2003HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Turnover 31,858,928 8,200,869 1,319,738 1,250,975 42,630,510

Segment results 952,878 318,907 37,626 10,805 1,320,216

Amortisation of goodwill (26,210)

Net investment loss (8,054)

Interest income 38,373

Interest expenses (9,813)

Share of profits less losses of

associated companies 2,015

Profit before taxation 1,316,527

Taxation (105,513)

Profit after taxation 1,211,014

Minority interests 12,104

Profit attributable to shareholders 1,223,118

Segment assets 5,249,148 1,407,406 203,327 198,641 7,058,522

Unallocated assets 2,186,049

Total assets 9,244,571

Segment liabilities 3,414,795 854,008 139,161 101,232 4,509,196

Unallocated liabilities 505,548

Total liabilities 5,014,744


2003 2003 2003 2003 2003HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Capital expenditure 276,528 74,571 11,241 10,984 373,324

Depreciation 85,392 26,427 4,197 3,829 119,845

Amortisation of goodwill 15,455 9,360 491 904 26,210




(b) Primary reporting format – geographical segments (continued)


2002 2002 2002 2002 2002HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Turnover 28,156,018 7,061,902 994,554 1,068,886 37,281,360

Segment results 873,714 239,284 29,585 4,280 1,146,863


Interest income 49,581

Interest expenses (8,987)

Share of profits less losses of

associated companies 393

Profit before taxation 1,175,592

Taxation (94,896)

Profit after taxation 1,080,696

Minority interests (228)

Profit attributable to shareholders 1,080,468

Segment assets 4,614,410 1,206,748 143,232 128,732 6,093,122



Segment liabilities 3,073,403 667,369 90,905 87,583 3,919,260

Unallocated liabilities 279,643

Total liabilities 4,198,903


2002 2002 2002 2002 2002HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Capital expenditure 117,704 27,170 3,653 4,458 152,985

Depreciation 78,569 20,874 2,978 4,086 106,507

Amortisation of goodwill 6,916 4,878 224 240 12,258




(c) Secondary reporting format – business segments

Segment Total CapitalTurnover results assets expenditure

2003 2003 2003 2003HK$’000 HK$’000 HK$’000 HK$’000

Softgoods 28,402,198 938,876 5,004,141 236,532

Hardgoods 14,228,312 381,340 2,054,381 136,792

42,630,510 1,320,216 7,058,522 373,324


Net investment loss (8,054)

Operating profit 1,285,952



Segment Total CapitalTurnover results assets expenditure

2002 2002 2002 2002HK$’000 HK$’000 HK$’000 HK$’000

Softgoods 25,497,622 849,624 4,421,444 97,791

Hardgoods 11,783,738 297,239 1,671,678 55,194

37,281,360 1,146,863 6,093,122 152,985


Operating profit 1,134,605





3 Operating profit

Operating profit is stated after crediting and charging the following:

2003 2002HK$’000 HK$’000

Crediting

Net exchange gains 16,378 15,549

Net rental income from land and buildings 5,902 1,032

Charging

Amortisation of intangible assets

Goodwill 26,210 12,258

System development costs 5,382 4,149

Depreciation of fixed assets 119,845 106,507

Loss on disposal of fixed assets 854 1,367

Operating leases rental in respect of land and buildings 86,128 84,869

Provision for doubtful debts 16,655 14,440

Staff costs, including directors’ emoluments (note 9) 1,546,296 1,375,444

The remuneration to the auditors for audit and non-audit services is as follows:

Audit services 5,572 5,069

Non-audit services

– due diligence on acquisitions 1,203 1,400

– taxation services 1,990 1,991

– others 231 170

Total remuneration to auditors 8,996 8,630

Less: non-audit service fee capitalised (1,203) (1,400)

Net remuneration to auditors charged to consolidated profit and loss account 7,793 7,230

Note: Of the above audit and non-audit services fee of HK$5,194,000 (2002: HK$4,792,000) and HK$3,252,000 (2002: HK$3,547,000)

respectively are payable to the Company’s auditors.

4 Interest expenses

2003 2002HK$’000 HK$’000

Interest on bank loans and overdrafts 9,813 8,987



5 Taxation

Hong Kong profits tax has been provided for at the rate of 17.5% (2002: 16%) on the estimated assessable profit for the

year. Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rates of

taxation prevailing in the countries in which subsidiaries of the Group operates.

The amount of taxation charged/(credited) to the consolidated profit and loss account represents:

2003 2002HK$’000 HK$’000

Hong Kong profits tax 84,011 79,990

Overseas taxation 28,607 15,048

Overprovision in prior years (2,663) (3,524)

Deferred taxation relating to the origination and reversal of temporary

differences (6,701) 1,351

Deferred taxation resulting from an increase in tax rate 675 –

103,929 92,865

Share of taxation attributable to associated companies

– Hong Kong 1,317 1,982

– Overseas 267 49

1,584 2,031

Total taxation charge 105,513 94,896

The taxation on the Group’s profit before taxation differs from the theoretical amount that would arise using the taxation

rate of the home country of the Company as follows:

2003 2002% %

Calculated at a taxation rate of 17.5 16.0

Effect of different taxation rates in other countries 0.4 0.5

Income net of expenses not subject to taxation (11.6) (8.9)

Utilisation of previously unrecognised tax losses (0.2) (0.4)

Unrecognised tax losses 1.9 0.9

Effective tax rate 8.0 8.1

At the date of approval of the accounts, certain subsidiaries of the Group have disputes with the Hong Kong Inland Revenue

involving additional assessments of tax of approximately HK$521 million on the non-taxable claim of certain non-Hong Kong

sourced income and the deduction claim of marketing expenses for the years of assessment from 1992/1993 to 2002/2003.

Under professional advice, the subsidiaries are pursuing objection against the additional assessments and the directors

believe that no material tax liabilities will finally crystallise. Accordingly, the directors consider that sufficient tax provision

has been made in this regard.



6 Profit attributable to shareholders

The profit attributable to shareholders is dealt with in the accounts of the Company to the extent of HK$1,035,100,000

(2002: HK$895,773,000).

7 Dividends

2003 2002HK$’000 HK$’000

Interim, paid, of HK$0.1 (2002: HK$0.085) per ordinary share 289,343 245,651

Final, proposed, of HK$0.25 (2002: HK$0.22) per ordinary share 726,977 635,803

1,016,320 881,454

8 Earnings per share

(a) The calculation of basic earnings per share is based on the Group’s profit attributable to shareholders of HK$1,223,118,000

(2002: HK$1,080,468,000) and on the weighted average number of 2,893,046,000 (2002: 2,886,524,000) shares

in issue during the year.

(b) In the event that share options outstanding at 31 December 2003 and 2002 respectively were exercised in full, the

diluted earnings per share would not be significantly different from the basic earnings per share as disclosed in the

consolidated profit and loss account.

9 Staff costs including directors’ emoluments

2003 2002HK$’000 HK$’000

Salaries and bonuses 1,397,275 1,244,139

Other staff-related expenses 81,665 70,233

Pension costs of defined contribution plans 50,853 48,601

Pension costs of defined benefits plans (note 24(a)(ii)) 15,303 12,471

Long service payments (note 24(b)) 1,200 –

1,546,296 1,375,444



10 Directors’ and senior management’s emoluments

(a) Directors’ remunerationThe aggregate amounts of the emoluments payable to directors of the Company during the year are as follows:

2003 2002HK$’000 HK$’000

Executive:

Fees 418 418

Basic salaries, housing allowances, other allowances

and benefits in kind 11,977 12,125

Discretionary bonuses 26,148 23,897

Contributions to pension scheme 60 60

38,603 36,500

Non-executive:

Fees 882 582

39,485 37,082

As at 31 December 2003, certain directors held options to acquire 720,000 (2002: 1,200,000), 960,000 (2002:

1,440,000), 2,400,000 (2002: Nil), 2,400,000 (2002: Nil) and 2,400,000 (2002: Nil) Shares of the Company at an

exercise price of HK$10.5, HK$7.98, HK$9.2, HK$9.2 and HK$9.2 per Share respectively. The closing market price

of the Shares as at 31 December 2003 was HK$13.3.

During the year, a total of 480,000 (2002: Nil) and 480,000 (2002: Nil) Shares were issued to a director of the

Company at an exercise price of HK$10.5 and HK$7.98 respectively under the Old Scheme. The weighted average

closing market price per Share immediately before the dates on which the share options were exercised was HK$13.17.

Directors’ fees disclosed above include HK$520,000 (2002: HK$320,000) paid to independent non-executive directors.



10 Directors’ and senior management’s emoluments (continued)

(a) Directors’ remuneration (continued)

The emoluments of the directors fell within the following bands. The emoluments represent the amount paid to or

receivable by the directors of the Company for the year and exclude the benefits derived or to be derived from the

share options granted under the Old Scheme.

Number of directorsEmolument bands 2003 2002

Nil – HK$1,000,000 7* 7*

HK$4,000,001 – HK$4,500,000 – 1

HK$5,000,001 – HK$5,500,000 – 1

HK$6,000,001 – HK$6,500,000 2 –

HK$7,000,001 – HK$7,500,000 1 –

HK$7,500,001 – HK$8,000,000 1 1

HK$9,000,001 – HK$9,500,000 – 1

HK$10,000,001 – HK$10,500,000 – 1

HK$11,000,001 – HK$11,500,000 1 –

* Represents non-executive directors

No directors waived their emoluments in respect of the year ended 31 December 2003 (2002: Nil).

(b) Five highest paid individualsThe five individuals whose emoluments were the highest in the Group for the year include four (2002: three) directors

whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining one

individual (2002: two) during the year are as follows:

2003 2002HK$’000 HK$’000

Basic salaries, housing allowances, other allowances and benefits in kind 3,523 3,791

Discretionary bonuses 2,673 8,746

Contributions to pension scheme 12 82

6,208 12,619

Number of individualsEmolument bands 2003 2002

HK$6,000,001 – HK$6,500,000 1 2



11 Intangible assets

The GroupSystem

developmentGoodwill costs TotalHK$’000 HK$’000 HK$’000

Cost

At 1 January 2003 314,407 40,459 354,866

Additions 315,589 2,156 317,745

At 31 December 2003 629,996 42,615 672,611

Accumulated amortisation

At 1 January 2003 15,490 12,680 28,170

Amortisation charge 26,210 5,382 31,592

At 31 December 2003 41,700 18,062 59,762

Net book value

At 31 December 2003 588,296 24,553 612,849

At 31 December 2002 298,917 27,779 326,696



12 Fixed assets

The GroupFurniture, Motor

fixtures, vehiclesLeasehold computer and

Land and improve- and other Plant and companybuildings ments equipment machinery boats TotalHK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Cost or valuation

At 1 January 2003 1,209,967 149,034 336,482 9,914 32,567 1,737,964

Acquisition of subsidiaries – – 1,000 76 – 1,076

Additions 237,371 59,093 63,672 6,177 4,855 371,168

Disposals – (11,560) (18,367) (88) (3,336) (33,351)

Exchange adjustment 2,907 348 2,778 1,231 487 7,751

At cost 1,104,833 196,915 385,565 17,310 34,573 1,739,196

At directors’ 1994 valuation 345,412 – – – – 345,412

At 31 December 2003 1,450,245 196,915 385,565 17,310 34,573 2,084,608

Accumulated depreciation

At 1 January 2003 135,732 83,333 229,784 5,408 19,869 474,126

Acquisition of subsidiaries – – 489 – – 489

Charge for the year 37,614 24,871 49,034 3,063 5,263 119,845

Disposals – (7,738) (15,181) (69) (2,586) (25,574)

Exchange adjustment 181 253 2,301 675 415 3,825

At 31 December 2003 173,527 100,719 266,427 9,077 22,961 572,711

Net book value

At 31 December 2003 1,276,718 96,196 119,138 8,233 11,612 1,511,897

At 31 December 2002 1,074,235 65,701 106,698 4,506 12,698 1,263,838



12 Fixed assets (continued)

The Group’s interests in land and buildings at their net book values are analysed as follows:

The Group2003 2002

HK$’000 HK$’000

In Hong Kong, held on:

Leases over 50 years 101,943 104,065

Leases of between 10 to 50 years 1,124,275 921,330

Outside Hong Kong, held on:

Freehold 39,859 37,402

Leases over 50 years 9,271 10,034

Leases of between 10 to 50 years 1,370 1,404

1,276,718 1,074,235

The original cost and accumulated depreciation based on cost of leasehold land and buildings in Hong Kong are as follows:

The Group2003 2002

HK$’000 HK$’000

Original cost 1,269,486 1,032,314

Accumulated depreciation based on cost (144,859) (111,955)

1,124,627 920,359

At 31 December 2003, the net book value of fixed assets pledged as security for the Group’s long-term loans amounted

to HK$35,521,000 (2002: HK$30,477,000).

13 Investments in subsidiaries

The Company2003 2002

HK$’000 HK$’000

Unlisted shares, at cost 111,210 111,210

Loan to a subsidiary 1,952,493 1,952,493

2,063,703 2,063,703

The loan to a subsidiary is interest free, unsecured and has no fixed terms of repayment.

Details of principal subsidiaries are set out on pages 95 to 102.



14 Associated companies

The Group2003 2002

HK$’000 HK$’000

Share of net (liabilities)/assets (4,467) 11,097

Loans to associated companies 8,690 11,158

4,223 22,255

The loans to associated companies are interest free and unsecured, except for amounts of HK$4,848,000 (2002: HK$7,247,000)

which are secured and interest bearing.

Details of principal associated companies are set out on page 103.

15 Investments

The Group2003 2002

HK$’000 HK$’000

Shares listed overseas, at cost 41,910 37,861

Unlisted shares, at cost 112,595 125,483

Less: provision for impairment losses (45,922) (30,012)

108,583 133,332

Club debentures, at cost 6,600 6,600

115,183 139,932

Market value of listed shares 21,289 19,327

16 Inventories

The Group2003 2002

HK$’000 HK$’000

Finished goods 177,817 89,346

Raw materials 40,458 28,736

218,275 118,082

At 31 December 2003, inventories that are carried at net realisable value amounted to HK$2,753,000 (2002: HK$543,000).

At 31 December 2003, inventories pledged as securities for bank facilities amounted to HK$79,940,000 (2002: HK$36,684,000).



17 Due from related companies

The Group The Company2003 2002 2003 2002

HK$’000 HK$’000 HK$’000 HK$’000

Due from:

Subsidiaries – – 6,723,311 5,713,162

Associated companies 28,505 22,155 – –

28,505 22,155 6,723,311 5,713,162

The amounts are unsecured, interest free and repayable on demand, except for amounts due from associated companies

amounting to HK$2,407,000 (2002: HK$2,418,000) which are secured and interest bearing.

18 Trade and bills receivable

Majority of the Group’s business are on sight letter of credit, usance letter of credit up to a tenor of 120 days, documents

against payment or customers’ letter of credit to suppliers. The remaining balances of the business are on open account

terms payable against deliveries of shipments which are mostly covered by customers’ standby letters of credit or bank

guarantees. The ageing analysis of trade and bills receivable is as follows:

The Group2003 2002

HK$’000 HK$’000

Current to 90 days 3,399,385 3,039,277

91 to 180 days 80,286 87,477

181 to 360 days 22,685 19,835

Over 360 days 956 6,247

3,503,312 3,152,836

19 Due to related companies


HK$’000 HK$’000 HK$’000 HK$’000

Due to:

A subsidiary – – 3,698,396 2,773,306

Associated companies 97 97 – –

97 97 3,698,396 2,773,306

The amounts are unsecured, interest free and repayable on demand.



20 Trade and bills payable

The ageing analysis of the trade and bills payable is as follows:

The Group2003 2002

HK$’000 HK$’000

Current to 90 days 3,503,955 3,218,305

91 to 180 days 111,207 108,140

181 to 360 days 20,369 31,718

Over 360 days 13,828 11,538

3,649,359 3,369,701

21 Share capital and options

2003 2002Number of Number of

shares shares(in thousand) HK$’000 (in thousand) HK$’000

Authorised

At 1 January and 31 December, ordinary

HK$0.025 each 3,200,000 80,000 3,200,000 80,000

Issued and fully paid

At 1 January, ordinary HK$0.025 each 2,890,012 72,250 2,878,978 71,974

Exercise of share options (note a) 8,229 206 11,034 276

Issue of shares for the acquisition of ISG (note b) 3,797 95 – –

At 31 December, ordinary of HK$0.025 each 2,902,038 72,551 2,890,012 72,250



21 Share capital and options (continued)

(a) Details of share options granted by the Company pursuant to the Old and New Schemes and the share options

outstanding at 31 December 2003, are as follows:

Shares Share Share Shareoptions options options options

Subscription At granted exercised lapsed cancelled AtDate of price per Exercisable 1 January during the during the during the during the 31 Decembergrant Share period 2003 year year year year 2003

7 July 2000 HK$15.26 7 July 2001- 9,072,000 – – (9,072,000 ) – –

6 July 2003

18 July 2001 HK$10.50 18 July 2002- 10,520,000 – (3,362,000 ) (288,000 ) – 6,870,000

17 July 2004

28 August 2001 HK$7.98 28 August 2003- 11,604,000 – (4,867,000 ) (136,000 ) – 6,601,000

27 August 2005

23 May 2003 HK$9.20 23 May 2004- – 16,790,000 – (45,000 ) (673,000 ) 16,072,000

22 May 2007

23 May 2003 HK$9.20 23 May 2005- – 17,760,000 – (250,000 ) – 17,510,000

22 May 2008

23 May 2003 HK$9.20 23 May 2006- – 17,760,000 – (250,000 ) – 17,510,000

22 May 2009

Subsequent to 31 December 2003, 3,625,000 Shares have been allotted and issued under the Old Scheme for a

total consideration of HK$35,200,000 and no Shares have been allotted and issued under the New Scheme.

(b) Pursuant to the sale and purchase agreements dated 18 August 2003, the Company acquired the additional one-third

of the equity interests in International Sourcing Group, LLC (“ISG”), from the former minority shareholder at a consideration

of approximately HK$40,695,000 through an issue of 3,797,191 Shares at an issue price of HK$10.715 each. ISG

becomes a wholly owned subsidiary of the Group since then.

(c) On 2 December 2003, the Company entered into an agreement to acquire certain assets and business of Firstworld

Garments Limited, a Hong Kong corporation, and International Porcelain, Inc., an US corporation, at a consideration

of HK$210,600,000. The purchase consideration is satisfied by cash of HK$180,960,000 (the “Cash consideration”)

and an issue of 2,246,660 Shares (the “Consideration shares”) at an issue price of HK$13.13 each amounting to

HK$29,640,000.

As at 31 December 2003, HK$40,560,000 of the Cash consideration was paid. The remaining balance of the Cash

consideration amounting to HK$140,400,000 will be paid and the Consideration shares will be issued in 2004.



22 Reserves

Share Capital Exchange Retainedpremium reserve reserve earnings Total

The Group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2003 2,879,330 5,811 (57,507) 898,136 3,725,770

2002 final dividend paid – – – (635,803) (635,803)

Share premium on issue of new shares 114,535 – – – 114,535

Exchange adjustment on translation of the

accounts of overseas subsidiaries and

associated companies – – 10,939 – 10,939

Transfer to capital reserve – 51 – (51) –

Profit for the year – – – 1,223,118 1,223,118

Exchange reserve realised upon disposal of

subsidiaries – – 135 – 135

2003 interim dividend paid – – – (289,343) (289,343)

Reserves 2,993,865 5,862 (46,433) 469,080 3,422,374

Proposed dividend – – – 726,977 726,977

At 31 December 2003 2,993,865 5,862 (46,433) 1,196,057 4,149,351

Company and subsidiaries 2,993,865 5,862 (45,027) 1,209,051 4,163,751

Associated companies – – (1,406) (12,994) (14,400)

At 31 December 2003 2,993,865 5,862 (46,433) 1,196,057 4,149,351



22 Reserves (continued)

Share Capital Exchange Retainedpremium reserve reserve earnings Total

The Group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2002 2,833,787 5,630 (65,905) 597,565 3,371,077

2001 final dividend paid – – – (534,065) (534,065)

Share premium on issue of new shares 45,543 – – – 45,543

Exchange adjustment on translation of the

accounts of overseas subsidiaries and

associated companies – – 8,398 – 8,398

Transfer to capital reserve – 181 – (181) –

Profit for the year – – – 1,080,468 1,080,468

2002 interim dividend paid – – – (245,651) (245,651)

Reserves 2,879,330 5,811 (57,507) 262,333 3,089,967

Proposed dividend – – – 635,803 635,803

At 31 December 2002 2,879,330 5,811 (57,507) 898,136 3,725,770

Company and subsidiaries 2,879,330 5,811 (56,108) 893,861 3,722,894

Associated companies – – (1,399) 4,275 2,876

At 31 December 2002 2,879,330 5,811 (57,507) 898,136 3,725,770



22 Reserves (continued)

ContributedShare surplus Retained

premium account earnings TotalThe Company HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2003 2,879,330 2,060,673 890,040 5,830,043

Share premium on issue of new shares 114,535 – – 114,535

Profit for the year – – 1,035,100 1,035,100

2002 final dividend paid – – (635,803) (635,803)

2003 interim dividend paid – – (289,343) (289,343)

Reserves 2,993,865 2,060,673 273,017 5,327,555

Proposed dividend – – 726,977 726,977

At 31 December 2003 2,993,865 2,060,673 999,994 6,054,532

At 1 January 2002 2,833,787 2,060,673 773,983 5,668,443

Share premium on issue of new shares 45,543 – – 45,543

Profit for the year – – 895,773 895,773

2001 final dividend paid – – (534,065) (534,065)

2002 interim dividend paid – – (245,651) (245,651)

Reserves 2,879,330 2,060,673 254,237 5,194,240

Proposed dividend – – 635,803 635,803

At 31 December 2002 2,879,330 2,060,673 890,040 5,830,043

(a) Capital reserve represents amount set aside from the profit of an overseas subsidiary of the Group in accordance

with the local statutory requirement.

(b) The contributed surplus account of the Company represents:–

(i) the difference between the nominal value of the Company’s shares issued in exchange for the issued ordinary

shares of Li & Fung (B.V.I.) Limited and the value of net assets of the underlying subsidiaries acquired as at 2

June 1992 amounting to HK$111,010,000. At Group level, the amount is reclassified into its components of

reserves of the underlying subsidiaries.

(ii) the difference between the issue price and the nominal value of the Company’s shares issued in connection with

the acquisition of Colby in 2000 amounting to HK$1,949,663,000. At Group level, the amount is set off against

goodwill arising from the acquisition.



23 Long-term liabilities

The Group2003 2002

HK$’000 HK$’000

Long-term bank loans, secured (note 29) 39,008 45,274

Other loans, unsecured 30,400 36,622

69,408 81,896

Current portion of long-term liabilities (44,668) (51,496)

24,740 30,400

At 31 December 2003, the Group’s long-term bank loans and other borrowings are repayable as follows:

Long-term bank loans Other loans2003 2002 2003 2002

HK$’000 HK$’000 HK$’000 HK$’000

Within one year 39,008 45,274 5,660 6,222

In the second year – – 5,349 6,175

In the third to fifth year – – 19,391 24,225

39,008 45,274 30,400 36,622



24 Post-employment benefit obligations

The Group2003 2002

HK$’000 HK$’000

Pension obligations (note a) 9,627 4,029

Long service payment liabilities (note b) 1,200 –

10,827 4,029

(a) The Group participates in a number of defined benefit plans in certain countries. Most of the pension plans are final

salary defined benefit plans. The assets of the funded plans are held independently of the Group’s assets in separate

trustee-administered funds. The Group’s defined benefit plans are valued by qualified actuaries annually using the

projected unit credit method.

(i) The amount recognised in the consolidated balance sheet is determined as follows:

The Group2003 2002

HK$’000 HK$’000

Present value of funded obligations 140,400 111,160

Fair value of plan assets (98,079) (79,977)

42,321 31,183

Unrecognised actuarial losses (22,374) (14,314)

Unrecognised liability on initial adoption of SSAP34

paragraph 155 (b) (9,632) (12,840)

Exchange difference on unrecognised liability (688) –

Pension obligations 9,627 4,029



24 Post-employment benefit obligations (continued)

(ii) The amount recognised in the consolidated profit and loss account is as follows:

The Group2003 2002

HK$’000 HK$’000

Current service cost 10,931 9,438

Interest cost 5,891 4,962

Expected return on plan assets (5,270) (5,137)

Net actuarial gain recognised during the year 320 –

Amortisation of unrecognised liability on initial adoption of SSAP34 3,208 3,208

Exchange difference on amortisation of unrecognised liability 223 –

Total, included in staff costs (note 9) 15,303 12,471

(iii) Movement in the pension obligations recognised in the consolidated balance sheet:

The Group2003 2002

HK$’000 HK$’000

At 1 January 4,029 –

Total expense – as shown above 15,303 12,471

Contributions paid (9,965) (8,442)

Exchange difference 260 –

At 31 December 9,627 4,029

(iv) The principal actuarial assumptions used are as follows:

The Group2003 2002

% %

Discount rate 3.5 – 5.4 4 – 5.5

Expected rate of return on plan assets 1.5 – 7.5 3.25 – 7.5

Expected rate of future salary increases 2 – 4.75 2 – 4.5

Expected rate of future pension increases 2.75 2.5

(b) Actuarial valuation is performed on the Group’s long service payment liabilities. At 31 December 2003, the Group has

transitional liability of approximately HK$6,000,000 relating to long service payment obligation, which the Group

chooses to recognise the transitional liability on a straight line basis over five years from the date of adoption of

SSAP 34 at 1 January 2003. For the year ended 31 December 2003, the transitional liability of approximately

HK$1,200,000 was charged to the consolidated profit and loss account. As at 31 December 2003, transitional

liability of approximately HK$4,800,000 remained unrecognised.



25 Deferred taxation

The movement in deferred tax assets and liabilities during the year is as follows:

Deceleratedtax

depreciationProvisions allowance Tax losses Others Total

2003 2002 2003 2002 2003 2002 2003 2002 2003 2002Deferred tax assets HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

As at 1 January – – – – – – – – – –

Credited to profit and

loss account 6,765 – 1,017 – 9,866 – 1,593 – 19,241 –

Exchange differences (157) – 12 – 54 – – – (91) –

As at 31 December 6,608 – 1,029 – 9,920 – 1,593 – 19,150 –

Acceleratedtax

depreciationallowance Others Total

2003 2002 2003 2002 2003 2002Deferred tax liabilities HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1st January 5,238 5,609 (227) (1,641) 5,011 3,968

Charged/(credited) to profit and

loss account 11,735 (371) 1,480 1,722 13,215 1,351

Acquisition of subsidiaries – – 50 (308) 50 (308)

Exchange differences – – 5 – 5 –

As at 31 December 16,973 5,238 1,308 (227) 18,281 5,011

2003 2002HK$’000 HK$’000

The amounts shown in the balance sheet include the following:

Deferred tax assets to be recovered after more than 12 months 13,359 –

Deferred tax liabilities to be settled after more than 12 months 13,329 4,827



26 Notes to the consolidated cash flow statement

(a) Reconciliation of profit before taxation to net cash inflow from operations

2003 2002HK$’000 HK$’000

Profit before taxation 1,316,527 1,175,592

Interest income (38,373) (49,581)

Interest expenses 9,813 8,987

Share of profits less losses of associated companies (2,015) (393)

Depreciation 119,845 106,507

Amortisation of goodwill 26,210 12,258

Amortisation of development costs 5,382 4,149

Write off of goodwill – 428

Net investments loss 8,054 –

Loss on disposal of subsidiaries 325 –

Profit on disposal of associated companies – (161)

Loss on disposal of fixed assets 854 1,367

Operating profit before working capital changes 1,446,622 1,259,153

(Increase)/decrease in inventories (93,855) 12,306

Increase in trade and bills receivable, other receivables, prepayments

and deposits including amounts due from associated companies (489,443) (871,722)

Increase in trade and bills payable, accrued charges and

sundry payables, and post-employment benefit obligations

including amounts due to associated companies 468,598 582,102

Net cash inflow generated from operations 1,331,922 981,839



26 Notes to the consolidated cash flow statement (continued)

(b) Disposal of subsidiaries

2003 2002HK$’000 HK$’000

Net assets disposed of:

Trade and other receivables 7,786 –

Cash and bank balances 83 –

Trade and other payables (7,836) –

Minority interests 552 –

Exchange reserve 135 –

720 –

Loss on disposal of subsidiaries (325) –

395 –

Satisfied by:

Cash consideration 395 –

Analysis of net outflow of cash and cash equivalents in respect of disposal of subsidiaries:

2003 2002HK$’000 HK$’000

Cash consideration 395 –

Cash and cash equivalents disposed (83) –

Net outflow of cash and cash equivalents in respect of disposal of subsidiaries 312 –




(c) Purchase of subsidiaries

2003 2002HK$’000 HK$’000

Net assets acquired:

Fixed assets 587 3,824

Investments – 5

Deferred taxation (note 25) (50) 308

Trade and other receivables 11,658 12,004

Inventories 6,338 –

Cash and bank balances 6,220 36,973

Trade and other payables (7,081) (12,825)

Taxation (2,740) (118)

14,932 40,171

Goodwill on consolidation 62,672 253,806

77,604 293,977

Satisfied by:

Cash consideration 62,981 271,653

Expenses incurred in respect of acquisition of subsidiaries 14,623 22,324

77,604 293,977

Analysis of the net outflow of cash and cash equivalents in respect of the acquisition of subsidiaries:

2003 2002HK$’000 HK$’000

Purchase consideration 62,981 271,653

Expenses incurred in respect of acquisition of subsidiaries 14,623 22,324

Cash and cash equivalents acquired (6,220) (36,973)

Net outflow of cash and cash equivalents in respect of acquisition

of subsidiaries 71,384 257,004




(d) Purchase of business

2003 2002HK$’000 HK$’000

Cash and bank balances acquired 7,800 –

Goodwill on consolidation 210,150 –

217,950 –

Satisfied by:

Cash consideration (note (21(c)) 180,960 –

Consideration share (note (21(c)) 29,640 –

Expenses incurred in respect of acquisition of business 7,350 –

217,950 –

Analysis of the net outflow of cash and cash equivalents in respect of the acquisition of business:

2003 2002HK$’000 HK$’000

Purchase consideration 210,600 –

Expenses incurred in respect of acquisition of business 7,350 –

Purchase consideration payable (176,051) –

Cash and cash equivalents acquired (7,800) –

Net outflow of cash and cash equivalents in respect of acquisition

of business 34,099 –

(e) Purchase of additional interests in a subsidiary

2003 2002HK$’000 HK$’000

Net liabilities acquired (1,520) –

Goodwill on consolidation 42,767 –

41,247 –

Satisfied by:

Consideration shares (note 21(b)) 40,695 –

Expenses incurred in respect of acquisition of additional interests in a

subsidiary, representing outflow of cash and cash equivalents 552 –

41,247 –




(f) Analysis of changes in financing during the year

2003 2002Share Share

capital Other capital Otherincluding loans and including loans and

share Long- term minority share Long- term minoritypremium bank loans interests premium bank loans interestsHK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2,951,580 45,274 63,870 2,905,761 48,115 55,870

Non cash movement

Share of (losses)/profit – – (12,104) – – 228

Purchase of additional interests

in a subsidiary (note 26(e)) 40,695 – 1,520 – – –

Disposal of subsidiaries – – 552 – – –

Exchange adjustment – 4,049 (466) – 4,208 736

2,992,275 49,323 53,372 2,905,761 52,323 56,834

Proceeds from issue of shares 74,141 – – 45,819 – –

Bank and other loans raised – – 553 – – 10,831

Repayment of bank loans – (10,315) – – (7,049) –

Dividends paid – – (9,378) – – (532)

Repayment of other loans – – (6,222) – – (3,549)

Capital contribution from a

minority shareholder – – – – – 286

At 31 December 3,066,416 39,008 38,325 2,951,580 45,274 63,870



27 Contingent liabilities


HK$’000 HK$’000 HK$’000 HK$’000

Bills of exchange discounted to banks with recourse 1,387,181 1,069,929 – –

Guarantees in respect of banking facilities granted to:

Subsidiaries – – 13,834,892 11,303,180

Associated companies 98,992 99,437 46,585 46,794

Other guarantees 9,600 9,600 – –

1,495,773 1,178,966 13,881,477 11,349,974

28 Commitments

(a) Operating lease commitments

At 31 December 2003, the Group had total future aggregate minimum lease payments under non-cancellable operating

leases as follows:

The Group2003 2002

HK$’000 HK$’000

Within one year 69,867 58,349

In the second to fifth year inclusive 100,357 114,289

After the fifth year 121,846 123,023

292,070 295,661

(b) Capital commitments

The Group2003 2002

HK$’000 HK$’000

Contracted but not provided for:

Property, plant and equipment 20,818 203,688

29 Charge of assets

At 31 December 2003, there were charges on the assets and undertakings of two (2002: two) overseas subsidiaries with

net book values amounting to HK$233,999,000 (2002: HK$114,530,000) in favour of banks to cover banking facilities

granted to the subsidiaries.



30 Connected transactions under the Listing Rules and related party transaction

(i) Details of connected transactions as defined under Chapter 14 of the Listing Rules are set out in page 42 in the

Directors’ Report.

(ii) The Group had no material related party transactions during the year.

31 Approval of accounts

The accounts were approved by the Board of Directors on 24 March 2004.


Principal Subsidiaries and Associated Companies (continued)Principal Subsidiaries and Associated Companies

Place of Percentage of

Incorporation Issued and fully equity held by Principal

and operation paid share capital the Company activities

Note Principal subsidiaries

Held directly

(1) Li & Fung (B.V.I.) British Virgin Ordinary US$400,010 100 Marketing

Limited Islands services and

investment holding

Held indirectly

Albinina Limited Hong Kong Ordinary HK$20 100 Property investment

(2) Appleton Holdings British Virgin Ordinary US$1 100 Investment holdings

Ltd. Islands

Bacarolle Limited Hong Kong Ordinary HK$20 100 Property investment

Basic & More Hong Kong Ordinary HK$1,000,000 100 Export trading

Fashion Limited

(2) Black Cat Fireworks England Ordinary GBP1,200,000 100 Wholesaling

Limited

Camberley Enterprises Hong Kong Ordinary HK$250,000 100 Apparel exporting

Limited

Civati Limited Hong Kong Ordinary US$450,000 100 Export trading

Clear Lake Group Hong Kong Ordinary HK$2 100 Property investment

Limited

(2) Colby Group Holdings British Virgin Ordinary US$45,000 100 Investment holding

Limited Islands

Colby International Hong Kong Ordinary HK$1,500,000 100 Exporting of

Limited garments and

sundry goods

(2) Colby Property British Virgin Ordinary US$1 100 Investment holding

Holdings Limited Islands

(2) Colby Tekstil ve Dis Turkey TL50,000,000,000 100 Export trading

Ticaret Limited Sirketi

Costume Limited Hong Kong Ordinary HK$2 100 Export trading


Principal Subsidiaries and Associated Companies (continued)





(2) CS Asia Limited British Virgin Ordinary US$1 100 Provision of export

Islands assistance service

CS International Limited Hong Kong Ordinary HK$1,000,000 100 Provision of export

assistance service

(2) CS International British Virgin Ordinary US$1 100 Provision of export

(Offshore) Limited Islands assistance service

Cuore Limited Hong Kong Ordinary HK$20 100 Property investment

Dodwell (Mauritius) Hong Kong Ordinary “A” 60 Export trading

Limited HK$300,000

Ordinary “B”

HK$200,000

(2) Eclat Properties Inc. British Virgin Ordinary US$100 100 Property investment

Islands

(2) Epiquest Limited England Ordinary GBP100 100 Investment holding

Eurosports Trading Hong Kong Ordinary HK$2 100 Export trading

Limited

(2) Golden Gate U.S.A. Common stock 100 Commission agent

Fireworks Inc. US$600,000 and investment

holding

(2) Golden Horn (III) L.P. Cayman Islands Capital contribution 66 Investment holding

US$100

Golden Horn N.V. Netherlands US$6,100 100 Investment holding

Antilles

GSCM (HK) Limited Hong Kong Ordinary HK$140,000 100 Export trading

(2) G.S.C.M. (Marketing) England Ordinary GBP50,000 100 Supply Chain

Limited Management

Hillung Enterprises Hong Kong Ordinary HK$300,000 100 Export trading

Limited







Homeworks (Asia) Hong Kong Ordinary HK$2 100 Export trading

Limited (formerly:

Homeworks Limited)

(2) Homeworks (Europe) The Ordinary Euro 18,000 100 Export trading

B.V. Netherlands

Interfocus Holdings British Virgin Ordinary US$1 100 Property investment

Limited Islands

(2) International Sourcing U.S.A. Capital contribution 100 Trading of apparel

Group, LLC US$300,000

(2) International Sources, Inc. U.S.A. Common Stock US$1 100 Trading of apparel

(2) International Sources Hong Kong Ordinary HK$2 100 Export trading

Trading Limited

Janco Overseas Limited Hong Kong Ordinary HK$760,000 100 Buying agent

(2) Kariya Industries Limited Hong Kong Ordinary HK$1,000,000 100 Manufacturing and

trading

Kwok Yue Limited Hong Kong Ordinary HK$10,000 100 Export trading

(2) LF Capital (II) Limited British Virgin Class “A” US$185 75 Investment holding

Islands Class “B” US$115

(2) LF Capital Management British Virgin Ordinary US$1 100 Investment

Limited Islands management

(2) LF Corporate Capital (I) British Virgin Ordinary US$1 100 Investment holding

Limited Islands

(2) LF Europe Limited British Virgin Ordinary US$1 100 Investment

Islands management

LF Europe Sourcing Hong Kong Ordinary HK$100 100 Export trading

Limited

(2) LF European Capital British Virgin Ordinary US$1 75 Investment holding

Limited Islands







(2) LF International Inc. U.S.A. Common stock 100 Investment

US$30,002 management

(2) LF Maclaine (Thailand) Thailand Ordinary 100 Export trading

Limited Baht 4,000,000

(2) LFCF Investment I British Virgin Ordinary US$1 100 Investment

(Europe) Limited Islands management

(2) LFCF Investment I British Virgin Ordinary US$1 100 Investment

(USA) Limited Islands management

(2) Li & Fung Agencia Portugal Quotas 100 Export trading

De Compras em PTE 20,000,000

Portugal, Limitada

Li & Fung Hong Kong Ordinary HK$20 100 Property investment

Development Limited

(2) Li & Fung Enterprise The People’s HK$10,000,000 100 Provision of

Development Republic of foreign- inspection services

(Shenzhen) Company China owned

Limited enterprise

Li & Fung (Exports) Hong Kong Ordinary HK$10,000 100 Export trading

Limited Non-voting deferred

HK$8,600,000

Li & Fung (Europe) England Ordinary GBP 100 100 Export trading

Holding Limited

Li & Fung (Fashion Hong Kong Ordinary “A” 100 Export trading

Accessories) Limited HK$300,000

Ordinary “B”

HK$300,000

(2) Li & Fung (Guatemala) Guatemala Common shares 100 Export trading

S.A. Q5,000

(2) Li & Fung (Honduras) Honduras Nominative common 100 Export trading

Limited shares Lps25,000







(2) Li & Fung (India) India Equity shares 100 Export trading

Private Limited Rupee 64,000,200

(2) Li & Fung (Italia) S.r.l. Italy Units Lire 90,000,000 100 Export trading

(2) Li & Fung (Korea) Korea Common stock 100 Export trading

Limited Won 200,000,000

(2) Li & Fung (Mauritius) Mauritius “A” Shares 60 Export trading

Limited Rupees 750,000

“B” Shares

Rupees 500,000

(2) Li & Fung Mumessillik, Turkey TL25,000,000,000 100 Export trading

Pazarlama Limited

Sirketi

(2) Li & Fung (Philippines) The Philippines Peso 500,000 100 Export trading

Inc.

(2) Li & Fung (Portugal) England Ordinary GBP 100 100 Investment holding

Limited

Li & Fung (Properties) Hong Kong Ordinary HK$1,000,000 100 Property investment

Limited

(2) Li & Fung (Singapore) Singapore Ordinary S$25,000 100 Export trading

Pte Limited

(2) Li & Fung South Africa South Africa Ordinary Rand 100 100 Export trading

(Proprietary) Limited

(2) Li & Fung Taiwan Taiwan NT$287,996,000 100 Investment holding

Holdings Limited

Li & Fung Taiwan British Virgin Ordinary US$4,912,180 100 Investment holding

Investments Limited Islands

(2) Li & Fung (Taiwan) Taiwan NT$63,000,000 100 Export trading

Limited

(2) Li & Fung (Thailand) Thailand Baht 6,000,000 100 Export trading

Limited







Li & Fung (Trading) Hong Kong Ordinary HK$200 100 Export trading and

Limited Non-voting deferred investment holding

HK$10,000,000

(2) Li & Fung Trading The People’s RMB50,000,000 100 Export trading

(Shanghai) Limited Republic of foreign-

China owned

enterprise

(2) Li & Fung (Zhanjiang) The People’s US$1,999,055 100 Packaging

Limited Republic of foreign-

China owned

enterprise

Lifung Express Limited Hong Kong Ordinary “A” HK$10 100 Export trading

Ordinary “B” HK$10

Lifung Structure Hong Kong Ordinary HK$20 100 Export trading

Limited

(2) Livring Limited Mauritius Ordinary Rs250,000 60 Export trading

Lloyd Manufacturing Hong Kong Ordinary HK$2 100 Export trading

Limited

Lloyd Textile Trading Hong Kong Ordinary 100 Export trading

Limited HK$1,000,000

Luma Trading Limited Hong Kong Ordinary HK$100 60 Export trading

Maclaine Limited Hong Kong Ordinary HK$5,570,150 100 Export trading

(2) Mercury (BVI) British Virgin Ordinary US$1 100 Investment holding

Holdings Limited Islands

(2) Mighty Hurricane U.S.A. Common shares of 100 Investment holding

Holdings Inc. US$100

Preference shares

of US$100

Momentum Clothing Hong Kong Ordinary HK$2 100 Export trading

(HK) Limited







(2) Momentum Clothing England Ordinary GBP100 100 Export trading

Limited

Ocean Choice British Virgin Ordinary US$1 100 Property investment

Properties Limited Islands

Paco Trading Hong Kong Ordinary HK$2 100 Export trading

(International) Limited

(2) Perfect Trading Inc. Egypt LE 2,480,000 60 Export trading

(2) Pinstripe Sourcing England Ordinary GBP1 100 Export trading

Limited

Product Development Hong Kong Ordinary HK$2 100 Export trading

Partners Limited

(2) P.T. Lifung Indonesia Indonesia US$250,000 100 Export trading

(2) Ratners Enterprises British Virgin Ordinary US$1 100 Investment holding

Limited Islands

Shiu Fung Fireworks Hong Kong Ordinary “A” 100 Export trading

Company Limited HK$1,100,000

Ordinary “B”

HK$1,100,000

Sky Million Hong Kong Ordinary HK$2 100 Property investment

International Limited

(2) Tantallon Enterprises British Virgin Ordinary US$1 100 Investment holding

Limited Islands

(2) Texnorte II-Industrias Portugal Quotas Euro 5,000 100 Export trading

Texteis, Limitada

Texnorte Industrial Hong Kong Ordinary HK$2 100 Export trading

Limited

(2) The Millwork Trading U.S.A. Common stock 100 Distribution and

Co., Ltd US$1,331,000 wholesaling

9.5% Preferred Stock

US$0.17







Toy Island Manufacturing Hong Kong Ordinary 100 Design and marketing

Company Limited HK$62,000,000

(2) Toy Island (U.S.A.) Inc. U.S.A. Common stock US$100 100 Marketing

Ultimate Quest Limited Hong Kong Ordinary HK$2 100 Property Investment

Verity Enterprises Hong Kong Ordinary HK$2,000,000 100 Export trading

Limited

W S Trading Limited Hong Kong Ordinary HK$1,000,000 100 Export trading

Notes:–

(1) Li & Fung (B.V.I.) Limited provides the subsidiaries with promotional and marketing services outside Hong Kong.

(2) Subsidiaries not audited by PricewaterhouseCoopers, Hong Kong. The aggregate net assets of subsidiaries not audited by PricewaterhouseCoopers,

Hong Kong amounted to approximately 5% of the Group’s total net assets.

The above table lists out the principal subsidiaries of the Company as at 31 December 2003 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.



Percentage

Place of of equity

Incorporation Issued and fully indirectly held Principal

and operation paid share capital by the Company activities

Principal associated

companies

# Asia Direct Corporation U.S.A. Common stock 40 Distribution and

US$1,000,000 wholesaling

Asia Direct Trading Hong Kong Ordinary HK$1,000 40 Export trading

Limited

# Asia Directo Limited British Virgin Ordinary US$50,000 40 Investment holding

Islands

Blue Work Trading Hong Kong Ordinary HK$4,000,000 50 Export trading

Company Limited

# Fireworks Management, U.S.A. Common stock 25 Investment holding

Inc. US$60,000

# Gulf Coast Fireworks U.S.A Capital contribution 30 Fireworks distribution

Sales, L.L.C. US$1,633,687

# Kosiuko International British Virgin Ordinary US$50,000 30 Investment holding

Limited Islands

# LF Basic Europe S.r.l. Italy Units Lire20,000,000 50 Export trading

LF Basic Limited Hong Kong Ordinary HK$1,560,000 50 Export trading

# MBC Enterprises, Inc. U.S.A. Common stock 25 Retailing

US$1,500

# Winco Fireworks U.S.A. Capital contribution 30 Wholesaling

International, L.L.C. US$2,865,614

# 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 2003 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.


Ten-Year Financial Summary

CONSOLIDATED PROFIT & LOSS ACCOUNT2003 2002 2001 2000 1999 1998 1997 1996 1995 1994

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

TurnoverContinuing operations 42,630,510 37,281,360 32,941,392 24,992,227 16,297,501 14,312,618 13,345,722 12,513,857 9,213,099 6,125,459Discontinued operations – – 87,183 791 – – – – – –

42,630,510 37,281,360 33,028,575 24,993,018 16,297,501 14,312,618 13,345,722 12,513,857 9,213,099 6,125,459

Operating profitContinuing operations 1,285,952 1,134,605 904,520 830,223 592,885 469,501 361,289 302,075 241,806 554,612Discontinued operations – – (237,955 ) (39,375 ) – – – – – –

1,285,952 1,134,605 666,565 790,848 592,885 469,501 361,289 302,075 241,806 554,612Interest income 38,373 49,581 112,837 140,330 43,830 56,093 37,772 37,163 37,028 21,717Interest expenses (9,813 ) (8,987 ) (12,464 ) (20,585 ) (32,243 ) (61,346 ) (6,270 ) (20,077 ) (29,655 ) (11,681 )Share of profit less losses of

associated companies 2,015 393 1,443 13,677 9,389 6,850 6,666 (120 ) (7,838 ) 7,073

Profit before taxation 1,316,527 1,175,592 768,381 924,270 613,861 471,098 399,457 319,041 241,341 571,721Taxation (105,513 ) (94,896 ) (55,637 ) (64,178 ) (36,638 ) (16,425 ) (25,326 ) (22,096 ) (24,648 ) (19,012 )

Profit after taxation 1,211,014 1,080,696 712,744 860,092 577,223 454,673 374,131 296,945 216,693 552,709Minority interests 12,104 (228 ) 69,567 10,296 (2,585 ) 495 974 3,157 8,690 107

Profit attributable to shareholdersContinuing operations 1,223,118 1,080,468 951,307 893,118 574,638 455,168 375,105 300,102 225,383 552,816Discontinued operations – – (168,996 ) (22,730) – – – – – –

1,223,118 1,080,468 782,311 870,388 574,638 455,168 375,105 300,102 225,383 552,816

Earnings per share (HK cents)Basic 42.3 37.4 27.3 32.2 22.4 18.0 15.0 12.6 10.1 25.1Continuing operations 42.3 37.4 33.1 33.0 22.4 18.0 15.0 12.6 10.1 25.1

Dividend per share (HK cents) 35.0 30.5 26.5 25.0 17.0 14.3 11.0 9.0 7.0 12.5

CONSOLIDATED BALANCE SHEET2003 2002 2001 2000 1999 1998 1997 1996 1995 1994

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Intangible assets 612,849 326,696 79,585 79,625 6,274 6,228 – – – –Fixed assets 1,511,897 1,263,838 1,224,354 1,281,810 1,155,534 1,138,828 1,113,430 898,652 795,314 754,422Associated companies 4,223 22,255 34,288 28,564 1,242 12,790 83,441 81,461 74,010 36,493Investments 115,183 139,932 71,348 53,807 86,484 51,389 16,748 16,748 10,148 10,148Deferred tax assets 19,150 – – – – – – – – –Current assets 6,981,269 6,271,450 5,619,991 5,853,106 2,961,634 2,234,490 1,971,270 1,895,508 1,434,377 1,275,346Current liabilities 4,960,896 4,159,463 3,528,862 3,790,138 2,652,179 1,708,934 1,619,437 1,552,023 1,180,692 847,597Net current assets 2,020,373 2,111,987 2,091,129 2,062,968 309,455 525,556 351,833 343,485 253,685 427,749

4,283,675 3,864,708 3,500,704 3,506,774 1,558,989 1,734,791 1,565,452 1,340,346 1,133,157 1,228,812

Financed by:

Share capital 72,551 72,250 71,974 71,605 64,765 63,761 62,759 62,163 55,948 55,110Reserves 4,149,351 3,725,770 3,371,077 3,270,450 1,073,996 1,298,319 1,121,371 1,011,262 523,798 937,014

Shareholders’ funds 4,221,902 3,798,020 3,443,051 3,342,055 1,138,761 1,362,080 1,184,130 1,073,425 579,746 992,124Minority interests 7,925 27,248 25,965 19,861 4,460 (24,595 ) (20,486 ) (18,531 ) (15,198 ) (7,456 )Long-term liabilities 24,740 30,400 27,720 137,642 414,868 397,058 400,000 283,431 566,175 243,893Post-employment benefit obligations 10,827 4,029 – – – – – – – –Deferred taxation 18,281 5,011 3,968 7,216 900 248 1,808 2,021 2,434 251

4,283,675 3,864,708 3,500,704 3,506,774 1,558,989 1,734,791 1,565,452 1,340,346 1,133,157 1,228,812

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