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NEW WORLD. NEW THINKING.
TM
TM
IDEAS EVERYWHERE
Lenovo Group Limited Annual Report 2007/08
Stock Code: 992

Table of contents

  • Page 1
    Stock Code: 992 IDEAS EVERYWHERE Lenovo Group Limited Annual Report 2007/08 TM NEW WORLD. NEW THINKING. TM

  • Page 2
    ...use technology products and services worldwide and is dedicated to building the world's best-engineered personal computers. Formed by Lenovo Group's acquisition of the former IBM Personal Computing Division, Lenovo's heritage in both emerging and developed markets has resulted in a New World Company...

  • Page 3
    IN EVERY DIRECTION On the subway. At the office. In the elevator. At the beach. In the park. In the car. On the bus. In the bedroom. In the boardroom. Where do you have your best ideas? Wherever it may be, Lenovo believes in the power of ideas and helps you create, nurture, preserve, share and...

  • Page 4
    ... 231.8% 2.0 pts Expense-to-revenue ratio (%) Group Results Profit attributable to shareholders EPS - basic (US cents) EPS - diluted (US cents) Interim dividend per share (HK cents) Proposed final dividend per share (HK cents) Proposed total dividend per share (HK cents) 484 5.51 5.06 3.0 12.8 15...

  • Page 5
    ... 55% 44% 1% 13,978 Greater China Americas Europe, Middle East & Africa Asia Pacific (excluding Greater China) Notebook computer Desktop computer Others EBITDA - Continuing Operations1, 2 for the year ended March 31 (US$ million) Profit Attributable to Shareholders for the year ended March...

  • Page 6
    .... Our goal is nothing less than to build the best engineered PCs in the world, so every one of our products has been thoughtfully designed to inspire through ease of use, reliability and broadened capabilities. Lenovo aims to offer a working platform that is second to none in facilitating brilliance...

  • Page 7

  • Page 8
    ... of IBM's PC Division has proved to be a successful transaction. Lenovo's aspirations to expand our base of business through the acquisition, remove the ceiling on our growth, and generate enhanced returns for our shareholders are becoming a reality. 6 Lenovo Group Limited • Annual Report 2007...

  • Page 9
    ...investors. Last but not least, I would like to express my sincere thanks to our shareholders, my fellow board members, customers and employees for their continuous support of Lenovo over the years. Yang Yuanqing Chairman of the Board Hong Kong, May 22, 2008 Lenovo Group Limited • Annual Report...

  • Page 10
    ... REPORT Thanks to increased efficiencies, we have been able to significantly reduce our costs while maintaining product quality and availability. Last year, Lenovo set out three important and aggressive goals for the company: to make the world's best PCs, to offer customers an unrivaled ownership...

  • Page 11
    ... our global supply chain and logistics network. Thanks to increased efficiencies, we have been able to significantly reduce our costs while maintaining product quality and William Amelio President and Chief Executive Officer Hong Kong, May 22, 2008 Lenovo Group Limited • Annual Report 2007...

  • Page 12
    ... Marketing Officer 11 Kenneth DiPietro Senior Vice President, Human Resources 4 Scott DiValerio Senior Vice President and President, Americas 8 Cuong Viet Do Senior Vice President and Chief Strategy Officer 12 Robert Cones Controller and Senior Vice President, Finance 10 Lenovo Group Limited...

  • Page 13
    ... Senior Vice President and Chief Information Officer 23 Qiao Song Senior Vice President and Chief Procurement Officer 16 Peter Hortensius Senior Vice President, Notebook Business Unit 20 Gerry Smith Senior Vice President, Global Supply Chain Lenovo Group Limited • Annual Report 2007/08 11

  • Page 14
    SHARING IDEAS We understand that communicating great ideas is just as important as having them. Lenovo's spirit of innovation ensures that all our products feature cutting edge technology that helps you connect with others easier, faster and more securely. In addition, our development in wireless ...

  • Page 15

  • Page 16
    ... profitably than the industry during the 2007/08 fiscal year. Lenovo's financial performance was outstanding thanks to solid execution of its key initiatives, including rolling out the transaction model in additional geographies, improving global supply chain, enhancing competitiveness in desktop...

  • Page 17
    ...-market segment through a strengthening of the Group's sales resources. Lenovo increased its new account acquisition rate and options and service attach rates, delivering improved customer satisfaction and profitability. IdeaCentre Mini Q consumer desktop Lenovo Group Limited • Annual Report...

  • Page 18
    ...and South Africa to better address market demand. Asia Pacific (excluding Greater China): The PC market in Asia Pacific (excluding Greater China) continued its strong growth, mainly driven by India, Australia, New Zealand and the ASEAN countries. Lenovo's PC shipments in this geography increased 18...

  • Page 19
    ... product awards from leading publications. ThinkPad X300 product launch ThinkPad X300 is the thinnest and lightest full-function notebook in its class, measuring less than three-fourths of an inch at its thinnest point and weighing as little as 2.9 pounds. Lenovo Group Limited • Annual Report...

  • Page 20
    ...operational complexity. With these efforts, Lenovo was able to further reduce the number of machine models which, in turn, helped reduce cost and enhance serviceability, leading to greater customer satisfaction. Tianyi F21 - The Cloud of Promise 18 Lenovo Group Limited • Annual Report 2007/08

  • Page 21
    ... for SMB customers. The Group refreshed its product lineup for the consumer market in China with Tianjiao i ultra small form factor desktop for the high-end segment and Fengxing King-series for computer gamers. ThinkCentre 61e small form factor desktop Lenovo Group Limited • Annual Report 2007...

  • Page 22
    ... compared with last year. The Group has adopted geographical segments as the primary reporting format. Geographical segments comprise the Americas, EMEA (Europe, Middle East and Africa), Asia Pacific (excluding Greater China), and Greater China. 20 Lenovo Group Limited • Annual Report 2007/08

  • Page 23
    ... actions taken to streamline processes, consolidate Lenovo's expertise across the globe, and increase global operational efficiency. Restructuring costs incurred during the year under review amounted to US$48 million (2007: US$12 million). Lenovo Group Limited • Annual Report 2007/08 21

  • Page 24
    ... Group has also arranged other short-term credit facilities. At March 31, 2008, the Group's total available credit facilities amounted to US$2,628 million (2007: US$2,502 million), of which US$384 million (2007: US$476 million) was in trade lines, 22 Lenovo Group Limited • Annual Report 2007...

  • Page 25
    ... policy, bonus and long-term incentive schemes with reference to the performance of the Group and individual employees. The Group also provides benefits such as insurance, medical and retirement funds to employees to sustain competitiveness of the Group. Lenovo Group Limited • Annual Report...

  • Page 26
    ... of its strategic initiatives over the past two years has dramatically improved its market and financial performance during the 2007/08 fiscal year. Lenovo has embedded these initiatives and their key performance indicators (KPIs) into the fabric of how it manages the company day-to-day. The Group...

  • Page 27
    ... a result of streamlining the global supply organization including Lenovo's logistics network, it further improved its notebook and desktop serviceability by 10 percent and reduced end-to-end supply chain cost per box by 17 percent year-on-year in the 2007/08 fiscal year. In the 2008/09 fiscal year...

  • Page 28
    ..., South Africa, India, Australia, Hong Kong, Indonesia, Malaysia, Vietnam, Thailand, China, the Philippines and Singapore. The 11-inch IdeaPad U110 won three "Best of Show" awards at the Consumer Electronics Show 2008 and earned very positive product reviews. 26 Lenovo Group Limited • Annual...

  • Page 29
    ... on the key product technology trends in PC market. At the same time, it will drive products that satisfy customers' desires, such as smaller form factor desktop computers, and thin and light notebook computers. Leverage Our Base in China and Large Enterprise Business: Lenovo's China PC business...

  • Page 30
    ... improvement in profitability. The Group will continue to implement a number of initiatives to further expand the business to drive sales productivity and enhance customer segment coverage. The focus will remain on better serving key accounts and growing share to meet the mid-market opportunity...

  • Page 31
    ... launch a new integrated advertising campaign to support products of both Think and Idea brands, and invest to build our brand in emerging markets. Accelerate Trust-Based and Performance-Driven Culture As a newly-integrated company, Lenovo has put great emphasis on creating a corporate culture that...

  • Page 32

  • Page 33
    ...From large corporations, to small businesses, to home users, our PCs are able to meet the differing needs of everyone. The combination of better technology, better support and products with proven track records for quality and value for money makes Lenovo the first choice for a growing number of PC...

  • Page 34
    ... Code on Corporate Governance Practices During the year, the Company has complied with all the code provisions in the Code on Corporate Governance Practices (the "CG Code") in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules...

  • Page 35
    ...other relationship among the Board and the chief executives to the best knowledge of the Board members as at the date of this annual report: 1. Mr. Liu Chuanzhi and Mr. Zhu Linan, non-executive directors, also serve on the board of directors of Legend Holdings Limited, the controlling shareholder of...

  • Page 36
    ... to review the financial performance of the Group, the overall group strategy, and the operations. The Board also held an extra meeting to discuss the strategy during the year. Board meetings are scheduled two years in advance to facilitate maximum attendance of directors. The meeting agenda is set...

  • Page 37
    ... and annual financial statements, announcements, interim report and annual report before submission to the Board for approval 2006/07 internal audit and business control review and 2007/08 internal audit report of the Group 2006/07 external audit progress report and 2007/08 audit plan of the Group...

  • Page 38
    ... to the report date, the Committee undertook the following activities Review of the compensation policy and levels for executive directors and senior management Review of and recommendations to the Board concerning the Long-Term Incentive Program, and awards made under this plan in 2007 Review of...

  • Page 39
    ..., 2008. Three out of total attendance was attended by Mr. Coulter's alternate director, Mr. Justin T. Chang. For corporate governance reason, the relevant directors were required to excuse themselves from the meetings to avoid potential conflict of interest. Lenovo Group Limited • Annual Report...

  • Page 40
    ... Company, location and market practices, Company business performance and individual performance. Lenovo's compensation structure for its employees, including the Chairman of the Board, executive directors and senior management, is comprised of base salaries and allowances, performance bonus, long...

  • Page 41
    ... eligible executive directors and senior management received an annual award comprised of SARs, RSUs and Performance Based RSUs. Awards outstanding for executive and non-executive directors as of March 31, 2008 under the LTI Program are presented below. Lenovo Group Limited • Annual Report 2007...

  • Page 42
    ... market practices. Details of the programs are set out in the Directors' Report on pages 65 to 67. Long-Term Incentive Awards The total number of awards of the members of the Board, including the Chairman of the Board and Chief Executive Officer, under the LTI Program as at March 31, 2008 is set...

  • Page 43
    ...75 days following the announcement of the audited financial results of the Company for the financial year ending March 31, 2008. # Out of 990,638 units, 346,724 units were withheld for tax purpose. Resigned as a non-executive director on May 23, 2008. Lenovo Group Limited • * Annual Report 2007...

  • Page 44
    ... INTERNAL CONTROL The Board acknowledges its responsibility to ensure the Company maintains sound and effective internal controls. This is achieved through a defined management structure with specified limits of authority and defined control responsibility to: • • Achieve business objectives...

  • Page 45
    ... management functions. The Board is not aware of any significant areas of concern which may affect the shareholders. The Board is satisfied that the Company has fully complied with the code provisions on internal controls as set forth in the CG Code. Lenovo Group Limited • Annual Report 2007...

  • Page 46
    ...Company's website (www.lenovo.com/hk/publication) and the Hong Kong Stock Exchange's website (www.hkex.com.hk). Other than the 2007 Annual General Meeting, the Company also held an extraordinary general meeting on March 17, 2008 for the purpose of seeking the approval of the independent shareholders...

  • Page 47
    ... the Directors are aware, the Company has maintained a public float of more than 25 percent of the Company's issued Shares throughout the financial year ended March 31, 2008 and has continued to maintain the public float as at the date of this annual report. Lenovo Group Limited • Annual Report...

  • Page 48
    ..., 2008 July 21-25, 2008 (Both days inclusive) July 25, 2008 August 1, 2008 2,000 shares 8,907,722,650 shares HK$44,538,613,250 (Approx. US$5,710 million) 5.51 US cents 3.0 HK cents 12.8 HK cents 15.8 HK cents 20:1 LNVGY Hong Kong Stock Exchange 992 46 Lenovo Group Limited • Annual Report 2007...

  • Page 49
    ... and supports sustainable business practices with respect to the environment, employees, customers, and stakeholders around the world. Lenovo's corporate social responsibility commitments encompass the environment employee health and welfare global supply chain, and corporate social investments...

  • Page 50
    .... Global Supply Chain Lenovo's Global Supply Chain continues its focus on driving sustainable activity both within its internal supply chain operations as well as the operations of its suppliers. Internally, Lenovo supply chain team has executed local manufacturing strategies to shorten ship...

  • Page 51
    Directors' Report and Financial Statements

  • Page 52
    CONTENTS 51 75 76 77 78 79 81 144 Directors' Report Independent Auditor's Report Consolidated Income Statement Balance Sheets Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity Notes to the Financial Statements Five-Year Financial Summary

  • Page 53
    ...note 30 to the financial statements. Subsidiaries and associated companies Particulars of the Company's principal subsidiaries and associated companies as at March 31, 2008 are set out in notes 38 and 21 to the financial statements respectively. Lenovo Group Limited • Annual Report 2007/08 51

  • Page 54
    DIRECTORS' REPORT (CONTINUED) 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. Major customers and suppliers During the year, the Group sold less than 8 ...

  • Page 55
    ... the date of grant shall not exceed 1 percent of the ordinary shares of the Company in issue. Any further grant of share options in excess of this limit is subject to shareholders' approval in general meeting of the Company. Share options to be granted to a director or chief executive of the Company...

  • Page 56
    ...the share options based on speculative assumptions in respect of such variables would not be meaningful and the results thereof may be misleading to the shareholders. Thus, it is more appropriate to disclose only the market price and exercise price. 54 Lenovo Group Limited • Annual Report 2007...

  • Page 57
    ...report, the Company purchased 99,318,000 ordinary voting shares of HK$0.025 each in the capital of the Company at prices ranging from HK$4.25 to HK$5.58 per share on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"). Month/Year Number of shares repurchased and cancelled Highest price...

  • Page 58
    ... Capital, an equity investment firm having a substantial interest in the convertible preferred shares of the Company. She is a director of Shenzhen Development Bank (listed on the Shenzhen Stock Exchange) and also an independent non-executive director of Standard Chartered Bank (Hong Kong) Limited...

  • Page 59
    ... shares of the Company. He serves on the boards of directors at BOC Hong Kong (Holdings) Limited, China Unicom Limited, TCC International Holdings Limited (each of which is listed on the Hong Kong Stock Exchange), Shenzhen Development Bank (listed on the Shenzhen Stock Exchange), Taishin Financial...

  • Page 60
    ... chairman and non-executive director of PCCW Limited (Hong Kong Stock Exchange listed) between 2005 and 2007. During 1994 to 1999, Dr. Tian was co-founder and chief executive officer of AsiaInfo Holdings, Inc. (a NASDAQ listed company providing software and networking solutions in China) of which he...

  • Page 61
    ... the largest home improvement Internet superstores. Mr. Petracca holds an MBA from Nova University. Mr. Qiao Song, 40, joined the Group in 1991 and is currently the Senior Vice President and Chief Procurement Officer. He has expertise in product development, sales and marketing, and supply chain and...

  • Page 62
    ..., the then executive director, Chief Financial Officer and Senior Vice President of the Company, respectively for an unfixed term commencing from October 9, 2006. Upon termination of the service contracts, each of Mr. Yang and Ms. Ma may be entitled to compensation and other payments equivalent to...

  • Page 63
    ... the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuer in the Listing Rules ("Model Code") were as follows: Interests in the shares and underlying shares of the Company Capacity and number of shares/underlying shares held Personal Family Corporate...

  • Page 64
    ... the Company and the Stock Exchange pursuant to the Model Code. Substantial shareholders' interests in securities of the Company As at March 31, 2008, the following persons (not being a director or chief executive of the Company) had an interests in the shares or underlying shares of the Company as...

  • Page 65
    Substantial shareholders' interests in securities of the Company (continued) Capacity and number of shares/ underlying shares held Beneficial Corporate owner interests Name Nature of interests in long position Aggregate long position Percentage (Note 14) 35.43% TPG IV Acquisition Company LLC (...

  • Page 66
    ...transliteration of its Chinese company name. The shares were beneficially held by Right Lane Limited, a direct wholly-owned subsidiary of Legend Holdings Limited. Employees' Shareholding Society of Legend Holdings Limited is an equity holder of Legend Holdings Limited which in turn wholly owns Right...

  • Page 67
    ... part of the company's total compensation and benefits program that is designed to attract and retain highly skilled and talented employees. Defined benefit pensions plans Hong Kong - Mandatory Provident Fund The Group operates a Mandatory Provident Fund Scheme for all qualified employees employed...

  • Page 68
    ... were: • • Discount rate: Future salary increases: Future pension increases: 4.75% 2.20% 1.75% • The plan was 67% funded at the actuarial valuation date. There was a deficit of US$9,621,958 under this plan at the actuarial valuation date. 66 Lenovo Group Limited • Annual Report 2007...

  • Page 69
    ... Lenovo Savings Plan investment options. Company matching contributions, are directed to participant accounts and fluctuate based on changes in the stock prices of the underlying investment portfolio. United Kingdom ("UK") - Lenovo Savings Plan UK regular, full-time and part-time employees are...

  • Page 70
    ... other than IBM 1. On March 27, 2006, the Company and Digital China Holdings Limited ("DCHL") entered into (1) a Supplemental Master Sales Agreement (amending a Master Sales Agreement dated May 17, 2004) to govern the sale of IT products and provision of technical services to the Group by DCHL...

  • Page 71
    ... 30, 2005) provide to each other certain transitional services. Details of the ancillary agreements and arrangements ("Ancillary Agreements") are set out in the circular issued by the Company to the shareholders on December 31, 2004 (the "Circular"). Because IBM was deemed by the Stock Exchange to...

  • Page 72
    ...) 1. Ancillary Agreements (continued) (b) Strategic Financing and Asset Disposition Services Agreement (continued) (iii) Excess Surplus Disposition Services If IBM purchases any used personal computing products returned to resellers, the maximum amount of fees payable by IBM to the Company will not...

  • Page 73
    ... with IBM or insist on purchasing products and services directly from IBM. For a period of two years from April 30, 2005. Nil US$15 million (April 30, 2006 to April 29, 2007) Nil (April 1, 2007 to May 31, 2007) Term: Annual caps: Transaction value: Lenovo Group Limited • Annual Report 2007...

  • Page 74
    ... independent shareholders at an extraordinary general meeting of the Company on August 9, 2005. (b) A Master Services Agreement dated December 30, 2005 ("HR-MSA") pursuant to which IBM agreed to provide certain human resources related information technology services to the Group for a term of three...

  • Page 75
    ...to provide IBM of maintenance and warranty services in the PRC on IBM logoed, other logoed and non-logoed products sold by IBM prior to Initial Closing (i.e. April 30, 2005) for a term of 20.5 months commencing from October 1, 2006 till June 15, 2008. Details of the Maintenance Agreement are set out...

  • Page 76
    ... directors of the Company, as at the date of this report, there is sufficient public float of more than 25 percent of the Company's issued shares as required under the Listing Rules. On behalf of the Board Yang Yuanqing Chairman Hong Kong, May 22, 2008 74 Lenovo Group Limited • Annual Report...

  • Page 77
    ... in Hong Kong with limited liability) We have audited the consolidated financial statements of Lenovo Group Limited (the "Company") and its subsidiaries (together, the "Group") set out on pages 76 to 143, which comprise the consolidated and company balance sheets as at March 31, 2008, and...

  • Page 78
    ... STATEMENT For the year ended March 31, 2008 Note Continuing operations Sales Cost of sales Gross profit Other income - net Selling and distribution expenses Administrative expenses Research and development expenses Other operating expenses - net Operating profit Finance income Finance costs Share...

  • Page 79
    BALANCE SHEETS At March 31, 2008 Group Note Non-current assets Property, plant and equipment Prepaid lease payments Construction-in-progress Intangible assets Investments in subsidiaries Investments in associated companies Deferred tax assets Available-for-sale financial assets Other non-current ...

  • Page 80
    ... company Net cash outflow from discontinued operations Increase in bank deposits Dividend received Interest received Net cash used in investing activities Cash flows from financing activities Exercise of share options Repurchase of shares Contributions to employee share trusts Dividends...

  • Page 81
    ...-sale financial assets Fair value change on interest rate swap Transfer to statutory reserve Profit for the year Exchange differences Reserve realized on disposal of available-for-sale financial assets Conversion of Series A cumulative convertible preferred shares Vesting of shares under long-term...

  • Page 82
    ... disposal of available-for-sale financial assets Transfer of warrants from non-current liabilities at fair value Vesting of shares under long-term incentive program Exercise of share options Share-based compensation Repurchase of shares Contributions to employee share trusts Dividends paid At March...

  • Page 83
    ... with Hong Kong Financial Reporting Standards ("HKFRS"). The financial statements have been prepared under the historical cost convention except that certain financial assets and financial liabilities are stated at fair values, as explained in the significant accounting policies set out below...

  • Page 84
    ...balance sheet the investments in associated companies are stated at cost less provision for impairment losses. The results of associated companies are accounted for by the Company on the basis of dividends received and receivable. (ii) (iii) (iv) 82 Lenovo Group Limited • Annual Report 2007...

  • Page 85
    ... cost to their estimated residual value on the straight-line basis over their expected useful lives to the Group of 5 to 10 years or unexpired periods of the leases whichever is shorter. The principal annual rates used for this purpose are 10 to 20 percent. Lenovo Group Limited • Annual Report...

  • Page 86
    ... part is derecognized. All other repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. (iv) (v) (e) Construction-in-progress Construction-in-progress is stated at cost. Cost comprises all direct and indirect costs of acquisition...

  • Page 87
    ... fair value attributed to the customer base or existing contractual bids with customers taken over as a result of business combinations. The amount is amortized over the transition period until the customer relationships are fully transferable to the Group. Patents, technology and marketing rights...

  • Page 88
    ...other income. Dividends on available-for-sale equity instruments are recognized in the income statement as part of other income when the Group's right to receive payments is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not...

  • Page 89
    ... production overheads. For trading products, cost represents invoiced value on purchases, less purchase returns and discounts. Net realizable value is determined on the basis of anticipated sales proceeds less estimated selling expenses. (k) Trade and other receivables Trade and other receivables...

  • Page 90
    ...in shareholders' equity, net of income tax effects. Incremental costs directly attributable to the issue of new shares or exercise of options are shown in equity as a deduction, net of tax, from the proceeds. Where any group company purchases the Company's equity share capital (treasury shares), the...

  • Page 91
    ... service and information technology technical service is recognized over the term of contract or when services are rendered. The Group defers the cost of shipped products awaiting revenue recognition until the goods are delivered and revenue is recognized. In-transit product shipments to customers...

  • Page 92
    ...accumulated investment returns. The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognized past service costs...

  • Page 93
    ... value of the employee services received in exchange for the grant of the Long-term Incentive Awards is recognized as employee benefit expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the Long-term Incentive Awards granted. Non-market...

  • Page 94
    ... banks and other financial institutions, the Group controls its credit risk through monitoring their credit rating and setting approved counterparty credit limits that are regularly reviewed. The Group has no significant concentration of customer credit risk. The Group has a credit policy in place...

  • Page 95
    ... Over 3 months to 1 year US$'000 Repayable on demand US$'000 At March 31, 2008 Amount payable for marketing rights Bank loans Derivative financial liabilities Trade payables Notes payable Provisions, accruals and other payables Convertible preferred shares Share-based compensation Deferred revenue...

  • Page 96
    ...as the impact of discounting is not significant. Group 3 months or less but not repayable on demand US$'000 Over 3 months to 1 year US$'000 Repayable on demand US$'000 At March 31, 2008 Forward foreign exchange contracts cash flow hedges: - outflow - inflow Interest rate swaps contracts - cash flow...

  • Page 97
    3 Financial risk management (continued) (a) Financial risk factors (continued) (v) Liquidity risk (continued) Company 3 months or less but not repayable on demand US$'000 Over 3 months to 1 year US$'000 Repayable on demand US$'000 At March 31, 2008 Forward foreign exchange contracts cash flow ...

  • Page 98
    ... or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio...

  • Page 99
    ... risk management (continued) (d) Fair value estimation The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group...

  • Page 100
    ... the discount rate, the Group references market yields at the balance sheet date on high quality corporate bonds. The currency and term of the bonds are consistent with the currency and estimated term of the benefit obligations being valued. The expected return on plan assets is based on market...

  • Page 101
    ...) before restructuring costs are: Americas US$105,399,000; Europe, Middle East and Africa US$137,406,000; Asia Pacific (excluding Greater China) US$12,387,000; Greater China US$427,459,000; and corporate or unallocated (US$153,228,000) respectively. Lenovo Group Limited • Annual Report 2007/08...

  • Page 102
    ...Europe, Middle East and Africa US$'000 788,664 Asia Pacific (excluding Greater China) US$'000 1,213,620 Corporate or unallocated US$'000 Americas US$'000 Segment assets Investments in associated companies Deferred tax assets Available-for-sale financial assets Derivative financial assets Income tax...

  • Page 103
    ...Greater China US$'000 611,895 33,178 - - - - Americas US$'000 Sales Segment operating results Finance income Finance costs Impairment of assets Fair value change on warrants Gain on disposal of investments and available-for-sale financial assets Share of profits of associated companies Profit...

  • Page 104
    ..., Middle East and Africa US$'000 589,350 Asia Pacific (excluding Greater China) US$'000 847,038 Corporate or unallocated US$'000 Americas US$'000 Segment assets Investments in associated companies Deferred tax assets Available-for-sale financial assets Derivative financial assets Income tax...

  • Page 105
    ...-sale financial assets Impairment of assets - 19,791 (2,530) 17,261 2007 US$'000 (171) 17,348 (8,990) 8,187 7 Finance income 2008 US$'000 Interest on bank deposits Interest on money market funds Others 37,100 14,808 140 52,048 2007 US$'000 17,962 8,258 109 26,329 Lenovo Group Limited • Annual...

  • Page 106
    ... of - Goodwill - Investments - Other receivables Rental expenses under operating leases Restructuring costs (net of reversal of unused provision) (Note 28) - Impairment of trademarks and trade names (Note 19) - Staff related costs (included in employee benefit costs) - Others Net exchange gain Loss...

  • Page 107
    ...) 3,126 - 26,197 The weighted average applicable tax rate was 9.3% (2007: 17.0%). The decrease is caused by a change in the profitability of the Group's subsidiaries in the respective countries that are entitled to preferential tax treatment. Lenovo Group Limited • Annual Report 2007/08 105

  • Page 108
    ... TO THE FINANCIAL STATEMENTS (CONTINUED) 11 Employee benefit costs 2008 US$'000 Wages and salaries (including restructuring costs provision US$44,070,000 (2007: reversal of unused restructuring costs provision US$3,156,000)) Social security costs Long-term incentive awards granted to directors and...

  • Page 109
    ... the Company and its subsidiaries. The remuneration of each director for the years ended March 31, 2007 and 2008 is set out below: 2008 Retirement payments and Long-term employer's incentives contribution awards to pension (note ii) schemes US$'000 US$'000 Name of Director Fees US$'000 Salary US...

  • Page 110
    ...$1.5 million) over a five-year period to December 2010 pursuant to the Agreement. (ii) Details of the long-term incentive program of the Company are set out in note 30(a). The fair value of the employee services received in exchange for the grant of the long-term incentive awards is recognized as an...

  • Page 111
    ... as follows: 2008 US$'000 Basic salaries, allowances, and benefits in kind Discretionary bonuses Employer's contribution to pension scheme Long-term incentive awards Others 1,349 1,163 - 4,841 1,163 8,516 The emoluments fell within the following bands: Number of individuals 2008 2007 Emolument bands...

  • Page 112
    ... operations is stated after charging/(crediting) the following: 2008 US$'000 Amortization of intangible assets Auditor's remuneration Cost of inventories sold Depreciation of property, plant and equipment and amortization of prepaid lease payments Employee benefit costs Loss on disposal of property...

  • Page 113
    ... number of shares for the purpose of basic earnings per share 2007 8,781,101,650 US$'000 8,625,392,946 US$'000 Profit attributable to shareholders of the Company - Continuing operations - Discontinued operations 464,343 19,920 484,263 128,354 32,784 161,138 Lenovo Group Limited • Annual...

  • Page 114
    ... attributable to shareholders of the Company Interest expense on convertible preferred shares 464,343 18,700 483,043 128,354 - 128,354 32,784 161,138 Profit from discontinued operations attributable to shareholders of the Company 19,920 502,963 112 Lenovo Group Limited • Annual Report 2007...

  • Page 115
    ... US$'000 Plant and machinery US$'000 Furniture and fixtures US$'000 Office equipment US$'000 Motor vehicles US$'000 Buildings US$'000 At April 1, 2006 Cost Accumulated depreciation Net book amount Year ended March 31, 2007 Opening net book amount Exchange adjustment Additions Transfer from...

  • Page 116
    ...FINANCIAL STATEMENTS (CONTINUED) 16 Property, plant and equipment (continued) (b) Company Leasehold improvements US$'000 At April 1, 2006 Cost Accumulated depreciation Net book amount Year ended March 31, 2007 Opening net book amount Exchange... 114 Lenovo Group Limited • Annual Report 2007/08

  • Page 117
    ...US$'000 US$'000 20,438 526 - 67,142 27,965 447 - 39,601 Company Internal use software 2008 2007 US$'000 US$'000 16,500 74 - 187 18,100 (32) - 4,032 No interest expenses were capitalized in construction-in-progress as at March 31, 2007 and 2008. Lenovo Group Limited • Annual Report 2007/08 115

  • Page 118
    ... STATEMENTS (CONTINUED) 19 Intangible assets (a) Group Trademarks and trade names US$'000 Goodwill US$'000 At April 1, 2006 Cost Accumulated amortization and impairment losses Net book amount Year ended March 31, 2007 Opening net book amount Exchange adjustment Reclassification Additions Transfer...

  • Page 119
    ... Transfer from construction-in-progress Additions Amortization Closing net book amount At March 31, 2008 Cost Accumulated amortization Net book amount - - - 5,600 (187) 5,413 5,600 187 5,413 5,413 18 2,868 1,757 (1,813) 8,243 10,243 2,000 8,243 Lenovo Group Limited • Annual Report...

  • Page 120
    ... investments, at cost A summary of the principal subsidiaries of the Company is set out in Note 38. 1,187,893 2007 US$'000 1,145,721 (b) Amounts due from/(to) subsidiaries The amounts are interest-free, unsecured and have no fixed terms of repayment. 118 Lenovo Group Limited • Annual Report...

  • Page 121
    ...Distribution and development of IT technology The associated companies operate principally in their respective places of establishment. The English name of each company is a direct translation or transliteration of its Chinese registered name. Lenovo Group Limited • Annual Report 2007/08 119

  • Page 122
    ... under the liability method using the rates applicable in the respective jurisdictions. The movements in deferred tax assets/(liabilities) are as follows: Group 2008 US$'000 At the beginning of the year Exchange and reclassification adjustments Credited to consolidated income statement Disposal of...

  • Page 123
    ...currencies: Group 2008 US$'000 Hong Kong dollar Renminbi United States dollar 22,914 855 43,928 67,697 2007 US$'000 13,906 775 28,257 42,938 Company 2008 US$'000 - - - - 2007 US$'000 361 - - 361 The maximum exposure to credit risk at the reporting date is the fair value of the investment securities...

  • Page 124
    NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 25 Receivables (a) Customers are generally granted credit term of 30 days. Ageing analysis of trade receivables of the Group at the balance sheet date is as follows: Group 2008 US$'000 0 - 30 days 31 - 60 days 61 - 90 days Over 90 days 788,126 32,240 21...

  • Page 125
    ... value. The maximum exposure to credit risk at the balance sheet date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. The carrying amounts of receivables are denominated in the following currencies: Group 2008 US$'000 Euro Hong Kong...

  • Page 126
    NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 27 Payables (a) Ageing analysis of trade payables of the Group at the balance sheet date is as follows: Group 2008 US$'000 0 - 30 days 31 - 60 days 61 - 90 days Over 90 days 1,618,188 466,068 176,094 21,849 2,282,199 Trade payables are denominated in ...

  • Page 127
    ... with the suppliers. The Group announced a voluntary recall of battery packs that shipped in some of the products. Under the arrangement with the suppliers, majority of the costs associated with the recall were reimbursed by the suppliers. (b) Lenovo Group Limited • Annual Report 2007/08...

  • Page 128
    ... liabilities. This represents deferred share-based compensation in relation to replacement shares granted to legacy IBM employees as compensation of IBM vested stock options forfeited by them, and were treated as assumed liabilities of the acquisition. On May 17, 2005, the Company issued 2,730,000...

  • Page 129
    ... Participants to work towards enhancing the value of the Company and its shares by aligning their interests with those of the shareholders of the Company. The Company also approved a share-based compensation package for non-executive directors. Lenovo Group Limited • Annual Report 2007/08 127

  • Page 130
    ... 4.75 (2007: 7) years, and a risk-free interest rate of 4.44 (2007: 4.37) percent. The remaining vesting periods of the awards under the long-term incentive program as at March 31, 2008 ranged from 0.08 to 3.92 years (2007: 0.17 to 3.17 years). 128 Lenovo Group Limited • Annual Report 2007/08

  • Page 131
    ...,399) 373,395,601 No share options were granted, lapsed or cancelled by the Company during the years ended March 31, 2007 and 2008. Details of share options exercised during the year are as follows: Year ended March 31, 2008 Market value per ordinary share at exercise date HK$ 4.87-4.93 4.71-5.26...

  • Page 132
    NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 30 Share capital (continued) (b) Share options (continued) (ii) Details of share options exercised during the year are as follows: (continued) Year ended March 31, 2008 (continued) Market value per ordinary share at exercise date HK$ 5.14-5.47 6.67-8.04...

  • Page 133
    ...Share capital (continued) (b) Share options (continued) (ii) Details of share options exercised during the year are as follows: (continued) Year ended March 31, 2007 Market value per ordinary share at exercise date HK...-3.44 Number of share options ...Lenovo Group Limited • Annual Report 2007/08 131

  • Page 134
    ... on available-for-sale financial assets Profit for the year Exchange differences Vesting of shares under long-term incentive program Transfer of warrants from non-current liabilities at fair value (Note 29(d)) Exercise of share options Share-based compensation Repurchase of shares Dividends paid At...

  • Page 135
    ... compensation Details on key management compensation are set out in Note 12. 33 Bank facilities Total bank facilities of the Group are as follows: Total facilities 2008 2007 US$'000 US$'000 Term loan Short-term syndicated loans Short-term loans Foreign exchange contracts Other trade finance...

  • Page 136
    ... TO THE FINANCIAL STATEMENTS (CONTINUED) 34 Commitments (a) Capital commitments Group 2008 US$'000 Contracted but not provided for: - Property, plant and equipment - Intangible assets - Investment 2007 US$'000 15,854 13,584 5,216 34,654 26,496 - 5,600 32,096 Authorized but not contracted for...

  • Page 137
    ... new entrants. Participant benefits under the Group plans depend on the provisions of the former IBM plan under which the participant had been covered. The Group's major plans are valued by qualified actuaries annually using the projected unit credit method. Lenovo Group Limited • Annual Report...

  • Page 138
    ...service costs Curtailment gain Total expense recognized in the income statement The principal actuarial assumptions used are as follows: Group 2008 Discount rate Expected return on plan assets Future salary increases Future pension increases Cash balance crediting rate Life expectancy of a male aged...

  • Page 139
    ...Group operates a number of post-employment medical benefit schemes, principally in the US. The method of accounting, assumptions and the frequency of valuations are similar to those used for defined benefit pension schemes. The US plan (Lenovo Future Health Account and Retiree Life Insurance Program...

  • Page 140
    ... TO THE FINANCIAL STATEMENTS (CONTINUED) 37 Retirement benefit obligations (continued) (c) Additional information on post-employment benefits (pension and medical) Reconciliation of fair value of plan assets of the Group: Pensions 2008 US$'000 Opening fair value Exchange adjustment Reclassification...

  • Page 141
    ...owned enterprise) Held indirectly: Lenovo (Asia Pacific) Limited Chinese Mainland HK$10,000,000 100% 100% Hong Kong HK$1,225,130,734 100% 100% Investment holding and distribution of IT products Provision of IT services and distribution of IT products Property holding and property management...

  • Page 142
    ...paid up capital US$7,800,000 Effective holding 2008 2007 Principal activities 100% 100% Manufacturing and distribution of IT products Company name International Information Products (Shenzhen) Co., Ltd)1 (wholly foreign-owned enterprise) Lenovo (Australia & New Zealand) Pty Limited Lenovo (Belgium...

  • Page 143
    ... of IT products Company name Lenovo Information Products (Shenzhen) Co. Ltd.)1 (wholly foreign-owned enterprise) Lenovo (International) B.V. Netherlands EUR20,000 100% 100% Investment holding and distribution of IT products Property holding and property management Lenovo Industrial...

  • Page 144
    ...Products (Malaysia) Sdn Bhd Chinese Mainland RMB20,000,000 100% 100% Chinese Mainland RMB20,000,000 100% 100% Provision of repair services for computer hardware and software systems Malaysia MYR251,000 100% 100% Distribution of IT products 142 Lenovo Group Limited • Annual Report...

  • Page 145
    ... of such conversion, the 375,282,756 non-voting shares have been converted into 375,282,756 voting shares on May 15, 2008. 40 Approval of financial statements The financial statements were approved by the board of directors on May 22, 2008. Lenovo Group Limited • Annual Report 2007/08 143

  • Page 146
    ...YEAR FINANCIAL SUMMARY 2008 US$'000 Continuing operations Sales Cost of sales Gross profit Other income/(expenses) - net Selling and distribution expenses Administrative expenses Research and development expenses Other operating (expenses)/ income - net Operating profit Finance income Finance costs...

  • Page 147
    ...Company Secretary Mr. Mok Chung Fu Stock Codes Hong Kong Stock Exchange: 992 American Depositary Receipts: LNVGY Registered Office 23rd Floor, Lincoln House, Taikoo Place, 979 King's Road, Quarry Bay, Hong Kong Website www.lenovo.com * Resigned as director or alternate director on May 23, 2008

  • Page 148
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