As filed with the Securities and Exchange Commission on January 16, 2009.December 17, 2010
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
   
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
or
   
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2008
For the year ended August 31, 2010
or
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromor                    or
or
   
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report                    
Commission file number: 333-11012000-30354
City Telecom (H.K.) Limited
(Exact name of registrant as Specified in its Charter)
Hong Kong Special Administrative Region,
The People’s Republic of China

(Jurisdiction of Incorporation or Organization)
Level 39, Tower 1, Metroplaza
No. 223 Hing Fong Road
Kwai Chung, New Territories
Hong Kong

(Address of Principal Executive Offices)
Mr. Lai Ni Quiaque
12th Floor, Trans Asia Centre
No.18 Kin Hong Street
Kwai Chung, New Territories
Hong Kong
Telephone : (852) 3145 6068
Facsimile : (852) 2199 8445

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
   
Name Of Each
Exchange On Which
Title Of Each Class Name Of Each Exchange On Which Registered
American Depositary Shares, each representing 20 Ordinary Shares, par value HK$0.10 per share The Nasdaq Stock
Market LLC
Ordinary Shares, par value HK$0.10 per share* The Nasdaq Stock
Market LLC*
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as at the close of the period covered by the annual report:650,621,823764,997,344 Ordinary Shares, par value HK$0.10 per share
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso      Noþ
     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
Yeso      Noþ
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ      Noo
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso       Noo
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer orand large accelerated filer” in Rule 12b-2 of the Exchange ActAct. (Check one):
Large accelerated fileroAccelerated filero                    Accelerated Filer o                    Non-accelerated filer þNon-accelerated filero
     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP o          International Financial Reporting Standards as issued
US GAAPoInternational Financial Reporting Standards as issuedþOthero
by the International Accounting Standards Board
     If “Other” has been checked in response to the International Accounting Standards Board o          Other þ
     Indicateprevious question, indicate by check mark which financial statement item the registrant has selected to follow.
Item 17o      Item 18þo
     If this report is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso       Noþ
*      Not for trading, but only in connection with the registration of the American Depositary Shares
 
 


 

CONTENTSContents
     
  1 
  1 
  12
3
 
  2 
  24 
  24 
  24-18 
  1118-33 
  2533-43 
  3743-52 
  4452-53 
  4553-54 
  4654-56 
  4856-64 
  5464 
  5464
 
  54 
  5464 
  5464 
  5464-65 
  55 
  5565 
  5565 
  5666 
  5666
66
66
66-67
 
  56 
  5668 
  5668 
  5668 
 EX-12.1
 EX-12.2
 EX-13


USE OF DEFINED AND TECHNICAL TERMSUse of defined and technical terms
Except as otherwise indicated by the context, references in this annual report to:
 “Hong Kong Companies Ordinance” are references to Chapter 32 of the laws of Hong Kong;
 
 “City Telecom” or the “Company” are references to City Telecom (H.K.) Limited;
 
 “fiscal year” or “fiscal” are references to the Company’s fiscal year ended August 31 for the year referenced;
 
“FTNS business” are to our business segment in which we provide fixed telecommunications network services, including dial up and broadband Internet access services, local VoIP services, IP-TV services and corporate data services;
 “FTNS Licenses” are references to the licenses issued by the Hong Kong regulatory authorities for fixed telecommunications network services licenses;services;
 
 “GPON” are references to our Gigabit Passive Optical Network;
 
“Group” are to the Company and its subsidiaries;
 “HKBN” are references to Hong Kong Broadband Network Limited;Limited, a wholly owned subsidiary of the Company;
 
 HKFRS”HKFRSs” are references to Hong Kong Financial Reporting Standards;Standards issued by the Hong Kong Institute of Certified Public Accountants;
 
“IDD business” are to our business segment in which we provide international telecommunications services, including international long distance call services;
“IFRSs” are to International Financial Reporting Standards, as issued by the International Accounting Standards Board;
 “IP-TV services” are references to pay-television services through Internet Protocol;
 
 “PNETS Licenses” are references to licenses issued by the Hong Kong regulatory authorities for the public non-exclusive telecommunications service licenses;services;
 
“UC License” are to the Unified Carrier License issued by the Hong Kong regulatory authorities for fixed and mobile telecommunication services; and
 “VoIP” are references to Voice over Internet Protocol.
CURRENCY TRANSLATIONCurrency translation
     We publish our consolidated financial statements in Hong Kong dollars. In this annual report, references to “Hong Kong dollars” or “HK$” are to the currency of Hong Kong, and references to “U.S. dollars” or “US$” are to the currency of the United States. This annual report contains translations of Hong Kong dollar amounts into U.S. dollar amounts, solely for your convenience. Unless otherwise indicated, the translations have been made at US$1.00 = HK$7.8036,7.7781, which was the noon buyingexchange rate set forth in The Citythe H.10 statistical release of New York for cable transfers in Hong Kong dollars as certified for customs purposes by the Federal Reserve Bank of New YorkBoard on August 31, 2008.2010. On January 9, 2009December 10, 2010 the noon buyingexchange rate was US$1.00=1.00 = HK$7.7572.7.7737. You should not construe these translations as representations that the Hong Kong dollar amounts actually represent such U.S. dollar amounts or could have been or could be converted into U.S. dollars at the rates indicated or at any other rates.

1


FORWARD-LOOKING STATEMENTSNote regarding forward-looking statements
     This annual report contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. These include statements with respect to City Telecom or the Company and our plans, strategies and beliefs and other statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “intend”, “estimate”, “continue”, “plan”, “predict”, “project” or other similar words. The statements are based on management’s assumptions and beliefs in light of the information currently available to us.
     These assumptions involve risks and uncertainties which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Potential risks and uncertainties include, without limitation:
  technologytechnological changes;
 
  changes in theour regulatory environment, in which we operate, including changes in rules and policies promulgated by regulatory agencies from time to time;
 
  the increasing competition in the local or international telecommunications, Internet access, local VoIP, or pay-television and corporate data markets;
 
  the benefits we expect to derive from our Next Generation Network, which consists of ourutilize Metro Ethernet Network and our newly-deployed GPON technologies, in which we have been making significant capital investments;
 
  our ability to maintain growth and successfully introduce new products and services;
 
  the continued development and stability of our technological infrastructure, a platform through which our local and international telecommunications, Internet access, local VoIP, IP-TV and IP-TVcorporate data services are offered; and
 
  changes in the local and global economic and financial environment.
     When considering such forward-looking statements, you should keep in mind the factors described in Item 3 “Key Information—Risk Factors”information — risk factors” and other cautionary statements appearing in Item 5 “Operating and Financial Reviewfinancial review and Prospects”prospects” of this annual report. Such risk factors and statements describe circumstances that could cause actual results to differ materially from those contained in any forward-looking statement.

2


Special note on our financial information presented in this annual report
     Our consolidated financial statements as of and for the years ended August 31, 2008, 2009 and 2010 included in this annual report on Form 20-F have been prepared in accordance with IFRSs as issued by the International Accounting Standards Board, or the IASB. Pursuant to the requirement under IFRS 1: First-Time Adoption of International Financial Reporting Standards, or IFRS 1, the date of our transition to IFRS was September 1, 2007, which is the beginning of the earliest period for which we have presented full comparative information in our consolidated financial statements in our annual report for the year ended August 31, 2009. With due regard to our accounting policies in previous periods and the requirements of IFRS 1, we have concluded that no adjustments were required to the amounts reported under HKFRSs as at September 1, 2007 or in respect of the year ended August 31, 2008.
     In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission, or the SEC, which became effective on March 4, 2008, we are not required to provide a reconciliation to generally accepted accounting principles in the United States, or U.S. GAAP.

3


PART I
ITEM 1.1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
     Not applicable.
ITEM 2.2 OFFER STATISTICS AND EXPECTED TIMETABLE
     Not applicable.
ITEM 3.3 KEY INFORMATION
A. Selected Financial Datafinancial data
City Telecom’s Historical Financial Informationhistorical financial information
     The following table presents the selected consolidated financial informationdata and operating informationdata of City Telecom as of and for the years ended August 31, 2004, 2005, 2006, 20072008, 2009 and 2008.2010. The selected financial informationdata should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements included elsewhere in this annual report, the accompanying notes thereto and Item 5 “Operating and Financial Reviewfinancial review and Prospects”prospects”. As disclosed above under “Special note on our financial information presented in this annual report”, our consolidated financial statements as of and for the years ended August 31, 2008, 2009 and 2010 have been prepared and presented in accordance with IFRSs.
Selected consolidated statement of operations data:
                 
  For the year ended August 31, 
  2008  2009  2010  2010 
  HK$  HK$  HK$  US$ 
  (Amounts in thousands except per share data and number of ordinary shares) 
Revenue:                
- FTNS business  1,011,038   1,230,880   1,356,098   174,348 
- IDD business  291,943   247,359   218,589   28,103 
             
                 
Total operating revenue  1,302,981   1,478,239   1,574,687   202,451 
             
                 
Network costs:                
- FTNS business  (103,524)  (107,670)  (144,347)  (18,558)
- IDD business  (74,843)  (67,459)  (50,945)  (6,550)
             
                 
Total network costs  (178,367)  (175,129)  (195,292)  (25,108)
             
                 
Other operating expenses  (966,094)  (1,037,964)  (1,105,604)  (142,143)
                 
Interest expense, net  (59,541)  (50,258)  (10,863)  (1,397)
Other income/(expense), net  9,393   36,671   (3,383)  (434)
Income taxes benefit/(expense)  16,818   (38,730)  (42,679)  (5,487)
             
                 
Net income  125,190   212,829   216,866   27,882 
             
                 
Basic earnings per share (cents)  19.7   32.4   30.7   3.9 
Diluted earnings per share (cents) (note 1)  19.0   31.8   29.4   3.8 
Dividends per share attributable to the year (cents)  6.0   19.0   20.0   2.6 
Weighted average number of ordinary shares  634,015   657,201   706,605   706,605 
Diluted weighted average number of ordinary shares (note 2)  657,997   668,384   736,616   736,616 

4


Selected consolidated balance sheet data:
                 
  As of August 31, 
  2008  2009  2010  2010 
  HK$  HK$  HK$  US$ 
  (Amounts in thousands) 
Total assets  2,093,410   1,790,408   2,251,549   289,473 
                 
Long-term debt and other liabilities  (683,242)  (162,586)  (134,860)  (17,338)
Finance lease obligations  (376)  (732)  (605)  (78)
Other liabilities  (377,185)  (398,563)  (427,545)  (54,969)
             
                 
Total liabilities  (1,060,803)  (561,881)  (563,010)  (72,385)
             
                 
Net assets  1,032,607   1,228,527   1,688,539   217,088 
             
                 
Share capital  65,062   66,418   76,500   9,835 
Share premium  670,717   681,208   1,074,997   138,208 
Reserves  296,828   480,901   537,042   69,045 
             
                 
Total shareholders’ equity  1,032,607   1,228,527   1,688,539   217,088 
             
Other financial data:
                 
  For the year ended August 31, 
  2008  2009  2010  2010 
  HK$  HK$  HK$  US$ 
  (Amounts in thousands) 
EBITDA (note 3)  377,964   508,058   469,437   60,354 
Net cash inflow from operating activities  381,991   536,771   485,340   62,398 
Net cash outflow from investing activities  (147,750)  (176,488)  (306,254)  (39,374)
Net cash outflow from financing activities  (345,978)  (561,292)  178,307   22,924 
Capital expenditures (note 4)  211,684   286,734   344,844   44,335 
     As a measure of our operating performance or liquidity, we believe that the most directly comparable measure to EBITDA is net cash provided by operating activities. The following table reconciles our net cash inflow from operating activities, the most directly comparable financial measure calculated and presented in accordance with IFRSs, to our definition of EBITDA on a consolidated basis for the years ended 2008, 2009 and 2010.
                 
  For the year ended August 31, 
  2008  2009  2010  2010 
  HK$  HK$  HK$  US$ 
  (Amounts in thousands) 
EBITDA  377,964   508,058   469,437   60,354 
Depreciation and amortization  (210,051)  (206,241)  (199,029)  (25,588)
Interest expense, net  (59,541)  (50,258)  (10,863)  (1,397)
Income taxes benefit/(expense)  16,818   (38,730)  (42,679)  (5,487)
             
                 
Net income  125,190   212,829   216,866   27,882 
Depreciation and amortization  210,051   206,241   199,029   25,588 
Amortization of deferred expenditure  33,777   53,160   48,621   6,251 
Income taxes (benefit)/expense  (16,818)  38,730   42,679   5,487 
Interest income  (15,596)  (4,869)  (11,372)  (1,462)
Interest element of finance lease  34   27   42   5 
Interest, amortization and exchange difference on senior notes  72,640   49,214   6,069   780 
Interest on other borrowings  3,428   885   3,260   419 
Amortization of upfront cost on bank loan        192   25 
Interest expense on bank loan        1,379   177 
Change in fair value of derivative financial instruments        11,293   1,452 
Realized gain on long term bank deposit  (1,185)         

5


                 
  For the year ended August 31, 
  2008  2009  2010  2010 
  HK$  HK$  HK$  US$ 
  (Amounts in thousands) 
Loss/(gain) on disposal of fixed assets  1,431   1,016   (1,375)  (177)
Equity settled share-based transaction  4,204   4,768   5,347   687 
Realized loss on derivatives financial instruments  1,039          
Realized and unrealized gain on other financial assets  (3,284)  (189)      
(Gain)/loss on extinguishment of senior notes  (2,582)  (31,371)  9,650   1,241 
Taxation paid  (4,250)  (1,732)  (3,013)  (387)
Change in long term receivable and prepayments  1,346   (505)  917   118 
Change in working capital, net  (27,434)  8,567   (44,244)  (5,688)
             
                 
Net cash inflow from operating activities  381,991   536,771   485,340   62,398 
             
Operating data:
             
  As of and for the year ended August 31, 
  2008  2009  2010 
FTNS subscriptions:            
- Broadband Internet access  316,000   391,000   526,000 
- Local VoIP  329,000   382,000   431,000 
- IP-TV  156,000   170,000   153,000 
Total  801,000   943,000   1,110,000 
Registered international telecommunications accounts (note 5)  2,336,000   2,383,000   2,445,000 
IDD outgoing minutes (in thousands)  574,000   487,000   464,000 
Notes:
(1)Diluted earnings per share is computed by dividing the net income by the diluted weighted average number of ordinary shares during the year.
(2)For the years ended August 31, 2008, 2009 and 2010, the diluted weighted average number of ordinary shares was the weighted average number of ordinary shares outstanding during the respective years, plus the weighted average number of additional ordinary shares which would have been outstanding assuming all the outstanding share options have been exercised at the beginning of the respective years or on the date of issue, whichever is earlier.
(3)EBITDA for any period means, without duplication, net income for such period, plus the following to the extent deducted in calculating such net income: interest expense, income taxes, depreciation and amortization expense (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period not included in the calculation), less interest income. EBITDA is not a measure of performance under IFRSs. We believe that EBITDA is an additional measure utilized by investors in determining a borrower’s ability to meet debt service requirements. However, EBITDA does not represent, and should not be used as a substitute for, net earnings or cash flows from operations as determined in accordance with IFRSs, and EBITDA is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. In addition, our definition of EBITDA may differ from that of other companies.
(4)Capital expenditures represent additions to fixed assets and include non-cash transactions.
(5)Registered accounts refer to international telecommunications customers that have a valid account. Account holders may or may not be active users of our services.

6


Selected Consolidated Statement of Operations Data:
                                
 As of and for the year ended August 31, For the year ended August 31, 
 2004 2005(6) 2006(6) 2007 2008 2008 2006 (note 6) 2007 
 HK$ HK$ HK$ HK$ HK$ US$ HK$ HK$ 
 (Amounts in thousands except per share data) (Amounts in thousands except per share data) 
HKFRS
  
  
Revenues:  
Fixed telecommunications network services 541,902 629,464 716,600 816,800 1,011,038 129,561  716,600 816,800 
International telecommunications services 627,978 532,595 418,276 324,470 291,943 37,411  418,276 324,470 
                  
  
Total operating revenue 1,169,880 1,162,059 1,134,876 1,141,270 1,302,981 166,972  1,134,876 1,141,270 
                  
  
Network Costs:  
Fixed telecommunications network services  (122,476)  (118,383)  (125,639)  (103,795)  (103,524)  (13,266)  (125,639)  (103,795)
International telecommunications services  (208,932)  (221,019)  (174,954)  (110,796)  (74,843)  (9,591)  (174,954)  (110,796)
                  
  
Total network costs  (331,408)  (339,402)  (300,593)  (214,591)  (178,367)  (22,857)  (300,593)  (214,591)
Other operating expenses  (793,212)  (958,031)  (919,795)  (834,104)  (966,094)  (123,801)  (919,795)  (834,104)
                  
Income/(loss) from operations 45,260  (135,374)  (85,512) 92,575 158,520 20,314 
Interest income/(expense), net 3,578  (40,884)  (68,259)  (64,833)  (59,541)  (7,630)
 
(Loss)/income from operations  (85,512) 92,575 
Interest (expense)/income, net  (68,259)  (64,833)
Other income, net 2,668 6,037 4,465 3,149 9,393 1,204  4,465 3,149 
Income taxes (expense)/credit  (2,043) 6,725 7,244  (2,026) 16,818 2,155 
Income taxes credit/(expense) 7,244  (2,026)
                  
Net income/(loss) 49,463  (163,496)  (142,062) 28,865 125,190 16,043 
Basic earnings/(loss) per share (cents) 8.1  (26.6)  (23.1) 4.7 19.7 2.5 
Diluted earnings/(loss) per share (cents)(1)
 8.1  (26.6)  (23.1) 4.6 19.0 2.4 
 
Net (loss)/income  (142,062) 28,865 
Basic (loss)/earnings per share (cents)  (23.1) 4.7 
Diluted (loss)/earnings per share (cents) (note 1)  (23.1) 4.6 
Dividends declared per share (cents) 9.0   8.0 6.0 0.8   8.0 
Weighted average number of shares 610,095 613,525 614,134 614,840 634,015 634,015  614,134 614,840 
Diluted weighted average number of shares(2)
 614,365 613,525 614,134 631,319 657,997 657,997 
Diluted weighted average number of shares (note 2) 614,134 631,319 
                                
 As of and for the year ended August 31, For the year ended August 31, 
 2004 2005 2006 2007 2008 2008 2006 2007 
 HK$ HK$ HK$ HK$ HK$ US$ HK$ HK$ 
 (Amounts in thousands except per share data) (Amounts in thousands except per share data) 
U.S. GAAP
  
Total operating revenue 1,169,880 1,162,059 1,134,876 1,141,270 1,302,981 166,972  1,134,876 1,141,270 
Total operating expenses  (1,123,198)  (1,289,014)  (1,220,388)  (1,048,695)  (1,144,461)  (146,658)  (1,220,388)  (1,048,695)
Net income/(loss) 51,565  (149,148)  (142,062) 28,865 125,190 16,043 
Basic earnings/(loss) per share (cents) 8.5  (24.3)  (23.1) 4.7 19.7 2.5 
Diluted earnings/(loss) per share (cents) (1)
 8.4  (24.3)  (23.1) 4.6 19.0 2.4 
Net (loss)/income  (142,062) 28,865 
Basic (loss)/earnings per share (cents)  (23.1) 4.7 
Diluted (loss)/earnings per share (cents) (note 1)  (23.1) 4.6 
Dividends declared per share (cents) 9.0   8.0 6.0 0.8   8.0 
Weighted average number of shares 610,095 613,525 614,134 614,840 634,015 634,015  614,134 614,840 
Diluted weighted average number of shares(2)
 614,365 613,525 614,134 631,319 657,997 657,997 
Diluted weighted average number of shares (note 2) 614,134 631,319 

27


Selected Consolidated Balance Sheet Data:
                                
 As of and for the year ended August 31, As of August 31, 
 2004 2005 2006 2007 2008 2008 2006 2007 
 HK$ HK$ HK$ HK$ HK$ US$ HK$ HK$ 
 (Amounts in thousands) (Amounts in thousands) 
HKFRS
  
Total assets 1,683,408 2,347,428 2,124,215 2,161,133 2,080,416 266,597  2,124,215 2,161,133 
Debt  (119,170)  (945,348)  (948,027)  (952,593)  (683,242)  (87,555)  (948,027)  (952,593)
Finance lease obligation   (3,135)  (2,373)  (1,210)  (376)  (48)  (2,373)  (1,210)
Other liabilities  (388,540)  (378,491)  (282,161)  (303,448)  (364,191)  (46,670)  (282,161)  (303,448)
                  
  
Total liabilities  (507,710)  (1,326,974)  (1,232,561)  (1,257,251)  (1,047,809)  (134,273)  (1,232,561)  (1,257,251)
                  
  
Net assets employed 1,175,698 1,020,454 891,654 903,882 1,032,607 132,324  891,654 903,882 
                  
  
Share capital 61,057 61,412 61,417 61,650 65,062 8,337  61,417 61,650 
Share premium 617,986 619,408 620,298 622,433 670,717 85,950  620,298 622,433 
Reserves 496,655 339,634 209,939 219,799 296,828 38,037  209,939 219,799 
                  
  
Total shareholders’ equity 1,175,698 1,020,454 891,654 903,882 1,032,607 132,324  891,654 903,882 
                  
                                
 As of and for the year ended August 31, As of August 31, 
 2004 2005 2006 2007 2008 2008 2006 2007 
 HK$ HK$ HK$ HK$ HK$ US$ HK$ HK$ 
 (Amounts in thousands) (Amounts in thousands) 
U.S. GAAP
  
Total assets 1,688,640 2,385,556 2,154,305 2,189,086 2,100,638 269,188  2,154,305 2,189,086 
Total liabilities  (507,710)  (1,352,876)  (1,257,034)  (1,279,587)  (1,062,414)  (136,144)  (1,257,034)  (1,279,587)
Net shareholders’ equity 1,180,930 1,032,680 897,271 909,499 1,038,224 133,044  897,271 909,499 
Other Financial Data:
                         
  As of and for the year ended August 31,
  2004 2005(6) 2006(6) 2007 2008 2008
  HK$ HK$ HK$ HK$ HK$ US$
  (Amounts in thousands)
HKFRS
                        
EBITDA(3)
  244,945   108,377   195,417   353,827   377,964   48,435 
Net cash provided by operating activities  203,763   77,383   184,151   383,999   378,529   48,507 
Net cash (used in) / provided by investing activities  (406,244)  (557,440)  (492,742)  114,053   (147,750)  (18,934)
Net cash provided by /(used in) financing activities  47,221   792,216   (86,432)  (109,504)  (342,516)  (43,892)
Capital expenditures(4)
  410,046   419,126   322,935   132,250   211,684   27,126 
         
  For the year ended August 31, 
  2006 (note 6)  2007 
  HK$  HK$ 
  (Amounts in thousands) 
HKFRS
        
EBITDA (note 3)  195,417   353,827 
Net cash provided by operating activities  184,151   383,999 
Net cash (used in)/provided by investing activities  (492,742)  114,053 
Net cash used in financing activities  (86,432)  (109,504)
Capital expenditures (note 4)  322,935   132,250 

8


     As a measure of our operating performance or liquidity, we believe that the most directly comparable measure to EBITDA is net cash provided by operating activities. The following table reconciles our net cash provided by operating activities under HKFRS to our definition of EBITDA on a consolidated basis for each of fiscal 2004, 2005, 2006 2007 and 2008.2007.
                                
 As of and for the year ended August 31, For the year ended August 31 
 2004 2005 2006 2007 2008 2008 2006 2007 
 HK$ HK$ HK$ HK$ HK$ US$ HK$ HK$ 
 (Amounts in thousands) (Amounts in thousands) 
EBITDA(3)
 244,945 108,377 195,417 353,827 377,964 48,435 
EBITDA (note 3)
 195,417 353,827 
Depreciation and amortization  (197,017)  (237,714)  (276,464)  (258,103)  (210,051)  (26,917)  (276,464)  (258,103)
Interest income/(expense), net 3,578  (40,884)  (68,259)  (64,833)  (59,541)  (7,630)
Income taxes (expense)/credit  (2,043) 6,725 7,244  (2,026) 16,818 2,155 
Interest expense, net  (68,259)  (64,833)
Income taxes credit/(expense) 7,244  (2,026)
                  
  
Net income/(loss)
 49,463  (163,496)  (142,062) 28,865 125,190 16,043 
Net (loss)/income
  (142,062) 28,865 
Depreciation and amortization 197,017 237,714 276,464 258,103 210,051 26,917  276,464 258,103 
Impairment loss on investment property   1,131     1,131  
Amortization of deferred expenditure 1,828 12,927 13,973 15,580 33,777 4,329  13,973 15,580 
Income taxes expense/(credit) 2,043  (6,725)  (7,244) 2,026  (16,818)  (2,155)
Income taxes (credit)/expense  (7,244) 2,026 
Interest income  (3,753)  (13,578)  (20,378)  (22,671)  (15,596)  (1,999)  (20,378)  (22,671)
Interest, amortization and exchange difference on senior notes  54,065 86,664 89,879 72,640 9,309  86,664 89,879 
Other borrowing costs   1,919  (739)  (1,185)  (152) 1,919  (739)
(Gain) / loss on disposal of fixed assets  (34)  (134) 9,621 1,714 1,431 183 
Loss on disposal of fixed assets 9,621 1,714 
Equity settled share-based transaction 87 6,965 6,823 5,727 4,204 539  6,823 5,727 
Realized and unrealized loss on derivatives financial instruments   125 806 1,039 133  125 806 
Unrealized losses/(gain) on other investments 1,696  (300)  (668)  (1,887)  (3,284)  (421)
Gain on extinguishment of senior notes      (2,582)  (331)
Unrealized gain on other investments  (668)  (1,887)
Taxation paid  (24,819)  (1,393)  (2,532)  (2,171)  (4,250)  (545)  (2,532)  (2,171)
Change in long term receivable  (6,206)  (6,893) 567 5,600 1,346 173  567 5,600 
Change in working capital, net  (13,559)  (41,769)  (40,252) 3,167  (27,434)  (3,516)  (40,252) 3,167 
                  
 
Net cash flow provided by operating activities 184,151 383,999 
     
Operating Data:
         
  As of and for the year ended August 31, 
  2006  2007 
FTNS Subscriptions:        
Broadband Internet Access  220,000   247,000 
Local VoIP  281,000   308,000 
IP-TV  116,000   128,000 
       
         
Total  617,000   683,000 
       
         
Registered international telecommunications accounts (note 5)  2,201,963   2,331,000 
IDD outgoing minutes (in thousands)  788,000   659,000 

39


                         
  As of and for the year ended August 31,
  2004 2005 2006 2007 2008 2008
  HK$ HK$ HK$ HK$ HK$ US$
  (Amounts in thousands)
Net cash flow provided by operating activities  203,763   77,383   184,151   383,999   378,529   48,507 
                         
Operating Data:
                     
  As of and for the year ended August 31,
  2004 2005 2006 2007 2008
Fixed Telecommunications Network Services Subscriptions:                    
Broadband Internet Access  197,000   229,000   220,000   247,000   316,000 
Local VoIP  237,000   293,000   281,000   308,000   329,000 
IP-TV  31,000   109,000   116,000   128,000   156,000 
                     
                     
Total  465,000   631,000   617,000   683,000   801,000 
                     
                     
Registered international telecommunications accounts (5)
  1,916,235   2,054,036   2,201,963   2,331,000   2,336,000 
IDD outgoing minutes (in thousands)  1,007,000   947,100   788,000   659,000   574,000 
 
Notes:
(1) Diluted earnings/(loss)/earnings per share is computed by dividing the net income/(loss)/income by the diluted weighted average number of ordinary shares during the year.
 
(2) For fiscal 2004, 2007, and 2008, the diluted weighted average number of shares was the weighted average number of ordinary shares outstanding during the respective years,year, plus the weighted average number of additional ordinary shares which would have been outstanding assuming all the outstanding share options and share warrants (if any) have been exercised at the beginning of the respective years or on the date of issue, whichever is earlier. For fiscal 2005 and 2006, the diluted weighted average number of shares was equal to the weighted average number of ordinary shares outstanding during the respective years because the incremental effect of share options and share warrants was anti-dilutive in a loss-making year.
 
(3) EBITDA for any period means, without duplication, net income/(loss) for such period, plus the following to the extent deducted in calculating such net income/(loss): interest expense, income taxes, depreciation and amortization expense (excluding any such non cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period not included in the calculation), less interest income. EBITDA is not a measure of performance under HKFRS or U.S. GAAP. We believe that EBITDA is an additional measure utilized by investors in determining a borrower’s ability to meet debt service requirements. However, EBITDA does not represent, and should not be used as a substitute for, net earnings or cash flows from operations as determined in accordance with HKFRS or U.S. GAAP, and EBITDA is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. In addition, our definition of EBITDA may differ from that of other companies.
 
(4) Capital expenditures represent additions to fixed assets and include non-cash transactions.
 
(5) Registered accounts refer to international telecommunications customers that have a valid account. Account holders may or may not be active users of our services.
 
(6) Due to additional evidence and information received with respect to the collectability of the mobile interconnection charges on January 30, 2006, we were required to reassess the conditions on which the estimates on bad debt provision for mobile interconnection charges receivables were based. Such assessment were made after the publication of our Hong Kong statutory financial statements for fiscal 2005 but prior to the filing of our annual report on Form 20-F for fiscal 2005. The effect of the reassessment was reflected in our annual report on Form 20-F for fiscal 2005 and in our Hong Kong statutory financial statements for fiscal 2006.
 
  Our reassessment had the following effects on our consolidated statement of operations for fiscal 2005 and 2006:
                 
          As previously    
          reported in    
  As previously      2006 Hong Kong    
  reported in 2005 Hong  As reported  statutory  As reported 
  Kong statutory  in 2005 Form  financial  in 2006 
  financial statements  20-F  statements  Form 20-F 
  HK$  HK$  HK$  HK$ 
  (Amounts in thousands except per share data) 
Total operating revenue  1,137,356   1,162,059   1,159,579   1,134,876 
Provision for doubtful debts  (60,563)  (35,445)  7,668   (17,450)
Net loss after tax  (206,352)  (156,531)  (92,241)  (142,062)
Loss per share — basic and diluted (33.6) cents (25.5) cents (15.0) cents (23.1) cents

410


Exchange Rate Informationrate information
     The Hong Kong dollar is freely convertible into other currencies (including the U.S. dollar). Since 1983, the Hong Kong dollar has been officially linked to the U.S. dollar and the current rate is US$1.00 to HK$7.80. However, even with this official exchange rate, and despiteDespite the efforts of the Hong Kong Monetary Authority, or HKMA’s currency boardHKMA, to keep suchthe official exchange rate stable, the market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be influenced by the forces of supply and demand in the foreign exchange markets. Furthermore, the official exchange rate is itself subject to fluctuations and can be reset in circumstances where the secondary foreign exchange markets move beyond the HKMA’s ability to back the official rate with foreign reserves.
     Exchange rates between the Hong Kong dollar and other currencies are influenced by the rate between the U.S. dollar and the Hong Kong dollar.
     The following table sets forth the average, high, low and period-end noon buyingexchange rate between the Hong Kong dollar and the U.S. dollar (in Hong Kong dollars per U.S. dollar) for the fiscal periods indicated:indicated:
                 
  Average(1) High Low Period-End
  HK$ HK$ HK$ HK$
 
Fiscal 2004  7.7821   7.8010   7.7085   7.8000 
Fiscal 2005  7.7869   7.8002   7.7684   7.7718 
Fiscal 2006  7.7601   7.7796   7.7506   7.7767 
Fiscal 2007  7.8029   7.8289   7.7665   7.7968 
Fiscal 2008  7.7915   7.8159   7.7497   7.8036 
July 2008  7.8001   7.8039   7.7959   7.8017 
August 2008  7.8076   7.8142   7.8036   7.8036 
September 2008  7.7854   7.8094   7.7582   7.7659 
October 2008  7.7589   7.7736   7.7503   7.7503 
November 2008  7.7507   7.7560   7.7497   7.7501 
December 2008  7.7504   7.7522   7.7497   7.7499 
January 2009 (through January 9, 2009)  7.7533   7.7572   7.7504   7.7572 
                 
  Average  High  Low  Period-end 
  (note)          
  HK$  HK$  HK$  HK$ 
Fiscal 2006  7.7601   7.7796   7.7506   7.7767 
Fiscal 2007  7.8029   7.8289   7.7665   7.7968 
Fiscal 2008  7.7915   7.8159   7.7497   7.8036 
Fiscal 2009  7.7550   7.8094   7.7495   7.7505 
Fiscal 2010  7.7646   7.8040   7.7495   7.7781 
June 2010  7.7880   7.8040   7.7690   7.7865 
July 2010  7.7753   7.7962   7.7651   7.7672 
August 2010  7.7702   7.7788   7.7605   7.7781 
September 2010  7.7643   7.7738   7.7561   7.7599 
October 2010  7.7580   7.7642   7.7513   7.7513 
November 2010  7.7547   7.7656   7.7506   7.7649 
December 2010 (through December 10, 2010)  7.7666   7.7737   7.7612   7.7737 
 
(1)Note: The average of the noon buying rates on the last business day of each month during the relevant fiscal year period or the average noon buying rates for each business day during the relevant monthly period.
Source:For all periods prior to January 1, 2009, the exchange rate refers to noon buying rate as reported by the Federal Reserve Bank of New York. For periods beginning on or after January 1, 2009, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.
Source: Federal Reserve Bank of New York.
B. Capitalization and indebtedness
Not applicableapplicable.
C. Reasons for the offer and use of proceeds
Not applicable

11


D. Risk Factorsfactors
     You should carefully consider the risks described below and other information contained in this annual report before making an investment decision. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. If they do, our business, financial condition or results of operations could be materially adversely affected.
Risks Relatingrelating to Our Businessour business and Operationsoperations
WeIn light of the intense competition in our target markets, we cannot assure you that weour revenues and net profit will be ablecontinue to maintain an increase ingrow.
     We derive our total revenues from our FTNS business and operating results
our IDD business. Our FTNS business primarily consists of broadband Internet access, local VoIP, IP-TV and corporate data services, while our IDD business primarily consists of direct dial, international calling cards and mobile call forwarding services. Our total revenues increased by 6.5% to HK$1,303.01,574.7 million in fiscal 20082010 from HK$1,141.31,478.2 million in fiscal 2007,2009, and we recorded aour net profit ofincreased by 1.9% to HK$125.2216.9 million in fiscal 2008 versus2010 from HK$28.9212.8 million in fiscal 2007.2009. The increasedincrease in net profit in fiscal 20082010 was mainlyprimarily due to the benefit of shiftingincreased contribution from our business mix towards the more sustainable FTNS business and finance cost savings of HK$32.9 million as a changeresult of repurchase and redemption of our outstanding 10-year senior notes.
     Although revenue from our FTNS business increased by 10.2% in the estimated useful lives for certain major telecommunications equipment effective from June 1, 2007, interest savings from senior-notes buyback and tax benefit from recognition of deferred tax asset on tax loss in prior years. However,fiscal 2010, we cannot assure you that we will be able to maintain oursuch revenue and profit growth.
     A larger portion The increase in revenue of our revenueFTNS business was primarily due to an increase in fiscal 2008 was derivedour broadband subscription base of 34.5%, driven by our marketing program between November 2009 to August 2010, which lowered by approximately 50.0% our symmetric 100Mbps service to HK$99 per month, including a Member-Get-Member promotion at this price for both the referee and referrer. Effective from September 1, 2010, we terminated such marketing program and increased the price of our residential broadband service plan from HK$99 per month to HK$169 per month. We cannot assure you whether our revenues and net profit will continue to grow as a result of such price increase due to intense competition in our industry. The growth of our subscription base will depend on our ability to continue to expand our network coverage and operate in a highly competitive market.
     Further, revenue from our fixed telecommunications network business, which carries a higher margin than our international telecommunications business. Revenues from our international telecommunicationsIDD business decreased by 10.0%11.6% in fiscal 2008,2010. The decrease was primarily due to a decrease in the total number of airtime minutes by 12.9%, which reflected4.7% and a reductiondecrease in the operating scale of our international telecommunicationstariff rate that we are able to charge our customers. On our IDD service, our strategy is to focus on cash flow rather than market share. Due to increasing competition, we expect our IDD business.With expected competitive will continue to experience pressure on tariff rates and a reduced operating scale, we expect our international telecommunications business to contribute to a smaller portion of our revenue and net profit over time.

5


     Revenues fromOur ability to continue to grow our fixedtotal revenues and net profit in the rapidly evolving telecommunications network business increased by 23.8% in fiscal 2008, primarily dueindustry depends on many factors, including our ability to an increase in our average revenue per useraccurately identify and an increase in our subscription base by 17.3%. This increase was mainly driven by the growingrespond to demand for high bandwidthnew services, success in developing new services on a timely basis, quality and cost competitiveness of our services, effectiveness of our sales and marketing efforts, and the number and nature of competitors in a given market segment. The global economic uncertainty has resulted in decreased consumer confidence and overall slower economic activity, which may dampen the demand for broadband Internet access service. However,services or affect our customers’ ability to continue with existing services. We cannot assure you that we can maintain the current level of revenue growth and profitability.
Given the pace of change in the telecommunications industry and the characteristics of our target markets, we cannot assure you that our fixed telecommunications networkFTNS business will continue to be profitable, as we will needprofitable.
     The main target market for our FTNS business is Hong Kong. The Hong Kong telecommunications industry is highly competitive. The intense competition could result in price reductions, reduced gross margins or loss of market share, any of which could adversely affect our future growth and profitability. We expect competition to continue to expend substantial resources in developing and marketing broadband Internet access, local VoIP, IP-TV and corporate data services.
We have substantially less financial and human resourcesincrease for the development of our business than some of our main competitors.
     The telecommunications and pay-television markets in Hong Kong are highly competitive. Some of our main competitors for Internet access, local telephony, pay-television and international telecommunications services have longer operating histories and others are subsidiaries of large business conglomerates. Consequently, our competitors may have the following advantages over us:reasons:
  greater financial, technical, marketingIncreasing liberalization of the telecommunications industry in Hong Kong may continue to attract new local and other resources;foreign entrants and broaden the variety of telecommunications services available in the market, thereby increasing the overall level of competition in our industry.
 
  greater existing infrastructure;
greater name recognition;The Hong Kong government may continue to issue new wireless and
larger customer bases.
     In addition, certain areas of the fixed telecommunications network business are very capital intensive. Our competitors may be able to devote more human and financial resources to research and development, network improvement and marketing than we can.
Our growth and profitability could be affected by an increasing number of local and foreign entrants in the international and local telecommunications, Internet access and television broadcasting markets.
     The Hong Kong government continues to liberalize access into the telecommunications industry in Hong Kong, including issuing new wireless and wire-line FTNS Licenses. We expect the Hong Kong government to continue to open the telecommunications market in the next several years. In particular, the Company may be adversely affected as a result of the following:
As of January 6, 2009, 246 wire-line FTNS Licenses. For instance, 291 PNETS Licenses had been issued in Hong Kong as of October 31, 2010 for the provision of external“external telecommunications services asservices” (as defined in the Telecommunications Authority’s Determination as of December 30, 1998.1998). Some of these licenses are held by subsidiaries of major foreign telecommunications providers, which have competitive advantages over us due to their global presence and size.
 
  Around December 31, 2007, Television Broadcasts Limited and Asia Television Limited, commonly known as TVB and ATV, respectively, the only two licensed domestic territorialfree television programme broadcasters in Hong Kong, launched their digital terrestrial television services and have since broadened such services to cover an increasingly large percentage of the viewing public in Hong Kong. TheAs of December 14, 2010, their services offeroffered a total of 1311 free channels in both standard and high definition. This improvement in the quality of free television may result in a reduction in the number of subscribers for pay-television services.

12


     Increasing liberalizationAs some of our main competitors have longer operating histories and others are subsidiaries of large business conglomerates, they may have greater financial, technical, marketing and other resources; a more sophisticated infrastructure; better brand recognition; and a larger subscription base and may be able to devote more human and financial resources to research and development, network improvement and marketing than we can. Our competitive position varies significantly by service type because each service is characterized by a different market. If we cannot compete effectively in a major market, our business, operating results and financial condition could be adversely affected.
Our services may become obsolete if we cannot address the changing needs of our customers.
     The telecommunications industry is characterized by rapidly changing technology and industry standards, evolving subscriber needs and the changing nature of services with increasingly short life cycles. We cannot assure you that we will be able to respond successfully to technological advances and stay ahead of the evolving industry standards, for the following reasons:
To compete successfully, we must constantly increase the diversity and sophistication of the services we offer and upgrade our telecommunications technologies. We may be required to make substantial capital expenditures and may not be successful in modifying our network infrastructure in a timely and cost-effective manner in response to these changes.
New technology, such as the possible development of 4G wireless data networks as a substitute for fiber-based services, or other trends in the telecommunications industry, could have an adverse effect on the services we currently offer. For example, traditional fixed line home telephones are being replaced by mobile telephones and/or VoIP services. Technology substitution from global VoIP providers, some of which offer free PC-to-PC based international calls, is also becoming more prevalent. Increased adoption of such competing technology may lead to a decline in our revenues.
Changing our services in response to market demand may require the adoption of new technologies that could render many of the technologies that we are currently implementing less competitive or obsolete. We may also need to gain access to related or enabling technologies in order to integrate the new technology with our existing technology. Our new services may contain design flaws or other defects when first introduced to the market.
     If we cannot offer the new services demanded by our customers in Hong Kong may continue to attract new local and foreign entrants to the market, which may broaden the variety of telecommunications services supplied by existing service providers, thereby heightening the overall level of competition ina timely manner, our industry. Increased competitionbusiness, operating results or financial condition could result in price reductions, reduced gross margins or loss of market share, any of which couldbe adversely affect our future growth and profitability.affected.
The development of our Next Generation Network requires significant capital expenditures. These capital expenditures, which may vary materially from those currently planned andnot be available on terms satisfactory to us or may impose a burden on our financing and operatingother business activities.
     Our business is capital intensive,intensive. We need to continue to devote substantial resources in infrastructure construction and upgrade to provide consistent and high quality services. In particular, because we deliver our capital expenditures may not have the positive effect onfixed telecommunications network services through our business and revenues thatself-owned Next Generation Network, we expect. We have made, and will continue to make, capital investments in the expansion and upgrade of our self-owned Next Generation Networkthis network and the development of ourvarious telecommunications services. We incurred total capital expenditures of approximately HK$211.7344.8 million in fiscal 2008 and2010.
     We expect to incur capital expenditures ofranging from approximately HK$650320 million to HK$350 million in total in fiscal 2009 and 2010,2011, a large majority of which will be spent on the continued expansion and upgrade of our network.
While we intend to fund such expenditures by using our currently available cash as well as cash flow from operations, we may not have adequate capital to fund our projected capital expenditures. Future,Our ability to fund operating and capital expenditures depends significantly on our ability to generate cash from operations. In fiscal 2010, we generated cash from operating activities of HK$485.3 million. However, we cannot assure you that we will be able to sustain our operations in order to generate sufficient cash flows to meet our future requirements. Our ability to generate cash from operations is subject to general economic, financial, industry, legal and other factors and conditions, many of which are outside our control. In particular, our operations are subject to price and demand volatility in the telecommunications industry.
     If we cannot finance our operations and capital expenditure using cash generated from operations, we may be required to, among other things, incur additional debt, reduce capital expenditures, sell assets, or raise equity. The global economic uncertainty has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and volatility in the capital markets. Although we have sufficient cash to meet our anticipated cash needs for at least the next 12 months, the current market conditions may affect our ability to obtain further financing to support our network expansion in the future. Any failure to do so will negatively impact our business and slow down our network deployment, in that we may not be able to continue expanding our network infrastructure to cover substantial area of the Hong Kong territory. Additional debt or equity financing may not be available, and debt financing, if available, may involve restrictions on our investing, financing and operating activities.

6


We mayIf any of our new services are not realize the commercial benefits we expect fromsuccessful, our investments, which mayoperating results could be adversely impact our business.affected.
     To compete effectively, we need to launchNew telecommunications services are introduced by our competitors from time to timetime. If we do not anticipate these changes and rapidly adopt new and commercially viable products and services. Any of these newinnovative services in response, we may not be commercially successful, and weable to fully capture the opportunities in the market. Development of new services, however, exposes us to the following risks:
Developing new telecommunications services can be complex. We may not be able to adapt the new services effectively, promptly and economically to meet consumers’customer demand. Because we are required to continue to make significant investments in our network infrastructure in order to support these services, we cannot assure you that we can generate satisfactory investment returns.

13


In developing new services, we are required to continue to make significant investments in our network infrastructure in order to support these services. If we exceed our budgeted capital expenditure and cannot meet the additional capital requirements in time through operating cash flows and planned financings, we may have to delay the project.
Any of our new services may not be commercially successful. The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or, to the extent that we are required under the applicable accounting standards to recognize a charge for the impairment of assets. Any impairment charges could materially adversely affect our financial condition and the results of our operations.
     Specifically, we cannot assure you that any services enabled by upgrading and expanding our Next Generation Network will be accepted by the public to the extent required to generateprovide us with an acceptable rate of return. Furthermore, weThis would depend on our ability to accurately identify and respond to emerging consumer trends and demand. We cannot assure you that our estimate of the necessary capital expenditure to offer such services will not be exceeded. The failure ofwe can generate satisfactory investment returns on any of our services to achieve commercial acceptance could result in additional capital expenditures or, to the extent that we are required under the applicable accounting standards to recognize a charge for the impairment of assets, a reduction in our profitability. Any such charge could materially and adversely affect our financial condition and the results of our operations.new service.
We may need to improve our internal controls over financial reporting and our independent auditors may not be able to attest to their effectiveness.
     The United States Securities and Exchange Commission, or the SEC, as required by Section 404404(a) of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition,Effective from September 21, 2010, the SEC adopted amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act, as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 404(c) provides that Section 404(b) of the Sarbanes-Oxley Act shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer. During fiscal 2010, we became an accelerated filer. Therefore, we are required to have an independent registered public accounting firm mustto attest to and report on the effectiveness of the company’s internal controls over financial reporting. As a non-accelerated filer, we are required to file management’s first report on internal controls over financial reporting for fiscal 2008 and our first auditor’s report on the effectiveness of our internal controls over financial reporting forstarting from fiscal 2010.
     We have evaluated our internal controls surrounding the financial reporting process for the current fiscal period so that management can attest to the effectiveness of these controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. We have implemented appropriate steps to strengthen the internal controls. However, we may identify conditions that could result in significant deficiencies or material weaknesses in the future. As a result, we could experience a negative reaction in the financial markets and incur additional costs in improving the condition of our internal controls. For a detailed discussion of controls and procedures, see Item 15 “Controls and Procedures”.procedures.”
     Notwithstanding our efforts, our management may subsequently conclude that our internal controls over our financial reporting are not effective. However, in fiscal 2010,Further, even if our management concludes that our internal controls over our financial reporting are effective, our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective.
If we do not successfully design and implement changes to our internal controls and management systems, or if we fail to maintain the adequacy of these controls as such standards are modified or amended from time to time, we may not be able to comply with Section 404404(a) of the Sarbanes Oxley Act of 2002.Sarbanes-Oxley Act. This could subject us to regulatory scrutiny and penalties that may result in a loss of public confidence in our management, which could, among other things, adversely affect our customerscustomer and vendor confidence, stock price and our ability to raise additional capital and operate our business as projected.
OurIf we cannot manage the growth and expansion may impactin our ability to manage our operations, increase our costs of operation and adversely affectFTNS business, the quality of our services.services and our operating results could be adversely affected.
     We have been pursuing aan aggressive strategy of aggressive growth in growing our fixed telecommunications network servicesFTNS business. As part of this strategy, we intend to continue to expand and invest in our Next Generation Network infrastructure to support our range of broadband Internet access, local VoIP, IP-TV and corporate data services. The deployment of these projects has resulted and will result in significant demands on our systems and controls and may impact our administrative, operational and financial resources. These projects will also place significant demands on us to maintain the quality of our services to ensure that our brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of our services.
Our ability to manage the growth in our future growthFTNS business will depend upon our ability to:
  simultaneously manage implementation ofimprove our existing operational, administrative and technological systems and our financial and management controls;
enhance our infrastructure development andto support the expansion;
develop effective marketing plans;
 
  effectively monitor our operations so as to containcontrol operational costs and maintain effective quality controls; and
 
  continue to offer competitive prices to customers for our services.

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     Our failure to achieve any of the above in an efficient manner and at a pace consistent with the growth of our fixed telecommunications network servicesFTNS business could have an adverse effect on the quality of our services and increase our costs of operation.
We depend on certain key personnel, and our business and growth prospects may be disrupted by the loss of their services.
     Our future success is dependent upon the continued service of our key executives and employees.Talents (All individuals employed by the Group, including directors of the Company are defined as “Talents” hereafter). While we have employment agreements with members of our senior management, staff, we cannot assure you that we will be able to retain these executives and employees.senior management. If one or more of our key personnel arewere unable or unwilling to continue in their present positions, or if they joinjoined a competitor or formformed a competing company, or if they shiftshifted their focus away from Hong Kong operations, we may not be able to replace them easily, our business may be significantly disrupted and our financial condition and results of operations may be materially and adversely affected. Furthermore, as our industry is characterized by high demand and increased competition for talent,Talents, we may need to offer higher compensation and other benefits in order to attract and retain key personnel in the future. We cannot assure you that we will be able to attract and retain the key personnel that we will need to achieve our business objectives.

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ExpansionOur ability to further expand the coverage of our Next Generation Network into certain buildings and residences may be limited by the physical limitations or our ability to obtain access rights.rights in certain buildings.
     We intend to continue to expand the coverage of our Next Generation Network. To expand coverage to a new physical site within a residential or commercial building, we are required to connect ourOur Next Generation Network has the capability of providing value-added broadband services and content that combine voice, data and images with increased efficiency and flexibility. As part of our strategy to the site by installing fiber-to-the-home or fiber-to-the-building plus Category-5e copper wiring, whichgrow our FTNS business, we refer to as in-building wiring. Our target isplan to increase the coverage of our Next Generation Network from the current number of 1.51.77 million residential home passeshomes pass as of August 31, 2010 to our target of 2.0 million residential home passeshomes pass by 2010. Suchthe end of 2011. To connect our Next Generation Network to a new physical site, we need to install fibre-to-the-home or fibre-to-the-building with Category-5e copper wiring, which we refer to as “in-building wiring”. Our expansion however,plan may be hindered bybecause the installation of in-building wiring is subject to the following constraints:
  Because at least one of our competitors has already installed in-building wiring in virtually all buildings and many buildings have limited physical space for additional in-building wiring, other fixed telecommunications network serviceFTNS providers, including us, may encounter a bottleneck when installing our own in-building wiring because many buildings have limited physical space for additional in-building wiring.wiring;
 
  Some single-owner commercial buildings may grant rights of access to our competitors while barring us from installing our own in-building wiring.wiring; and
 
  Certain developers may have affiliations with our competitors and may attempt to delay or inhibit our wiring installations.
     We may be unable to capitalize on any economy of scale benefits if we fail to expand our network coverage at our projected rate. Our growth opportunities will also be limited as a result.
     Internet security concerns could adversely affect our Internet access services.
     We intend toTo remain competitive, we must continue to upgrade our broadband Internet access, local VoIP, IP-TV and corporate data services. Computer viruses, break-ins and other inappropriate or unauthorized uses of our Next Generation Network could affect the provision of our full suite of Internet Protocol services. Computer viruses, break-ins or other problems couldservices and have the following effects on our fixed telecommunications networkFTNS business:
  interruption, delays or cessation in services to our customers;
 
  a threat to the security of confidential information stored in the computer system of our customers; and
 
  illegal viewing or download of our contents.
     There is no assurance thatTo protect our business from computer viruses and other harmful attacks, could not affect our business. Wewe may need to incur significant costs to protect us against the threat of security breaches or to alleviate problems caused by such breaches. We intend to continue to strengthen our network security to alleviate these problems. Our efforts, however, may cause interruptions, delays or cessationcessations of our services, and our customers may stop using our service or assert claims against us as a result.

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     Although we have expressed our interest in obtaining a Broadband Wireless Access (“BWA”) license, we cannot assure you that we will be the successful bidder, and, if we are granted the license, that the business in relation to BWA will be successful.
     Even though we have participated in the auction, we cannot assure you that our bid will be successful, if succeeded and the related license is granted to HKBN eventually, that our business and operation in relation to BWA will generate sufficient revenues to result in profitability. We are also subject to the risks of unforeseen technological development or other technological difficulties and/or cost overruns.
Risks Relating to Our Technological Infrastructure
We may be unable to further expand the scope of our Internet access businessservices unless we obtain additional network capacity.
     Our ability to transition from time to time to more advanced technologies for faster Internet access networkis critical to our sustainable competitiveness. Because our Next Generation Network has limited capacity. Our ability to continue to increase Internet service depends oncapacity, our ability to expand the network bandwidth on a timely basis which in turn is subject to:to the following factors:
  the expansion and development of our own international telecommunications facilities;
 
  the availability of leased capacity from third party carriers at favorable rates; and
 
  the possible termination or cancellation of our existing contracts.
     If we fail to increase the capacity of our international bandwidth, our ability to increase our market share and revenue in the Internet access businessmarket segment will be limited.
We are vulnerable to naturalNatural disasters and other disruptive regional events which could cause damage to our network and result in lost revenueadversely affect our business and perhaps lost customers.operating results.
     Our network is vulnerable to damage or cessation of operations from fire, earthquakes, severe storms, heavy rainfall, power loss, telecommunications failures, network software flaws, vandalism, transmission cable cuts and other catastrophic events. We may experience failures or shut downs relating to individual points of presence or even catastrophic failure of our entire network. Any sustained failure of our network, our servers, or any link in the delivery chain, whether from operational disruption, natural disaster or otherwise, could have a material adverse effect on our business, financial condition and results of operations.

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The loss of key suppliers or their failure to deliver equipment on a timely basis could negatively impact our business prospects.business.
     We rely on our suppliersthird parties for our Next Generation Network infrastructure and follow-up maintenance.the supply of network equipment. Further, because an IP set-top-box must be installed in order to access our IP-TV services, we must have an adequate supply of such installation equipment on hand for delivery to respond to new customer subscriptionsour customers in a timely manner.
     We purchase all of our IP set-top boxes and other equipment from our suppliers on a purchase order basis and have no long-term contracts. If our suppliers are unable to supply us with these products in a timely manner or the costs of these products increase due to unforeseen causes, this could negatively impact our operating results, especially if we are unable to acquire new subscribersspread the costs over a larger subscription base or effectively appropriate ourpass the additional costs on to our customers.subscribers.
Our relianceBecause we rely on third parties to provide maintenance and repairs forin delivering services through our Next Generation Network, could adversely affect our operating results could be adversely affected if their services are not timely or do not meet our standards.
     We depend on our suppliers and other third parties for the ongoing support and assistance with respect to maintenance and repairsrepair of majorour Next Generation Network. Further, although our Next Generation Network is operated essentially as an independent network, equipments.a small portion of it is connected to the network of other providers under interconnection agreements. We are also dependent on certain Hong Kong rail transport providers to maintain and provide us with access to their infrastructure to support the proper functioning of our equipment and fiber-based backbone. If these third parties fail to respond or are untimely in their response to our maintenance and repair needs, our customers may experience interruptions or variations in the quality of our fixed telecommunications network services. Any service interruptions or variations maycould adversely affect our operating results and our ability to retain or add new customers.
If we are unableRisks relating to stay ahead of technology trendsthe regulatory, political and evolving industry standards, our services may become obsolete.economic environment
     To compete successfully, we are required to continually improve our performance, services and network. Telecommunications businesses are characterized by rapidly changing technology and industry standards, evolving subscriber needs and the changing nature of services with increasingly shorter life cycles. To respond successfully to technological advances and emerging industry standards, we may be required to make substantial capital expenditures and gain access to related or enabling technologies in order to integrate the new technology with our existing technology.
     Further, new technology or trends in the telecommunications industry could have an adverse effect on the services we currently offer. For example, the replacement of traditional fixed line home telephones with mobile telephones and/or VoIP services may lead to a decline in our revenue from international telecommunications services and local telephony services. Further, technology substitution from global VoIP providers, some of which offer free PC-to-PC based international calls, is also becoming more prevalent. Changing our services in response to market demand may require the adoption of new technologies that could render many of the technologies that we are currently implementing less competitive or obsolete.
     Finally, our new products and services may contain design flaws or other defects that could have a material adverse effect on our business, operating results or financial condition. We may not be successful in modifying our network infrastructure in a timely and cost-effective manner in response to these changes, which will affect our ability to continue to offer the products and services demanded by our customers.
Risks Relating to the Regulatory, Political and Economic Environment
Regulatory reforms and currently contemplated regulatory initiatives in the telecommunications industry may adversely affect us.
     The Hong Kong telecommunications industry is undergoing continuous regulatory reform. Our business and results of operations may be adversely affected by changes in the telecommunications regulations, especially in the following areas:
  In July 2004, a new provision of the Telecommunications Ordinance came into force. This anti-competition provision specifically regulates the conduct of all carrier licensees (in particular merger and acquisition transactions) in the Hong Kong telecommunications industry by giving the Telecommunications Authority the power to review the conductconducts and transactions concerning carrier licensees and to take appropriate actions if it determines that the transaction would, or is likely to, prevent or substantially lessen competition in a telecommunications market. The Telecommunications Authority has the power under this provision to conduct an investigation into any questionable transaction. It might consent to the transaction (unconditionally or subject to any conditions it deems appropriate) or reject the transaction outright. The decision of the Telecommunications Authority will take into account of whether the transaction will adversely affect the public interest and benefit. This provision may have an adverse effect on our ability to grow our business through mergers and acquisitions.
 
  We offer local VoIP services through our Next Generation Network under HKBN’s FTNS License. Following the conclusion of a public consultation on the regulation of Internet Protocol Telephony Services, the Telecommunications Authority issued a statement on June 20, 2005, setting out its views and decisions on the regulatory and licensing framework for the provision of VoIP services, including the creation of a licensing framework, conformance to the existing system of assigning telephone numbers, imposition of interconnection charges and establishing guidelines with respect to the quality of services.

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  We offer fixed but not mobile telecommunications network services. The Telecommunications Authority has implemented a new fixed-mobile convergence licensing practice by way of the Unified CarrierUC License. The UC License (“UCL”). The implementation of the UCL regime, started fromwhich began on August 1, 2008, and replacesseeks to replace the existing four classes of carrier licenses for the provision of fixed and mobile services.services with a simple license. Going forward the UCLUC License will be the only carrier licencelicense to be issued for the provision of fixed, mobile and/or converged services. Existing carrier licenses will remain effective until their expiry date. Licensees can choose to apply to convert their existing licenceslicenses to UCLsUC Licenses before then or apply for a UCLUC License upon expiry. This regulatory change, together with the

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development of new technologies, may further accelerate the convergence of fixed and mobile telecommunications services, resulting in more structural competition between fixed-line and mobile telecommunications operators. As we do not have a mobile license, and are not currently authorisedauthorized to provide mobile services, our ability to compete may be hindered by our inability to offer such services independently.
 
  We provide our IP-TV services over our Next Generation Network under HKBN’s FTNS License. The Hong Kong government has indicated that because our IP-TV services are carried over the Internet, we are exemptexempted under the Broadcasting Ordinance from the requirement to obtain a domestic pay-television programprogramme service license. However, the government’s Communications and Technology Branch has informed us that the government is considering a review of the broadcasting regulatory regime and may introduce changes to the existing regulatory framework, including the existing exemption in the Broadcasting Ordinance. However, we cannot predict whether the government may require us to obtain a pay-television programprogramme service license in the future.
We require licenses from the Telecommunications Authority to provide our services. If one of these licenses is revoked or not renewed or there are substantial changes in its terms and conditions, we wouldmay be unable to deliver the services authorized by that license.
     We require licenses from the Telecommunications Authority to provide our international telecommunications and fixed telecommunications network and international telecommunications services. Our PNETS License is subjectbusiness operations therefore are susceptible to the Telecommunications Authority’s annual renewal. HKBN’s FTNS License was initially grantedfollowing changes in 2000 for a term of 15 years and may be renewed for such further period not exceeding 15 years at the discretion of the Telecommunications Authority. regulatory environment in particular:
Our ability to adjust the tariffs for different services are governed by the terms and conditions of the relevant licenses. The licenses, however, are issued under different regulatory frameworks. The differences in regulatory structure for these licenses may constrain our flexibility to respond to market conditions, competition or cost structure.
We have been granted a waiver by the Telecommunications Authority to comply with the tariff restrictions contained in HKBN’s FTNS License. If the waiver is revoked, our ability to adjust the tariffs for our fixed telecommunication network services, including our offer of discounts to subscribers from time to time, will be restricted.
Our PNETS License is subject to the Telecommunications Authority’s annual renewal. On October 19, 2009, the Telecommunications Authority announced the replacement of the PNETS License by a new class of Services-Based Operator License, Class 3 Modified Services-Based Operator License. On November 10, 2009, the PNETS License of City Telecom was replaced by a Class 3 Modified Services-Based Operator License. It is noted that the PNETS License of HKBN would also be replaced by a Class 3 Modified Services-Based Operator License on December 7, 2009 through the renewal procedure. HKBN’s FTNS License was initially granted in 2000 for a term of 15 years and may be renewed for such further period not exceeding 15 years at the discretion of the Telecommunications Authority.
The Telecommunications Authority’s failure to renew or its revocation of any of these licenses or its amendment of any of the terms and conditions contained in such licenses for any reason would prohibit us from continuing to offer the services authorized by those licenses, for any reason would prohibit us from continuing to offer the services authorized by that license, which would have a significant adverse impact on our revenues and profitability. In addition, there may be future changes in Hong Kong’s telecommunications regulations or policies that would require us to obtain additional licenses, which could have an adverse impact on our operations.
Our international telecommunications revenues may be adversely affected by increases in tariffscarrier charges in China.
     In China, tariffs for all domestic and international long distance services offered through public switched telephone networks, leased lines and data services are jointly set by the Ministry of Information Industry of the PRC and the State Development Planning Commission. Certain tariffs payable by us to our carrier partners are based, among other things, on the tariffs set by these agencies with respect to the calls our subscribers make to persons in China. In fiscal 2008,2010, approximately 77%79% of our international call traffic volume was to China. We cannot predict the timing, likelihood or magnitude of any tariff adjustments that may be imposed by the Ministry of Information Industry of the PRC and the State Development Planning Commission, nor can we predict the extent or potential impact upon our business of any future tariff increases. Such increases may lead to a decrease in traffic, reduce our revenues and adversely affect our business and results of operations. In addition, if we are unable to effectively manage the increased network costs, it would have an adverse effect on the profit margins forof our international telecommunications services.IDD business could be adversely affected.
     As approximately 49%50% of our staffTalents are located in Guangzhou, China, changes in Chinese labor or business laws may significantly affect our operations and our ability to serviceserve our Hong Kong based customers.
     Our call center in Guangzhou employs over 1,400 persons1,600 Talents and is an important resource forto us. We are therefore significantly affected by the laws and regulations that governgoverning foreign companies with operations in China. As the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may lead to restrictions on our ability to hire and retain our employeesTalents in China, which could impact our ability to provide serviceservices to our Hong Kong-based customers.

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Currency fluctuations of the Hong Kong dollar, our functional currency, may increase our operating costs and long term liability.
     OurWe are exposed to a certain amount of foreign exchange risk because our revenues are predominantly denominated in Hong Kong dollars. Adollars, while a major portion of our operating costs consist of interconnection charges paid to overseas carriers for the delivery of our international calls. Substantially all of these interconnection charges are denominated in U.S. dollars, Renminbi or other foreign currencies. In addition,Our foreign currency-denominated expenses primarily consist of the following:
A major portion of our operating costs of interconnection charges payable to overseas carriers for the delivery of our international calls. Substantially all of these interconnection charges are denominated in U.S. dollars or other foreign currencies.
The equipment and hardware we purchase for the expansion of our Next Generation Network constitutes a large portion of our capital expenditures and is also denominated in U.S. dollars. Finally, payment of interest, principal and any other amounts due under our 8.75% senior notes due 2015 are made in U.S. dollars.
Expenses incurred for the operation of our call center located in Guangzhou, China are denominated exclusively in Renminbi, the official currency of the People’s Republic of China. These include salaries paid to our personnel as well as various operating expenses that we incur to maintain our operations.
     Since October 17, 1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of HK$7.80 per US$1.00. We, however, cannot assure you the link will be maintained in future.
     The expenses that we incur in relation to our call center located in Guangzhou, China are denominated exclusively in Renminbi, the official currencyfuture. Any depreciation of the People’s Republic of China. These include the salaries that we pay to our personnel as well as various operating expenses that we incur to maintain our operations. As a result, we are exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollar against the U.S. dollar, Renminbi or other currencies would increase our operating costs, including our debt servicing costs, make our capital expenditure plans more expensive, and the Renminbi.adversely affect our profitability.
     The Renminbi is presently pegged to a basket of currencies, and there remains significant international pressure on the PRC government to further liberalize its currency policy. This could result in a further and more significant appreciation in the value of the Renminbi against the Hong Kong dollar, which would increase the cost of operating our call center.
     Any depreciation of the Hong Kong dollar against the U.S. dollar, Renminbi or other currencies would increase our operating costs, including our debt servicing costs, make our capital expenditure plans more expensive,Our Chairman and adversely affect our profitability.
Impact of credit crunch on local and global economy may negatively impact our business and our progress on NGN development.
     The current credit crunch will affect both the local economy and global economy. Although weVice Chairman have sufficient cash to meet our anticipated cash needs for at least the next 12 months, the current market conditions may affect our ability to obtain further financing to support our network expansionsignificant ownership interest in the future. Failure to do so will negatively impact our business and slow down our progress on NGN deployment. The economic downturn may also dampen the demand for broadband services or affect our customers’ ability to continue with existing services.

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Risks Relating to our Securities
company. We cannot assure you that weour Chairman and Vice Chairman will be ablenot engage in any transactions that lead to generate sufficient cashconflicts of interest resulting from operations to fund our operations.their ownership interests.
     Our ability to fund operatingChairman and capital expenditures and to service debt will depend significantly on our ability to generate cash from operations. In fiscal 2008, we were able to generate cash from operationsVice Chairman each have an indirect ownership interest in the Company through Top Group International Limited (“Top Group”), which, as of HK$378.5 million. However, we cannot assure you that we will be able to sustain our operations in order to generate sufficient cash flows to meet our future debt service requirements.
     Our ability to generate cash from operations is subject to general economic, financial, industry, legal and other factors and conditions, manyDecember 14, 2010, held approximately 44.22% of the Company’s shares, of which are outside42.12% and 27.06% was owned by our control. In particular, our operations are subject to priceChairman and demand volatilityVice Chairman, respectively. Top Group International Limited is a special purpose vehicle incorporated in the telecommunications industry. If weBritish Virgin Islands. Its board of directors consists of Mr. Wong and Mr. Cheung. Mr. Wong and Mr. Cheung have entered into a voting agreement pursuant to which they agreed to vote the 339,814,284 shares held by Top Group International Limited, the 7,145,289 shares held by Mr. Wong individually, and the 42,286,159 shares held by Mr. Cheung individually, collectively as a group. We cannot financemake assurances that our operations and capital expenditure using cash generated from operations, we may be required to (among other things) incur additional debt, reduce capital expenditures, sell assets,Chairman or raise equity. WeVice Chairman will not take actions that may not be successful in taking these actions. Further, our ability to take many of these steps may be subject to approval by future creditors in addition to holdersthe best interests of our 8.75% senior notes due 2015.
Our 8.75% senior notes due 2015 contain covenants that limit our financial and operating flexibility.
     Covenants under our 8.75% senior notes due 2015 restrict our ability to, among other things:
pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;
incur additional indebtedness or issue certain equity interests;
merge, consolidate or sell all or substantially all of our assets;
issue or sell capital stock of some of our subsidiaries;
sell or exchange assets or enter into new businesses;
create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;
create liens on assets;
enter into sale and lease back transactions; and
enter into certain transactions with affiliates or related persons.
     All of these limitations are subject to exceptions and qualifications specified in the indenture governing the 8.75% senior notes. These restrictive covenants could limit our ability to pursue our growth plan, restrict our flexibility in planning for, or reacting to, changes in our business and industry and increase our vulnerability to general adverse economic and industry conditions.shareholders.
ITEM 4. INFORMATION ON THE COMPANYItem 4 Information on the Company
A. History and Developmentdevelopment of the Company
     The legal and commercial name of the Company is City Telecom (H.K.) Limited. The Company was incorporated in Hong Kong on May 19, 1992 under the Hong Kong Companies Ordinance asand is a limited liability company. Our registered office is located at Level 39, Tower 1, Metroplaza, No. 223 Hing Fong Road, Kwai Chung, New Territories, Hong Kong, telephone (852) 3145-6888. Our agent for U.S. federal securities laws purposes is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.
     We began offering international telecommunications services in September 1992. From that date,In our early stage of development, we focused on increasing our subscription base and amount of international traffic, and on building the CTI brand name as a low cost provider of international telecommunications services. In addition to our operations in Hong Kong, we also provide international telecommunications and Internet access services in Canada through two telecommunications companies in Canada, City Telecom Inc. and City Telecom (B.C.) Inc. We acquired our interests in these companies in December 1998 as part of our efforts to increase our market share of the telecommunications traffic between Canada and Hong Kong.
     In January 1999, we became the first company in Hong Kong to obtain the first PNETS License. The Licenselicense gives us the right to offer international telecommunications services using international simple resale and has had a significant positive impact on our international telecommunications revenues. We incorporated HKBN in Hong Kong in August 1999 and launched our broadband Internet access services in March 2000. In addition, we began providing local VoIP services in April 2002, IP-TV services in August 2003, and corporate data services in July 2004 using our Next Generation Network. The network has the capability of providing value-added broadband services and content that combine voice, data and images with increased efficiency and flexibility.
     We believe that one of the cornerstones of our success has been our ability to quickly expand our service offerings when changes in regulation or technology have provided us with an opportunity to do so. Some of the key events in our history and development include the following:
  In September 2005, HKBN was conferred as the winner of the Global Entrepolis@Singapore Award 2005, which was presented by the Asian Wall Street Journal in association with the Economic Development Board of Singapore. This award recognizes innovation in the application of technology to a strong business model with commercial potential to be an industry or market leader.
In October 2005, HKBN became the first service provider in the world to achieve the Cisco Powered Network Metro Ethernet QoS Certified status.
In October 2005, HKBN launched our “2b” Broadband Phone Service, providing VoIP services to local and overseas users via a software-based broadband phone.
In November 2005, we announced cooperation with China Telecom Hong Kong Limited to provide Pan-China Internet Protocol Virtual Private Network services to corporate customers.

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In March 2006, HKBN launched our “bb25” Internet access service with symmetric 25 Mbps access for the residential mass market. This supplemented our existing bb10, bb100 and bb1000 service offerings.
In July 2006, HKBN was conferred “Call Center of the Year” & “Customer Service Center of the Year” awards at the Customer Relationship Excellence Awards 2005.
In October 2006, our Liu Xiang “Be Ahead of Yourself” marketing campaign won the “Certificate of Excellence” of HKMA/TVB Awards for Marketing Excellence 2006.
 
  In February 2007, HKBNwe launched bb50our “bb50 and bb200bb200” symmetric residential broadband service supported by “SDU” personalized customer care service.

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  In June 2007, CTI Group waswe were awarded “Best Retention Strategies” at the Hong Kong HR Awards 20072007.
 
  In July 2007, HKBN waswe were awarded “Integrated Support Team” of the year at the Asia Pacific Customer Service Consortium Customer Relationship Excellence AwardsAwards.
 
  In September 2007, HKBNwe launched “Fiber-To-The-Home”“Fibre-To-The-Home” residential broadband service, “FiberHome100”“FibreHome100”, “FiberHome200”“FibreHome200” and “FiberHome1000”“FibreHome1000”. As the same time, we upgraded our entry level service broadband Internet access from 10 Mbps to 25 Mbps.
 
  In January 2008, HKBN launchedwe began to offer our “Dual Mode High Definition Terrestrial TV Receiver and IPTV Set-Top Box” to all of our customers in Hong Kong.
 
  In February 2008, HKBN waswe were awarded the contract for the provision of payphone service at the Hong Kong International Airport.
 
  In September 2008, HKBNwe launched the National Geographic Channel’s first ever Interactive Channel.
In June 2009, we launched the first Online Broadband Service Registration Platform in Hong Kong.
In November 2009, we accepted the Innovation in Recruitment award and Champion of HR award at the Hong Kong HRM Awards 2009.
In December 2009, we shattered the one-million mark for Fixed Telecommunications Network Services subscriptions.
In March 2010, we launched our “bb100” symmetric broadband and WiFi services at Hong Kong International Airport.
In April 2010, we launched our 1Gbps symmetric residential broadband service at HK$199 per month.
B. Business Overviewoverview
Principal Activities
     We are a Hong Kong-based provider of residential and corporate fixed telecommunications network and international telecommunications services andservices. We specialize in the residential mass market and small-to-medium corporate and enterprise market segments. The majority of our revenues are derived from business conducted in Hong Kong.
     We derive our revenues from two business segments: FTNS and IDD. A breakdown of our revenues is as follows:
            
 For the year ended August 31, 
 2008 2009 2010 
             HK$ HK$ HK$ 
 Year ended August 31, (Amounts in thousands) 
Revenue 2006 2007 2008 
 HK$ HK$ HK$
 (Amounts in thousands)
Fixed telecommunications network services(1)
 716,600 816,800 1,011,038 
International telecommunications services 418,276 324,470 291,943 
FTNS business 1,011,038 1,230,880 1,356,098 
IDD business 291,943 247,359 218,589 
              
  
Total operating revenue 1,134,876 1,141,270 1,302,981  1,302,981 1,478,239 1,574,687 
              
(1)Includes Internet access, local telephony services, pay-TV services and corporate data services.
FTNS business.Our FTNS business involves the provision of fixed telecommunications network services are delivered through our self-owned Next Generation Network andNetwork. Such services include the following:
  high-speed broadband Internet access services at symmetric upstream and downstream access speeds of 25 Mbps to 1,0001000 Mbps;
 
  fixed line local telephony services using VoIP technology;
 
  pay television services consisting of more than 88110 channels, including self-produced news, children’s programming,program, international drama, movies and documentary and local interest programming, using our IP platform; and
 
  corporate data services, including the provision of dedicated bandwidth to corporate customers.

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     As of August 31, 2008, we had a total of approximately 801,000 subscriptions for our fixed telecommunications network services, consisting of 316,000 broadband Internet access, 329,000
As of August 31, 2010, we had a total of approximately 1,110,000 subscriptions for our fixed telecommunications network services, consisting of 526,000 broadband Internet access, 431,000 local VoIP and 153,000 IP-TV services subscriptions.
IDD business.Our IDD business involves the provision of international telecommunications services. Such services include direct dial services, international calling cards and mobile call forwarding services in Hong Kong and Canada. As of August 31, 2010, the customer base for our total international telecommunications services consisted of approximately 2.4 million registered accounts.
Strategy and 156,000 IP-TV services subscriptions.
     Our international telecommunications services include direct dial services, international calling cards and mobile call forwarding services in Hong Kong and Canada. As of August 31, 2008, the customer database for our total international telecommunications services comprised approximately 2.3 million registered accounts.Competitive StrengthsOur international telecommunications business contributed 22.4% of our total revenues in fiscal 2008 as compared to 28.4% in fiscal 2007.
     Our strategy is to market multiple fixed telecommunications network services usingby capitalizing on the new in-building blockwiring we have done on a mass scale for our Next Generation Network and will focus on growing our market share, increasing our network coverage and introducing new services through our IP platform. We believe that our success

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will continue to depend on our ability to capitalize on our focus on the residential mass and small to mediumsmall-to-medium corporate and enterprise market segments, our leading-edge Next Generation Network, and our first mover advantage in an industry withthe fixed line telecommunications market, which has a high barriers to entry.
Our Competitive Strengthsentry barrier.
     We believe that our demonstrated success is primarily due to our ability to capitalize on the following key strengths:
  Focus on the Residential Mass and Small-To-Medium Corporate and Enterprise Market SegmentsSegments.. We focus on offering high-bandwidth services to the residential mass and small-to-medium enterprise markets in Hong Kong, which we believe have significant growth potential. We price our services attractively on a value for bandwidthvalue-for-bandwidth basis and at the same time offer bandwidth advantages over comparable service offerings by our competitors. Our IP-TV services focus on the residential mass market by providing Chinese-language content that targets the Chinese-speaking population of Hong Kong. We have also strengthened our English language contents over the past year to increase our competitiveness by adding Disney Channels, Discovery Channels, National Geographic, AXN, Bloomberg and other channels. Our focus on the residential mass and small-to-medium corporate and enterprise markets has enabled us to quickly grow our subscription base, and we believe this will help us to up-sell our services.
 
  Leading-Edge Next Generation NetworkNetwork.. We believe our self-owned Next Generation Network, a fiber-based backbone, gives us an inherent cost and performance advantage over our competitors. OurThe high capacity of this network has enabled us to offer a suite of services on a single IP network platform. This IP platform is highly scalable, enabling us to offer broadband Internet access, local VoIP, IP-TV and corporate data services over a single network. It is also capable of providing up to 1,0001000 Mbps symmetric broadband Internet access. Whereas our competitors are on a linear improvement path, we can upgrade our fiber based services logarithmically from 100Mbps to 1000Mbps on our existing passive fiber infrastructure which existing technology cannot accomplish using legacy telephone lines.
 
  First Mover Advantage and High Barriers to EntryEntry.. Our first mover advantage andDespite the intense competition in the Hong Kong telecommunications industry, the inherent characteristics of the Hong Kongfixed line telecommunications infrastructure, which presentmarket create a natural barrier tohigh entry make it difficult forbarrier. Accordingly, we believe that our competitorsNext Generation Network’s current coverage of 1.77 million residential homes pass, substantially all in densely populated areas, gives us a first mover advantage over our competitors. Competitors who want to replicate our business model. Metro Ethernet technology is not appropriate for our competitors who intendmodel to offerprovide a full coverage network that includes remote and difficult to reachdifficult-to-reach areas of Hong Kong.Kong may encounter technological difficulties. Attempting to deploy Metro Ethernet technology in such locations would significantly increase costs and completion time of such a network. While other telecommunications operators may lay their own fiber-to-the-building, we believe some would encounter significant in-building bottlenecks when attempting to complete an end-to-end network. This is because a majority of Hong Kong’s residential properties have limited space for in-building wiring leading to subscribers’ residences, making it difficult for new entrants to replicate our end-to-end network build.
Recent DevelopmentsDevelopment
     On February 9, 2007,December 31, 2009, we signed a Memorandum of Understanding with MobileOne Limited, setting forth our interest to participate as a member ofsubmitted an application for the bidding consortiumdomestic free television programme service license in the Next Generation National Broadband Network project in Singapore. The project relatesHong Kong to the provision of ultra-high speed national connectivity in Singapore at competitive prices by 2015, and the Singapore government is expectedBroadcasting Authority. If granted, such license would allow us to provide a grant of up to S$750 million for the project. A company is expected to be selected to design, build and operate the passive infrastructure layer of the project. The deployment of active electronics is expected to be handled by another company, which is expected to be the entity that offers wholesale broadband access to downstream retail service providers.
     After extensive evaluation and business planning, the Company ceased to be a member of the bidding consortium with effect from August 20, 2008.
     On January 2, 2009, the Telecommunications Authority unveiled five qualified bidders for the BWA spectrum auctionfree television programme services in Hong Kong. BWA isWe expect the cumulative investment amount to be approximately HK$210 million before we are able to generate positive cash flow from such services. We completed a radio technology that can supportpublic offering of our American depositary shares, or ADSs, in April 2010 and expect to use a variety of wide area high-speed wireless data services for fixed and mobile customers. Our wholly owned subsidiary, HKBN, is oneportion of the qualified bidders. The other four qualified bidders are, namely, China Mobile Hong Kong Company Limited, CSL Limited, Genius Brand Limited, and SmarTone Wireless Limited.net proceeds of this offering to fund such services.
     All qualified bidders are eligible for participating in the BWA spectrum bidding stage. The bidding stage started on January 12, 2009 is still in progress as on January 16, 2009.
     For uncertainties relating to BWA, see “Risks Relating to Our Business and Operations — Although we have expressed our interest in obtaining a BWA license, we cannot assure you that we will be the successful bidder, and, if we are granted the license, that the business in relation to BWA will be successful”.
Our Services
Fixed Telecommunications Network Servicestelecommunications network services
     We offer our fixed telecommunications network services overthrough our Next Generation Network. The high capacity of our fiber-based backbone has enabled us to offer a suite of services on a single IP network platform. These services include our broadband Internet access, local VoIP, IP-TV and corporate data services. The table below shows the profile of the subscriptions for our fixed telecommunications network services over the past three years:

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  As of August 31, 
  2006  2007  2008 
Broadband Internet Access  220,000   247,000   316,000 
Local VoIP  281,000   308,000   329,000 
IP-TV  116,000   128,000   156,000 
          
             
Total Subscriptions  617,000   683,000   801,000 
          
Broadband Internet Access
     We offer our broadband Internet access services in Hong Kong through HKBN. Our strategy is to leverage our broadband subscription base to up-sell our other fixed telecommunications network services such as local VoIP and IP-TV.
     We currently offer broadband Internet access to our residential and corporate customers at access speeds of up to 1,000 Mbps, but the majority of our customers currently have access speeds of between 25 Mbps and 100 Mbps. We currently offer broadband service for bb25, bb50, bb100, bb200 and bb1000 at monthly fees ranging from HK$208 to HK$1,680 for unlimited access. Moreover, we also offer FTTH broadband service for 200 Mbps and 1000 Mbps at monthly fees at HK$688 and HK$1,680 respectively for unlimited access. Instead of using Category-5e copper wiring for the last mile, optical fiber is used in FTTH broadband service. Currently, all of our broadband Internet access packages offer a free e-mail service and at a charge, offer customers for a variety of value added services, such as “bbDrive”, an on-line virtual hard drive with up to 10Gb of storage, “bbGuard”, an anti-spam and anti-virus package, “bbWatch”, a full-screen IP-TV service that is viewed with a desktop or laptop computer, “bbWi-Fi”, a service in which subscribers can have wireless Internet access through more than 2,000 hotspots, and “getFAXEASY”, a service in which subscribers can simply receive fax by their designated email address in Hong Kong and worldwide. An unique Hong Kong fax number is assigned to each subscriber. We frequently alter our promotions in response to changing market conditions or as a way of attracting additional subscribers.
     In addition to the residential packages described above, we have also developed broadband promotions that target corporate customers. We offer prepackaged plans that provide access at speeds of up to 1,000 Mbps. Corporate customers that subscribe to prepackaged plans pay fixed monthly subscription fees that range from HK$150 to HK$22,000. Our prepackaged plans include on-site training, on-site maintenance support, high capacity data transfer and e-mail services.
Competition
     There have been many new entrants to the Internet access business, but our main competitors are PCCW-HKT (through its current subsidiary PCCW-IMS Limited), i-Cable and HGC. PCCW-HKT has been offering broadband Internet access services since May 1998 and mainly uses asymmetric digital subscriber line technology, or ADSL, over its telephone network to provide asymmetric Internet access typically at speeds up to 6 Mbps downstream and 640 Kbps upstream. In November 2007, PCCW-HKT announced the provision of 100 Mbps and 1,000 Mbps fiber direct broadband Internet access service to two-thirds of Hong Kong’s households. i-Cable began providing broadband Internet access services in March 2000 using its hybrid fiber coaxial network that provides symmetric typical access speeds up to 8 Mbps shared by a cluster of buildings. HGC predominantly uses VDSL technology and typically provides access speeds up to 100 Mbps.
     Our main competitors have been in operation longer and may have greater market presence, brand recognition and more financial, technical and personnel resources. In addition, they may have greater network coverage in terms of the number of homes passes.
     We had approximately 316,000 broadband Internet access subscriptions as of August 31, 2008, which represented a market share of approximately 16% with respect to the total number of broadband Internet access subscribers in Hong Kong.
Local VoIP
     We offer our on-network local VoIP services in Hong Kong by installing IP-based voice switching equipment in locations already covered by our Next Generation Network. Voice signals are transmitted by the VoIP switches into the Ethernet network installed in the subscriber’s building.
     The quality of our local VoIP service is indistinguishable from traditional fixed line local telephony services, and customers are able to use their existing telephone equipment. In addition, with portability of fixed line numbers, fixed line telephony subscribers switching to our local VoIP services are able to retain their existing local telephone number.
     We currently charge HK$88 to HK$118 per month for our local VoIP services depending on the service plan, and we offer a full range of value added services, including call waiting, caller display and conference call services.
     We also offer hardware-based off-network local VoIP services, which we refer to our “Broadband Phone” service. “Broadband Phone” allows subscribers to use our local VoIP services via the broadband network of other operators. In October 2005, we launched our global software-based VoIP service called “2b”. This service is primarily targeted at the overseas Chinese community, which we believe will enable us to access a wider addressable market with higher tariff compared to the Hong Kong market. For HK$168 per month, “2b” provides broadband users around the world with a standard Hong Kong 8-digit fixed line number to make and receive unlimited calls to/from Hong Kong. Moreover, we offer a full range of value added services, including call waiting, voice mail and conference call features.

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     Competition
     PCCW-HKT isThe table below shows the incumbent and largestprofile the subscriptions of our fixed telecommunications network operator in Hong Kong. Based on public information, PCCW-HKT had a market share of approximately 71% with respect to local telephony services as of June 30, 2008. The remainder ofover the market is shared among ourselves andpast three other alternative carriers: HGC, New World and Wharf T&T. The principal basis of competition for local telephony is price and brand name recognition. PCCW-HKT has the highest brand name recognition, but we and the other operators are contending by offering competitively priced local telephony services that provide comparable quality to PCCW-HKT. As of August 31, 2008, we had 329,000 localyears:
             
  As of August 31, 
  2008  2009  2010 
Broadband Internet access  316,000   391,000   526,000 
Local VoIP  329,000   382,000   431,000 
IP-TV  156,000   170,000   153,000 
          
             
Total FTNS subscriptions  801,000   943,000   1,110,000 
          
Broadband Internet Access
Scope of service.Our broadband Internet access services in Hong Kong are offered through HKBN. We currently offer our residential and corporate customers broadband Internet access speeds of up to 1000 Mbps, but the majority of our customers currently have access speeds of 100 Mbps. We also offer Fiber-to-the-Home, or FTTH, broadband service for 100 Mbps, 200 Mbps and 1000 Mbps. Rather than using Category-5e copper wiring for the last mile, optical fiber is used in FTTH broadband service. Currently, all of our broadband Internet access packages include free e-mail and for additional charges, offer customers for a variety of value added services, such as “bbWatch,” a full-screen IP-TV service that is viewed with a desktop or laptop computer; “bbWi-Fi”, a service in which subscribers can have wireless Internet access through more than 2,000 hotspots; and “Game.hkbn.net”, a game point portal that sells various game providers’ cards and merchandises. We frequently alter our promotions in response to changing market conditions or as a way of attracting additional subscribers.
Pricing.We currently offer broadband service for bb100 and FibreHome1000 at monthly fees ranging from HK$169 to HK$199 for unlimited service access. On August 19, 2010, we announced to the public that effective from September 1, 2010, we ended the promotional rate at HK$99 per month. By paying HK$199 per month, customers can choose 100 Mbps triple play service or HK$199 per month for 1000Mbps broadband Internet access service. Our strategy is to change from subscriber growth to revenue growth with a reasonable and acceptable pricing to our customers.
In addition to the residential packages described above, we have also developed broadband and Metronet private network service plans that target corporate customers. We offer prepackaged plans that provide access at speeds of up to 1000 Mbps. Corporate customers that subscribe to prepackaged plans pay fixed monthly subscription fees ranging from HK$128 to HK$200,000 depending on bandwidth or solution selected. Our prepackaged plans include on-site training, on-site maintenance support, high capacity data transfer and e-mail services.
Competition.There have been many new entrants to the Internet access business, but our main competitors are PCCW-HKT, i-Cable and HGC. PCCW-HKT has been offering broadband Internet access services since May 1998 and mainly uses asymmetric digital subscriber line technology, or ADSL, over its telephone network to provide asymmetric Internet access at speeds up to 6 Mbps/8 Mbps downstream and 640 Kbps/800 Kbps upstream. In November 2007, PCCW-HKT announced the provision of 100 Mbps and 1000 Mbps fiber direct broadband Internet access service to two-thirds of Hong Kong’s households. i-Cable began providing broadband Internet access services in March 2000 using its hybrid fiber coaxial network that provides symmetric typical access speeds up to 8 Mbps shared by a cluster of buildings. HGC predominantly uses VDSL technology and typically provides access speeds up to 100 Mbps.
Our main competitors have been in operation longer and may have greater market presence, brand recognition and more financial, technical and personnel resources. In addition, they may have greater network coverage in terms of number of homes pass.
Market share.We had approximately 526,000 broadband Internet access subscriptions as at August 31, 2010, which represented a market share of approximately 25% with respect to the total number of broadband Internet access subscribers in Hong Kong.
Local VoIP subscriptions. Our market share with respect to local residential telephony services amounts to approximately 17% as of August 31, 2008.
Scope of service.We offer our on-network local VoIP services in Hong Kong by installing IP-based voice switching equipment in locations covered by our Next Generation Network. Voice signals are transmitted through our Ethernet network by the VoIP switches installed in the subscriber’s building. The quality of our local VoIP service is comparable to traditional fixed line local telephony services, and customers are able to use their existing telephone equipment. In addition, with portability of fixed line numbers, fixed line telephony subscribers switching to our local VoIP services are able to retain their existing local telephone number.

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We also offer hardware-based off-network local VoIP services, or “Broadband Phone” services, via the broadband network of other operators. In October 2005, we launched our global software-based VoIP services under the brand “2b”. This service is primarily targeted at the overseas Chinese community, which we believe will enable us to access a wider addressable market with higher tariff compared to the Hong Kong market. For HK$98 per month, “2b” provides broadband users around the world with a standard Hong Kong 8-digit fixed line number to make and receive unlimited calls to/from Hong Kong. Moreover, we offer a full range of value added services, including call waiting, voice mail and conference call features.
Pricing.We currently charge from HK$68 to HK$118 per month, on standalone basis, for our on-network local VoIP services depending on the service plan, and we offer a full range of value added services, including call waiting, caller display and conference call services. The majority of our new local VoIP is included in our triple play service offered at HK$199 per month for voice, IP-TV and broadband.
Competition.PCCW-HKT is the incumbent and largest fixed telecommunications network operator in Hong Kong. Based on public information, PCCW-HKT had a market share of approximately 70% with respect to local telephony services as of June 30, 2010. The remainder of the market is shared among ourselves and three other alternative carriers: HGC, New World and Wharf T&T. The principal basis of competition for local telephony is price and brand name recognition. PCCW-HKT has the highest brand name recognition, but we and the other operators are contending by offering competitively priced local telephony services that provide comparable quality to PCCW-HKT.
Market share.As of August 31, 2010, we had 431,000 local VoIP subscriptions. Our market share with respect to local residential and business telephony services was approximately 10% as of August 31, 2010.
IP-TV
Scope of service.Our IP-TV services began in August 2003 and include the provision of standard definition and high definition video via our Next Generation Network to an IP set-top-box connected to the subscriber’s television set. In May 2007, we renamed our IP-TV services as “bbTV”. “bbTV” currently consists of more than 110 channels, including a self-produced 24-hour news channel and kids education and development channels and turnaround channels from various international content providers. Since the launch of our IP-TV services in August 2003, we have progressively adjusted our content offerings and valued added components of the services. We consider our IP-TV to be an incremental component of our broadband and VoIP service offerings, rather than a large standalone business.
Pricing.We currently charge our IP-TV service together with our broadband and VoIP services at HK$199 per month for this subscription-based pay television service. Because of the scalability of our Next Generation Network infrastructure, the current cost of adding IP-TV services to an existing broadband Internet access or local VoIP subscriber is small.
Competition.Our two main competitors in the pay-television business are i-Cable and PCCW-HKT. The pay-television services of i-Cable and PCCW-HKT include a significant amount of exclusive contents, such as Barclays Premier League Football until June 2013, HBO, Cinemax, ESPN and others. We target a different market than these competitors by offering a wide spectrum of content line-up and attractive pricing, both of which we consider critical for successful penetration in the residential mass market. We have also strengthened our English language contents over the past year to increase our competitiveness by adding Disney Channels, Discovery Channels, National Geographic, AXN, Bloomberg and other channels.
TVB and ATV are indirect competitors of our pay-TV services. TVB and ATV account for a substantial proportion of Hong Kong’s television viewership and we market our services as supplemental to theirs. Because TVB and ATV offer primarily subscription-free television services supported by advertising revenues, we expect that their programming is designed to attract the widest possible audience. In contrast, we and the other pay-TV operators rely on monthly subscription fees for most of our revenues. Other competitors include satellite TV operators, such as Star TV, as well as potential competition from direct-to-home broadcasters and broadcasters using digital terrestrial delivery methods.
Market share. As of August 31, 2010, we had 153,000 IP-TV subscriptions, representing approximately 7% of the total pay-television subscription base in Hong Kong.
International telecommunications services
     In August 2003 we introduced our IP-TV service that provides DVD quality video delivered via our Next Generation Network to an IP set-top-box connected to the subscriber’s television set. In May 2007, we renamed our IP-TV service as “bbTV”. This monthly subscription-based pay television service offers 88 channels consisting
Scope of a self-produced 24-hour news channel and education and recreation channels (including children’s programming) and channels whose content is obtained from other content-providers.
     Because of the scalability of our Next Generation Network infrastructure, the current cost of adding IP-TV services to an existing broadband Internet access or local VoIP subscriber is small. Since the launch of our IP-TV services in August 2003 we have progressively adjusted our content offerings and valued added components of the services. We consider our IP-TV to be an incremental component of our broadband and VoIP service offerings, rather than a large standalone business. As of August 31, 2008, we had 156,000 subscriptions representing approximately 8% of the total pay-television subscription base in Hong Kong.
Competition
     Our two main competitors in the pay-television business are i-Cable and PCCW-HKT. The pay-television services of i-Cable and PCCW-HKT include a significant amount of English language content, such as English Premier League Football, HBO, Cinemax, ESPN and others. PCCW-HKT, in particular, has signed exclusive content contracts with English Premier League Football, HBO, ESPN, and Star among others. We target a different market than these competitors by offering predominantly Chinese language content, and pricing our IP-TV service attractively to the residential mass market.
     Television Broadcasts Limited and Asia Television Limited, commonly known as TVB and ATV, respectively, are indirect competitors to our pay-TV services in the Hong Kong television market. TVB and ATV account for a substantial proportion of Hong Kong’s television viewership and we market our services as supplemental to theirs. Because TVB and ATV are supported by advertising revenues, we expect that their programming is designed to attract the widest possible audience. In contrast, we and the other pay-TV operators rely on monthly subscription fees for most of our revenues. Other competitors include satellite TV operators, such as Star TV, as well as potential competition from direct-to-home broadcasters and broadcasters using digital terrestrial delivery methods.
International Telecommunications Services
We began providing international telecommunications services in 1992 and were among the first companies to be granted a PNETS License. Our international telecommunications services are offered to our FTNS business customers via our Next Generation Network and to other carriers’ customers via indirect access. Indirect access allows any pre-registered telecom user in Hong Kong to access our services via our two primary access codes “1666” and “0030”. By dialing our access code, our registered customers can access any destination in the world through our network, by paying us a usage charge.

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We have greatly expanded our range of services over the years to include a variety of international direct dial services at competitive rates. We believe that our ability to deliver a range of calling plans with varying features that cater to different customer needs has been one of the key factors of our success.
     We offer international telecommunications services to our FTNS customers via our network and to other carriers’ customers via indirect access. Indirect access allows any pre-registered telecom user in Hong Kong to access our services via our two primary access codes “1666” and “0030”. By dialing our access code, our registered customers can access any destination in the world through our network, allowing us to generate a usage charge.
We market our international telecommunications services under the IDD 1666 and IDD 0030 brand names. These two brands provide us with flexibility in our marketing strategies. The primary international telecommunications services that we currently offer our customers are the following:
   
Service Description
IDD 1666 Provides subscribers with international direct dial using the access numbercode 1666 in Hong Kong.
 
IDD 0030 Provides subscribers with international direct dial using the access numbercode 0030 in Hong Kong.
 
Mobile Call Forwarding Servicescall forwarding services Allows call forwarding of Hong Kong mobile numbers to any overseas telephone number so that subscribers can receive calls while in overseas.
Pricing.We charge our IDD 1666 and IDD 0030 users a per minute tariff rate that varies according to the destination of the call and the calling prefix, with discounts depending on the time of day or day of the week when the call is placed.

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     We experienced a reduction in total traffic volume of 16.4% to 659 million minutes in fiscal 2007 and a further reduction of 12.9% to 574 million minutes in fiscal 2008. The continuing reduction in traffic volume was mainly due to intense competition as some of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share. Further, technology substitution from global VoIP providers such as Skype, which offers free PC-to-PC based international calls, is becoming more prevalent. We are proactively migrating our international telecommunications services to our “2b” services, which we believe carry higher margins and enjoy a wider addressable market.
Competition
     PCCW-HKT, HGC, New World, and Wharf T&T are our main competitors in the international telecommunications business. As in previous years, we experienced fierce price competition in Hong Kong during fiscal 2008. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2009. In our efforts to the destination of the call and the calling prefix, with discounts depending on the time of day or day of the week when the call is placed as well as monthly plans. To maintain our market share in a market segment with increasingly intense competition, we have significantly reduced some of our international telecommunications rates and introduce new marketing and promotional offers from time to time. We also employ two brand names, IDD 1666 and IDD 0030, to provide us with flexibility in our marketing strategies. To offset the effects of these price reductions, we have taken steps to reduce our cost base, such as using our relatively large traffic volume to negotiate lower prices from our international partners, establishing a call center in Guangzhou to provide customer service and back office support services, and developing our own international telecommunications infrastructure. Our employment of two separate brand names, IDD 1666 and IDD 0030, also provide us with flexibility in our marketing strategies.
Competition.PCCW-HKT, HGC, New World, and Wharf T&T are our main competitors in the international telecommunications business. As in previous years, we experienced fierce price competition in Hong Kong during fiscal 2010. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2011.
Further, technology substitution from global VoIP providers such as Skype, which offers free PC-to-PC based international calls, is becoming more prevalent.
Market share.We experienced a reduction in total traffic volume of 15.2% to 487 million minutes in fiscal 2009 and a further reduction of 4.7% to 464 million minutes in fiscal 2010. The continuing reduction in traffic volume was mainly due to intense competition as some of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share.
Our Network Infrastructurenetwork infrastructure
     Fixed Telecommunications Networktelecommunications network
     Our fixed telecommunications network services are delivered over our self-owned Next Generation Network, which allows us to deliver multiple services, including the triple play servicesservice of voice, broadband and IP-TV. The coverage of our Next Generation Network is concentrated in Hong Kong’s most densely populated areas, characterized by high-rise apartment buildings with multiple apartments on each floor. The network currently covers approximately 1.51.77 million residential home passes,homes pass, representing approximately 67%80% of Hong Kong’s population.total households and also 1,430 commercial buildings. We plan to extend the coverage of our Next Generation Network to 2.0 million residential home passes,homes pass, representing approximately 90% of Hong Kong’s population, and to 1,800 commercial buildings by 2010.the end of 2011. As we expand the reach and coverage of our Next Generation Network, we plan to continue introducing new services.
     Our Next Generation Network is deployed by using Metro Ethernet technology. Metro Ethernet technology is highly cost-effective when access is to be provided to a large number of users in a single building or cluster of buildings and is typically used in commercial buildings in metropolitan areas in other geographical markets. Our Ethernet infrastructure is a system of Category-5e copper wiring that connects our subscribers’ premises to our local area network, or LAN, switches within a residential or commercial building. By keeping our Category-5e copper distance to less than 100 meters we are able to deliver bandwidth of up to 1,000Mbps1000Mbps to our end users.subscribers.
     The first step in expanding the reach of our fixed telecommunications network infrastructure is to select buildings that we believe will provide sufficient economic returns to justify our investment based on several factors, including population density, proximity of the building to our existing fiber loop and our projected ability to sell services. We then perform a site visit to analyze the feasibility of installing our Ethernet technology. Once we are satisfied with the prospects of a particular building, we must obtain access rights from the building’s management, which may take several weeks or months. After receiving the required access rights, we employ a combination of our full-time staffTalents and contractors to begin installation of our in-building Ethernet infrastructure.Ethernet. The length of time required for the installation process depends on the size and structural features of the building and can be completed in as little as three weeks or take several months. As we install our in-building Ethernet infrastructure we simultaneously connect the building to our fiber-based backbone. All the buildings that we reach through our expansion efforts will be served by our self-owned infrastructure.

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     Unlike many of our competitors, which use multiple platforms to provide comparable services, all of our fixed telecommunications network services are offered through a single IP platform. In addition, unlike many new entrants to the industry, we operate an “end-to-end” network that extends from our IP network hub sites and our switching centers in Hong Kong to our subscribers’ premises. All the buildings covered by us are served by our self-owned infrastructure.
     In November 2007, we collaboratedhave been collaborating with one of the largest network solution providers for the deployment of our Next Generation Network using GPON in Hong Kong.technology. As the reach of GPON is considerably more than 100 meters, it can be a more cost effective solution to expand our Next Generation Network than our Ethernet setup for lower density deployments.
     In summary, our Next Generation Network allows us to deliver multiple services, including the triple play services of voice, broadband and IP-TV.
We incurred capital expenditures of approximately HK$286.7 million in fiscal 2009 and HK$344.8 million in fiscal 2010, substantially all of which were made in connection with the construction and upgrade of our infrastructure for ourthe provision of fixed telecommunications network infrastructure of approximately HK$132.3 million in fiscal 2007 and HK$211.7 million in fiscal 2008.services. In fiscal 2009 to fiscal 2010,2011, we plan to further incur total capital expenditures ofabout HK$650.0320 million to continue increasing the capacity of our existing network coverage and extending the reach of our Next Generation Network.HK$350 million per year.
     International Telecommunications Networktelecommunications network
     Our international telecommunications network infrastructure isconsists of a system of switches, self-owned and leased backbone capacity, interconnection arrangements and undersea cables that connect a subscriber’s telephone call to its destination.for the transmission of long distance calls.
Undersea cables. In March 2002, we received our license to provide undersea cable-based FTNS. This license allows us to purchase and operate our own undersea cables. In 2000, we entered into contracts with two large consortia of international telecommunications companies to acquire undersea cable capacity. Pursuant to the first contract, we completed the construction of a Japan-U.S. undersea cable in August 2001. Pursuant to the second contract, we agreed to jointly construct and maintain the Asia-Pacific Cable Network 2 undersea cable as an international transmission facility. Construction of the cable was completed in May 2002, and commercial operation began immediately thereafter. We spent a total of HK$120 million on these two projects. We believe the utilization of these undersea cables provides capacity for significant future growth of our international and fixed-network telecommunications services.
Having our own undersea cables and our fiber-based backbone have enabled us to better control international transmission quality, reduce the costs associated with international transmission and reduce our reliance on third party infrastructure. Our international telecommunications network currently has a monthly handling capacity of approximately 130 million minutes. We believe that the continuing improvement of our international telecommunications network is important in supporting the growth of our subscription base and the expansion of our range of services.
Interconnection arrangements.We have entered into interconnection arrangements with other local fixed network operators in Hong Kong and overseas carriers to transmit calls between Hong Kong and overseas destinations for our customers. We take into account a number of factors in choosing the local fixed network operators and overseas carriers with whom we cooperate, including the level of termination charges and transmission efficiency and quality. We evaluate the performance of parties with whom we have interconnection arrangements periodically. We believe that we will not have difficulty in finding alternative overseas carriers if performance standards are not being met or a change is otherwise necessary. We have not experienced any disruption in the provision of our services as a result of a change of arrangements with overseas carriers or local fixed network operators.
We pay a fixed monthly fee to local fixed network operators for connection between our switches and their networks and a variable access fee payable on a per-minute basis when accessing their network. For customers using our own network, no interconnection fee is charged. We negotiate the termination charges we pay with the overseas carriers, and the termination charges vary from one overseas carrier to another. All of the interconnection and termination charges we pay to local fixed network operators and overseas carriers, respectively, are made on an open account basis with credit terms ranging from 10 to 30 days. The interconnection charges we pay to local fixed network operators are denominated in Hong Kong dollars and substantially all the interconnection charges we pay to overseas carriers are denominated in U.S. dollars.
International telecommunications switching systems.We own five international telecommunications switching systems: three in Hong Kong and two in Canada, one in Vancouver and one in Toronto.
Our three international telecommunications switching systems in Hong Kong handle telephone calls originating or terminating in Hong Kong as well as transit traffic. Our telecommunications network mainly consists of switching equipment by Nortel Networks Limited and compression units supplied by Cisco Systems, Inc. and ECI Telecom Ltd. These systems are programed to automatically choose the optimal routing for each transmission. Optimal routing is a function of a variety of factors, such as country or territory of origination and destination, communication quality, efficiency and costs, and the capacity of the various communication methods available.
Because our three international telecommunications switching systems in Hong Kong operate independently of each other, if one system breaks down, all transmissions are immediately diverted to another switching system. We have never experienced a period where all systems experienced a failure at the same time since we commenced operations in 1992.

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Undersea Cables
     In March 2002, we received our license to provide undersea cable-based fixed telecommunications network services. This license allows us to purchase and operate our own undersea cables. In 2000, we entered into contracts with two large consortia of international telecommunications companies to acquire undersea cable capacity. Pursuant to the first contract, we completed the construction of a Japan-U.S. undersea cable in August 2001. Pursuant to the second contract, we agreed to jointly construct and maintain the Asia-Pacific Cable Network 2 undersea cable as an international transmission facility. Construction of the cable was completed in May 2002, and commercial operation began immediately thereafter. We spent a total of HK$120 million on these two projects. We believe the utilization of these undersea cables provides capacity for significant future growth of our international and fixed-network telecommunications services.
     Having our own undersea cables and our fiber-based backbone has enabled us to better control international transmission quality, reduced the costs associated with international transmission and reduced our reliance on third party infrastructure. Our international telecommunications network currently has a monthly handling capacity of approximately 140 million minutes. We believe that the continuing improvement of our international telecommunications network is important in supporting the growth in our subscription base and the expansion of our range of services.
Interconnection Arrangements
     We have entered into interconnection arrangements with other local fixed network operators in Hong Kong and overseas carriers to transmit calls between Hong Kong and overseas destinations for our customers. We take into account a number of factors in choosing the local fixed network operators and overseas carriers with whom we cooperate, including the level of termination charges and transmission efficiency and quality. We evaluate the performance of parties with whom we have interconnection arrangements periodically. We believe that we will not have difficulty in finding alternative overseas carriers if performance standards are not being met or a change is otherwise necessary. We have not experienced any disruption in the provision of our services as a result of a change of arrangements with overseas carriers or local fixed network operators.
     We pay a fixed monthly fee to local fixed network operators for connection between our switches and their networks and a variable access fee payable on a per-minute basis when accessing their network. For customers using our own network, no interconnection fee is charged. We negotiate the termination charges we pay with the overseas carriers, and the termination charges vary from one overseas carrier to another. All of the interconnection and termination charges we pay to local fixed network operators and overseas carriers, respectively, are made on an open account basis with credit terms ranging from 15 to 30 days. The interconnection charges we pay to local fixed network operators are denominated in Hong Kong dollars and substantially all the interconnection charges we pay to overseas carriers are mainly denominated in U.S. dollars.
International Telecommunications Switching Systems
     We own three international telecommunications switching systems in Hong Kong and two in Canada, one in Vancouver and the other in Toronto.
     Our three international telecommunications switching systems in Hong Kong handle telephone calls originating or terminating in Hong Kong as well as transit traffic. Our telecommunications network mainly consists of switching equipment supplied by Nortel Networks Limited and compression units supplied by Cisco Systems, Inc. and ECI Telecom Ltd. These systems are programmed to automatically choose the optimal routing for each transmission. Optimal routing is a function of a variety of factors, such as country or territory of origination and destination, communication quality, efficiency and costs, and the capacity of the various communication methods available.
     Furthermore, since our three international telecommunications switching systems in Hong Kong operate independently of each other, if one system breaks down, all transmissions are immediately diverted to another switching system. We have never experienced a period where all systems experienced a failure at the same time since we commenced operations in 1992.
Sales and Marketingmarketing
     We advertise our products and services through our “Fibre Shops”, “on-the-street” marketing kiosks, telemarketing and direct mailing, as well as through Chinese language television, radio, print media and on the Internet.
     As of August 31, 2010, we had 20 “Fibre Shops” and a customer service center. We have developedplanned to open more shops in the future. We believe these shops can offer our customers convenient access to our wide range of services.
     We have an extensive sales network in Hong Kong. Our senior marketing personnel closely oversee our sales network to ensure that a consistent image is presented by all of theour sales representatives we use to promotein promoting City Telecom and HKBN. We provide commission-basedcommission based incentives to our residential sales force that sellfor our international and fixed telecommunications network services and international telecommunications services.
     We have a sales division responsible for coordinating our corporate marketing and sales efforts. We believe our dedicated corporate and small-to-medium enterprise sales force is one of the largest sales forces targeted at corporate users of telecommunications and Internet services in Hong Kong. In addition, our dedicated corporate staffTalents designs marketing and sales promotions specifically tailored to address the concerns of business users. This division also organizes seminars for current and prospective customers to promote new products and services and to raise the public awareness of our various corporate offerings.
Maintenance and Monitoringmonitoring
     To enhance theensure reliability of our fixed telecommunications network, we continue to maintain our monitoring system, which involves:

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  a year round, 24-hourtwo separate network operation centers in two different locations that operate 24 hours a day, 7 days a week, network operation center providing real-time service monitoring and maintenance services and supported by about 120133 operational and field staff;Talents;
 
  individual self-reporting mechanisms and centralized performance monitoring systems for our switches and equipment;
 
  an emergency self-reporting system that automatically contacts designated personnel; and
 
  back-up systems for our switches, critical software and hardware components.
     Once a network fault is detected by our control room, we will either rectify the problem remotely or dispatch field staffTalents to that location should physical interaction be required. After the problem has been resolved, we will continue to monitor network performance as well as track customer service feedback until we are assured of the fault being fully rectified.
Research and Development Activitiesdevelopment activities
     As of August 31, 2008,2010, our research and development department in Hong Kong consisted of approximately 27 staff members21 Talents experienced in systems design, engineering, telecommunications and computer programming. Our research and development department is primarily responsible for assessing and adapting the technology that we employ in upgrading and expanding our Next Generation Network. To identify and develop new market opportunities, our research and development department assessesevaluates new services offered by telecommunications and Internet companies in the United States and elsewhere and works closely with our marketing department.department for product development. Our research and development expenditures were approximately HK$9.6 million, HK$5.010.8 million and HK$9.611.2 million for fiscal 2006, 20072008, 2009 and 2008,2010, respectively.
Customer Serviceservice
     We believe that providing excellent customer service and support is essential to our building and retaining of a large and loyal subscribersubscription base. We therefore have committed considerable personnel and financial resources to establishing a reliable and accessible customer service system.
     Our customer service department provides integrated support to subscribers of our internationalFTNS business and fixed telecommunications network services.IDD business. We provide a hotline to handle complaints, subscription applications and queries relating to account balances, pricing, billing, service and technical information. Complaints and in-depth queries from subscribers that cannot be immediately remedied or answered are forwarded to a customer care team, which is responsible for answering such complaints and queries. We also have a dedicated customer service team to provide service to our corporate subscribers, which includes access to a highly skilled technical team that may go to the customer site for trouble shooting and repairs.
     Our centralized customer service call center is located in Guangzhou, which provides our customer service functions and back office support services at that location. This enables us to lower our operating costs while continuing to increase our customer service capabilities. As of August 31, 2008,2010, our Guangzhou customer service facility had 1,489 employees.1,620 Talents.
Billing and Collectioncollection
     Our credit and collection team is responsible for securing prompt payment from subscribers. Invoices are issued on a monthly or quarterly basis with a specified payment due date. VarietyA variety of payment methods are used for payment collection,made available to our subscribers, including cash, check, credit card,

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payment by telephone service, automatic transfer from subscribers’ bank accounts or through Internet banking. Our bad debts expense represented approximately 1.5%1.1%, 0.6%0.8% and 1.1%0.9% of our revenue for each of fiscal 2006, 20072008, 2009 and 2008,2010, respectively. The lower bad debt expenses in fiscal 2007 was due to the reversal of HK$9.4 million of a previously recognized provision for doubtful accounts as a result of the issuance by the Telecommunications Authority of its final determination on mobile interconnection charges. For more information regarding our provision for mobile interconnection charges, see “Factors Affecting our Results of Operations—Our Revenues” below in this annual report.
     We maintain tight collection procedures, including periodic reminder notices, and impose a charge of HK$10 or a fee of 1.5% to 2.5% per month on outstanding overdue amount for late payment. We have the right to charge the outstanding overdue amount to the subscriber’s pre-registered credit card account for any amount overdue or if applicable, deduct such amount from the subscriber’s application deposit. Moreover, we generally suspend an account if thewhen amount overdue is not settled within our prescribed period. If payment is still not settled after we suspend the account, further recovery actions including court proceedings and/or the use of collection agencies will be taken.
Seasonality
     Our operations are not generally subject to significant seasonal fluctuations.fluctuations generally. Our international telecommunicationsIDD business typically experienceexperiences a slight decrease in revenue during the second fiscal quarter of each fiscal year (December(i.e. December through February) in connection with the Christmas holiday and Chinese New Year holiday. We do not believe that seasonality has had a material effect on our business, financial condition or results of operations.
Environmental Mattersmatters
     Since our date of incorporation, we have not violated any environmental laws, ordinances or regulations, and believe that all of our operations comply fully with applicable environmental laws.

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Intellectual Property Rightsproperty rights
     We have registered our trademarks with the Trademarks Registry of the Intellectual Property Department in Hong Kong. We have no other material intellectual property.
C. Regulatory framework
The following is a brief summary of the Hong Kong laws and regulations that currently materially affect our business. This section does not purport to be a comprehensive summary of all present and proposed regulations and legislation relating to the industries in which we operate.
C.     Regulatory Framework
     As a provider of broadband Internet access, local VoIP, IP-TV and international telecommunications services in Hong Kong, our operations are subject to the Telecommunications Ordinance and the Broadcasting Ordinance and their respective subsidiary legislation, regulations and codes of practice. The Telecommunications Ordinance provides the legislative and regulatory framework for the provision of telecommunications services and facilities in Hong Kong. The Broadcasting Ordinance governs the content and scope of television programming and the licensing of television broadcasters.
     Our primary regulator is the Telecommunications Authority, whose responsibility and functions include regulating and licensing telecommunications network services and regulating the telecommunications markets in Hong Kong, including the issuingissuance of non-exclusive licenses; the determination of terms of interconnection; promotion of fair competition in the telecommunications sector; management of the frequency spectrum; development of technical standards and customer equipment testing; protection of consumer interests; and the control and administration of the Hong Kong numbering plans (including allocation of numbers or codes). The Telecommunications Authority is also responsible for the administration of the Telecommunications Ordinance. We are also regulated by the Broadcasting Authority, which administers the Broadcasting Ordinance and makes recommendations to the Chief Executive-in-Council on applications for broadcasting licenses, as well as on the renewal, suspension and revocation of licenses.
Telecommunications Industryindustry
     Licensing
     It is unlawful to establish or maintain any means of telecommunications, or possess, use or deal with telecommunications apparatus in Hong Kong without a license. The Telecommunications Authority has the authority to grant licenses for all means of telecommunications services and facilities in Hong Kong, including the provision of fixed wireline, public mobile telephone, Internet and satellite services. Furthermore, the Telecommunications Authority has the authority to require a licensee to comply with the terms of its license and any applicable legislation or regulations or codes of practice, and to suspend or revoke licenses to enforce the Telecommunications Ordinance or other rules or regulations or codes of practice to protect the public interest.
     Prior to August 1, August 2008 the operation of fixed and mobile services waswere regulated separately under four types of carrier licence.license. Further, a number of other types of licenceslicenses permitted a licensee to establish facilities or services of a similar kind.
     However, in recognition of the convergence of fixed and mobile services enabling voice, data and multimedia applications to be provided over common core networks, delivered through a range of wireline and wireless customer access networks and which will be accessible from common end-user devices irrespective of whether the users are at fixed locations or on the move with the result that is becoming more difficult to classify a service as a “fixed” or “mobile”, amendment legislation has been passed to create a single Unified CarrierUC License or UCL, encompassing both fixed and mobile carrier services. The UCLUC License regime came into operation on August 1, 2008. After that date the Telecommunications Authority

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will not issue any further fixed or mobile carrier licenceslicenses (save for a Mobile Carrier LicenceLicense which the Telecommunications Authority had already committed to grant to the successful bidder of the spectrum in the 850 MHz band to provide CDMA2000 service). Instead the UCL will beUC License is the only carrier licencelicense to be issued for the provision of fixed, mobile and/or converged services. In the meantime, existing fixed and mobile licences willlicenses continue to be effective until their expiry date. License holders may convert existing fixed or mobile licenses into UCLsUC Licenses before their expiry on a voluntary basis or apply for UCLsUC Licenses upon the expiry of existing fixed or mobile licenses.

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     General Licensing Requirements
     Generally, a licensee is required to be a company incorporated in Hong Kong (which can be wholly owned by a foreign company) or a foreign company registered in Hong Kong. Currently, there is no foreign ownership restriction on the holder of a telecommunications license under the current regulatory regime.
     Non-compliance with the Telecommunications Ordinance, any subsidiary legislation made pursuant to it, any of the license conditions or any direction issued by the Telecommunications Authority by a telecommunications licensee, could result in the revocation or suspension of the relevant license. The Telecommunications Ordinance contains a set of provisions setting forth the procedural steps which the Telecommunications Authority must adhere to prior to revoking or suspending any telecommunications licenses. In addition, the Chief Executive in Council has the authority, at the recommendation of the Telecommunications Authority, to revoke a telecommunications license at any time if it is in the public interest to do so.
     Public Non-Exclusive Telecommunications Services License
     A PNETS License is used by the Telecommunications Authority to cover the provision of a number of different telecommunications services where the service provider provides the service to the public using the network of a licensed carrier or by establishing or maintaining transmission facilities within the boundary of a building or property. In practice, the PNETS License is also used as a “sweep-up” license category, where a license is required by virtue of the Telecommunications Ordinance but none of the existing categories are applicable to the means of telecommunications or telecommunications service for which the license is required. With effect from November 30, 2009, the Telecommunications Authority no longer issue PNETS License to service-based providers using the network of a licensed carrier. As a replacement, all PNETS License will be gradually replaced by the modified Services-Based Operator License, i.e. Class 3 Services-Based Operator License. Holder of Class 1 & 2 Services-Based Operator License is allowed to provide Internet Protocol based telephony services making use of Hong Kong telephone numbers, while Class 3 Services-Based Operator is not allowed. Existing PNETS License will remain in force until their next anniversary date when they would be replaced by the Class 3 Services-Based Operator License.
     A PNETSClass 3 Services-Based Operator License has a validity period of 12 months and is renewable at the discretion of the Telecommunications Authority on an annual basis upon the payment of a prescribed annual fee, which is currently set at HK$750. Where radio communications apparatus is used, there is an additional variable component calculated by reference to the number of base stations and mobile stations involved.
     We currently holdSince the expiry of PNETS License in December 2009, the Telecommunications Authority granted us a PNETS ETSClass 3 Services-Based operator License. The Class 3 Services-Based Operator License which was issued to us in November 1998. This PNETS ETS License has been subsequently amended twice and presently gives us the right to provide calling card services, international simple resale services for facsimile and data services, virtual private network services and external telecommunications services over the external telecommunications facilities of other licensed external facilities providers. Our subsidiaryproviders, the scope of service under the Class 3 Services-Based operator License is similar to the PNETS License previously granted to us by the Telecommunications Authority. HKBN also holds a PNETS IVANS License, which was issued to us in December 1993. This PNETS IVANS License allows us to act as an Internet Service Provider.
     Under the terms of the Class 3 Services-Based Operator License, PNETS ETS and PNETS IVANS Licenses, we and IDD 1600IDD1600 Company Limited, or IDD 1600,IDD1600, our wholly owned subsidiary, are required to comply with certain license conditions relating to technical and reporting matters.
     Fixed Telecommunications Network ServicesFTNS License
     A FTNS License authorizes the licensee, among other things:
 to provide a public fixed telecommunications network service, covering internal services or external services, or both; and
 
 to establish and maintain a fixed telecommunications network, which may be wireline-based or wireless-based (Wi-Fi spectrum included), or a combination of both.
     A FTNS License is valid for a period of 15 years and is renewable for a further period of not exceeding 15 years at the Telecommunications Authority’s discretion. The amount of license fee payable by a holder of a FTNS License comprises (i) a fixed annual amount of HK$1.0 million; (ii) a variable amount calculated on the basis of the number of customer connections (which is currently set at HK$700 for each 100 customer connections); and (iii) a variable fee calculated by reference to the radio spectrum assigned and used by the license holder.
     HKBN our wholly-owned subsidiary, currently holds a FTNS License, which was issued to it in February 2000 initially for the operation of a local fixed wireless network. This FTNS License has been subsequently amended three times and presently, HKBN is authorized to operate both local fixed telecommunications networks (wireline and wireless based) and external telecommunications facilities.

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     Interconnection
     The Telecommunications Authority divides interconnection into two main types:types. The first type is “Type I Interconnection”, which is interconnection between network gateways, such as tandem exchanges, local exchanges or dedicated interconnection gateways, which allow end users on different networks to “communicate” with each other. The second type is “Type II Interconnection”, which is a connection to a fixed carrier’s network at points of the customer access network level (more often referred to as local access or local loop unbundling) allowing the end customer requesting the interconnection to use the customer access network of the fixed carrier to obtain fixed telecommunications network services.FTNS. The Telecommunications Authority introduced the Type II interconnection policy in 1995 that the fixed carriers have obligation to provide Type II interconnection at regulated terms and conditions.
     On July 6, 2004 the Hong Kong Government announced that the mandatory Type II Interconnection policy applicable to telephone exchanges for individual buildings covered by such exchanges, would be gradually withdrawn on a building-by-building basis, applying to buildings already connected to at least two self-built customer access networks, such withdrawal to be fully implemented by a final sunset date of June 30, June 2008. After that time, mandatory Type II Interconnection will be maintained only in buildings for which it is technically not feasible or economically not viable for an operator to roll out its customer access network.

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     On July 3, 2008, the Telecommunications Authority issued a statement to confirm that the mandatory Type II Interconnection policy has been successfully withdrawn as from July 1, 2008 as well as to set out the issues to be followed up after its withdrawal. After this date, interconnection terms including charges will be determined by commercial negotiation between carriers.
     On April 27, 2009, the Telecommunications Authority issued a statement on “Carrier-to-Carrier Charging Principles (For Fixed Carrier Interconnections) providing guidance on carrier-to-carrier charging principles for fixed carrier interconnections that the Telecommunication Authority will rely on when making determination for interconnection between fixed telecommunications networks in Hong Kong.
Competition Provisionsprovisions
     Regulation of Anti-Competitive Conductanti-competitive conduct
     Although Hong Kong has never had a general competition code, historically, holders of FTNS Licenses wereare prohibited from engaging in anti-competitive conduct, abusing its dominant position in a telecommunications market, or engaging in any discriminatory conduct by certain competition-related license conditions contained in the FTNS Licenses issued by the Telecommunications Authority. In June 2000, the competition provisions of the Telecommunications Ordinance became operational and, as from that time, anti-competitive conduct was prohibited by legislation as well as under the relevant license conditions.
     The Telecommunications Ordinance provides an appeal mechanism by the establishment of a Telecommunications (Competition Provisions) Appeal Board. A person or a licensee aggrieved by a decision made by the Telecommunications Authority relating to the competition provisions may appeal to the Board. Additionally, a third party suffering loss or damage from breach of such competition provisions may bring an action for damages or seek other appropriate remedies against the offending licensee.
     Control on Mergersmergers and Acquisitionsacquisitions
     If the Telecommunications Authority determines that the relevant merger and acquisition activity has, or is likely to have, the effect of preventing or substantially lessening competition in a telecommunications market, the Telecommunications Authority is empowered to direct a carrier licensee to take such actions, such as the complete or partial divestiture of the relevant parties’ interests in the merged entity, as the Telecommunications Authority considers necessary, to eliminate or avoid any anti-competitive effect. However, the Telecommunications Authority may not issue such a direction if heit takes the view that the public benefit of the merger and acquisition outweighs any detriment caused by a reduction in competition. Any decision made or direction issued by the Telecommunications Authority under the mergersmerger and acquisition provision is subject to appeal to the Telecommunications (Competition Provisions) Appeal Board.
     The regulatory regime on mergers and acquisitions only applies to carrier licensees, which includes HKBN as a holder of a FTNS License, which is regarded as a carrier license for the purpose of the Telecommunications Ordinance.
     Consumer Protectionprotection
     The Telecommunications Ordinance also contains a statutory provision that is primarily aimed at protecting consumers. This provision prohibits a licensee from engaging in any misleading or deceptive conduct.
     The Telecommunications Authority has taken an active role in enforcing this prohibition and has developed voluntary codes to assist in this respect. For instance, in November 2004,February 2010, the Telecommunications Authority issued a “Code of Practice for Communications Service Contracts” (the “Code”) which supersedes the “Code of Practice for the Service Contracts for the Provision of Public Telecommunications Services” whichissued in November 2004. The Code is a voluntary scheme intended to heighten customer satisfaction levels by improving the provisions used in communications customer contracts The Code sets out guidelines on, among other things, the preparationstyle, format and structure of service contracts.written contracts, the expiry of term contract, termination of contract etc. Besides, the Code requires that the contracts to provide a cooling-off period of not less than seven days during which the customers my cancel the contract without incurring any payment liability or any other obligation whatsoever. The code states that important terms of a service contract (e.g. a compensation clause for early termination by the customer) should be presented in a prominent place and should be highlighted in the contract. The codeCode is applicable to all providers of communications service which include the supply of telecommunications and ancillary services and customer equipment, as well as the supply of content services delivered through telecommunications. Service providers (except mobile network operators which are subjectpledging compliance with the Code shall publish on their respective website their pledges to a separate code of practice) including holders of FTNS Licenses, suchthe Code and report about their compliance status

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on annual or bi-annual basis as HKBN, and holders of PNETS ETS Licenses and IVANS Licenses, such as ourselves and IDD 1600. Althoughthey may decide. In the guidelines are voluntary in nature,meantime, the Telecommunications Authority has indicated thatand providers of communications service are reviewing the extentCode, and the majority of a licensee’sproviders, including HKBN, is not pledging compliance with the guidelines will be taken into account in assessing if a licensee has complied with the statutory provision mentioned above.Code.
     Apart from the Telecommunications Ordinance, like any companiescompany carrying on business in Hong Kong, telecommunications operators are required to comply with applicable Hong Kong consumer protection laws, for example, the Sale of Goods Ordinance (Cap 26), Control of Exemption Ordinance (Cap 71), Supply of Services (Implied Terms) Ordinance (Cap 457), the Unconscionable Contracts Ordinance (Cap 458) , Personal Data (Privacy) Ordinance (Cap 486), and the Unsolicited Electronic Messages Ordinance (Cap 593).
     Regulation of Pricingpricing
     Currently, the pricing of both fixed telecommunications network servicesFTNS and public non-exclusive external telecommunications services in Hong Kong is regulated by license conditions. However, the regulatory frameworks of each type of services are different.
     All Services-Based Operator License and PNETS Licenses contain license conditions requiring the licensees to publish their tariffs and to charge no more than the published tariffs.
     Similarly, holders of FTNS Licenses are prohibited by license conditions from charging more than their published tariffs for their services. The FTNS License conditions prohibit licensees from offering discounts to their published tariffs and require the licensees to seek approval from the Telecommunications Authority in connection with (i) any revision of published tariffs, (ii) tariffs for any new services or products or (iii) tariffs for any trial services. However, the Telecommunications Authority may grant a waiver of the application of any or all of these restrictions in relation to a relevant telecommunications market if, in the opinion of the Telecommunications Authority, the licensee is not “dominant” in such market. This is known as an ex ante regime.

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     HKBN has been granted a waiver from all the tariff revision prohibitions contained in its FTNS License and is able to provide discounts and revise its tariffs in all the fixed telecommunications network servicesFTNS markets.
     Universal Service Contributionservice contribution and Local Access Chargelocal access charge
     Under the current regulatory regime, PCCW-HKT has a universal service obligation to provide good, efficient and continuous basic telecommunications services at reasonable cost on a non-discriminatory basis to all persons in Hong Kong. To compensate PCCW-HKT for the expenses of this obligation, certain licensees are required to contribute to such cost, which is referred to as the universal service contribution.
     On June 8, 2007, the Telecommunications Authority issued a Statement entitled “Review of the Regulatory Framework for Universal Service Arrangement”, which announced the new universal service contribution arrangement for funding the cost of Universal Service Obligation. Commencing from May 1, 2009, the USC sharing arrangement based on external traffic volume has been migrated to that based on the number of all telephone numbers allocated which may be assigned to customer for voice services, non-voice services or both voice and non-voice services. Under the new arrangement, local fixed carrier license, local fixed telecommunications network service licensee, mobile carrier licensee, unified carrier licensee authorized to provide local fixed or mobile services, mobile virtual network operator licensee and services-based operator licensee authorized to provide Class 1 or 2 services are the USC Holderscontributing parties. In respect of FTNS Licensesthe above, HKBN as a local fixed telecommunications network service licensee is classified as a USC contributing party and PNETS ETS Licenses, including ourselves, HKBN, and IDD1600 areis required to pay USC.USC under the new regime.
     The level of USC is determined by the Telecommunications Authority and is reviewed periodically based on actual cost and revenue and on a customer-by-customer basis. The average rate has declined over the past several years. In accordance with a statement dated December 28, 2007April 27, 2010 issued by the Telecommunications Authority, the level for the period from JanuaryJuly 1, 20052008 to JuneApril 30, 20072009 is confirmed to be zero cent per minute. Inminute and the circumstances, PCCW-HKT must refund to allTelecommunications Authority decided that USC contributing parties HK 0.3 cent per minute already paid before and there willare not be any interest payment for the adjustment of those USC. The level ofrequired to pay provisional USC from JulyMay 1, 2007 onwards is to be determined by2009 onward until a further review of the Telecommunications Authority.USC.
     Additionally, providers of external telecommunications services, such as holders of Class 3 Services-Based Operator License and PNETS ETS Licenses, including ourselves and IDD 1600,IDD1600, are required to pay a local access charge, or LAC, to the local network operators whose network facilities holders of PNETS ETS Licenses use to transmit calls to and from their customers’ sites. The level of the LAC is calculated on a per-minute basis and its arrangement is based on the statement dated November 25, 1998 issued by the Telecommunications Authority. Recently, based on the conclusion from the statement dated April 27, 2007 issued by the Telecommunications Authority, the Telecommunications Authority will not, for the time being, proceed with the complete deregulation of the LAC.
     Fixed Mobile Interconnection Chargemobile interconnection charge

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     Fixed Mobile Interconnection Charge, or FMIC, is an interconnection charge for circuit-switched traffic between a Fixed Network Operator and a Mobile Network Operator. Currently, except for the FMIC charged by the incumbent Fixed Network Operator, PCCW Limited, the terms and conditions for the provision of interconnection service by the Fixed Network Operator to Mobile Network Operators are not regulated by the Telecommunications Authority but are subject to commercial negotiation between Fixed Network Operator and Mobile Network Operators. In case that commercial agreement can not be reached on the terms and conditions, Telecommunication Authority may intervene by mediating and, if necessary determining the terms and conditions which are in dispute.
     The current level of FMIC charged by the PCCW Limited is HK4.36 cents per occupancy minute, as determined by the Telecommunications Authority in November 2004.     In June 2007, the Telecommunications Authority determined the FMIC rates for HKBN, our wholly owned subsidiary which is a Fixed Network Operator, with one of its Mobile Network Operators, China Resources Peoples Telephone Company Limited, or Peoples, at a rate of HK4.8 cents per occupancy minute for interconnection from April 1, 2002 to August 31, 2002, HK4.22 cents per occupancy minute for interconnection from September 1, 2002 to August 31, 2003 and HK2.89 cents per occupancy minute for interconnection from September 1, 20032004 to August 31, 2004. In February 2008, HKBN requested TelecommunicationsTelecommunication Authority to make a new determination with four Mobile Network Operators on the rate of FMIC payable by these Mobile Network Operators for mobile interconnection service. In September 2008 the Telecommunications Authority indicated that it accepted HKBN’s request for determination. AsOn May 28, 2010, the Telecommunications Authority issued its decision on the determination which set out the rates of 9 January 2009,mobile interconnection charges payable by the newmobile operators under dispute. Based on this determination, the Group adjusted its revenue related to mobile interconnection charges and interest income during the year ended August 31, 2010. For details, please refer to note 2 (b) of our consolidated financial statements.
     Fixed Mobile Interconnection Charge, or FMIC, is still in process.
an interconnection charge for circuit-switched traffic between a Fixed Network Operator and a Mobile Network Operator. The Telecommunications Authority has indicated in its statement published on April 27, 2007, that it will de-regulate the existing FMIC arrangement with effect from April 27, 2009. When this occurs the Fixed and Mobile Network Operators would have to adopt a more market driven approach in that parties are expected bilaterally to negotiate a commercially agreed FMIC without the Telecommunications Authority’s intervention.
     Since the deregulation of FMIC arrangement on April 27, 2009, HKBN reached agreements with some of the mobile operators on the settlement arrangements of FMIC. As of December 14, 2010, the discussion with remaining mobile operators on FMIC is still in progress.
Television Broadcasting Industrybroadcasting industry
     At present, Hong Kong has two licensed domestic terrestrialfree television programme broadcasters, TVB and ATV, providing free-to-air broadcasting services. In addition, there are also three licensed domestic pay-TV broadcasters, namely Hong Kong Cable Television Limited, PCCW Media Limited and TVB Pay Vision Limited (formerly known as Galaxy Satellite Broadcasting Limited). HKBN provides TV services over the Internet under its FTNS License, while Star TV continues to provide its services through satellite means under its satellite television uplink and downlink license.
     Licensing
     It is unlawful to offer any “television programprogramme service” in Hong Kong without a license. “Television programprogramme service” is broadly defined to mean the provision of television programsprogrammes for transmission by telecommunications that are readily accessible to the general public in or outside Hong Kong or to persons in 2 or more specified premises simultaneously or on demand, whether on a point-to-point or a point-to-multipoint basis. The Broadcasting Ordinance exempts certain categories of television programprogramme services from the current licensing regime, including television programprogramme services provided on the service commonly known as the “Internet”. The Broadcasting Ordinance itself, however, does not contain a definition of “Internet”.
     The Secretary for Commerce, Industry and Technology has indicated that on the condition that HKBN continues to provide its service on the platform currently deployed by HKBN, the Government does not dispute that HKBN’s service is provided on the “Internet” and is thus exempt. On this basis, HKBN hasdoes not obtainedrequire to obtain a pay-television broadcasting license and provides IP-TV services under its FTNS License.

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     Cross Media Ownership Restrictionsmedia ownership restrictions
     As with other television regulatory regimes, there are detailed cross-media ownership restrictions in the Broadcasting Ordinance. The restrictions are only applicable to domestic free and domestic pay television programprogramme service licenses.
     The Broadcasting Ordinance essentially provides that a company which is either a “disqualified person” or has a “disqualified person” exercising control over it will not be eligible to be granted a broadcasting license unless it discloses the disqualification in its license application. “Disqualified person” includes, for example, a company which is an existing domestic free or domestic pay television programprogramme licensee; an advertising agent; a sound broadcasting licensee; or a proprietor of newspaper printed or produced in Hong Kong.
     Generally, a disqualified person who has complied with the disclosure requirement may apply for a broadcasting license. The Broadcasting Ordinance provides that the Chief Executive in Council may grant a broadcasting license to a company, including a disqualified person or to a company which has a disqualified person exercising control, over it or to a disqualified person in which another disqualified person exercises control subject to such conditions as the Chief Executive in Council sees fit.
     Foreign Ownership Restrictionsownership restrictions
     In addition to the cross-media ownership restrictions outlined above, the Broadcasting Ordinance also imposes restrictions on foreign ownership of a holder of a domestic free television programprogramme service license. The restrictions do not prohibit the ownership of any voting shares in a domestic free television programprogramme service licensee but rather take the form of prohibiting the exercise of any voting rights attached to such voting shares.
     Competition Provisionsprovisions
     The Broadcasting Ordinance also contains competition provisions, which are aimed at prohibiting a licensee from engaging in “anti-competitive conduct” and a licensee who is in a dominant position from abusing its position. “Anti-competitive conduct” is defined as conduct that has the purpose or effect of preventing, distorting or substantially restricting competition in a television programprogramme service market.
     The Broadcasting Ordinance provides that a breach of any of the competition statutory provisions may lead to the relevant contractual provisions in an agreement being regarded as void.
     Unlike the regulatory regime for the telecommunications industry, there is no equivalent of a specialized competition appeal board for the television broadcasting industry. A licensee aggrieved by a decision made by the Broadcasting Authority, however may lodge an appeal by way of petition to the Chief Executive in Council.

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     Program Standardsstandards and Advertising Standardsadvertising standards
     A broadcasting licensee is required to comply with the program standards and the advertising standards published by the Broadcasting Authority. The latest program standards and the advertising standards were both issued on May 4, 2007.December 12, 2008.
C.D. Organizational Structurestructure
     In addition to our operations in Hong Kong, we also provide international telecommunications and Internet access services in Canada through two telecommunications companies in Canada, City Telecom Inc. and City Telecom (B.C.) Inc. We acquired our interests in these companies in December 1998 as part of our efforts to increase our market share of the telecommunications traffic between Canada and Hong Kong.

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     The following chart sets forth our principal subsidiaries as of January 9, 2009:December 14, 2010:
(CHART)(ORGNIZATION CHART)
 
Notes:
(1) The other immediate subsidiaries of City Telecom (H.K.) Limited are SGBN Singapore Broadband Network Pte. Limited and Golden Trinity Holdings Limited. The immediate subsidiaries of Golden Trinity Holdings Limited are Warwick Gold Enterprises Limited and Attitude Holdings Limited.
 
(2) The companyCompany has only registered its Chinese name. The English name is an unregistered translation.
 
(3) The other immediate subsidiaries of Automedia Holdings Limited are Global Courier Company Limited, CTI International Limited, BBTV Company Limited, City Telecom (U.S.A.) Inc., City Telecom (Vancouver) Inc. and City Telecom (Toronto) Inc.
 
(4) The immediate subsidiaries of Hong Kong Broadband Network Limited are Excel Billion Profits Limited, Hong Kong Television Network Limited, Hong Kong Broadband Television Company Limited, Hong Kong Broadband Phone Limited and Hong Kong Broadband Digital TV Limited.

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The jurisdiction of incorporation and our ownership percentage of each these subsidiaries as of January 9, 2009December 14, 2010 were as follows:
           
    Percentage of interest
    held by City Telecom
  Jurisdiction of (%)
NameDirect Jurisdiction of IncorporationIndirect
Name Directincorporation Indirect%%
963673 Ontario Limited Canada     100 
Attitude Holdings Limited British Virgin Islands     100 
Automedia Holdings Limited British Virgin Islands  100    
BBTV Company Limited Hong Kong     100 
City Telecom (B.C.) Inc. Canada     100 
City Telecom (Canada) Inc. Canada     100 
City Telecom (Toronto) Inc. Canada     100 
City Telecom (U.S.A.) Inc. United States of America     100 
City Telecom (Vancouver) Inc. Canada     100 
City Telecom Inc. Canada     100 
City Telecom International Limited British Virgin Islands  100    

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Percentage of interest
held by City Telecom
(%)
NameJurisdiction of IncorporationDirectIndirect
Credibility Holdings Limited British Virgin Islands  100    
CTI Guangzhou Customer Services Company Limited(1)
Co. Ltd. (note)
 People’s Republic of China  100    
CTI International Limited Hong Kong     100 
CTI Marketing Company Limited Hong Kong     100 
Excel Billion Profits Limited Hong Kong     100 
Global Courier Company Limited Hong Kong     100 
Golden Trinity Holdings Limited British Virgin Islands  100    
Hong Kong Broadband Digital TV Limited Hong Kong     100 
Hong Kong Broadband Network Limited Hong Kong     100 
Hong Kong Broadband Phone Limited Hong Kong     100 
Hong Kong Broadband Television Company Limited Hong Kong     100 
Hong Kong Television Network Limited Hong Kong     100 
IDD1600 Company Limited Hong Kong     100 
SGBN Singapore Broadband Network Pte. Limited Singapore  100    
Warwick Gold Enterprises Limited Hong Kong     100 
 
(1)Note: The companyCompany has only registered its Chinese name. The English name is an unregistered translation.
D.E. Property, Plantsplant and Equipmentequipment
     For the provision of fixed telecommunicationstelecommunication network services, we own, or control through long-term leases, equipment consisting of switching, transmission and power equipment and connecting lines comprised of in-building wiring, fiber-based backbone, wireless and leased wire-line backbone and other support structures, conduits and similar items that comprise our Next Generation Network. The majority of the fiber-based backbone connecting our services are under public road, highways and streets. In Hong Kong, we ownowned an aggregate of 136,900161,000 square feet predominately for self use as of August 31, 2008.2010.
     For the provision of international telecommunications services, we own three switching systems in Hong Kong and two in Canada (one in Vancouver and the other in Toronto). We have invested and have rights to dedicated capacity in two undersea cables, the Japan-U.S. cable and the APCN 2 cable, for use as international transmission facilities, both of which were completed and have been operational since May 2002.
     In addition, we lease propertyhave leased properties in Hong Kong for two20 retail shops and for a 3,500 square feet customer service center in Mongkok, Kowloon, Hong Kong.
     We rely on suppliers to provide equipment, underground cables and other necessary components in buildingfor the construction and upgrade of our Next Generation Network, infrastructure, and for our VoIP equipment. In order for new subscribers to be able to access our IP-TV services, we must install an

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IP set-top-box in their homes. We must have an adequate supply of such installation equipment on hand to respond to new customer subscriptions in a timely manner. We purchase all of our IP set-top boxes and other equipment from our suppliers on a purchase order basis and have no long-term contracts. If our suppliers are unable to supply us with these products in a timely manner or the costs of these products increase due to unforeseen causes, this could negatively impact our operating results, especially if we are unable to acquire new subscribers or effectively appropriate our costs on to our customers.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSItem 5 Operating and financial review and prospects
     You should read the following discussion together with the rest of this annual report, including the consolidated financial statements and related notes included elsewhere in this annual report. The results discussed below are not necessarily indicative of the results to be expected in any future periods.
Overview
     We are a provider of residential and corporate fixed telecommunications network services in Hong Kong. We offer our customers an integrated suite of broadband Internet access, local VoIP, IP-TV and corporate data services through our self-owned Next Generation Network. Our network covered 1.77 million residential homes pass as of August 31, 2010, representing approximately 80% of the total households in Hong Kong, and is concentrated in Hong Kong’s most densely populated areas, which reduces our cost of network deployment per home pass. As of August 31, 2008, we2010, our FTNS business had a totalsubscription base of approximately 801,000 subscriptions for our fixed telecommunications network services.1,110,000 subscriptions. In addition, we offer a variety of international telecommunications services, including direct dial services, international calling cards and mobile call forwarding services, in Hong Kong. As of August 31, 2008, the customer database2010, our IDD business had a subscription base of our total international telecommunications services comprised approximately 2.32.4 million registered accounts.
     Our Next Generation Network currently covers 1.5 million residential home passes, representing approximately 67% of the population in Hong Kong. The coverage of our network is concentrated in Hong Kong’s most densely populated areas, which reduces our cost of network deployment per home pass.
A. Factors Affecting Our Resultsaffecting our results of Operationsoperations
     The preparation of our consolidated financial statements in conformity with Hong Kong Financial Reporting Standards and accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions about future events. These estimates and underlying assumptions affects the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses.

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Such estimates include the valuation of accounts receivable, goodwill, long-lived assets, and assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on our management’s best estimates and judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Decreases in consumer spending or deterioration of the local economic conditions brought about by the global credit crisis have increased uncertainty inherent in such estimates and assumptions including our estimates of future operations. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Change in those estimates resulting from continuing changes in economic environment will be reflected in the consolidated financial statements in future periods.
Our Revenuesrevenues
     Our revenues are derived from two business segments: our FTNS business and our IDD business. Our FTNS business primarily consists of broadband Internet access, local VoIP, IP-TV and corporate data services, while our IDD business primarily consists of direct dial services, international calling cards and mobile call forwarding services.
Fixed telecommunications network services.FTNS business.Revenues from our fixed telecommunications network servicesFTNS business primarily consist of monthly service charges payable by our subscribers and interconnection charges payable by other telecommunications operators.
  Monthly service charges.We charge our customerssubscribers a monthly service charge, for each typewhich generally varies by the number and nature of the fixed telecommunications network services that we provide. After a customer has begunsubscribed. Our strategy is to use one of our services, we then try to up-sellmarket additional services to our subscribers by leveraging our broadband Internet access subscription base of 526,000 as of August 31, 2010 and the customer to generate more revenues.scalability of our Next Generation Network.
 
  Interconnection charges.As a FTNS licensee, HKBN, a wholly-owned subsidiaryWe offer fixed telecommunications network services through our self-owned Next Generation Network. Under the terms of the Company, is obligedHKBN’s fixed telecommunications network services license, we are required to provide interconnection services to enable delivery of telecommunications service to customers of differentother network operators, including mobile network operators.
Since HKBN was granted the FTNS license, we have been billing mobile network operators interconnection charges using the interconnection rates between fixed and mobile operators. The rates are computed based on a fully distributed cost model using the historical cost data of PCCW-HKT, the incumbent FTNS operator. We have recognized all such mobile interconnection charges as revenue.
In May 2004, the Telecommunications Authority confirmed that mobile network operators are obliged to pay interconnection charges to HKBN in accordance with the charging principles promulgated by the Telecommunications Authority. Certain mobile network operators, however, disputed the basis of our calculation. In August 2004, to resolve our dispute with one mobile network operator, we asked the Telecommunications Authority to make a determination on the level of interconnection charges payable by such mobile network operator to HKBN and the date after which such interconnection charges shall be applicable.
In November 2005, HKBN entered into contractual agreements with two other mobile network operators, who agreed to pay to HKBN on interim mobile interconnection charges at a rate based on PCCW-HKT’s published fully distributed cost model of HK$0.0436 per occupancy minute until the Telecommunications Authority issued its final ruling.
In March 2006, the Telecommunications Authority made a confidential preliminary analysis (the “2006 PA”) with respect to the rates of mobile interconnection charges payable by mobile operators under dispute and the timing of the determination. The final level of mobile interconnection charges was then subject to the determination to be issued by the authority. As a result of the foregoing, in fiscal 2006, we recognized mobile interconnection charges of HK$22.0 million based on the 2006 PA.
In March 2007, the Telecommunications Authority issued a revised preliminary analysis (the “2007 PA”) which superseded the 2006 PA. The 2007 PA set out the rates of mobile interconnection charges, which are different from those rates stated in the 2006 PA.
In June 2007, the Telecommunications Authority issued a final determination (the “2004 Determination”) which set out the rates of mobile interconnection charges payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from April 1, 2002 to August 31, 2004, which superseded the rates stated in both the 2006 PA and 2007 PA issued by the Telecommunications Authority previously.
Based on the 2004 Determination, we recorded mobile interconnection charges of HK$40.9 million in fiscal 2007, which include charges for fiscal 2007 and additional charges for fiscal 2005 and 2006 previously measured based on the 2006 PA. We have also written back provision for doubtful accounts for mobile interconnection charges receivables of HK$9.4 million based on the amount we expected to collect for billings outstanding through August 31, 2007.
During fiscal 2008, HKBN entered into contractual agreements with additional mobile operators, which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from April 1, 2002 to August 31, 2004 and for the subsequent period at an interim rate stated in the agreements, which will be adjusted based on further determination to be issued by Telecommunications Authority.
In February 2008, HKBN requested the Telecommunications Authority to make a new determination with four mobile operators (the “2008 Determination”) on the rate of mobile interconnection charge and interest thereon. In September 2008, the authority indicated that it accepted HKBN’s request for a determination covering the mobile interconnection charges payable by the mobile operators for the period from April 1, 2002 to April 26, 2009 (for certain mobile operators who have reached the relevant contractual agreements with HKBN) or for the period from September 1, 2004 to April 26, 2009 (for certain other mobile operators who have reached the relevant contractual agreements with HKBN), and the interest rate thereon. As of January 9, 2009, the 2008 Determination is still in progress.

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For fiscal 2008, we recognized revenue related to mobile interconnection charges of HK$29.6 million, representing the amount of mobile interconnection charges that our management expects to collect. As of August 31, 2008, certain amount of mobile interconnection charges billed to mobile network operators had not been collected.
International telecommunications servicesIDD business.
Substantially all of our international telecommunications revenues are generated by the per minute tariff rate that we chargefrom our IDD customers. We charge our IDD 1666 and IDD 0030 users a per minute tariff rate thatbusiness consists of tariffs, which generally varies according toby the destination of the call and the calling prefix, with discounts depending on the time of the day or day of the week when the call is placed.
     The customer database of our international telecommunications services comprised approximately 2.3 million registered accounts as of August 31, 2008. During fiscal 2008, we experienced a reduction in total traffic volume of 12.9% to 574 million minutes. Competition during the year was intense as some of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share. Further, technology substitution from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent. As a consequence of reduced minutes marginally offset by higher revenues per minute, our revenues decreased by 10.0% to HK$292.0 million in fiscal 2008.
Our Operating Expenses
Network Costs. Network costs vary according to either our network capacity or our traffic volume. Such costs mainly include leased line rentals, program fees and production costs for our IP-TV service and costs of inventories sold, local interconnection charges payable to other local fixed network operators and interconnection charges payable to international bandwidth providers and do not include depreciation charge which is included in general and administration expenses.
Other Operating Expenses.We have incurred significant operating costs related to our efforts to promote our broadband Internet access, local VoIP, IP-TV and corporate data services. As a result, our sales and marketing costs in subscription acquisition activities have been relatively high. We expect that we will be required to continue to invest significant financial and human resources in our sales and marketing efforts as we strive to build our subscription base, particularly as we work towards enhancing our brand value.
     Other operating expenses also include salaries and related costs, office, general and administrative costs and depreciation and amortization. Salaries and related costs include those employees working on our various service offerings and on maintaining and operating our Next Generation Network.
Critical Accounting Policies
Introduction
     Our operating expenses consist of network costs and other operating expenses.
Network costs. Network costs vary according to either our network capacity or our traffic volume. Such costs mainly include leased line rentals, program fees and production costs for our IP-TV services and interconnection charges payable to other local fixed network operators and international bandwidth providers. Network costs do not include depreciation charge, which is included in other operating expenses.
Other operating expenses.Other operating expenses mainly consist of Talent costs, advertising and marketing expenses, depreciation of owned fixed assets.
Talent costs. Salaries and related costs incurred for services rendered by Talents.
Advertising and marketing expenses.Due to our efforts in promoting our FTNS services, our advertising and marketing expenses incurred in connection with subscription acquisition activities have been relatively high. We expect that we will be required to continue to invest significant financial and human resources in our sales and marketing efforts as we strive to build our subscription base and to enhance our brand value.

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Depreciation.Depreciation is calculated to write off the cost of fixed assets less their estimated residual value, if any, using straight line method over their estimated useful lives. We expect that we will continue to invest in our Next Generation Network to expand our network coverage. In addition, any technological advancement or obsolescence might affect the estimated useful lives of our fixed assets.
Critical accounting policies
The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with HKFRS. Accounting principles generally accepted in Hong Kong differ in certain significant respects from U.S. GAAP, details of which are set out in noteIFRSs for the fiscal years ended August 31, to our consolidated financial statements.2008, 2009 and 2010. Our significant accounting policies are more fully described in note 21 to our consolidated financial statements.
     The preparation of our consolidated financial statements in conformity with HKFRSIFRSs requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments including those related to fixed assets, provision for doubtful accounts, deferred taxes, USC charges and certain revenue items. We base our estimates and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates as facts, circumstances and conditions change. The estimates and underlying assumptions are reviewed on an ongoing basis. RevisionsChanges to accounting estimates are recognized in the period in which the estimate is revisedchanged if the revisionchange affects only that period or in the period of the revisionchange and future periods if the revisionchange affects both current and future periods.
     Our accounting policies have been developed over many years as the telecommunications industry and generally accepted accounting principles have evolved. As our financial statements are prepared under HKFRS,IFRSs, our accounting policies are necessarily compliant with all aspects of HKFRS. HKFRS isIFRSs. IFRSs are based on a “substance over form” conceptual framework that requires us to look through the legal interpretation of an arrangement or transaction to its underlying purpose and to reflect it in our consolidated financial statements on that basis.
     In developing accounting policies, in addition to HKFRS requirements, we also consider telecommunications industry practice in other countries. Where there is no conflict with HKFRS we also align our accounting policies with U.S. GAAP. In all material respects our accounting policies are applied consistently across City Telecom. The critical accounting policies discussed below generally apply to all segments of City Telecom.
     The following are the most significant accounting estimates and judgments we apply in producing our consolidated financial statements.
Revenue recognition
     Revenue for the provision of telecommunications services is recognized when an arrangement exists, service is rendered, fee is fixed or determinable and collectability is probable. Revenue received in advance is deferred and recognized as revenue on a straight-line basis over the stated period of time in the subscriber agreement.
     A portion of revenue from our FTNS business is derived from network interconnection charges. Network interconnection charges are recorded as revenue based on usage of our fixed telecommunications network by mobile and other fixed telecommunications network operators. The determination of the rates on mobile interconnection charges at which revenue is recognized involved significant estimates by management. Significant changes in management estimates may result in material revenue adjustments.
     Prior to April 27, 2009, mobile network operators were obliged to pay interconnection charges to us in accordance with the charging principles promulgated by the Telecommunications Authority. Because certain local mobile network operators disagreed with the level of charges computed by us, certain amount of the mobile interconnection charges billed by us had not been collected as of December 14, 2010. We recognize revenue related to mobile interconnection charges at amounts we believe to be realizable after consideration of the uncertainty regarding the timing and amount of the ultimate collection of amounts due. Specifically:
The amount recognized for fiscal 2004 and before was determined using the available rates under the then-existing calculation model (fully distributed cost model) for interconnection service between fixed and mobile operators, which are based on historical cost data of PCCW-HKT Telephone Limited. In May 2004, the Telecommunications Authority confirmed that mobile network operators are obliged to pay interconnection charges to us in accordance with the charging principles promulgated by the Telecommunications Authority. A number of mobile network operators, however, disputed the basis of our calculation. In August 2004, we requested the Telecommunications Authority to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile network operators to us and the effective date of the determined mobile interconnection charges.
The amount recognized in fiscal 2005 reflected a discount from the amounts billed which was determined based on our assessment of the range of likely outcomes of the 2004 Determination. In November 2005, we entered into contractual agreements with one of the mobile network operators who agreed to pay interim mobile interconnection charges at a rate based on PCCW-HKT’s published fully distributed cost model of HK$0.0436 per occupancy minute until the Telecommunications Authority issued its final ruling.
The amount recognized in fiscal 2006 was based on the preliminary rates published by the Telecommunications Authority in March 2006 as we awaited a final ruling by the Telecommunications Authority on the 2004 Determination.

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The amount recognized in fiscal 2007 was based on the 2004 Determination issued by the Telecommunications Authority in June 2007, which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by us for the period from April 1, 2002 to August 31, 2004.
The amount recognized in fiscal 2008 was based also on the 2004 Determination issued by the Telecommunications Authority in June 2007. In February 2008, we requested the Telecommunications Authority to make a new determination with four mobile operators on the rates of mobile interconnection charge and interest thereon. We subsequently entered into contractual agreements with some of these mobile operators, which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from April 1, 2002 to August 31, 2004 and with respect to the period after August 31, 2004 at the interim rates stated in the agreements, which will be adjusted based on further determination to be issued by the Telecommunications Authority.
The amount recognized in fiscal 2009 and before was based on the 2004 Determination issued by the Telecommunications Authority in June 2007 which set out the rates of mobile interconnection charge payable by the mobile operators under dispute for interconnection services provided by us for the period from April 1, 2002 to August 31, 2004. In September 2008, the Telecommunications Authority indicated that it accepted our request for determination on the rate of mobile interconnection charge for the period from April 1, 2002 to April 26, 2009 payable by the mobile operators that have not reached contractual agreements with us, and the rate for period from September 1, 2004 to April 26, 2009 payable by those mobile operators that have reached contractual agreements with us and the interest thereon (the “2008 Determination”). On November 25, 2009, the Telecommunications Authority issued a Preliminary Analysis in relation to the 2008 Determination for the parties’ comments.
In May 2010, the Telecommunications Authority issued its decision on the 2008 Determination, which set out the rates of mobile interconnection charges payable by the mobile operators involved in the dispute. Based on such decision on the 2008 Determination, we reversed approximately HK$19.7 million revenue related to mobile interconnection charges and recognized approximately HK$10.1 million interest income in fiscal 2010.
     For a discussion of our revenue recognition of mobile interconnection charges, please refer to note 2(b) to our consolidated financial statements. Actual amounts realized could be different from our estimate.
Useful lives of fixed assets
     We estimate the useful lives of fixed assets in order to determine the amount of depreciation expense to be recorded. The useful lives arelife of an asset is estimated at the time the asset is acquired based on historical experience, the expected usage, wear and tear of the assets,asset, as well as technical

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obsolescence arising from changes in the market demands or service output of the assets.asset. Changes in technology or industry conditions may cause the estimated period of use or the value of these assets to change.
We started providing broadband Internet access serviceperform periodic reviews to confirm the appropriateness of estimated economic useful lives for each class of fixed assets. For the three years ended August 31, 2010, there were no changes in 2000 and substantially completed the construction of the fiber backbone network in fiscal 2005. With only a short history of operating the broadband business, we assessed the estimated useful lives of our network assets based on our knowledge and expected usage at that time. As we have gained more experience and knowledge of the broadband business, our expected usage of the assets and the impact of certain new telecommunication technologies indicated that we should re-evaluate the estimated useful lives of our networkfixed assets.
     During the second half of fiscal 2007, we reviewed the estimated useful lives of fixed assets based on technology considerations, actual business experience, consultation with internal experts and external valuation firm and industry benchmarks. Based on such review, certain classes of network assets are expected to operate beyond their original estimated useful lives and as such the estimated useful lives of the fiber network and related peripherals have been revised from 4-15 years to 6-20 years effective from June 1, 2007.
     The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. As a result of such change, the depreciation expense decreased by HK$15.9 million, and both income before taxation and net income after taxation increased by HK$15.9 million for fiscal 2007. The increase in net income resulted in a HK2.6 cents increase in both basic earnings per share and diluted earnings per share. This change also increased each of total assets, retained profits and total shareholders’ equity for fiscal 2007 by HK$15.9 million.
Impairment of fixed assets
     Under HKFRS and U.S. GAAP,IFRSs, if a triggering event occurs indicating that the carrying amount of an asset may not be recoverable, a new assessment of the carrying amount of that asset is required. Triggering events include significant adverse changes in the market value of an asset, changes in the business or regulatory environment, or certain legal events. The interpretation of such events requires judgment from the management with respect to whether such an event has occurred and whether the management feels that reassessment of the carrying value of the asset is required. If an event occurs that could affect the carrying value of the asset and the management does not identify it as a triggering event and identify the asset as impaired, future operations could be adversely affected if this asset is subsequently written off or sold for less than its carrying value due to sudden downturns in the business environment.
     Upon the occurrence of triggering events, the carrying amounts of fixed assets are reviewed to assess whether their recoverable amounts have declined below their carrying amounts. Under HKFRS,IFRSs, the recoverable amount is the presentgreater of its net selling price and value ofin use. In assessing value in use, the estimated net future cash flows which we expectare discounted to recover fromtheir present value using a pre-tax discount rate that reflects current market assessments of time value of money and the future use ofrisks specific to the assets. Where the asset plusdoes not generate cash inflows largely independent of those from other assets, the asset’s residual value on disposal, discounted atrecoverable amount is determined for the financial asset’s original effective interest rate.smallest group of assets that generates cash inflows independently (i.e. cash-generating-unit). Where the recoverable amount of fixed and other long-lived assets is less than their carrying value, an impairment loss is recognized to write down the assets to their recoverable amount, which is based on the fair value less costs to sell or discounted estimated cash flows.
     Under U.S. GAAP, recoverability of assets is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset which is the amount the asset can be bought and sold in a current transaction between willing parties.use.

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     Estimation of cash flows arising from future use of the asset requires careful analysis regarding what we expect to recover from its future use. This includes consideration of our target market share and customersubscription base, market competition, future changes to our cost structure and technological change. In addition, the residual value of the asset on disposal requires judgment, as the estimated fair value of the asset at the time of disposal could change in response to market conditions and changes in expected use of the asset prior to disposal. Changes in the estimate of cash flows arising from expected future use of the asset or its residual value on disposal — based on changes in market conditions, changes in the use of assets, management plan, foreseeable technological changes or otherwise — could significantly change the calculation of the fair value or recoverable amount of the asset and the resulting impairment loss. This in turn could significantly affect the results of our operations.
     For the three fiscal years ended August 31, 2008, except for investment property,2010, no impairment loss was recognized based on the estimated recoverable amount of our long-lived assets. The Company has assessed the open market value of the investment property and based on such assessment, the carrying amount hasfixed assets have been written down by HK$1.1 million for the year ended August 31, 2006. There was no difference between HKFRS and U.S. GAAP in the accounting for the impairment in our investment property because the investment property represents the lowest level at which cash flows can be identified that are largely independent of the cash flows of other asset groups and its carrying value before the recognition of an impairment loss was higher than its recoverable amount.recognized.
Accounts Receivablereceivable
     Under HKFRS and U.S. GAAP,IFRSs, provision is made against accounts receivable to the extent they are considered to be doubtful. This provision requires judgment regarding the collectability of certain receivables both as they are incurred and as they age. We assess bad debt provisionsprovision by type of customers, namely residential, corporate and carrier, based on past experience of recovery of old receivables, the aging of the accounts receivable balance and historical write-off experience. Certain receivables may be initially identified as collectible, yet subsequently become uncollectible and result in a subsequent write-off of the related receivable to the consolidated statement of operations. Changes in the collectability of accounts receivable for which provisions are not made could affect our future results of operations.
     Included in the accounts receivable balance (net of allowance for doubtful debts) arewere receivables for mobile interconnection charges of HK$62.164.4 million, HK$103.868.8 million and HK$71.939.8 million as of August 31, 2006, 20072008, 2009 and 20082010, respectively. The balance represented mobile interconnection charges we billed to the local mobile network operators, and some of which, however,these charges had not been collected.

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     Changes in the allowance for doubtful debts consist of:
            
             For the year ended August 31, 
 Year ended August 31, 2008 2009 2010 
 2006 2007 2008 HK$ HK$ HK$ 
 (Thousands of HK$) (Amounts in thousands) 
Balance at beginning of the year 48,316 55,745 22,392  22,392 11,944 3,160 
Additions charged to expense(1)(2)
 17,450 15,973 14,293 
Reversals   (9,404)  
Additions charged to expense 14,293 12,103 14,742 
Write-off(2)
  (10,021)  (39,922)  (24,741)  (24,741)  (20,887)  (12,079)
              
  
Balance at the end of the year 55,745 22,392 11,944  11,944 3,160 5,823 
              
(1)Allowance for doubtful debts as at August 31, 2006 includes allowance for mobile interconnection charges receivables of HK$20.8 million (For more information regarding our provision for mobile interconnection charges, see “Our Revenues—Fixed Telecommunications Network Services” above in this annual report.).
(2)Following the TA’s 2004 Determination issued in June 2007, in fiscal 2007 the Company has reversed HK$9.4 million of the allowance for doubtful debts previously recognized for mobile interconnection charges to the consolidated statement of operations and has written off the remaining balance of the allowance of HK$11.4 million against the accounts receivable relating to mobile interconnection charges.
Deferred Taxationtaxation
     Under HKFRS, weWe recognized deferred tax assets for all deductible temporary differences and operating loss carry forwards to the extent it is probable that future taxable profits will be available against which the asset can be utilized.
In assessing whether a deferred tax asset is expected to be utilized in the foreseeable future, we considerour management considers all available evidence, including projected future taxable profit by taking into consideration of the effect of our capital expenditures and other plans, such as the existing network capacity, technological changes, future market trends and projected fixed network coverage.
     ManagementThe recognition of deferred tax assets requires judgment regarding the results of future operations, including the assumption that there will be sufficient future operations to allow us to utilize the related deferred tax asset. Our management projects future taxable income by considering all available information, including tax planning strategies, historical taxable incomes, and the expiration period of the unused tax losses carry forwards of each of the Company and its subsidiaries. During the year ended August 31, August 2008, taking into consideration of the current results of operations, our management assessed that it iswas probable that sufficient future taxable profits willwould be generated to utilize the unused tax losses of HK$159.6 million, which resulted in the recognition of deferred tax assets of HK$26.3 million. As at August 31, August 2008, the Group2009 and 2010, we had not recognized deferred tax assets in respect of unused tax losses of HK$9.5 million, HK$8.2 million and HK$8.2 million respectively, because it was not probable that future taxable profits cancould be generated to utilize the tax losses. All tax losses are subject to agreement with local tax authorizes.
     Under U.S. GAAP, a valuation allowance against deferred tax assets is recorded if we determine it is more likely than not that we will not be able to utilize such benefits in the future.
     The recognition of deferred tax assets requires judgment regarding the results of future operations, including the assumption that there will be sufficient future operations to allow us to utilize the related deferred tax asset.authorities. Any changes in the estimate of future operations could change the recognition of suchour deferred tax assets, which could significantly affect theour results of our operations.
     A change in judgment regarding the likelihood of the generation of future taxable income necessary to realize deferred tax assets could result in a change in the valuation allowance on deferred tax assets which would impact our results under both HKFRS and U.S. GAAP.
USC charges
     Our management makes their best estimates for the universal service contribution charges, of theor USC, payable to PCCW-HKT in order to fund the costs of network development costs incurred by PCCW-HKT in remote areas in Hong Kong. Such estimated costs are included as part of our costs of rendering services. The estimate is made based on the provisional rates announced by the Telecommunications Authority and is effective up to the date of the release of our consolidated financial statements. The Telecommunications Authority periodically reviews the actual costs incurred by PCCW-HKT in the development and adjusts the amounts owed to PCCW-HKT, or to be refunded by it, to the respective USC contributing parties, including our company.us. Accordingly, the estimate made by our management for a financial year is subject to changes based on the

36


revisions published by the Telecommunications Authority up to the date prior to the release of our consolidated financial statements. We adjust such differences as an addition to, or reduction of, the corresponding costs of services in that particular reporting period.
     Any sum received in advance from PCCW-HKT as an estimated refund of USC on a provisional basis, which is subject to the final confirmation and determination of the Telecommunications Authority, is recorded in other payables and accrued charges in our balance sheet.
Revenue Recognition
     Revenue for the provision of telecommunications services is recognized when an arrangement exists, service is rendered, fee is fixed or determinable and collectability is probable. Revenue received in advance is deferred and recognized as revenue on a straight-line basis over the stated period of time in the subscriber agreement. Network interconnection charges are recorded as revenue based on usage of the fixed telecommunications network of the Company by mobile and other fixed telecommunications network operators. The determination of the rates on

29


mobile interconnection charges at which revenue is recognized involved significant estimates by management. Significant changes in management estimates may result in material revenue adjustments.
     Mobile network operators are obliged to pay interconnection charges to HKBN in accordance with the charging principles promulgated by the Telecommunications Authority. Because certain local mobile network operators disagreed with the level of charges computed by HKBN, certain amount of the mobile interconnection charges billed by HKBN had not been collected as of August 31, 2008. We recognize revenue related to mobile interconnection charges at amounts we believe to be realizable after consideration of the uncertainty regarding the timing and amount of the ultimate collection of amounts due. The amount recognized for the fiscal 2004 or before was determined using the available rates under the existing calculation model (fully distributed cost model) for interconnection service between fixed and mobile operators, which are based on historical cost data of PCCW-HKT Telephone Limited. The amount recognized in fiscal year 2005 reflects a discount from the amount billed which is determined based on our assessment of the range of likely outcomes from the determination process. The amount recognized in fiscal year 2006 is based on the preliminary rates from the Telecommunications Authority as we await a final ruling by the Telecommunications Authority on the level of charges payable by one of the operators. The amounts recognized in fiscal year 2007 and 2008 are based on the 2004 Determination issued by the Telecommunications Authority in June 2007 which sets out the rates payable by a mobile operator under dispute. For a discussion of our revenue recognition of mobile interconnection charges, please refer to “Factors Affecting Our Results of Operations — Our Revenues” above in this annual report and note 26(c) to our consolidated financial statements. Actual amounts realized could be different from our estimate.
Operating Results
     The following table sets forth, for the years indicated, a summary of our results of operations.
                 
  Year Ended August 31,
  2006 2007 2008 2008
  HK$ HK$ HK$ US$
  (In thousands)
HKFRS
                
Revenues                
Fixed telecommunications network services  716,600   816,800   1,011,038   129,561 
International telecommunications  418,276   324,470   291,943   37,411 
                 
   1,134,876   1,141,270   1,302,981   166,972 
                 
Operating Expenses:                
Network costs  (300,593)  (214,591)  (178,367)  (22,857)
                 
Other operating expenses                
Salaries and related costs  (256,721)  (221,102)  (247,460)  (31,711)
Sales and marketing expenses  (204,952)  (203,673)  (307,743)  (39,436)
Office, general and administrative expenses  (164,208)  (144,657)  (186,547)  (23,905)
Depreciation and amortization  (276,464)  (258,103)  (210,051)  (26,917)
Provision for doubtful accounts  (17,450)  (6,569)  (14,293)  (1,832)
                 
Total other operating expenses  (919,795)  (834,104)  (966,094)  (123,801)
                 
                 
Total Operating Expenses  (1,220,388)  (1,048,695)  (1,144,461)  (146,658)
                 
                 
(Loss)/income from operations  (85,512)  92,575   158,520   20,314 
Interest income  20,378   22,671   15,596   1,999 
Interest expense  (88,637)  (87,504)  (75,137)  (9,629)
Other income, net  4,465   3,149   9,393   1,204 
                 
(Loss)/income before taxation  (149,306)  30,891   108,372   13,888 
Income taxes (expense)/credit  7,244   (2,026)  16,818   2,155 
                 
Net (loss)/income  (142,062)  28,865   125,190   16,043 
                 
                 
  For the year ended August 31, 
  2008  2009  2010  2010 
  HK$  HK$  HK$  US$ 
  (Amounts in thousands) 
Revenue                
FTNS business  1,011,038   1,230,880   1,356,098   174,348 
IDD business  291,943   247,359   218,589   28,103 
             
                 
   1,302,981   1,478,239   1,574,687   202,451 
             
                 
Network costs  (178,367)  (175,129)  (195,292)  (25,108)
                 
Other operating expenses  (966,094)  (1,037,964)  (1,105,604)  (142,143)
                 
Other income, net  24,989   41,540   7,989   1,028 
                 
Finance costs  (75,137)  (55,127)  (22,235)  (2,859)
             
                 
Profit before taxation  108,372   251,559   259,545   33,369 
Income taxes benefit/(expense)  16,818   (38,730)  (42,679)  (5,487)
             
                 
Net income  125,190   212,829   216,866   27,882 
             
Year Ended August 31, 2008Fiscal 2010 Compared to Year Ended August 31, 2007Fiscal 2009
     Revenues.Revenues increased by 14.2%6.5% to HK$1,303.01,574.7 million in fiscal 20082010 from HK$1,141.31,478.2 million in fiscal 2007,2009, reflecting an increase in revenue from fixed telecommunications network services,our FTNS business, the effects of which were partially offset by a decrease in revenue from our international communications services.IDD business and the change in the regulatory regime of mobile interconnection charges summarized below. Revenue contribution from our fixed telecommunications network servicesFTNS business increased to 77.6%86.1% in fiscal 20082010 from 71.6%83.3% in fiscal 2007.2009.
Fixed telecommunications network services.Revenues from fixed telecommunications network services increased by 23.8% to HK$1,011.0 million in fiscal 2008 from HK$816.8 million in fiscal 2007. The increase was primarily caused by an increase of 17.3% of our FTNS subscription base to 801,000 as of August 31,2008 from 683,000 as of August 31, 2007 and, to a lesser extent, an increase in the average revenue per user for our Internet access services. We believe that there is increasing market acceptance of premium pricing.
FTNS business.Revenues from our FTNS business increased by 10.2% to HK$1,356.1 million in fiscal 2010 from HK$1,230.9 million in fiscal 2009. The increase was primarily caused by an increase of 17.7% of our FTNS subscription base to 1,110,000 as of August 31, 2010 from 943,000 as of August 31, 2009.
  Broadband Internet access.SubscriptionThe subscription base for our Internet access services roseincreased by 27.9%34.5%, to 316,000526,000 as of August 31, 20082010 from 247,000391,000 as of August 31, 2007.2009. During fiscal 2008,2010, we are able to have a record growth of 135,000 net additions through our average revenue per user increased, mainly because we focused on differentiating“Member-Get-Member” marketing campaigns which reduced the price of our symmetric 100Mbps broadband services by emphasizinghalf to HK$99 per month if a customer introduces a new customer at HK$99 per month. Such marketing campaigns essentially allowed us to increase our ultra high Internet access speed. Our strategy wasrevenues by converting one subscriber at HK$182 per month to acquire and retain customers whotwo subscribers at a minimum rate of HK$99 per month.

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  are willingLocal VoIP.The subscription base for our local VoIP services increased by 12.8%, to enter into subscription contracts with a longer service period and431,000 as of August 31, 2010 from 382,000 as of August 31, 2009, mainly due to pay higher prices in return for a more stable and higher speed broadband service and a reliable customer support. This strategy was proven successful as evidenced by theimproved branding that allowed us to increase in revenues fromsales of our VoIP services to subscribers of our Internet access services.
 
  IP-TV.The subscription base for our IP-TV services decreased by 10.0% to 153,000 subscriptions as of August 31, 2010 from 170,000 as of August 31, 2009 because we proactively churned off free or low paying IP-TV subscribers and redeployed the set-top-boxes to higher yielding customers. We continued to enhance our channel variety so as to increase the content value to our customers. We currently offer more than 110 channels to our customers.

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As a result of the Telecommunications Authority’s decision on the 2008 Determination in May 2010 as stated above, revenue of HK$19.7 million related to mobile interconnection charges was reversed in fiscal 2010. In addition, prior to April 26, 2009, the mobile network operators were required to pay interconnection charges for all calls originating to and from the mobile users. After April 26, 2009, the chargeability of interconnection charges is subject to commercial negotiation. With the withdrawal of regulatory guidance on FMIC in favor of mobile network operators on April 27, 2009, only an insignificant amount of revenue related to mobile interconnection charges was recognized.
IDD business.Revenues from our IDD business decreased by 11.6% to HK$218.6 million in fiscal 2010 from HK$247.4 million in fiscal 2009. The decrease was primarily due to the reduction in IDD traffic volume and the decrease in the tariff rate we charged to our customers. Competition during fiscal 2010 intensified as some of our competitors offered international direct dial minutes for free or at significantly lower rates as a marketing incentive to gain local fixed line and mobile market shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, was becoming more prevalent.
Network costs.Network costs increased by 11.5% to HK$195.3 million in fiscal 2010 from HK$175.1 million in fiscal 2009 mainly due to the increase in the cost of purchasing international bandwidth as a result of the combined effect of the record growth in broadband subscription and the increasing demand of bandwidth from customers as well as the increase in program fees for IP-TV services to enhance the value of content to customers.
Other operating expenses.Other operating expenses increased by 6.5% to HK$1,105.6 million in fiscal 2010 from HK$1,038.0 million in fiscal 2009 mainly due to the following:
     Set forth below is a table summarizing the details of our other operating expenses in fiscal 2009 and 2010:
             
  For the year ended August 31, 
  2009  2010  2010 
  HK$  HK$  US$ 
  (Amounts in thousands) 
Talent costs  (302,279)  (301,760)  (38,796)
Advertising and marketing expenses  (299,794)  (372,727)  (47,920)
Depreciation  (206,241)  (199,029)  (25,588)
Others  (229,650)  (232,088)  (29,839)
          
             
Other operating expenses  (1,037,964)  (1,105,604)  (142,143)
          
             
Talent costs.Talent costs decreased by 0.2% to HK$301.8 million in fiscal 2010 from HK$302.3 million in fiscal 2009.
Advertising and marketing expenses.Advertising and marketing expenses increased by 24.3% to HK$372.7 million in fiscal 2010 from HK$299.8 million in fiscal 2009. Our salaries and commissions for our sales and marketing Talents increased by HK$28.5 million due to our growth in broadband subscription base. Moreover, our marketing campaigns resulted in an increase in mass media advertising costs of HK$21.6 million and other advertising costs of HK$14.9 million. In addition, the expansion of our sales channels through opening new shops resulted in an increase of advertising and marketing related expenses of HK$7.9 million.
Depreciation.Depreciation decreased by 3.5% to HK$199.0 million in fiscal 2010 from HK$206.2 million in fiscal 2009. Notwithstanding our purchase of additional fixed assets for our network infrastructure as we increased the scale of operations in our FTNS business, a portion of our owned fixed assets were fully depreciated. As a result, we incurred lower depreciation expenses.
Other income, net.Other income, net decreased to HK$8.0 million in fiscal 2010 from HK$41.5 million in fiscal 2009. The decrease was mainly contributed by the loss on extinguishment of our 10-year senior notes of HK$9.7 million in fiscal 2010 compared to the gain on extinguishment of our 10-year senior notes of HK$31.4 million in fiscal 2009. The effect of which was partially offset by an increase in interest income of HK$10.1 million recognized in relation to mobile interconnection charges in fiscal 2010.
Finance costs.Finance costs decreased by 59.7% to HK$22.2 million in fiscal 2010 from HK$55.1 million in fiscal 2009. The decrease was mainly due to finance cost savings through repurchase and redemption of our 10-year senior notes and interest bearing bank borrowings at

38


a lower interest rate. The effect of which was partially offset by the change in fair value of derivative financial instrument that we did not have in fiscal 2009.
Income tax benefit/(expense).We recorded an income tax expense of HK$42.7 million, which included a non-cash deferred tax expenses of HK$40.1 million in fiscal 2010, compared to an income tax expense of HK$38.7 million in fiscal 2009, which included a non-cash deferred tax expenses of HK$37.1 million.
Net income.For the foregoing reasons, net income increased to HK$216.9 million in fiscal 2010 from HK$212.8 million in fiscal 2009. Net margin decreased to 13.8% in fiscal 2010 from 14.4% in fiscal 2009. The slight decrease in net margin was primarily due to a higher cost in acquiring new customers.
Fiscal 2009 Compared to Fiscal 2008
Revenues.Revenues increased by 13.4% to HK$1,478.2 million in fiscal 2009 from HK$1,303.0 million in fiscal 2008, reflecting an increase in revenue from our FTNS business, the effects of which were partially offset by a decrease in revenue from our IDD business. Revenue contribution from our FTNS business increased to 83.3% in fiscal 2009 from 77.6% in fiscal 2008.
FTNS business.Revenues from our FTNS business increased by 21.8% to HK$1,230.9 million in fiscal 2009 from HK$1,011.0 million in fiscal 2008. The increase was primarily caused by an increase of 17.7% of our FTNS subscription base to 943,000 as of August 31, 2009 from 801,000 as of August 31, 2008 and, to a lesser extent, an increase in the average revenue per user for our Internet access services. We believe that there was growing market acceptance of premium pricing in fiscal 2009.
Broadband Internet access.The subscription base for our Internet access services increased by 23.7%, to 391,000 as of August 31, 2009 from 316,000 as of August 31, 2008. During fiscal 2009, partly as a result of our success in differentiating our services by emphasizing our ultra high Internet access speed, we were able to acquire and retain customers who are willing to enter into subscription contracts with a long service period. Revenues from our Internet access services increased as a result.
Local VoIP.SubscriptionThe subscription base for our local VoIP services rose by 6.8%16.1%, to 382,000 as of August 31, 2009 from 329,000 as of August 31, 2008, from 308,000 as of August 31, 2007, mainly due to improved branding and our greater success in cross selling our VoIP services to subscribers of our Internet access services.
 
  IP-TV.SubscriptionThe subscription base for our IP-TV services increased by 21.9%9.0% to 156,000170,000 subscriptions, with the majority of the new subscriptions coming from existing subscribers of our Internet access and local VoIP services.
     Included
Also as included in revenue from our FTNS business were mobile interconnection charges of HK$20.6 million in fiscal 2009. The mobile interconnection charges in fiscal 2009 decreased by 30.5% compared to fiscal 2008 due to the withdrawal of regulatory guidance on FMIC in favor of Mobile Party’s Network Pay on April 26, 2009. Prior to April 26, 2009, the mobile network operators were required to pay interconnection charges for all calls originating to and from the mobile users. After April 26, 2009, the chargeability of interconnection charges is subject to commercial negotiation.
IDD business.Revenues from our IDD business decreased by 15.3% to HK$247.4 million in fiscal 2009 from HK$292.0 million in fiscal 2008. The decrease was primarily due to the reduction in IDD traffic volume. Competition during the fiscal year was intense as some of our integrated competitors offered international direct dial minutes for free or at very low cost as a marketing incentive to gain local fixed line and mobile market shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, was also becoming more prevalent.
Network costs.Network costs decreased by 1.8% to HK$175.1 million in revenuefiscal 2009 from fixed telecommunications networkHK$178.4 million in fiscal 2008 mainly due to a reduction in carrier costs as IDD traffic decreased. The effects of the foregoing, however, were partially offset by the recovery of HK$7.6 million universal services alsocontribution charges from PCCW-HK in fiscal 2008 pursuant to the TA Statement issued by the Telecommunications Authority on December 28, 2007. No similar recovery was revenue relatedrecorded in fiscal 2009.
Other operating expenses.Other operating expenses increased by 7.4% to mobile interconnection chargesHK$1,038.0 million in fiscal 2009 from HK$966.1 million in fiscal 2008 mainly due to the following:

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     Set forth below is a table summarizing the details of our other operating expenses in fiscal 2008 and 2009:
             
  For the year ended August 31, 
  2008  2009  2009 
  HK$  HK$  US$ 
      (Amounts in thousands)     
Talent costs  (247,460)  (302,279)  (39,001)
Advertising and marketing expenses  (307,743)  (299,794)  (38,681)
Depreciation  (210,051)  (206,241)  (26,610)
Others  (200,840)  (229,650)  (29,630)
          
             
Other operating expenses  (966,094)  (1,037,964)  (133,922)
          
Talent costs.Talent costs increased by 22.1% to HK$302.3 million in fiscal 2009 from HK$247.5 million in fiscal 2008. We increased our total work force by 4.0% to 3,173 Talents as of August 31, 2009 from 3,051 Talents as of August 31, 2008, primarily due to the increased scale of operations in our FTNS business and the increasing scope in investing and developing our Talents through Talents education partnership and Talent infinity program.
Advertising and marketing expenses.Advertising and marketing expenses decreased by 2.6% to HK$299.8 million in fiscal 2009 from HK$307.7 million in fiscal 2008. Our salaries and commissions for our sales and marketing Talents were increased by HK$19.5 million due to an increase in total contract sum due to substantial growth in subscription base. Moreover, our opening of additional new shops caused shop related operating costs to increase by HK$11.4 million. The effects of the foregoing, however, were partially offset by a decrease in mass media advertising costs of HK$34.4 million.
Depreciation.Depreciation decreased by 1.9% to HK$206.2 million in fiscal 2009. Notwithstanding our purchase of additional fixed assets for our network infrastructure as we increased the scale of operations in our FTNS business, a portion of our owned fixed assets were fully depreciated and a lower depreciation expenses was incurred as a result.
Other income, net.Other income, net increased to HK$29.641.5 million in fiscal 2009 from HK$25.0 million in fiscal 2008. The mobile interconnection charges in fiscal 2008 decreasedincrease was mainly contributed by 27.6% compared to fiscal 2007 because the amount recognized in fiscal 2007 included charges for fiscal 2007 and additional charges for fiscal 2005 and 2006 previously measured basedgain on the 2006 PA. For more information regarding mobile interconnection charges, see “Factors Affecting Our Results of Operations — Our Revenues”.
International telecommunications services.Revenues from our international telecommunications services decreased by 10.0% to HK$292.0 million in fiscal 2008 from HK$324.5 million in fiscal 2007. The decrease was primarily due to lower volumes, the effects of which were partially offset by higher revenue per minute. Competition during the fiscal year was intense as someextinguishment of our integrated competitors offered international direct dial minutes for free or at very low cost as a marketing incentive to gain local fixed line and mobile market shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, was also becoming more prevalent.
Operating expenses.Operating expenses increased by 9.1% to10-year senior notes of HK$1,144.531.4 million, in fiscal 2008 from HK$1,048.7 million in fiscal 2007, reflecting an increase in other operating expenses, the effects of which were partially offset by a decrease in network costs.
Network costs.Network costs decreased by 16.9% to HK$178.4 million in fiscal 2008 from HK$214.6 million in fiscal 2007 mainly due to a reduction in international tariff volume and the recovery of HK$7.6 million Universal Services Contributions from PCCW-HK during fiscal 2008 pursuant to the TA Statement issued by the Telecommunications Authority. There was no recovery of Universal Services Contributions during fiscal 2007.
Other operating expenses.Other operating expenses increased by 15.8% to HK$966.1 million in fiscal 2008 from HK$834.1 million in fiscal 2007.
Salaries and related costs.Salaries and related costs increased by 11.9% to HK247.5 million in fiscal 2008. We increased our total work force by 13.3% to 3,051 employees as of August 31, 2008 from 2,692 employees as of August 31, 2007, primarily due to the increased operating scale in fixed telecommunications network services.
Sales and marketing expenses.Sales and marketing expenses increased by 51.1% to HK$307.7 million in fiscal 2008 from HK$203.7 million in fiscal 2007, as we increased our salaries and commissions for our sales and marketing employees of HK$59.9 million and the increased mass media advertising costs of HK$30.3 million. In fiscal 2008, we started a strategy of promoting the brand to a wider audience.
Office, general and administrative expenses.Office, general and administrative expenses increased by 28.9% to HK$186.5 million in fiscal 2008 from HK$144.7 million in fiscal 2007, mainly due to the expanded operating scale of our fixed telecommunications network services.
Depreciation and amortization.Depreciation and amortization expenses decreased by 18.6% to HK$210.1 million in fiscal 2008 from HK$258.1 million in fiscal 2007. Our management revised the estimated useful lives of our fiber network and related peripherals from 4-15 years to 6-20 years, and the revisions became effective from June 1, 2007. As a result, fiscal 2008 was the first full year in which the impact on depreciation charges resulting from such revision was realized. The effect of the decrease in depreciation expense for fiscal 2008 due to the changes in estimated useful lives which was estimated to be HK$63.6 million.
Provision for doubtful accounts.Provision for doubtful accounts increased to HK$14.3 million in fiscal 2008 from HK$6.6 million in fiscal 2007. Included in the provision for fiscal 2007 was the reversal of HK$9.4 million of the allowance for doubtful debts previously recognized for mobile interconnection charges. If such effect was excluded, the provision for doubtful accounts decreased by HK$1.7 million due to better collection efforts. For more information regarding our provisions for mobile interconnection charges, see “Factors Affecting Our Results of Operations—Our Revenues” above in this annual report.
Income from operations.For the foregoing reasons,interest income from operations increased by 71.2% to HK$158.5 million in fiscal 2008 from HK$92.6 million in fiscal 2007. Operating margin increased to 12.2% in fiscal 2008 from 8.1% in fiscal 2007. The increase in operating margin was primarily due to higher revenue contribution from fixed telecommunications network services and the better margin achieved in our international telecommunications services as a result of the phasing out of lower margin customers.
Interest income and expense.Interest income decreased by 31.3% to HK$15.6 million in fiscal 2008 fromto HK$22.74.8 million in fiscal 2007. The decrease was primarily due to a decrease in our average outstanding cash balance,2009 as a significant portionresult of our interest income was derived from our deposit of surplus capital in interest-bearing accounts at commercial banks. Thethe decrease in our average cash balance in fiscal 2008 was

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2009 mainly due to the repurchase of our 8.75% senior notes withbuyback actions.
Finance costs.Finance costs decreased by 26.6% to HK$55.1 million in fiscal 2009 from HK$75.1 million in fiscal 2008 as a result of the redemption and cancellation of an aggregate principal amount of US$35.668.0 million of our 10-year senior notes from the market at a total consideration of US$35.3 million in fiscal 2008. As a result of this, interest expense decreased by 14.1% to HK$75.1 million in fiscal 2008 from HK$87.5 million in fiscal 2007.
Other income, net.Other income, net consists of the roaming charges we receive from overseas carriers that deliver traffic over our network, exchange gains and losses, and management and other fees we received in the ordinary course of our business. Other income, net increased to HK$9.4 million in fiscal 2008 from HK$3.1 million in fiscal 2007. The increase mainly includes realized gain on early redemption of long term deposits of HK$1.2 million, realized and unrealized gain on other financial assets of HK$3.3 million, and gain on extinguishment of 8.75% senior notes of HK$2.6 million.2009.
     Income tax benefit/(expense)/credit..We recorded an income tax creditexpense of HK$38.8 million in fiscal 2009, compared to an income tax benefit of HK$16.8 million in fiscal 2008, compared to an2008. Included in the income tax expense of HK$2.0 million in fiscal 2007. The income tax creditbenefit in fiscal 2008 was primarilya tax credit of HK$26.3 million related to HK$26.3 million ofthe deferred tax assets recognized in respect of the tax loss carryforwards of our major operating subsidiary as basedat August 31, 2008. Based on the results of operations of our major operating subsidiary in recent years and our forecast for future years, we concludeconcluded it iswas probable that the subsidiary willwould generate sufficient taxable income to utilize the tax loss carryforwards. The HK$26.3 millionIf such effect was offset byexcluded, the current income tax expenses ofincrease by HK$4.929.3 million, in respect of twowhich was primarily caused by the increase of our subsidiaries and the reversal of HK$4.6 million of deferred tax assets upon utilization of tax loss carryforward by the Company.income before taxation.
     Net income.For the foregoing reasons, net income increased to HK$212.8 million in fiscal 2009 from HK$125.2 million in fiscal 2008 from HK$28.9 million2008. Net margin increased to 14.4% in fiscal 2007.
Year Ended August 31, 2007 Compared to Year Ended August 31, 2006
Revenues.Revenues increased by 0.6% to HK$1,141.3 million2009 from 9.6% in fiscal 2007 from HK$1,134.9 million in fiscal 2006, reflecting an2008. The increase in revenue from fixed telecommunications network services, the effects of which were substantially offset by a decrease in revenue from our international telecommunications services. Revenue contribution from our fixed telecommunications network services increased to 71.6% in fiscal 2007 from 63.1% in fiscal 2006.
Fixed telecommunications network services.Revenues from fixed telecommunications network services increased by 14.0% to HK$816.8 million in fiscal 2007 from HK$716.6 million in fiscal 2006. The increase was primarily caused by an increase of 10.7% of our FTNS subscription base to 683,000 as of August 31, 2007 from 617,000 as of August 31, 2006 and an increase in the average revenue per user for our Internet access services. We believe that such increases suggested that there is increasing market acceptance of premium pricing.
Internet access.Subscription base for our Internet access services rose by 12.3%, to 247,000 as of August 31, 2007 from 220,000 as of August 31, 2006. During fiscal 2007, we focused on differentiating our services by emphasizing our ultra high Internet access speed. which allow us to increase our average revenue per user. By providing stable and high speed broadband services and reliable customer service, we aim to acquire and retain customers with longer subscription period to higher price. This has significantly increased our revenue from Internet access services.
Local VoIP.Subscription base for our local VoIP services rose by 9.6%, to 308,000 as of August 31, 2007 from 281,000 as of August 31, 2006, mainly due to improved branding and cross selling our VoIP services to subscribers of our Internet access services.
IP-TV.Subscription base for our IP-TV services increased by 10.3% to 128,000 subscriptions, with the majority of the new subscriptions coming from existing subscribers of our Internet access and local VoIP services.
International telecommunications services.Revenues from our international telecommunications services decreased by 22.4% to HK$324.5 million in fiscal 2007 from HK$418.3 million in fiscal 2006. The decrease was primarily due to the combined effects of lower volumes and lower revenue per minute. Competition during the fiscal year was intense as some of our integrated competitors offered international direct dial minutes for free or at very low cost as a marketing incentive to gain local fixed line and mobile market shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent.
Operating expenses.Operating expenses decreased by 14.1% to HK$1,048.7 million in fiscal 2007 from HK$1,220.4 million in fiscal 2006, reflecting decreases in network costs and other operating increases.
Network costs.Network costs decreased by 28.6% to HK$214.6 million in fiscal 2007 mainly due to a reduction in international tariff volume and less reliance on third parties backhaul for our FTNS business.
Other operating expenses.Other operating expenses decreased by 9.3% to HK$834.1 million in fiscal 2007.
Salaries and related costs.Salaries and related costs decreased by 13.9% to HK$221.1 million in fiscal 2007 from HK$256.7 million in fiscal 2006 mainly due to the benefits from streamlining the work force in fiscal 2006.
Sales and marketing expenses.Sales and marketing expenses in fiscal 2007 was comparable to that in fiscal 2006.

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Office, general and administrative expenses.Office, general and administrative expenses decreased by 13.6% to HK$144.6 million in fiscal 2007 from HK$164.2 million in fiscal 2006, mainly as a result of last year’s operational efficiency plan and cost savings due to the decentralization of authority to department heads.
Depreciation and amortization.Depreciation and amortization expenses decreased by 6.7% to HK$258.1 million in fiscal 2007 from HK$276.5 million in fiscal 2006, mainly due to changes in the estimated useful lives of certain assets amounting to HK$15.9 million. Our management revised the estimated useful lives of our fiber network and related peripherals from 4-15 years to 6-20 years, effective on June 1, 2007. The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. This change does not have any effect on the total depreciation charges of those assets during their remaining useful lives.
Provision for doubtful accounts.Provision for doubtful accounts decreased by 62.3% to HK$6.6 million in fiscal 2007, mainly due to the reversal of previously recognized provisions for mobile interconnection charges receivable. In fiscal 2006, we recorded a provision of HK$20.8 million for mobile interconnection charges receivable accumulated from previous years following our assessment of the collectability of these charges. In fiscal 2007, we reversed a portion of this provision by HK$9.4 million based on the rates set by the Telecommunications Authority in the 2004 determination issued in June 2007. Our provision for other trade receivables recorded in fiscal 2007 was HK$16.0 million compared to the HK$17.5 million in fiscal 2006. For more information regarding our provisions for mobile interconnection charges, see “Factors Affecting our Results of Operations—Our Revenues” above in this annual report.
Income from operations.For the foregoing reasons, income from operations was HK$92.6 million in fiscal 2007, compared with a loss from operations of HK$85.5 million in fiscal 2006. Income from operations in fiscal 2007net margin was primarily due to higher revenue contribution from fixed telecommunications network servicesour FTNS business and the better margin achieved in our international telecommunications servicesIDD business as a result of our gradualthe phasing out of lower margin customers.
Interest income and expense.Interest income increased by 11.3% to HK$22.7 million in fiscal 2007 from HK$20.4 million in fiscal 2006. The increase in interest income was due to a strong net cash inflow from our operations and a favorable interest rate environment, as a significant portion of our interest income was derived from our deposit of surplus capital in interest-bearing accounts at commercial banks. Interest expense in fiscal 2007 was HK$87.5 million which is comparable to HK$88.6 million in fiscal 2006. Such interest expense was predominantly due to the interest expense of our 8.75% senior notes.
Other income, net.Other income, net consists of the roaming charges we receive from overseas carriers that deliver traffic over our network, exchange gains and losses, and management and other fees we received in the ordinary course of our business. Other income, net decreased by 31.1% to HK$3.1 million in fiscal 2007 from HK$4.5 million in fiscal 2006. The other income, net in fiscal 2007 mainly includes net realized and unrealized gains on investment securities and derivative financial instruments of HK$1.8 million.
Income tax (expense)/credit.We recorded income tax expense of HK$2.0 million in fiscal 2007, compared with income tax credit of HK$7.2 million in fiscal 2006. The income tax expense in fiscal 2007 was mainly due to the tax paid by one of our subsidiaries in Guangzhou. The income tax credit in fiscal 2006 was mainly related to the recognition of deferred tax assets in respect of the tax losses from our fixed telecommunications network services business, the effects of which were partially offset by the income tax expense associated with the profit generated from our international telecommunications services.
Net income.For the foregoing reasons, we recorded net income of HK$28.9 million in fiscal 2007, compared with net loss of HK$142.1 million in fiscal 2006.
U.S. GAAP ReconciliationRecent accounting pronouncements
     Our financial statements are prepared in accordance with HKFRS, which differs in certain significant respects from U.S. GAAP.
     There were no differences in the net (loss) / income determined under HKFRS and U.S. GAAP for the years ended August 31, 2006, 2007 and 2008. The following tables provide a comparison of our shareholders’ equity in accordance with HKFRS and U.S. GAAP.
                 
  As of and for the Year Ended August 31,
  2006 2007 2008 2008
  HK$ HK$ HK$ US$
  (in thousands)
                 
Shareholders’ Equity
                
HKFRS  891,654   903,882   1,032,607   132,324 
U.S. GAAP  897,271   909,499   1,038,224   133,044 
     Differences between HKFRS and U.S. GAAP for the periods presented relate primarily to goodwill.

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     Disclosure relating to those differences can be found in note 31 to our consolidated financial statements. In addition, our condensed consolidated statement of operations, changes in shareholders’ equity and comprehensive (loss)/ income have been included in note 31 to our consolidated financial statements to reflect the impact of the significant differences between HKFRS and U.S. GAAP.
Recent Accounting Pronouncements
     Recently issued and adopted accounting pronouncements under HKFRS and U.S. GAAPIFRSs have been included in note 3032 to our consolidated financial statements.
B. Liquidity and Capital Resourcescapital resources
     We expect cash flows generatedflow from operations willoperating activities to continue to be our principal source of liquidity. As of August 31, 2008,2010, we had cash and bank balance of HK$421.6 million and pledged bank deposit of HK$87.3588.7 million. Our day-to-day operations are also supported by HK$87.3353.8 million banking facilities and revolving loan facility, of which only HK$29.9133.3 million was utilized.utilized as at August 31, 2010.
     We believe that our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs, including for working capital requirements, capital expenditure,expenditures, repayment of our indebtedness when fall due and various contractual obligations, for at least the next 12 months. However, if ourOur cash flows from operations, however, may decrease due to lower customer demand changes significantly due toresulting from rapid

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technological changes, if we are not able to successfully compete withincreasing competition resulting from new local and foreign entrants into the market, or if we failour failure to maintainobtain or obtainrenew the necessary license renewals from the Telecommunications Authority, thistelecommunication licenses. A decrease in our operating cash flow could have a significant adverse impact on our cash flows from operations, which could effectadversely affect our ability to make planned capital expenditures, as well as meet scheduled payments on the 8.75% senior notes,to comply with our obligations under various operating and capital leases commitments and to repay amounts due under banking facilities.
     We obtained the rating of B+ (stable) from Standard & Poor’s Rating Services and the rating of B1(positive) from Moody’s Investors Services for our 8.75% senior notes. Generally speaking, the credit ratings on our company are impacted by our revenue and earnings growth as well as our cash position. As of January 9, 2009, we are not aware of any significant factors that would change our credit ratings.
Cash Flowflow
The following table summarizes our cash flows for each of fiscal 2006, 20072008, 2009 and 2008:2010:
                 
  Year Ended August 31,
  2006 2007 2008 2008
  HK$ HK$ HK$ US$
  (In thousands)
Net cash flow from operating activities  184,151   383,999   378,529   48,507 
Net cash (used in)/provided by investing activities  (492,742)  114,053   (147,750)  (18,934)
Net cash used in financing activities  (86,432)  (109,504)  (342,516)  (43,892)
                 
                 
(Decrease)/increase in cash and bank balances  (395,023)  388,548   (111,737)  (14,319)
Cash and bank balances, at the beginning of year  539,591   144,917   532,894   68,289 
Effect of foreign exchange rate changes on cash  349   (571)  453   58 
                 
                 
Cash and bank balances, at the end of the year  144,917   532,894   421,610   54,028 
                 
                 
  For the year ended August 31, 
  2008  2009  2010  2010 
  HK$  HK$  HK$  US$ 
      (Amounts in thousands)     
Net cash inflow from operating activities  381,991   536,771   485,340   62,398 
Net cash outflow from investing activities  (147,750)  (176,488)  (306,254)  (39,374)
Net cash (outflow)/inflow from financing activities  (345,978)  (561,292)  178,307   22,924 
             
                 
(Decrease)/increase in cash and cash equivalents  (111,737)  (201,009)  357,393   45,948 
Cash and cash equivalents, at the beginning of year  532,894   421,610   221,052   28,420 
Effect of foreign exchange rate changes on cash  453   451   (270)  (35)
             
                 
Cash and cash equivalents, at the end of the year  421,610   221,052   578,175   74,333 
             
                 
Analysis of the balances of cash and cash equivalents                
Cash at bank and in hand  434,604   226,416   588,665   75,682 
Bank overdrafts — unsecured  (12,994)  (5,364)  (10,490)  (1,349)
             
                 
   421,610   221,052   578,175   74,333 
             
Operating Activitiesactivities
     Our principal source of cash was cash generated from our fixed telecommunications network services and to a lesser extent, international telecommunications services.
     The net decrease inFTNS business. Net cash inflow from operating cash flowsactivities increased 40.5% from HK$382.0 million in fiscal 2008 relates mainly to the increase of cash received from customer (exclude mobile operators) of HK$142.8536.8 million and recoveries of mobile interconnection charges of HK$53.4 million offset byin fiscal 2009, primarily reflecting the increase in our profit before taxation resulting from the continued expansion of our subscription base. Net cash inflow from operating activities decreased by 9.6% from HK$536.8 million in fiscal 2009 to HK$485.3 million in fiscal 2010, which was a reflection of a slight increase in our profit before taxation offsetting by our rather higher customer acquisition in fiscal 2010.
Investing activities
     Net cash outflow for the salaries and commission expenses offrom investing activities in fiscal 2010 was HK$97.6 million, mass media advertising cost of HK$30.3 million and premium cost of HK$44.0 million, and operating expenses of HK$29.8 million due to the expansion of the operation scale of our fixed telecommunications network services. Apart from uncertainties about the effect of the current credit crisis, we are not aware of any material trends or uncertainties which may have material effects on our sources and uses of cash.
306.3 million. The net increase in operating cash flow in fiscal 2007outflow was mainly due to increased revenueour purchase of fixed assets in the amount of HK$349.1 million.
     Net cash outflow from our fixed telecommunications network services and lower network costs as a result of the decreaseinvesting activities in our international telecommunications services. Moreover, leveraging on last year’s operating efficiency plan and decentralization of authority to individual department heads helped to increase our operating cash flow.
fiscal 2009 was HK$176.5 million. The net increase in operating cash flow in fiscal 2006outflow was mainly due to lower network costs as a resultour purchase of fixed assets of HK$289.9 million, the completioneffect of our fiber backbone network, which reduced our network costs paid to third party network operators. Moreover,were partially offset by leveraging on the large scale salesan decrease in pledged bank deposits of HK$72.3 million and marketingnet proceeds from maturity of investment in debt securities of HK$28.1 million.
     Net cash outflow from investing activities in fiscal 2005 which has enhanced brand image and improved customer experience, less sales and marketing expenses were incurred in fiscal 2006, which also helped to increase the operating cash flow.

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Investing Activities
     In fiscal 2008 net cash used in investing activities was HK$147.8 million. The net cash outflow was mainly due to the purchase of fixed assets of HK$189.9 million for the development of our Next Generation Network.
     InFinancing activities
     Net cash inflow from financing activities in fiscal 2007, net cash generated from investing activities2010 was HK$114.1178.3 million. The net cash generatedinflow was mainly due to the proceeds from the offering of new ordinary shares in the amount of HK$396.4 million and the proceeds from new bank loans of HK$163.4 million, which were partially offset by the repurchase and redemption of our 10-year senior notes of HK$172.4 million and dividend paid of HK$158.4 million.
     Net cash outflow from financing activities in fiscal 2009 was HK$561.3 million. The net cash outflow was mainly due to our receiptrepurchase of term deposits10-year senior notes for an aggregate consideration of HK$237.5 million. Further, our purchase485.8 million (including transaction cost), payment of fixed assetsinterest on the 10-year senior notes of HK$149.352.7 million was lower thanand payment of cash dividends of HK$23.0 million.

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     Net cash outflow from financing activities in fiscal 2006.
     In fiscal 2006, net cash used in investing activities2008 was HK$492.7346.0 million. The net cash outflow consisted primarily of purchases of fixed assets of HK$382.2 million for the development ofwas mainly due to our Next Generation Network and upgrading of our international telecommunications facilities. An increase in term deposits of HK$144.6 million further increased the cash outflow for investing activities in 2006.
Financing Activities
     Net cash used in financing activities in fiscal 2008 consisting mainly of considerations paid in the repurchase of 8.75%10-year senior notes for an aggregate consideration of HK$269.4 million, payment of interest paid on 8.75%the 10-year senior notes of HK$70.0 million and dividendpayment of cash dividends of HK$17.3 million.
     Net cash used in financing activities in fiscal 2007 consisting mainly of interest paid on our 8.75% senior notes of HK$85.3 million and interim dividend of HK$24.6 million.
     Net cash used in financing activities in fiscal 2006 which mainly consisted of interest paid on our 8.75% senior notes of HK$85.2 million.
Indebtedness
     As of August 31, 2008,2010, we had an outstanding borrowingsdebt of HK$683.6 million. Our long term liability consists mainly134.7 million, most of which consisted of our 8.75%bank loans in the amount of HK$123.6 million stated at amortized cost and were classified as non-current debt.
10-year senior notes due 2015, which amounted to HK$683.2 million.
8.75% Senior Notes
     On January 20, 2005 we issued unsecured 10-year senior fixed rate notes in the aggregate principle amount of US$125 million at par value.value and received net proceeds in the amount of US$121.0 million after deduction of expenses and commissions. The 10-year senior notes were rated BB- (stable) by Standard & Poor’s Rating Services and Ba3 (stable) by Moody’s Investors Services. A significant portion of the net proceeds were used to repay in full an existing bank loan in the outstanding amount of HK$196.7 million and to finance capital expenditures, including costs incurred in expanding and upgrading our Next Generation Network. As of August 31, 2009, the 10-year senior notes were stated at the amortized cost of US$21.0 million (HK$162.6 million), compared with the amortized costs of US$87.5 million (HK$683.2 million) as of August 31, 2008.
     The notes mature on February 1, 2015 and bear interest at the fixed rate of 8.75% per annum. Interest on the notes are payable semi-annually in arrears on February 1 and August 1.1 of each year. The notes are irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of our existing and future subsidiaries (other than, as of the issue date of the notes, CTI Guangzhou and, subsequently, any other subsidiary prohibited by applicable law, regulation or order from issuing a guarantee of the notes).
     We may redeem all but not less than all of the 8.75% senior notes in the event we have to pay additional amountsOn June 17, 2009, as a result of certain changes in taxation. Priorour tender offer and consent for amendments to February 1, 2008, we may redeem up to a maximum of 35%the indenture, substantially all of the original aggregate principal amount of the notes, with the proceeds from one or more specified public or private offerings of our common stock, at a redemption price equal to 108.75% of the principal amount of the notes. On or after February 1, 2010, we may redeem the notes, in whole or in part, at the redemption prices set forthrestrictive covenants in the indenture governing the notes. In all caseshave been eliminated. Consequently, certain events that would have constituted a violation of optional redemption, we will pay principal at the redemption price specified plus accrued and unpaid interest, additional amounts, if any, thereon to, but not including, the date of redemption.
     The indenture governing the 8.75% senior notes containssuch covenants that limit, among other things, our ability and the ability of certain of our existing and future subsidiaries to:
pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;
incur additional indebtedness or issue certain equity interests;
merge, consolidate or sell all or substantially all of our assets;
issue or sell capital stock of some of our subsidiaries;
sell or exchange assets or enter into new businesses;
create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;
create liens on assets;
enter into certain transactions with affiliates or related persons; and
enter into sale and lease back transactions.
     The net proceeds of the 8.75% senior notes were approximately US$121.0 million after deduction of expenses and commissions. We used the net proceeds, in part, to repay in full an existing bank loan in the outstanding amountpast will no longer constitute event of HK$196.7 million. The remaining net proceeds has been and will continue to be used for capital expenditures, including costs incurred in expanding and upgrading our Next Generation Network in Hong Kong, and for additional working capital and general corporate purposes.
     During December 2007, January 2008 and February 2008, wedefault. We also repurchased an aggregate principal amount of US$35.668.0 million of the 8.75%10-year senior notes from the market for an aggregate consideration (including transaction cost and accrued interest) of US$65.1 million.
     On December 4, 2009, we repurchased a portion of the 10-year senior notes with a cumulative principal amount of HK$11.6 million (US$1.5 million) from the open market. We paid a total consideration, (includingincluding accrued interest, and/or broker’s commissions) of US$35.4 million. All ofapproximately HK$12.1 million (US$1.6 million). On February 1, 2010, we redeemed the

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repurchased then outstanding 10-year senior notes have been cancelled. As of January 9, 2009, an aggregatewith a cumulative principal amount of US$89.4HK$153.9 million (US$19.9 million) at the redemption price equal to 104.375% of the 8.75%principal amount. We paid a total consideration, including accrued interest, of approximately HK$167.6 million (US$21.6 million). As of August 31, 2010, all the 10-year senior notes remained outstanding.has been repurchased and redeemed.
Banking facilities
     As of August 31, 2008, the 8.75% senior notes were stated at the amortized cost of US$87.5 million (HK$683.2 million), compared with the amortized costs of US$122.1 million (HK$952.6 million) as of August 31, 2007.
     In August 2008, we launched a tender offer and consent solicitation for the cash purchase of up to US$125 million aggregate principal amount of the 8.75% senior notes. The terms and conditions of the offer were set forth in an Offer to Purchase and Consent Solicitation Statement dated July 9, 2008, as further extended. We terminated the tender offer and consent solicitation due to adverse market conditions and therefore we determined that the financing condition of the offer would not be satisfied. All notes previously tendered were promptly returned to holders.
Banking Facilities
     As of August 31, 2008,2010, we had available banking facilities and revolving loan facility of HK$87.3353.8 million, of which HK$29.9133.3 million was utilized.
Capital Expendituresexpenditures
     In order to further develop our Next Generation Network and maintaincontinue to increase the scale of operations of our international telecommunicationsFTNS business, we plan to make a total capital expenditures ofexpenditure ranging from approximately HK$650320 million to HK$350 million in fiscal 2009 and 20102011 to increase the coverage of our Next Generation Network from 1.5 million residential home passesNetwork. Our plan is to reach 2.0 million residential home passeshomes pass and from 6971,800 commercial buildings by the end of 2011. We expect to 1,800 commercial buildings. Thefinance our budgeted capital expenditures will be financed by the company’s internally generatedwith cash flow in the respective year.
Contractual Obligations and Commercial Commitments
     The following table sets forth information regarding our aggregate payment obligations in future years of the contractual obligations and commercial commitments that we had as of August 31, 2008.
                     
  Payments due by period
          More than 1 More than  
          year but 3 years but More
      Within within 3 within 5 than
Contractual Obligations Total 1 year years years 5 years
  (Thousands of HK$)
Capital expenditure items  143,888   143,888          
Operating leases  87,000   55,095   21,077   3,444   7,384 
8.75% senior notes  1,093,852   61,012   122,024   122,024   788,792 
Obligation under finance leases  414   142   272         
Other current liabilities  248,805   248,805          
Programming fees (IP-TV)  6,862   6,583   219   60    
                     
                     
Total  1,580,821   515,525   143,592   125,528   796,176 
                     
     During December 2007, January 2008 and February 2008, we repurchased an aggregate principal amount of US$35.6 million of the 8.75% senior notes from the market for a total consideration (including accrued interest) of US$35.4 million. All of the repurchased notes have been cancelled. As a result of the market repurchase of the notes, our contractual obligations in respect of the short-term and long-term debt (principal and interest payments) decreased by US$55.9 million (equivalent to HK$436.4 million).
     We expect that our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs, including for working capital, capital expenditure, repayment of our indebtedness and various contractual obligations, for at least the next 12 months. However, if our customer demand changes significantly due to rapid technological changes, if we are not able to successfully compete with local and foreign entrants into the market, or if we fail to maintain or obtain the necessary license renewals from the Telecommunications Authority, this could have a significant adverse impact on our cash flows from operations, which could effect our ability to make planned capital expenditures as well as meet scheduled payments on the 8.75% senior notes, our various operating activities, bank loans and capital leases commitments and amounts due under banking facilities.market transactions.
C. Research and development, patents and licenses
     We commit considerable resources to our research and development department in order to continuously improve our services and improve our market position. As of August 31, 2008,2010, our research and development team consisted of approximately 27 staff members21 Talents experienced in systems design, engineering, telecommunications and computer programming. Our research and development department is primarily responsible for assessing and adapting the technology that we employ in upgrading and expanding our Next Generation Network. To identify and develop new market opportunities, the research and development team assesses new services offered by telecommunications and Internet companies in the United States and elsewhere and works closely with our marketing department. Our research and development expenditures were approximately HK$9.6 million, HK$5.010.8 million and HK$9.611.2 million for fiscal 2006, 20072008, 2009 and 2008,2010, respectively.
D. Trend information
     During fiscal 2008,Revenue from our international telecommunicationsIDD business experienced a 12.9% decline in volumedecreased by 11.6% to 574.0 million minutes, which marginally offset by higher revenue per minute, resulted in a 10.0% reduction in our international telecommunications revenues to HK$292.0218.6 million in fiscal 2008.2010 from HK$247.4 million in fiscal 2009. The principal reason for this declinedecrease was the intense competition, as our key competitors introduced highly aggressive price cuts. We expect that such decline will continue in future. Rather than directly competing on price, our strategy is to proactively migrate our international telecommunications customers to our FTNS global “2b” VoIP service which we believe will enable us to obtain higher margins and provide us with access toPartly as a wider addressable market.result,

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     Our revenuesthe traffic volume of our IDD business decreased by 4.7% to 464.0 million minutes in fiscal 2010 from 487.0 million minutes in fiscal 2009. We expect competition will continue to increase in the future, creating further pressure on our volume and pricing.
     Revenue from our fixed telecommunications network servicesFTNS business grew by 23.8%10.2% to HK$1,0111,356.1 million in fiscal 20082010 from HK$1,230.9 million in fiscal 2009. The principal reason for this increase was due to a rise in the broadband subscription basegrowth of our fixed telecommunications network services of 17.3%34.5% to 801,000 subscriptions526,000 subscription accounts as of August 31, 2008. The2010 from 391,000 subscription accounts as of August 31, 2009, which was partially offset by a decrease in the average revenue growth was also attributableper subscription account as part of our marketing campaigns to increase our success in raising revenue yields per subscription.subscriber base.
     The current global credit cruncheconomic downturn has already had a dampening effect on consumer sentiment and business activities across the globe. Although weglobe in late 2008 and 2009 and the global economy continues to experience continued market volatility. The impact of the downturn on our operations has been limited because our FTNS and IDD services are not immune from this macro economic downturn, our underlying broadband and voice servicesregarded as “semi-utility” services should be relatively less impacted.services. However, if the global economic conditions remain difficultdownturn continues to experience significant volatility, demand for a long period of time, weour services may also face demand-size pressures.be adversely affected.
E Off-Balance Sheet ArrangementsE. Off-balance sheet arrangements
     Other than as described above in “ Critical Accounting Policies” and note 28 to our Consolidated Financial Statements, we have not entered into any off-balance-sheet arrangements with any entities or individuals.
F. Tabular disclosure of contractual obligations.obligations
     The following table sets forth information regarding our aggregate payment obligations in future years of the contractual obligations and commercial commitments that we had as of August 31, 2010.
                     
  Payments due by period 
          More than  More than    
          1 year  3 years    
      Within  but within  but within  More than 
  Total  1 year  3 years  5 years  5 years 
Contractual obligations HK$  HK$  HK$  HK$  HK$ 
  (Amounts in thousands) 
Capital expenditure items  132,340   132,340          
Operating leases  124,287   88,821   26,555   4,062   4,849 
Long-term bank loan  133,996   1,829   4,326   127,841    
Obligation under finance leases  677   242   243   192    
Other current liabilities  264,904   264,904          
Programming fees (IP-TV)  73,626   25,539   41,506   6,581    
                
                     
Total  729,830   513,675   72,630   138,676   4,849 
                
Note:The other current liabilities of HK$264.9 million is comprised of bank overdrafts — unsecured of HK$10.5 million, accounts payable of HK$35.1 million, other payables and accrued charges of HK$195.9 million, deposits received of HK$21.8 million and tax payable of HK$1.5 million. A detailed explanation of the nature of accounts payable and other payables and accrued charges is contained in Note 17 to the Company’s audited consolidated financial statements included in this Form 20-F.
G. Safe Harbor
     See “Liquidity and Capital Resources” above in Item 5.“Note regarding forward-looking statements”.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESItem 6 Directors, senior management and employees
A. Directors and Senior Managementsenior management
     Our board of directors consists of eight directors, three of whom, Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu, are independent non-executive directors and one of whom, Mr.Dr. Cheng Mo Chi, Moses, is a non-executive director. The remaining four, Mr. Wong Wai Kay, Ricky, Mr. Cheung Chi Kin, Paul, Mr. Yeung Chu Kwong, William and Mr. Lai Ni Quiaque, are executive directors.

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     The following table sets forth certain information concerning our directors and senior management as of January 9, 2009.December 14, 2010.
       
           Date
 Date joined
 Joined City City
Name Age Position Telecom Age Position Telecom
Board of Directors :          
Board of directors:
         
         
WONG Wai Kay, Ricky  47  Chairman  1992   49  Executive Director and Chairman  1992
         
CHEUNG Chi Kin, Paul  51  Vice Chairman  1992   53  Executive Director and Vice Chairman  1992
         
YEUNG Chu Kwong, William  48  Executive Director and Chief Executive Officer  2005   50  Executive Director and Chief Executive Officer  2005
         
LAI Ni Quiaque  39  Executive Director, Chief Financial Officer, Company Secretary and Head of Staff Engagement  2004   41  Executive Director, Chief Financial Officer, Company Secretary and Head of Talent Engagement  2004
         
CHENG Mo Chi, Moses  58  Non-Executive Director  1997   60  Non-Executive Director  1997
         
LEE Hon Ying, John  62  Independent Non-Executive Director  1997   64  Independent Non-Executive Director  1997
         
CHAN Kin Man  49  Independent Non-Executive Director  1997   51  Independent Non-Executive Director  1997
         
PEH Jefferson Tun Lu  49  Independent Non-Executive Director  2004   51  Independent Non-Executive Director  2004
                   
Senior Management :          
Senior management:
         
��        
CHONG Kin Chun, John  46  Director of Corporate Division  1996   48  Managing Director of Corporate Division  1996
         
LO Sui Lun  44  Director of Infrastructure Development  1998   46  Director of Corporate Affairs Department  1998
         
TAM Ming Chit  42  Chief Technology Officer  2008   45  Chief Technology Officer  2008
         
TO Wai Bing  46  Managing Director of Business Development  2007   48  Managing Director of Business Development  2007
Executive Directorsdirectors
     Mr. WONG Wai Kay, Ricky, aged 47,49, is the co-founder and Chairman of the Company.Group. He is responsible for our overall strategic planning and management. Mr. Wong has over 2025 years’ experience in the telecommunications and computer industries. He had worked at a major US-listed computer company as a marketing representative and was responsible for marketing and distribution of computer products in Hong Kong from 1985 to 1989. He was also a co-founder and director of a company principally engaged in import and distribution of computer systems in Canada prior to co- foundingco-founding of the Company.Group. Mr. Wong holds a Bachelor’s Degree in Science and a Master of Business Administration Degree (Executive MBA Programme)Program) from The Chinese University of Hong Kong. He is a first cousin of Mr. Cheung Chi Kin, Paul, the Vice Chairman of the Company.Group. Currently, Mr. Wong is a member of Commission on Youth, a member of Zhejiang Committee, Chinese People’s Political Consultative Conference, an independent non-executive director of Bossini International Holdings Limited and a member of the Board of Trustees, United College, The Chinese University of Hong Kong. On December 4, 2008, Mr. Wong was appointed as chiefKong and a member of the executive officercommittee of ATV, a free-to-air broadcaster inthe Digital Solidarity Fund of Hong Kong. On December 18, 2008, Mr. Wong resigned from ATV as the chief executive officer due to inconsolable differences in ATV strategic turnaround plan.Kong Council of Social Service.
     Mr. CHEUNG Chi Kin, Paul, aged 51,53, is the co-founder and Vice Chairman of the Company.Group. Mr. Cheung is responsible for overall strategic planning and management of the Company.Group. Prior to that, Mr. Cheung was appointed as the Chief Executive Officer and was responsible for our day-to-day operations and technological research, development and support activities. Mr. Cheung has more than 2729 years’ experience in the

37


telecommunications and computer industries. He had worked in several companies engaged in application software development and computer consultancy prior to co-founding of the Company.Group. Mr. Cheung graduated with a Diploma of Advanced Programming and System Concepts Design from Herzing Institute, Canada. Mr. Cheung is a first cousin of Mr. Wong Wai Kay, Ricky, the Chairman of the Company.Group.
     Mr. YEUNG Chu Kwong, William, aged 48,50, was appointed as anour Executive Director and the Chief Executive Officer of the Company onin November 1, 2008 with the responsibilities for developing corporate strategies and overseeing the operations of the entire Group. Before that, Mr. Yeung joined the CompanyGroup as Chief Operating Officer in October 2005. He was responsible to head ourin charge of the Customer Engagement Department to overseeoverseeing customer relationship management. Mr. Yeungmanagement and was also responsible to headin charge of the Network Development Department. Mr. Yeung has more than 1719 years’ experience in the telecommunications industry. Prior to joining the Company,Group, Mr. Yeung was the Director of Customers Division in Smartone-Vodafone, the General Manager of Personal Communications and Retail Division in Tricom Telecom Limited, and was also an Inspector of Police in the Hong Kong Police Force. HeMr. Yeung holds a Bachelor of Arts Degree from Hong Kong Baptist University, a Master of Business Administration Degree from University of Strathclyde, UKU.K. and a Master of Science Degree in Electronic Commerce and Internet Computing

44


from The University of Hong Kong. Mr. Yeung is also a graduate of the Senior Executive Program of the Columbia University Graduate School of Business in New York.
     Mr. LAI Ni Quiaque, aged 39,41, is an Executive Director of the Company. He is also the Chief Financial Officer, Company Secretary and Head of Staff Engagement.Talent Engagement of the Group. Mr. Lai joined the CompanyGroup in May 2004. Mr. Lai has extensive experience in telecommunications industry, research and finance, being highly rated in this field. Prior to joining the Company,Group, Mr. Lai was a Director and Head of Asia Telecom Research for Credit Suisse heand was involved in global fund raisings for a wide range of Asian Telecom carriescarriers such as China Mobile, China Telecom, China Unicom, China Netcom, SK Telecom, PCCW, Telekom Malaysia, etc. Before that, Mr. Lai held positions with Hongkong Telecom and Kleinwort Benson Securities (Asia). Mr. Lai holds a Bachelor of Commerce degree from the University of Western Australia and an Executive Master of Business Administration Degree from Kellogg-HKUST. Mr. Lai is a Fellow member of HKICPA and CPA Australia and is a Member of the Hong Kong Institute of Directors. Mr. Lai has also been currently inappointed as a member of the Kellogg-HKUST EMBA programRemuneration Committee of the Company.
Non-executive director
          Dr. CHENG Mo Chi, Moses, aged 60, was appointed as the Independent Non-executive Director of the Group since 17 June 1997 and has been re-designated as a Non-executive Director of the Group with expected completion in 2009. Mr. Laieffect from 30 September 2004. Dr. Cheng has also been appointed as a member of the remuneration committeeRemuneration Committee of the Company.
Non-Executive Director
     Mr. CHENG Mo Chi, Moses, aged 58, was re-designated as Dr. Cheng is a Non-executive Director of the Company with effect from September 30, 2004. He was appointed as an Independent Non-executive Director of the Company since June 17, 1997. Mr. Cheng ispracticing solicitor and the senior partner of Messrs. P.C. Woo & Co., and was a firmmember of solicitors and notaries inthe Legislative Council of Hong Kong,Kong. He is the Founder Chairman of the Hong Kong Institute of Directors of which he is now the Honorary President and Chairman Emeritus and the ChairmanPresident of the Betting and Lotteries Commission. Mr. Cheng was appointed as a memberInternational Association of the Legislative Council of Hong Kong from 1991 to 1995. Mr.Practicing Lawyers. Dr. Cheng currently also serves as an independent non-executive director of another six companies listed on the Main Board, namelyholds directorships in K. Wah International Holdings Limited, China COSCO Holdings Company Limited, China Mobile Limited, China Resources Enterprise, Limited, Towngas China Company Limited, Hong Kong Exchanges and Clearing Limited, Kader Holdings Company Limited, Liu Chong Hing Investment Limited, and Towngas China Company Limited. He currently also serves as a non-executive director of another four companies listed on the Main Board, namely Galaxy Entertainment Group Limited, Guangdong Investment Limited, Kader Holdings Company Limited and Tian An China Investments Company Limited, all being public listed companies in Hong Kong. Dr. Cheng is also an independent non-executive director of ARA Asset Management Limited, a company whose shares are listed on Singapore Exchange Limited. Mr. Cheng has also been appointedHis other directorships in public listed companies in the last 3 years include Beijing Capital International Airport Company Limited, Galaxy Entertainment Group Limited and Shui On Construction and Materials Limited, all being public listed companies in Hong Kong, and ARA Asset Management (Fortune) Limited (formerly known as ARA Asset Management (Singapore) Limited), as the manager of Fortune Real Estate Investment Trust, a member of the remuneration committee of the Company.real estate investment trust listed on Singapore Exchange Limited.
Independent Non-Executive Directorsnon-executive directors
          Mr. LEE Hon Ying, John, aged 62,64, is the managing director of Cyber Networks Consultants Company in Hong Kong. He was the Regional Director, Asia Pacific of Northrop Grumman — Canada,Grumman-Canada, Ltd. He was previously the director of network services of Digital Equipment (HK) Limited and prior to that, worked for Cable &and Wireless HKT(HK) Limited and Hong Kong Telecom. He is a chartered engineer and a member of each of Institution of Engineering and Technology, the United Kingdom, and the Hong Kong Institution of Engineers and the Hong Kong Computer Society. He received a Master’s Degree in Information System from theThe Hong Kong Polytechnic University in 1992. In addition, he is the Territory Vice-presidentVice President and Board Member of the Society of St. Vincent de Paul, of Asia and Oceania,Council General, which is an international charity body.body with its head office in Paris, France. He is the Commission member of Catholic Diocese of Hong Kong Diocesan for Hospital Pastoral Care. Mr. Lee has been a Director of the Group since June 1997. Mr. Lee is also the chairman of the audit committeeAudit Committee and remuneration committeeRemuneration Committee of the Company.
          Dr. CHAN Kin Man, aged 49,51, is Director of Centre for Civil Society Studies and Associate Professor of the Department of Sociology of The Chinese University of Hong Kong. He received a Bachelor of Social Science Degree from The Chinese University of Hong Kong in 1983 and a Doctor of Philosophy Degree from Yale University in the U.S. in 1995. Dr. Chan has been a Director of the Group since June 1997. Dr. Chan has also been appointed as a member of the audit committeeAudit Committee and remuneration committeeRemuneration Committee of the Company.
          Mr. PEH Jefferson Tun Lu, ,aged 49,aged 51, is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a Certified Practicing Accountant of CPA Australia. Mr. Peh holds a Master Degree in Business from the University of Technology, Sydney. He has over 2628 years of experience in finance, accounting and management from listed and private companies in Hong Kong and Australia. Mr. Peh has been a Director of the CompanyGroup since September 2004. Mr. Peh has also been appointed as a member of the audit committeeAudit Committee and remuneration committeeRemuneration Committee of the Company.

3845


Senior Managementmanagement
          Mr. CHONG Kin Chun, John, aged 46,48, is the Managing Director of Corporate Division of the Corporate Division.Group. He is responsible for sales, marketingservicing and servicingnetwork expansion development of the Company’sGroup’s international telecommunications services and fixed telecommunications network services for business and corporate customers. Mr. Chong joined the CompanyGroup in February 1996 and holds a Bachelor’s Degree in Arts from The University of Hong Kong. Mr. Chong worked as a general manager overseeing product management and the sales force of a listed telecommunications products company in Hong Kong from 1987 to 1996.
          Mr. LO Sui Lun, aged 44,46, is the Director of HKBN, the wholly-owned subsidiaryCorporate Affairs Department of the Company.Group. He is now in chargeprimarily responsible for regulatory and carrier relations matters of the Company’s Infrastructure Development andGroup. In addition, Mr. Lo is also responsible for engaging in developmentoverseeing the legal and company secretarial functions of the Company’s infrastructure network.Group. Before that,taking up his current position, Mr. Lo was in charge of regulatory, carrier business, international business, network operation and network development for HKBN.Hong Kong Broadband Network Limited, the wholly-owned subsidiary of the Company. Mr. Lo joined the CompanyGroup in September 1998. Prior to that, Mr. Lo worked for PCCW (formerly known as “Hong Kong Telecom”) for 9 years, gaining experience in network planning and undersea cable investment. Mr. Lo holds a Bachelor’s Degree in Sciences in Electronics from The Chinese University of Hong Kong and a Master’s Degree in Business Administration from the University of Strathclyde, U.K.
          Dr. TAM Ming Chit, aged 42,45, is the Chief Technology Officer of the Company.Group. He is responsible for the Company’sGroup’s network, information system development and operations including broadband networking, IPTV, wireless applications, as well as VoIP networks. Prior to joining the CompanyGroup in 2008, Dr. Tam held various technical positions in various institutions in Hong Kong and overseas, such as Alcatel-Lucent, Citibank and SRA. He has over 1517 years of operational experience in the information technologies and telecom industry.telecommunications industries. Dr. TAMTam holds a Bachelor of Science (Hons) in Computer Science from Imperial College, University of London, U.K. and a Doctor of Philosophy in Computer Science from the University of Pennsylvania, U.S.A.
          Ms. TO Wai Bing, aged 46,48, is the Managing Director of Business Development of the Company.Group. Ms. To is also in charge of International Business Department, and Carrier Business Department and Pay TV Department. She is responsible for the control of cost of services, carrier relations, sales of carrier business, development of Pay TV business, explore and secure business partnerships to strengthen the Company’sGroup’s business operations and development. Before joining the Company,Group, Ms. To had worked in the Hong Kong Telecom Group for 16 years after graduating from theThe Hong Kong Polytechnic University with a Diploma in Electronic Engineering and subsequently a Higher Certificate in Electronic Engineering. Ms. To rejoined the CompanyGroup in May 2007 after her previous service with the CompanyGroup from September 1998 to July 2006.
B. Compensation
Directors’ and Senior Management’s Compensationsenior management’s compensation
     Our directors and senior management receive compensation in the form of salaries, housing allowances, discretionary bonuses, other allowances and benefits in kind, including our contribution to the pension schemes for such individuals. We also granted share options to various directors and members of our senior management. For more information regarding share options granted to directors and members of our senior management, see Item 56 “Directors, Senior Managementsenior management and Employeesemployees — Share Ownership”ownership” below in this annual report.
     Our senior management and employeesTalents are entitled to receive an annual discretionary bonus based on their individual performance and our financial performance during the year in question.
     The aggregate amount of salaries or other compensation, housing allowances, other allowances and benefits in kind paid by us to our directors and senior management was approximately HK$32.546.1 million for fiscal 2008,2010, compared with HK$31.238.8 million for fiscal 2007.2009. The aggregate amount of contribution that we made to the retirement or similar benefits for our directors and members of our senior management was HK$2.42.7 million for fiscal 2008,2010, compared with HK$2.22.6 million for fiscal 2007.2009.
     Except as discussed herein, no other payments have been paid or are payable, in respect of fiscal 2008,2010, by us or any of our subsidiaries to our directors and senior management.
C. Board Practicespractices
Service Contractscontracts
     We entered into service agreements with our four executive directors, Messrs. Wong Wai Kay, Ricky, Cheung Chi Kin, Paul, Yeung Chu Kwong, William and Lai Ni Quiaque, respectively. These service agreements include non-competition clauses under which our executive directors agree not to compete with us in accordance with the terms and conditions therein and shall continue to be effective unless and until terminated by either party of the respective service agreements. None of the agreements provide for any benefits or compensation upon termination of employment.

46


“Controlled Company” Exemptioncompany” exemption
     We are a “controlled company” within the meaning of Nasdaq Listing Rule 5615(c) and IM-5615-5. More than 50.0% of the NASDAQ Marketplace Rules, sincevoting power for the election of our directors is held by a group consisting of Top Group International Limited, holds more than 50%Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul. Mr. Wong and Mr. Cheung are the controlling shareholders of ourTop Group International Limited and have entered into a voting power. As such, we are exemptagreement pursuant to which they agreed to vote all of the shares held by Top Group International Limited, representing 44.22% of the voting power, all of the shares held by Mr. Wong individually, representing 0.93% of the voting power, and all of the shares held by Mr. Cheung individually, representing 5.50% of the voting power, collectively as a group.
     We have elected to rely on the exemption from the NASDAQ Marketplace Rulesmajority independent board requirement, that a majorityas set forth in Nasdaq Listing Rule 5615(b), except for the requirements of a company’s boardsubsection (b)(2), which pertain to executive sessions of directors must qualify as independent directors, within the meaning of the NASDAQ Marketplace Rules. We are also exemptand from the NASDAQ Marketplacerequirement for independent director oversight of executive officer compensation and director nominations, as set forth in Nasdaq Listing Rules requirement regarding nominations5605(d) and remuneration.5605(e).
     In accordance with the laws of Hong Kong, law, the nomination and remuneration of our directors are governed by our Articles of Association. Pursuant to our Articles of Association, our directors are appointed by our shareholders in the annual general meeting, and

39


the our directors’ fees which are recommended by the remuneration committee of our board of directors areand determined by our shareholders at the annual general meeting.
Audit Committeecommittee
     Our board of directors established an audit committee in March 1999 to ensure the impartial supervision of our accounting and business operations. The audit committee is comprised of three independent non-executive directors, namely, Mr. Lee Hon Ying, John (the Chairman of the audit committee), Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu. Mr. Peh was appointed to the audit committee on September 1, 2004 and is a “financial expert” within the meaning of, and as required by the U.S. Sarbanes-Oxley Act of 2002.
     The audit committee is governed by an audit committee charter, which was adopted by our board of directors at a meeting held in August 2004. It is responsible for overseeing the accounting and financial reporting process of the Company and the audits of the Company’s financial statements on behalf of our board of directors.following:
     Additionally, the audit committee is directly responsible for the appointment, compensation, retention and oversight of the work of City Telecom’s independent auditors (including resolution of disagreements between management and the auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for City Telecom.
overseeing the accounting and financial reporting process of the Company and the audits of the Company’s consolidated financial statements on behalf of the board of directors; and
the appointment, compensation, retention and oversight of the work of the Company’s independent auditors (including resolution of disagreements between management and the auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company.
     As provided in our audit committee charter, the audit committee is required to meet in person or telephonically at least twice a year and has the resources and authority appropriate to discharge its responsibilities as required by law, including the authority to engage independent counsel and other advisors as the audit committee deems necessary to carry out its duties.
     The audit committee met four times in fiscal 2008.2010. The major works performed by the committee from September 1, 20072009 to August 31, 20082010 included the following:
 Reviewed the Company’sour consolidated financial statements for the year ended August 31, 20072009 and for the six months ended February 29, 2008;28, 2010;
 
 Reviewed the internal audit progress, especially on theincluding procedures required for compliance ofwith the Sarbanes-Oxley Act;
 
 Reviewed the external auditor’s report on the review of the Company’sour interim financial report for the six months ended February 29, 200828, 2010 and the Company’sour audited consolidated financial statements for the year ended August 31, 2007;2009; and
 
 Pre-approved the audit and non-audit services provided by KPMG, the Company’sour external auditor.
Remuneration Committeecommittee
     Our board of directors established a remuneration committee in August 2001 to manage our offer ofoversee the Company’s remuneration packages tofor executive directors. Among others, each of our executive directordirectors is entitled to receive an annual discretionary bonus of such amount as shall be determined by the board of directors upon recommendation and approval by the remuneration committee. The remuneration committee is comprised of six members with three independent non-executive directors, Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu, the non-executive director, Mr.Dr. Cheng Mo Chi, Moses, Mr. Lai Ni Quiaque, the executive director, Chief Financial Officer, Company Secretary and Head of StaffTalent Engagement and our director of Talent Management. The remuneration committee’s objectives are set out as follows:-
Establish formal, fair and transparent procedures for developing policy and structure of all remuneration of directors and senior management.

47


Establish formal, fair and transparent procedures for developing policy and structure of all remuneration of directors and senior management.
 Review and consider the Company’s policy for remuneration of directors and senior management.
 
 Recommend the remuneration packages of non-executive directors (including independent non-executive directors).
The remuneration committee held two meetingsone meeting during the fiscal 2008.2010. The major works performed by the committee from September 1, 20072009 to August 31, 20082010 included the following:
 Reviewed and approved the proposed discretionary performance bonus for the management committee members.members;
 
 Reviewed and approved the remuneration packages for management committee members.members; and
 
 Reviewed and approved the remuneration packages for the Directors.directors.
D. Employees
     The following charttable sets forth the number of our employeesTalents by functional area as of August 31, 2008.2010.

40


     
  EmployeesTalents
Information technology and engineering  380363 
Sales and marketing, customer service and “Special Duty Unit”, or SDU  2,3672,499 
General administration and others  304370 
    
     
Total  3,0513,232 
    
     The following charttable sets forth the number of our employeesTalents by geographical region as of August 31, 2008.2010.
     
  EmployeesTalents
Hong Kong  1,5381,593 
Guangzhou  1,4891,620 
Canada  2419 
    
     
Total  3,0513,232 
    
     As of August 31, 2006, 20072008, 2009 and 2008,2010, we had 2,565, 2,6923,051, 3,173 and 3,051 employees3,232 Talents, respectively. The increase in our total number of employeesTalents in fiscal 20082010 was mainly due to the expansion in our fixed telecommunications networkFTNS business.
E. Share Ownershipownership
Share Ownershipownership
     The following charttable sets forth the share ownership of our directors and senior management as of January 9, 2009.December 14, 2010.
               
    Number of Shares Percentage of Outstanding
    Beneficially Shares Beneficially Share
Title of Class Identity of Person or Group Owned (4) Owned (%) (3) Options
Ordinary Shares Wong Wai Kay, Ricky  332,688,495(1)  51.13   14,093,586 
Ordinary Shares Cheung Chi Kin, Paul  366,983,820(2)  56.40   14,093,586 
Ordinary Shares Yeung Chu Kwong, William  3,000,000   Less than 1.0   7,029,678 
Ordinary Shares Lai Ni Quiaque  10,142,446   1.56   8,029,678 
Ordinary Shares Chong Kin Chun, John  2,271,364   Less than 1.0   2,516,710 
Ordinary Shares Lo Sui Lun  700,000   Less than 1.0   2,013,369 
Ordinary Shares Tam Ming Chit  Nil   Nil   1,002,718 
Ordinary Shares To Wai Bing  Nil   Nil   1,002,718 
                 
      Number  Percentage    
      of shares  of shares    
      beneficially  beneficially  Outstanding 
  Identity of person  owned  owned(note 3)  share 
Title of class or Group  (note 4)  %  options 
Ordinary shares Wong Wai Kay, Ricky 389,245,732
(note 1)
   50.66   8,091,604 
                 
Ordinary shares Cheung Chi Kin, Paul 389,245,732
(note 1)
   50.66   8,091,604 
                 
Ordinary shares Yeung Chu Kwong, William  2,306,000  Less than 1.0   11,542,956 
                 
Ordinary shares Lai Ni Quiaque  12,415,405   1.62   6,044,791 

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      Number  Percentage    
      of shares  of shares    
      beneficially  beneficially  Outstanding 
  Identity of person  owned  owned(note 3)  share 
Title of class or Group  (note 4)  %  options 
Ordinary shares Chong Kin Chun, John   2,777,089  Less than 1.0   2,022,900 
                 
Ordinary shares Lo Sui Lun  Nil  Nil   1,638,901 
                 
Ordinary shares Tam Ming Chit  Nil  Nil   629,665 
                 
Ordinary shares To Wai Bing  Nil  Nil   302,239 
 
(1)Notes: Of the 332,688,495 shares, 331,637,811
(1)The 389,245,732 shares are beneficially owned through Mr. Wong’s 42.12 % interest inheld by a group consisting of Top Group International Limited, orMr. Wong Wai Kay, Ricky, our chairman, and Mr. Cheung Chi Kin, Paul, our vice chairman, Top Group International Limited is a special purpose vehicle incorporated in the British Virgin Islands. Its board of directors consists of Mr. Wong and 1,050,684Mr. Cheung. Mr. Wong and Mr. Cheung have entered into a voting agreement pursuant to which they agreed to vote the 339,814,284 shares are owned directlyheld by Top Group International Limited, the 7,145,289 shares held by Mr. Wong.Wong individually, and the 42,286,159 shares held by Mr. Cheung individually, collectively as a group. The registered address of Top Group International Limited is Akara Bldg, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Top Group International Limited has four shareholders: Mr. Wong, Mr. Cheung, Mr. Leung Ka Pak, and Mr. Yau Ming Yan, Andrew, and their equity interests are 42.12%, 27.06%, 21.00% and 9.82%, respectively.
 
(2)Of the 366,983,820 shares, 331,637,811 shares are beneficially owned through Mr. Cheung’s 27.06% interest in Top Group,11,021,389 shares are owned directly by Mr. Cheung and 24,324,620 shares are beneficially owned through Mr. Cheung’s 50% interest in Worship Limited.
(3) Percentage ownership is based on 650,722,409768,410,429 shares issued as of January 9, 2009.December 14, 2010.
 
(4)(3) Beneficial ownership is determined in accordance with the rules of the SEC.

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Item 6 Directors, senior management and employees (continued)
Share ownership (continued)
     The following table sets forth the share options for the details of the share options held by the Directorsdirectors and Senior Managementsenior management of the Company as at January 9, 2009:-December 14, 2010:
                     
 Adjustment Adjustment      
 Options to number to number Options Options  
 Balance granted of options of options exercised cancelled/ Balance                                 
 as at during for 2007 for 2008 during lapsed as at  Options Options Options   
 Date of Exercise January the Exercise Final Interim the during January  Balance granted exercised cancelled/ Balance 
 grant price 21 ,2008 period period Dividend Dividend period the period 9, 2009  Exercise as at during during lapsed as at 
 HK$ (note 1) (note 2)  Date of price December 15, the Exercise the during December 14, 
Directors
                                     grant HK$ 2009 period period period the period 2010 
                                    
Mr. Wong Wai Kay, Ricky January 5, 2005 1.5297
(note 5)
  8,000,000     January 5, 2005 to
October 20, 2014
  31,646   21,832         8,053,478  January 5, 2005 1.5224 8,091,604  January 5, 2005 to October 20, 2014   8,091,604 
                                    
 May 22, 2006 0.6554
(note 6)
  6,000,000     May 22, 2007 to
May 21, 2016
  23,734   16,374         6,040,108 
                                    
Mr. Cheung Chi Kin,Paul January 5, 2005 1.5297
(note 5)
  8,000,000     January 5, 2005 to
October 20, 2014
  31,646   21,832         8,053,478 
                                    
 May 22, 2006 0.6554
(note 6)
  6,000,000     May 22, 2007 to
May 21, 2016
  23,734   16,374         6,040,108 
                                    
Mr. Cheung Chi Kin, Paul January 5, 2005 1.5224 8,091,604  January 5, 2005 to October 20, 2014   8,091,604 
Mr. Yeung Chu Kwong, William May 22, 2006 0.6554
(note 6)
  2,000,000     May 22, 2007 to
May 21, 2016
  7,911   5,458   1,000,000      1,013,369  May 22, 2006 0.6523 1,018,165  May 22, 2007 to May 21, 2016 1,018,000  165 
                                    
 February 6, 2008 1.7652
(note 7)
     6,000,000  (note 3)     16,309         6,016,309  February 6, 2008 1.7568 6,044,791  (note 1) 502,000  5,542,791 
                                     February 5, 2010 4.2400  6,000,000 (note 2)   6,000,000 
Mr. Lai Ni Quiaque June 3, 2004  1.4700   6,000,000     May 1, 2005 to
June 2,2014
        6,000,000       May 22, 2006 0.6523 2,022,899  May 22, 2007 to May 21, 2016 2,022,899   
                                     February 11, 2008 1.8660 6,044,791  (note 3)   6,044,791 
 May 22, 2006 0.6554
(note 6)
  3,000,000     May 22, 2007 to
May 21, 2016
  7,911   5,458   1,000,000      2,013,369 
                                    
 February 11, 2008 1.8749
(note 8)
     6,000,000  (note 4)     16,309         6,016,309 
                                    
Senior Management                                    
                                    
Senior management
 
Mr. Chong Kin Chun, John October 21, 2004 1.5297
(note 5)
  2,000,000     January 1, 2005 to
October 20, 2014
  7,911   5,457         2,013,368  October 21, 2004 1.5224 2,022,900  January 1, 2005 to October 20, 2014   2,022,900 
                                    
 May 22, 2006 0.6554
(note 6)
  1,000,000     May 22, 2007 to
May 21, 2016
  3,956   1,364   501,978      503,342 
                                    
Mr. Lo Sui Lun October 21, 2004 1.5297
(note 5)
  500,000     January 1, 2005 to
October 20, 2014
  1,978   1,365         503,343  October 21, 2004 1.5224 505,726  January 1, 2005 to October 20, 2014   505,726 
                                     May 22, 2006 0.6523 1,517,175  May 22, 2007 to May 21, 2016 384,000  1,133,175 
 May 22, 2006 0.6554
(note 6)
  1,500,000     May 22, 2007 to
May 21, 2016
  5,934   4,092         1,510,026 
                                    
Dr. Tam Ming Chit May 2, 2008 1.7951
(note 9)
     1,000,000  (note 3)     2,718         1,002,718  May 2, 2008 1.7866 1,007,465  (note 4) 377,800  629,665 
                                    
Ms. To Wai Bing February 15, 2008 1.7652
(note 7)
     4,000,000  (note 3)     10,873      3,008,155   1,002,718  February 15, 2008 1.7568 1,007,465  (note 4) 705,226  302,239 
 
Notes:
 
(1)As a result of allotment of 11,227,213 new shares to shareholders who elected to receive the 2007 Final Dividend in shares on February 4, 2008, the exercise price of and the number of share subject to the 51,805,000 share options outstanding on December 21, 2007 (being the Record Date for determining the entitlement of 2007 Final Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from February 4, 2008. The closing price per share immediately before the date of the grant of the Options was HK$1.70.

42


(2)As a result of allotment of 8,838,938 new shares to shareholders who elected to receive the 2008 Interim Dividend in shares on July 23, 2008, the exercise price of and the number of share subject to the 65,235,809 share options outstanding on June 6, 2008 (being the Record Date for determining the entitlement of 2008 Interim Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from July 23, 2008. The closing price per share immediately before the date of the grant of the Options was HK$1.79.
(3) The exercise of the Options is subject to certain conditions that must be achieved by the employee.grantee. During the year ended August 31, 2010, one of the clauses in the option agreement has been modified. The Options shall be exercised not later than December 23, 2012.
 
(4)(2)The exercise of the Options is subject to certain conditions that must be achieved by the grantee. The Options shall be exercised not later than February 4, 2020.
(3) The exercise of the Options is subject to the performance of the Company’s share.share and certain conditions that must be achieved by the grantee. During the year ended August 31, 2010, one of the clauses in the option agreement has been modified. The Options shall be exercised not later than December 23, December 2012.

50


(5)(4) Exercise priceThe exercise of the share options was adjusted from HK$1.54Options is subject to HK$1.5339 per ordinary share as a result of our payment ofcertain conditions that must be advanced by the 2007 Final Dividend (see Note 1). Exercise price of the share options was adjusted from HK$1.5339 to HK$1.5297 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).
(6)Exercise price of the share options was adjusted from HK$0.66 to HK$0.6573 per ordinary share as a result of our payment of the 2007 Final Dividend (see Note 1). Exercise price of the share options was adjusted from HK$0.6573 to HK$0.6554 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).
(7)Exercise price of the share options was adjusted from HK$1.77 to HK$1.7652 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).
(8)Exercise price of the share options was adjusted from HK$1.88 to HK$1.8749 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).
(9)Exercise price of the share options was adjusted from HK$1.80 to HK$1.7951 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).grantees. The Options shall be exercised not later than December 23, 2012.
     All shareholders own ordinary shares and enjoy the same voting rights with respect to each share.
Share Option Schemes
     We adopted a second share option scheme, which we refer to as the 2002 Share Option Scheme, on December 23, 2002 and terminated the share option scheme adopted and in effect sinceon July 12, 1997, which we refer to as the 1997 Share Option Scheme. Upon termination of the 1997 Share Option Scheme, no further options can be granted under the 1997 Share Option Scheme. Options granted under the 1997 Share Option Scheme that are not exercised have lapsed automatically on July 12, 2007. Under the terms of the 2002 Share Option Scheme, our board of directors may, in its discretion from time to time, and subject to such conditions as the board may determine, within ten years beginning on December 23, 2002, grant any employeeTalent or executive or officer of the Company or any of its subsidiaries (including executive, non-executive and independent non-executive directors of each of the abovementioned companies) and any suppliers or professional advisers who will or have provided services to the Company and/or its subsidiaries to subscribe for our ordinary shares.
     The maximum number of ordinary shares which may be issued upon exercise of all options to be granted under our 2002 Share Option Scheme and any of our other share option scheme(s) must not exceed 10% of the ordinary shares in issue as of the date of approval or adoption of the scheme by the shareholders which wason December 23, 2002 for the 2002 Scheme.2002. Ordinary shares which would have been issuable pursuant to options which have lapsed in accordance with the terms of such share option schemes will not be counted for the purpose of the 10% limit. Such limit may be refreshed upon approval by shareholders and compliance with all requirements under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, which we refer to as the Listing Rules. Pursuant thereto, such limit was refreshed with the approval of our shareholders in our annual general meeting held on December 24, 2007 up to a maximum limit equal to 10% of our total number of issued shares as at December 24, 2007. Notwithstanding the foregoing, the number of ordinary shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under our 2002 Share Option Scheme and any of our other share option scheme(s) at any time shall not exceed 30% of the total number of ordinary shares in issue from time to time.
     The total number of ordinary shares issued and which may be issued upon exercise in full of the options granted under our 2002 Share Option Scheme and any of our other share option scheme(s) (including exercised, cancelled and outstanding options) to each eligible participant in any 12 month12-month period up to and including the date of grant shall not exceed 1% of the outstanding ordinary shares as at the date of grant. Any further grant of options in excess of this 1% limit must be approved by shareholders.
     The subscription price for an ordinary share payable by a participant upon the exercise of any option granted under the 2002 Share Option Scheme will be determined by the Board in its absolute discretion, except that such price will not be less than the highest of (a) the closing price of the ordinary shares as stated in The Stock Exchange of Hong Kong Limited’s daily quotations sheet on the date of grant, which must be a business day; (b) the average of the closing prices of the ordinary shares as stated in The Stock Exchange of Hong Kong Limited’s daily quotations sheets for the 5 business days immediately preceding the date of grant; and (c) the nominal value of an ordinary share.
     Any grant of options to any of our directors, chief executives or substantial shareholders or any of their respective associates (as defined in the Listing Rules) is required to be approved by our non-grantee independent non-executive directors. If we propose to grant options to a

43


substantial shareholder or any of its independent non-executive directors, or their respective associates, which will result in the number of ordinary shares issued and to be issued upon exercise of options granted and to be granted under our 2002 Share Option Scheme and any of our other share option scheme(s) (including options exercised, cancelled and outstanding) to such person in the 12-month period up to and including the date of such grant (a) representing in aggregate over 0.1% of the outstanding ordinary shares; and (b) having an aggregate value in excess of HK$5 million, based on the closing price of the ordinary shares at the date of each grant, such further grant of options will be subject to approval by shareholders and all requirements under the Listing Rules.
     A grant of options may not be made after a price sensitive event has occurred or a price sensitive matter has been the subject of a decision until such price sensitive information, including annual and interim results, has been made public.
     The period during which an option may be exercised will be determined by the Boardour board of directors in its absolute discretion, except that no option may be exercised later than ten years from the date of grant. No option may be granted more than ten years after December 23, 2002. Subject to our earlier termination, the 2002 Share Option Scheme shall be valid and effective for a period of ten years after the date of adoption, that is, until December 23, 2012. In addition and to the extent not already exercised, an option will automatically lapse and not be exercisable upon the occurrence of any of the following events:
(i)(a) the expiry date relevant to that option;
 
(ii)(b) one month following the date a grantee ceases to be an eligible participant for any reason other than death or termination of his relationship with us (or the relevant subsidiary, as the case may be) on any of the grounds specified in (vii)(g) below;

51


(iii)(c) 12 months, or such longer period as the Board may determine, following the death of a grantee whose relationship with us (or the relevant subsidiary, as the case may be) would not have been terminated on any of the grounds specified in (vii)(g) below;
 
(iv)(d) 21 days following the date an effective resolution is passed for our voluntary winding-up;
 
(v)(e) subject to (iv)(d) above, the date of commencement of such winding-up;
 
(vi)(f) the date on which any compromise or arrangement between us and our members or creditors in connection with a scheme for our reconstruction or our amalgamation with any other company or companies becomes effective;
 
(vii)(g) the date on which the grantee ceases to be an eligible participant by reason of the termination of his or her relationship with us or the relevant subsidiary on any one or more of the grounds of serious misconduct or breach, bankruptcy, insolvency, composition with his or her creditors or conviction of any criminal offence involving his or her integrity or honesty or, in the case of a grantee-employeegrantee-Talent and if so determined by the Board, on any other common law, statutory or contractual ground on which an employer would be entitled to terminate such grantee’s employment;
 
(viii)(h) 14 days following the date a general offer (which has been made to shareholders by way of take-over offer, share repurchase offer or scheme of arrangement or otherwise in like manner) becomes, or is declared unconstitutional; and
 
(ix)(i) the date on which we cancel the options by reason that the grantee in any way sells, transfers, charges, mortgages, encumbers or creates any interest in favor of any third party over or in relation to any of his or her options or attempt to do so.
     As of January 9, 2009,December 14, 2010, a total number of 90,962,39396,247,857 options were granted, 26,677,26841,108,732 options were exercised, 13,418,91113,902,353 options were lapsed and 60,581,21441,236,772 options remain outstanding and unexercised. A totalTotal number of 47,413,20344,619,336 options are available for issue as of January 9, 2009.December 14, 2010.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSItem 7 Major shareholders and related party transaction
A. Major Shareholdersshareholders
     The following table sets forth certain information regarding ownership of our ordinary shares as of January 9, 2009December 14, 2010 by all persons who are known to us to own beneficially 5% or more of our ordinary shares.
           
        Percentages of Shares
    Beneficially Beneficially Owned
Title of Class Identity of Person or Group Owned(5) (%)(1)
Ordinary Shares Wong Wai Kay, Ricky  332,688,495(2)  51.13 
Ordinary Shares Cheung Chi Kin, Paul  366,983,820(3)  56.40 
Ordinary Shares Top Group International Limited  331,637,811   50.96 
Ordinary Shares Leung Ka Pak  331,637,811(4)  50.96 
Ordinary Shares Yau Ming Yan, Andrew  331,637,811(4)  50.96 
Percentages
of shares
Beneficially
beneficiallyowned
Identity of personowned(note 1)
Title of classor Group(note 4)%
Ordinary sharesWong Wai Kay, Ricky389,245,732 (note 2)50.66
Ordinary sharesCheung Chi Kin, Paul389,245,732 (note 2)50.66
Ordinary sharesTop Group International Limited389,245,732 (note 2)50.66
Ordinary sharesLeung Ka Pak339,814,284 (note 3)44.22
Ordinary sharesYau Ming Yan, Andrew339,814,284 (note 3)44.22
 
Notes:
(1) Percentage ownership is based on 650,722,409768,410,429 shares issued as of January 9, 2009.December 14, 2010.
 
(2) Of the 332,688,495 shares, 331,637,811The 389,245,732 shares are beneficially owned through Mr. Wong’s 42.12 % interest inheld by a group consisting of Top Group International Limited, or Top Group, and 1,050,684 shares are owned directly by him. Top Group International Limited, Top Group is a holding company incorporated in British Virgin Islands with no active operations. Top Group has two directors, Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul, who are our chairman and vice chairman respectively. They are two of shareholders of Top Group. Mr. Leung Ka Pak and Mr. Yau Ming Yan, Andrew are the two other shareholders of Top Group.

4452


(3) Of the 366,983,820 shares, 331,637,811 shares are beneficially owned throughKay, Ricky, our chairman, and Mr. Cheung’s 27.06% interest inCheung Chi Kin, Paul, our vice chairman, Top Group 11,021,389is a special purpose vehicle incorporated in the British Virgin Islands, and its board of directors consists of Mr. Wong and Mr. Cheung. Mr. Wong and Mr. Cheung have entered into a voting agreement pursuant to which they agreed to vote the 339,814,284 shares are owned directlyheld by Top Group International Limited, the 7,145,289 shares held by Mr. Wong individually, and the 42,286,159 shares held by Mr. Cheung individually, collectively as a group. The registered address of Top Group International Limited is Akara Bldg, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Top Group International Limited has four shareholders: Mr. Wong, Mr. Cheung, Mr. Leung Ka Pak, and 24,324,620 sharesMr. Yau Ming Yan, Andrew (See Note (3) below), and their equity interests are beneficially owned through Mr. Cheung’s 50% interest in Worship Limited.42.12%, 27.06%, 21.00% and 9.82%, respectively.
 
(4)(3) The 331,637,811 shares are beneficially owned through Mr. Leung’s 21.00% and Mr. Yau’s 9.82% interest in Top Group. Mr. Leung Ka Pak and Mr. Yau Ming Yan, Andrew may be deemed to have beneficial ownership in the 339,814,284 shares held by Top Group International Limited. Each of them expressly disclaims any beneficial ownership in such shares except to the extent of their respective pecuniary interest therein. Mr. Leung was a director and the president of all of the Company’sour subsidiaries in Canada (other than City Telecom (Canada) Inc.. HeInc.) and resigned as a director and president in October 2005. After Mr. Leung resigned,Leung’s resignation, Mr. Yau Ming Yan, Andrew wasbecame a director and the president of all of our subsidiaries in Canada (other than City Telecom (Canada) Inc.). He resigned as a director and president in July 2006.
 
(5)(4) Beneficial ownership is determined in accordance with the rules of the SEC.
As of January 9, 2009,December 14, 2010, there were 1014 registered holders of 1,838,11711,046,440 American Depositary Shares in the United States, consisting of 5.65%28.75% of our outstanding shares.
All shareholders own ordinary shares and enjoy the same voting rights with respect to each share.
Except as disclosed above, we are not directly or indirectly owned or controlled by any other person, corporation or foreign government.
We are not aware of any arrangement the operation of which may at a subsequent date result in a change of control of City Telecom.
     Except as disclosed above, we are not directly or indirectly owned or controlled by any other person, corporation or foreign government.
     We are not aware of any arrangement the operation of which may at a subsequent date result in a change of control of City Telecom.
B. Related Party Transactionsparty transactions
     For the period since the beginning of our preceding three financial years up to the date of this document, we were a party to the following related party transactions.
Contracts with Our Directorsour directors and Senior Managementsenior management
     All of our directors and senior management have employment service agreements with us. Certain of our directors and senior management receive housing allowances, pensions, bonuses and commissions. In addition, some of our directors are also senior management of City Telecom and these persons may also have the ability to make significant business decisions effecting our operations. See Item 6 “Directors and Senior Management”senior management” above inof this annual report for details concerning these arrangements.
C. Interests of Expertsexperts and Counselcounsel
Not applicable.
ITEM 8. FINANCIAL INFORMATIONItem 8 Financial information
A. Consolidated Statementsstatements and Other Financial Informationother financial information
Financial Statementsstatements
See pages F-1 — F-92F-64 following Item 19.
Legal and Regulatory Proceedingsregulatory proceedings
     We are currently involved in onea material legal or regulatory proceedingsproceeding relating to Fixed Mobile Interconnection Charges, or FMIC, as described below:
     FMIC.In March 2004,February 2008, our wholly owned subsidiary, HKBN, requested the Telecommunications Authority to make a determination, pursuant to section 36A of the Telecommunications Ordinance (Cap 106), in respect of the level of fixed-mobile interconnection charge, or FMIC, to be paid by four mobile operators including China Resources PeoplesMobile Hong Kong Company Limited, CSL Limited, Hutchison Telephone Company Limited, or Peoples,and SmarTone Mobile Communications Limited on the rate of FMIC and the effective date of such charges.interest thereon. This FMIC is paid by a mobile network operator to the interconnecting fixed network operator for telephony traffic both from a fixed line to a mobile phone and from a mobile phone to a fixed line. In May 2004, the Telecommunications Authority confirmed to Peoples and HKBN that mobile operators (in this case Peoples) should pay interconnection charges to fixed network operators (in this case HKBN) in accordance with the existing charging principles stated clearly in the relevant Statements issued by the Telecommunications Authority, particular in Statements No. 5 & 7. In August 2004, the Telecommunications Authority agreed to commence a determination regarding the level and effective date of FMIC payable to HKBN by Peoples. In March 2006, the Telecommunications Authority issued a preliminary analysis and requested comments from HKBN. HKBN submitted its response to the Telecommunications Authority in July 2006 and September 2006 respectively. Finally, in June 2007, the Telecommunications Authority made a determination on the level of FMIC payable by Peoples to HKBN for the period from April 2002 to August 2004.
     In February 2008, HKBN requested the Telecommunications Authority to make a new determination with four mobile network operators including Peoples, CSL Limited, Hutchison Telephone Company Limited, SmarTone Mobile Communications Limited & SmarTone 3G Limited (collectively “MNOs”) on the rate of FMIC and the interest thereon. In September 2008, the Telecommunications Authority indicated that it accepted HKBN’s request for determination. The proceedings are still in progress.determination and on November 25, 2009 issued its Preliminary Analysis for the parties’ comments. In May 2010, the Telecommunications Authority issued its decision on the 2008 Determination which set out the rates of mobile interconnection charges payable by the mobile operators under dispute. Based on the

53


2008 Determination, we reversed approximately HK$19.7 million revenue related to mobile interconnection charges and recognized approximately HK$10.1 million interest income during the year ended August 31, 2010.
Dividends
     Unless the relevant provisions of the Hong Kong Companies Ordinance require otherwise, we may by ordinary resolution (being a resolution passed by a majority of our shareholders who attend and vote at a meeting of shareholders) from time to time declare dividends, but no

45


dividend shall exceed the amount recommended by our board of directors. Our Articles contain provisions on apportioning dividends where shares are not or were not fully paid for during the period covered by the dividend.
     Unless the relevant provisions of the Hong Kong Companies Ordinance require otherwise, our board of directors may pay such interim dividends as appears to them to be justified by our financial position and pay any dividend payable at a fixed rate at intervals decided upon by our board of directors, whatever our financial position, if the board of directors feels that this payment is justified.
     Any dividend not claimed by a shareholder after a period of six years from the date when it was first due to be paid shall be forfeited and shall revert to us. The payment by our board of directors of any unclaimed dividend, interest or other sum payable on or in respect of a share into a separate account shall not make us responsible as a trustee for such sums.
     For fiscal 2008,2010, an interim dividend with a scrip alternative was declared at HK4HK6.5 cents per ordinary share. On July 23, 2008, the Company issued and allotted 8,838,938 New Shares to Shareholders who elected to receive the 2008 Interim Dividend in New Shares and theThe total amountsamount of HK$11,370,899.9249,724,827.45 was paid as cash dividend.dividend on July 25, 2010.
     A final dividend of HK2HK13.5 cents per ordinary share together with a scrip alternative was proposed on November 17, 2008,9, 2010, which was subsequentlywill be approved by shareholders in the annual general meeting to be held on December 19, 2008.21, 2010. The 2008 Final Dividend2010 final dividend will be paid on or about February 25, 2009.January 5, 2011.
B. Significant Changeschanges
None.
ITEM 9. THE OFFER AND LISTINGItem 9 The offer and listing
A. Offer and Listing Detailslisting details
     Our ordinary shares werehave been listed under the number “1137” on The Stock Exchange of Hong Kong Limited, or the HKSE, onsince August 4, 1997. Our American depositary shares, each representing 20 ordinary shares, werehave been listed under the symbol “CTEL” on the Nasdaq onsince November 3, 1999. Our 8.75%10-year senior notes were listed under the ISIN codes of US178677AA87 and USY16599AA30 on the Singapore Exchange Securities Trading Limited, or SGX-ST, on January 24, 2005. The 8.75%10-year senior notes were subsequently exchanged for registered notes with ISIN code US178677AB60 pursuant to a registration statement under the U.S. Securities Act of 1933 on June 24, 2005.
     On December 4, 2009, we repurchased a portion of the 10-year senior notes with a cumulative principal amount of HK$11.6 million (US$1.5 million) from the open market. We paid a total consideration, including accrued interest, of approximately HK$12.1 million (US$1.6 million). On February 1, 2010, we redeemed the then outstanding 10-year senior notes with a cumulative principal amount of HK$153.9 million (US$19.9 million) at the redemption price equal to 104.375% of the principal amount. We paid a total consideration, including accrued interest, of approximately HK$167.6 million (US$21.6 million). As of August 31, 2010, all the 10-year senior notes has been repurchased and redeemed.
     In April 2010, we offered an aggregate of 4,025,000 ADSs representing 80,500,000 ordinary shares at the offer price of US$13.00 per ADS. The proceeds we received, after deduction of underwriters’ discount but before deduction of offering expenses, amounted to US$49.8 million.
The price of our ordinary shares on the HKSE as of its close of trading on January 9, 2009December 14, 2010 was HK$1.045.78 per share. The table below shows the high and low closing prices of the shares on the HKSE since listing.
         
  Price
  High Low
  (In HK$)
2003  3.375   1.320 
2004  2.975   1.310 
2005  1.530   0.550 
2006  0.830   0.570 
2007  3.670   0.830 
         
2006        
January to March  0.770   0.570 
April to June  0.820   0.600 
July to September  0.710   0.630 
October to December  0.830   0.600 
         
2007        
January to March  1.560   0.830 
April to June  2.200   1.250 
July to September  2.120   1.780 
October to December  3.670   1.930 
         
2008        
January to March  2.170   1.620 
April to June  2.090   1.670 
July to September  1.950   1.340 
October to December  1.360   0.750 
2008        
August  1.910   1.650 
September  1.750   1.340 
October  1.360   0.750 
November  1.110   0.840 
December  1.160   0.950 
         
  Price 
  High  Low 
  (In HK$) 
Annual Date
        
2005  1.530   0.550 
2006  0.830   0.570 
2007  3.670   0.830 
2008  2.170   0.750 
2009  3.950   2.500 

4654


                
 Price Price 
 High Low High Low 
 (In HK$) (In HK$) 
Quarterly Data
 
2008
 
 
January to March 2.170 1.620 
April to June 2.090 1.670 
July to September 1.950 1.340 
October to December 1.360 0.750 
 
2009  
January (through January 9, 2009) 1.050 0.970 
 
January to March 1.140 0.840 
April to June 1.780 1.100 
July to September 2.630 1.630 
October to December 3.950 2.500 
 
2010
 
 
January to March 6.210 3.800 
April to June 6.770 4.420 
July to September 5.200 3.690 
October to December (through December 14, 2010) 6.200 4.800 
 
Monthly Data
 
2010
 
 
June 5.280 4.420 
July 4.560 3.690 
August 4.570 4.010 
September 5.200 4.720 
October 5.270 4.800 
November 6.200 5.000 
December (through December 14, 2010) 5.960 5.740 
     The price of our American depositary shares on Nasdaq as of its close of trading on January 9, 2009December 14, 2010 was US$2.6614.480 per American depositary share. The table below shows the high and low closing prices of the American depositary shares on Nasdaq since listing.
                
 Price Price 
 High Low High Low 
 (In US$) (In US$) 
2003 9.550 3.100 
2004 7.720 3.320 
Annual Date
 
2005 3.980 1.370  3.980 1.370 
2006 2.009 1.380  2.009 1.380 
2007 10.750 2.010  10.750 2.010 
2008 5.750 1.915 
2009 10.300 2.000 
  
2006 
Quarterly Data
 
2008
 
 
January to March 1.900 1.440  5.580 4.250 
April to June 1.970 1.380  5.750 4.370 
July to September 1.760 1.540  4.910 2.950 
October to December 2.009 1.400  3.380 1.915 
 
2007 
January to March 4.350 2.010 
April to June 5.830 3.100 
July to September 5.600 4.050 
October to December 10.750 4.830 
 
2008 
January to March 5.580 4.250 
April to June 5.750 4.370 
July to September 4.910 2.950 
October to December 3.380 1.915 
2008 
August 4.910 4.410 
September 4.720 2.950 
October 3.380 1.930 
November 2.560 1.915 
December 2.850 2.220 
 
2009 
January (through January 9, 2009) 2.820 2.660 

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  Price 
  High  Low 
  (In US$) 
2009
        
 
January to March  2.870   2.000 
April to June  4.650   2.870 
July to September  7.023   4.050 
October to December  10.300   6.610 
         
2010
        
         
January to March  16.180   10.150 
April to June  17.330   11.340 
July to September  13.500   9.670 
October to December(through December 14, 2010)  15.980   12.500 
         
Monthly Data
        
2010
        
         
June  13.460   11.340 
July  11.850   9.6700 
August  11.980   10.200 
September  13.500   12.450 
October  13.620   12.500 
November  15.980   12.770 
December (through December 14, 2010)  15.650   14.480 
B. Plan of distribution
Not applicable.
C. Markets
     Our ordinary shares of common stock were listed under the number “1137” on the HKSE on August 4, 1997. Our American depositary shares, each representing 20 ordinary shares, were listed under the symbol “CTEL” on the Nasdaq on November 3, 1999. Our 8.75% senior notes were listed under the ISIN codes of US178677AA87 and USY16599AA30 on the SGX-ST on January 24, 2005. The 8.75% senior notes were subsequently exchanged for registered notes with ISIN code US178677AB60 pursuant to a registration statement under the U.S. Securities Act of 1933 on June 24, 2005.See Item 9A above.
D. Selling shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the issue
Not applicable.

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ITEM 10. ADDITIONAL INFORMATIONItem 10 Additional information
A. Share Capitalcapital
Not applicable.
B. Memorandum and Articles of Association
     Described below is a summary of certain provisions of our existing Memorandum and Articles of Association (the “Articles”) and, where relevant, the Hong Kong Companies Ordinance. As this is a summary, it does not contain all the information that may be important to you. You should therefore read our complete Articles if you would like additional information, which were filed with the U.S. Securities and Exchange Commission as an exhibit 1 to the annual report on Form 20-F for fiscal 2005 and is incorporated by reference herein.

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General
     City Telecom was incorporated in Hong Kong on May 19, 1992 under the Hong Kong Companies Ordinance. Clause 3 of the Memorandum of Association states that the Company’ sCompany’s objects are to carry on the business of telecommunications services in addition to various other related and unrelated business activities.
Directors’ Interestsinterests
     A director shall not vote on, or be counted in the quorum in relation to, any resolution of our board of directors in respect of any contract in which the director or any of his associate(s) (within the meaning of the Listing Rules) has a material interest. This prohibition shall not apply to the following:
(a) the giving of any security or indemnity to him or his associates(s) in respect of money lent or obligations incurred or undertaken by him or any of them at the request of or for the benefit of the Company or any of its subsidiaries;
 
(b) the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he or his associate(s) has himself/themselves assumed responsibility in whole or in part and whether alone or jointly under a guarantee or indemnity or by the giving of security;
 
(c) any proposal concerning an offer of shares, debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase in which offer he or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting thereof;
 
(d) any proposal concerning any other company in which he or his associate(s) is/are interested only, whether directly or indirectly, as an officer, executive or shareholder or in which he or his associate(s) is/are beneficially interested in shares of that company,Company, provided that he and any of his associate(s) are not in aggregate beneficially interested in five per cent or more of the issued shares of any class of such companyCompany (or of any third company through which his interest or that of his associate(s) is derived) or of the voting rights;
 
(e) any proposal or arrangement concerning the benefit of employeesTalents of the Company or its subsidiaries, including the adoption, modification or operation of any employees’Talents’ share scheme or any share incentive or share option scheme under which the director or his associate(s) may benefit;
 
(f) any proposal or arrangement concerning the benefit of employeesTalents of the Company or its subsidiaries, including the adoption, modification or operation of a pension fund or retirement, death or disability benefits scheme which relates both to directors (or his associate(s)) and employeesTalents of the Company or any of its subsidiaries and does not provide in respect of any director or his associate(s), as such any privilege or advantage not generally accorded to the class of persons to which such scheme or fund relates; and
 
(g) any contract or arrangement in which he or his associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company.
     Additionally, there is no shareholding qualification required to be a director.
Dividends
     In accordance with our Articles, we may by ordinary resolution (being a resolution passed by a majority of those votes cast by the shareholders who attend and vote at a general meeting) from time to time declare dividends, but no dividend shall exceed the amount recommended by our board of directors. Our Articles contain provisions on apportioning dividends according to the amounts paid up on the shares in respect of which dividend is paid under pro rata basis during the period covered by the dividend.
     In accordance with our Articles, our board of directors may pay such interim dividends that appear to be justified by our financial position and may also pay any dividend payable at a fixed rate at intervals decided upon by our board of directors, whenever our financial position, in the opinion of our board of directors, justifies the payment.
     In respect of any dividend proposed to be paid or declared, our board of directors may further propose and announce prior to or at the same time as the payment or declaration of such dividend either that:

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(a) such dividend be satisfied in whole or in part in the form of an allotment of shares to the shareholders, credited as being fully paid up, provided that all the shareholders entitled to receive the dividend will also be entitled to choose to receive the dividend (or a part of it) in cash ;cash; or
 
(b) the shareholders entitled to such dividend are entitled to elect to receive an allotment of shares credited as fully paid up instead of the whole or part of the cash dividend our board of directors may decide upon.
     Any general meeting declaring a dividend may, upon the recommendation of our board of directors, by ordinary resolution, direct that the dividend shall be met, wholly or partly, by the distribution of our assets.

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     Any dividend not claimed by a shareholder after a period of six years from the date when it was first due to be paid shall be forfeited and shall revert to us. The payment by our board of directors of any unclaimed dividend, interest or other sum payable on or in respect of a share into a separate account shall not create any trustee relationship in respect of such sums.
Liquidation
     Subject to the requirements under the Hong Kong Companies Ordinance, in the event of a members’ winding up, the liquidator may, with the sanction of a special resolution of the Company:
(a) divide among the shareholders the whole or any part of the assets of the Company and set such value as the liquidator deems fair upon any property to be divided and determine how the division shall be carried out between the shareholders; or
 
(b) vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator shall think fit,
but no shareholder shall be compelled to accept any shares or other assets upon which there is any liability.
Annual and Extraordinary General Meetingextraordinary general meeting of Shareholdersshareholders
     The Hong Kong Companies Ordinance requires our board of directors to hold an annual general meeting of our shareholders once every year and not more than 15 months after our previous annual general meeting. The annual general meeting and any other general meeting of our shareholdersshareholder held for the passing of a special resolution (being a resolution passed by not less than 75% of those votes cast by the shareholders who attend and vote at a general meeting) should be convened by not less than 21 clear days’ notice in writing. The notice shall specify the place, date and time of meeting and the general nature of the business to be transacted. An annual general meeting may be called by not less than 2120 clear business days’ notice if it is agreed by all shareholders entitled to attend and vote at the meeting. The business of the annual general meeting will include:
(a) the declaration and sanctioning of dividends;
 
(b) the consideration and adoption of the accounts, balance sheet and reports of the directors and auditors and other documents required to be attached to the financial statements;
 
(c) the appointment of directors in place of those retiring (by rotation or otherwise);
 
(d) the appointment of auditors; and
 
(e) the fixing of, or the determining of the method of fixing, the remuneration of the directors and of the auditors.
     Our board of directors may convene an extraordinary general meeting (which is any general meeting of the shareholders other than the annual general meeting) whenever it thinks fit and must do so upon the request in writing of shareholders holding not less than one-twentieth of our paid-up capital carrying the right to vote at a general meeting. All extraordinary general meetings (other than those convened for the passing of a special resolution referred to above) should be convened by at not less than 1410 clear business days’ notice in writing. Extraordinary general meetings may be called by less than 1410 clear business days’ notice by a majority in number of the shareholders having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving that right.
     Except as otherwise provided by our Articles, two shareholders present in person or by proxy and entitled to vote shall be a quorum for all purposes. Whilst no business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, the absence of a quorum shall not preclude the choice or appointment of a chairman which shall not be treated as part of the business of the meeting.
     The Nasdaq marketplace rules also provide that a foreign private issuer such as ourselves may be granted an exemption from such requirements if it follows the practice of its home country.
Restrictions on Ownershipownership of Sharesshares
     There are no restrictions, either pursuant to our Articles or to the laws of Hong Kong, on the rights of non-residents of Hong Kong or foreign persons to hold or exercise voting rights with respect to our ordinary shares.

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Voting Rightsrights
     Any decisions that are made by the shareholders in a general meeting requiresrequire the passing of either an ordinary or a special resolution at such meeting. The type of resolution required to be passed depends upon the provisions of the Hong Kong Companies Ordinance and our Articles as certain matters may only be decided by the passing of a special resolutions.

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     Unless any shares have special terms as to voting, on a show of hands every shareholder who is present in person at a general meeting, shall have one vote irrespective of the number of shares he holds and on a poll every shareholder who is present in person or by proxy shall have one vote for every share of which he is the holder. Our Articles set out the circumstances in which a poll can be demanded.
     Pursuant to Rule 13.39(4) of the Listing Rules which became effective on January 1, 2009, any votes of the Shareholders at a general meeting must be taken by poll.
     Any shareholder that is a recognized clearing house within the meaning of the Securities and Futures Ordinance of Hong Kong may authorize such person or persons as it thinks fit to act as its representative (or representatives) at any general meeting or at any separate meeting of any class of shareholders (if relevant). However, if more than one person is authorized, the authorization must specify the number and class of shares in respect of which each person is in fact authorized. The authorized person will be entitled to exercise the same power on behalf of the recognized clearing house as that clearing house (or its nominees) could exercise if it were an individual shareholder of the Company.
Issue of Sharesshares
     Under the Hong Kong Companies Ordinance, our board of directors may, without the prior approval of the shareholders, offer to issue new shares to existing shareholders in proportion to their current shareholdings. Our board of directors may not issue new shares in any other way without the prior approval of the shareholders. Any such approval given in a general meeting shall continue in force until the earlier of: (1) the conclusion of the next annual general meeting; or (2) the expiration of the period within which the next annual general meeting is required by law to be held; or (3) when revoked or varied by an ordinary resolution of the shareholders in a general meeting. Where such shareholders’ approval is given, subject to the Listing Rules and any conditions attached to such approval, our unissued shares may be at the disposal of our board of directors, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the directors may decide.
     Subject to the provisions of our Articles, any shareholder may transfer all or any of his shares by an instrument of transfer in the usual or common form or in such other form as our board of directors may accept and may approve. Such instrument may be signed by hand or, if the buyer or seller is a clearing house or its nominee(s), signed by hand or by a machine imprinted signature or by such other manner as our board of directors may approve from time to time.
     The instrument of transfer of a share shall be executed by or on behalf of both the buyer and the seller of that share provided that our board of directors may dispense with the signing of the instrument of transfer by the buyer in any case which it thinks fit in its discretion to do so. Except as provided in the paragraph above, our board of directors may also decide, either generally or in any particular case, upon request by either the buyer or seller of shares to accept mechanically signed transfers. The seller shall be deemed to remain the holder of the share until the name of the buyer is entered into our register in respect of that share. All instruments of transfer, when registered, may be retained by us. Nothing in our Articles prevents our board of directors from recognizing a renunciation of the allotment or provisional allotment of any share by the person to whom the shares were to be allotted in favor of some other person.
     Our board of directors may in its absolute discretion and without giving any reason, decline to register any transfer of any share which is not a fully paid share.
     Our board of directors may also decline to register any transfer unless:
(a) the instrument of transfer, duly stamped, is lodged with us accompanied by the certificate for the shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the seller to make the transfer;
 
(b) such fee, not more than the maximum amount allowed by theThe Stock Exchange of Hong Kong Limited from time to time, as our board of directors may from time to time require is paid to us in respect of it;
 
(c) the instrument of transfer is in respect of only one class of share;
 
(d) in the case of a transfer of a share jointly held by two or more holders, the number of joint holders to whom the share is to be transferred does not exceed four; and
 
(e) the shares concerned are free of any lien in favor of us.
     If our board of directors declines to register a transfer of any share, it shall, within two months after the date on which the instrument of transfer was lodged, send to the buyer notice of the refusal.
Shareholders
     In accordance with our Articles, only persons who are registered in our register of members are recognized by us as shareholders and absolute owners of the shares. The register of members may be closed by our board of directors at such times and for such periods as it may from time to time decide by giving notice by advertisement in a newspaper circulating generally in Hong Kong, but the register shall not be closed in any year for more than 30 days (excluding Sundays and public holidays) unless extended by ordinary resolution.

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C. Material Contractscontracts
     Other than such contracts as are described in our disclosure in Item 7 “Major Shareholdersshareholders and Related Party Transactionsrelated party transactionsRelated Party Transactions”related party transactions”, we have not entered into any material contracts outside the ordinary course of our business within the two years preceding the date of this annual report.
D. Exchange Controlscontrols
     The Basic Law of Hong Kong provides that the Hong Kong dollar will remain the legal tender in Hong Kong after July 1, 1997. The Basic Law also provides that no foreign exchange control policies will be applied in Hong Kong and that the Hong Kong dollar will be freely convertible. During the Asia regional economic crisis in 1998, however, the Hong Kong Government intervened on several occasions in the foreign exchange market by purchasing the Hong Kong dollar and selling the U.S. dollar to support the value of the Hong Kong dollar.
     There are no restrictions, either pursuant to our Articles, or pursuant to the laws of Hong Kong, on the rights of non-residents of Hong Kong or foreign persons to hold or exercise voting rights with respect to our ordinary shares, or export or import capital.
E. Taxation
     The following provides a general outline of the material tax considerations that may be relevant to a decision to own or dispose of our American depositary shares or shares but does not purport to deal with the tax consequences applicable to all categories of investors. Prospective investors should consult their own professional advisers on the Hong Kong, United States and overall tax implications of investing, holding or disposing the American depositary shares or shares under the laws of the countries in which they are liable to taxation. The discussion below is applicable to both U.S. and non-U.S. citizens as an investor.
Hong Kong Taxation
Tax on dividends
     No tax is payable in Hong Kong by withholding or otherwise in respect of dividends paid by City Telecom.
Profits tax
     No tax is imposed in Hong Kong in respect of profits gainedgains from the sale of our shares and American depositary shares, unless all the following factors are present:
(i) such profits are derived from or arise in Hong Kong;
 
(ii) such profits are attributable to a trade, profession or business carried on in Hong Kong; and
 
(iii) the property in question, such as shares and American depositary shares, are not capital assets of that trade, profession or business.
     Taxable profits are subject to Hong Kong profits tax on corporations at the rate of 16.5% and on unincorporated businesses or individuals at the rate of 15%.
     Profits from the sales of our shares, which are effected on the Hong Kong Stock Exchange, will be considered to be derived from or arising in Hong Kong. Such profits are taxable if the shares are not held as capital assets and the profits are attributable to a business, trade or profession carried out in Hong Kong.
     Profits from the sales of our American depositary shares will be considered to be derived from or arising in Hong Kong if the relevant purchase or sales contracts are effected in Hong Kong. In the event that those persons dealing or trading in the American depositary shares are doing so as part of their trade, profession or business that is being carried out in Hong Kong and the shares are not capital assets of such trade of business, then such profits will be subject to Hong Kong profits tax. In any case of an exchange of any American depositary receipts evidencing American depositary shares for certificates representing shares, any profit gained on subsequent disposition of such shares will be the difference between the initial price of American depositary shares and the market value of such shares at the date of disposition.
Stamp duty
     The sale and purchase of shares is subject to Hong Kong stamp duty which is payable by both the seller and purchaser.purchase. Both seller and purchaser must pay stamp duty at a rate of 0.1% each, totaling 0.2%, of the total value of the greater of (i) the consideration paid or (ii) the market value of the shares on the Hong Kong Stock Exchange, or otherwise, on the date the contract note for the sale or purchase is executed. If, in the case of a sale or purchase of shares effected by a person who is not resident in Hong Kong, the stamp duty on either or both of the contract notes is not paid, the transferee will be liable to stamp the instrument of transfer and pay stamp duty on the instrument in an amount equal to the unpaid duty. If the instrument is not stamped before or within the time for stamping such instrument, a penalty of up to ten times the duty payable may be imposed. In addition, a fixed duty of HK$5.00 is currently payable on any instrument of transfer of shares.

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     In addition to the depositary’s charges, if any, the withdrawal of the shares upon the surrender of American depositary receipts evidencing American depositary shares, and the issuance of American depositary receipts evidencing American depositary shares upon the deposit of the shares, will be subject to Hong Kong stamp duty at the rate described above for sale and purchase transactions. In the event the withdrawal or deposit does not result in a change in the beneficial ownership of the shares under Hong Kong law, only the nominal fixed duty of HK$5.00 will

51


be payable. Investors are not liable for stamp duty on the issuance of the American depositary shares upon the initial deposit of shares issued directly to the depositary or for the account of the depositary. No Hong Kong stamp duty is payable upon the transfer of American depositary receipts evidencing our American depositary shares if such American depositary receipts are not maintained on a register in Hong Kong.
Tax treaty
     There is currently no reciprocal tax treaty between Hong Kong and the U.S. regarding withholding.
United States Taxation
Certain U.S. Federal Income Tax Considerations
     The following is a summary of certain United States federal income tax considerations that are anticipated to be material to the purchase, ownership, and disposition of our shares or American depositary shares by U.S. Holders, as defined below. This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed U.S. Treasury regulations, published rulings and court decisions, all as in effect on the date hereof. These laws are all subject to change or different interpretation, possibly on a retroactive basis. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as investors subject to special tax rules including: partnerships, financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, tax-exempt organizations, and, except as described below, non-U.S. Holders, or to persons that will hold our shares or American depositary shares as part of a straddle, hedge, conversion, or constructive sale transaction for United States federal income tax purposes or that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any foreign, state, or local tax considerations. This summary assumes that investors will hold our shares or American depositary shares as “capital assets” (generally, property held for investment) under the Code.
     Each prospective investor is urged to consult its own tax advisor regarding the United States federal, state, local, and foreign income and other tax considerations of the purchase, ownership, and disposition of our shares or American depositary shares.
     For purposes of this summary, a U.S. Holder is a beneficial owner of shares or American depositary shares that is for United States federal income tax purposes:
 an individual who is a citizen or resident of the United States;
 
 a corporation, or other entity that is taxable as a corporation, created in or organized under the laws of the United States or any State or political subdivision thereof;
 
 an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source;
 
 a trust the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust; or
 
 a trust that was in existence on August 20, 1996, was treated as a United States person, for United States federal income tax purposes, on the previous day, and elected to continue to be so treated.
     If a partnership or other entity or arrangement treated as a partnership for United States federal income tax purposes holds our shares or American depositary receipts, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A U.S. Holder that is a partner in a partnership holding our shares or American depositary receipts is urged to consult its own tax advisor concerning the United States federal income tax consequences of purchasing, owning and disposing of our shares or American depositary receipts by the partnership.
     A beneficial owner of our shares or American depositary shares that is not a U.S. Holder is referred to herein as a “Non-U.S. Holder.”
     A foreign corporation will be treated as a “passive foreign investment company” or “PFIC”, for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of “passive” income or 50% or more of the fair market value of its assets are passive“passive” for any taxable year. Based on our current and projected income, assets, and activities, we presently believe that we are not a PFIC in the current taxable year and do not anticipate becoming a PFIC in the future. The PFIC status of a foreign corporation for any taxable year, however, will not be determinable until after the end of that taxable year. Because the classification of certain of our assets for United States federal income tax purposes is uncertain, the PFIC rules are subject to administrative interpretation, and the relevant facts may change in the

61


future, however, no assurance can be given that we are not or will not be treated as a PFIC. The discussion below under “U.S. Holders-Dividends” and “U.S. Holders-Sale or Other Disposition of Shares or American depositary shares,” assumes that we will not be subject to treatment as a PFIC for United States federal income tax purposes. If we were currently or were to become a PFIC, U.S. Holders would be subject to special rules and a variety of potentially adverse tax consequences under the Code. See “PFIC Considerations” below.
U.S. Holders
     For United States federal income tax purposes, a U.S. Holder of an American depositary share will be treated as the owner of the proportionate interest of the shares held by the depositary that is represented by an American depositary share and evidenced by such American depositary share. Accordingly, no gain or loss will be recognized upon the exchange of an American depositary share for the holders’ proportionate interest in the shares. A U.S. Holder’s tax basis in the withdrawn shares will be the same as the tax basis in the American depositary share surrendered therefore, and the holding period in the withdrawn shares will include the period during which the holder held the surrendered American depositary share.
     DividendsDividends.. Any cash distributions paid by us out of our earnings and profits, as determined under United States federal income tax principles,rules, will be subject to tax as ordinary dividend income and will be includible in the gross income of a U.S. Holder upon actual or constructive receipt. Cash distributions paid by us in excess of our earnings and profits will be treated first as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in our shares or American depositary shares, and thereafter as gain from the sale or exchange of a

52


capital asset. Dividends paid in Hong Kong dollars will be includible in income in a United States dollar amount based on the United States dollar to Hong Kong dollar “spot” exchange rate prevailing at the time of receipt of such dividends by the depositary, in the case of American depositary shares, or by the U.S. Holder, in the case of shares held directly by such U.S. Holder. U.S. Holders should consult their own tax advisors regarding the United States federal income tax treatment of any foreign currency gain or loss recognized on the subsequent conversion of Hong Kong dollars received as dividends to United States dollars. Dividends received on shares or American depositary shares will not be eligible for the dividends received deduction allowed to corporations.
     Under current law, “qualified dividend income” received by an individual beforeprior to January 1, 2011 is subject to United States federal income tax rates lower than those applicable to ordinary income. The maximum federal income tax rate on such qualifying dividends received by an individual is 15%, or 5% for those individuals whose incomes fall in the 10% or 15% tax brackets. Based upon our existing and anticipated future operations and current assets, and the anticipation that our American depository shares are and will be listed on the NASDAQ, we believe that we are a “qualified foreign corporation” and that our dividends paid to U.S. Holders who are individuals will be eligible to be treated as “qualified dividend income”, provided that such Holders satisfy applicable holding period requirements with respect to the American depositary shares and other application requirements. Dividends paid by foreign corporations that are classified as PFICs are not “qualified dividend income”. See “PFIC Considerations” below.
     Dividends received on shares or American depositary shares generally will be treated, for United States federal income tax purposes, as income from non-U.S. sources. Such non-U.S. source income generally will be “passive category income”, or in certain cases “general category income”, for taxable years beginning after December 31, 2006, which is treated separately from other types of income for purposes of computing the U.S. foreign tax credit. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on shares or American depositary shares. U.S. Holders who do not elect to claim a U.S. foreign tax credit for federalforeign income tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which the U.S. Holder elects to do so for all creditable foreign income taxes.
     In addition, the United States Treasury has expressed concerns that parties to whom depositary shares are pre-released may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by the holders of American depositary shares. Accordingly, theThe analysis of the creditability of foreign withholding taxes could be affected by future actions that may be taken by the United States Treasury.
     Sale or Other Disposition of Shares or American depositary shares.shares. A U.S. Holder will recognize capital gain or loss upon the sale or other disposition of shares or American depositary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Holder’s adjusted tax basis in such shares or American depositary shares, as each is determined in U.S. dollars. Any such capital gain or loss will be long-term if the shares or American depositary shares have been held for more than one year and will generally be United States source gain or loss. Certain non-corporate U.S. Holders (including individuals) may qualify for preferential rates of United States federal income taxation in respect of long-term capital gains for taxable years beginning before January 1, 2011. The claim of a deduction in respect of a capital loss, for United States federal income tax purposes, may be subject to limitations. If a U.S. Holder receives Hong Kong dollars for any such disposition, such U.S. Holder should consult its own tax advisor regarding the United States federal income tax treatment of any foreign currency gain or loss recognized on the subsequent conversion of the Hong Kong dollars to United States dollars.
Medicare Tax
     For taxable years beginning after December 31, 2012, a United States person that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax on the lesser of (1) the United States person’s “net investment income” for the relevant taxable year and (2) the excess of the United States person’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between US$125,000 and US$250,000, depending on the individual’s circumstances). A holder’s net investment income will generally include its gross dividend income and its net gains from the disposition of ADSs, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a United States person that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the ADSs.
PFIC Considerationsconsiderations
     If we were to be classified as a PFIC for any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a foreign company that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder of the shares or American depositary shares may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sales of the shares or American depositary shares and (ii) any “excess distribution” paid on the shares or American depositary shares (generally, a distribution in excess of 125% of the average

62


annual distributions paid by us in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution. Prospective investors are urged to consult their own tax advisors regarding the potential tax consequences to them if we are or do become a PFIC, as well as certain elections that may be available to them to mitigate such consequences.
Non-U.S. Holders
     An investment in shares or American depositary shares by a Non-U.S. Holder will not give rise to any United States federal income tax consequences unless:
 the dividends received or gain recognized on the sale of the shares or American depositary shares by such person is treated as effectively connected with the conduct of a trade or business by such person in the United States as determined under United States federal income tax law, and the dividends are attributable to a permanent establishment (or in the case of an individual, a fixed place of business) that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis. In such cases you generally will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. Holder, “effectively connected” dividends may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate, or
 
 in the case of gains recognized on a sale of shares or American depositary shares by an individual, such individual is present in the United States for 183 days or more and certain other conditions are met. The non-U.S. Holder will be subject to United States federal income tax at a rate of 30% on the amount by which the U.S.-sourceU.S. — source capital gains exceed non-U.S.-sourcenon-U.S. — source capital losses.

53


Backup Withholdingwithholding and Information Reportinginformation reporting
     In general, information reporting requirements will apply to dividends on or the proceeds received on the sale, exchange or redemption of shares or American depositary shares paid within the United States (and, in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients, such as corporations, and backup withholding tax at the rate of 28% may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number (or otherwise establishes, in the manner provided by law, an exemption from backup withholding) or to report dividends required to be shown on the U.S. Holder’s United States Federalfederal income tax returns.
     Backup withholding is not an additional income tax, and the amount of any backup withholding from a payment to a U.S. Holder will be allowed as credit against the U.S. Holder’s United States Federalfederal income tax liability provided that the appropriate returns are filed.
     A non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status to the payor,payer, under penalties of perjury, on IRS Form W-8BEN.
Information with Respect to Foreign Financial Assets
     Under recently enacted legislation, individuals that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 in taxable years beginning after March 18, 2010 will generally be required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties and (iii) interests in foreign entities. U.S. holders that are individuals are urged to consult their tax advisors regarding the application of this legislation to their ownership of ADSs.
     THE ABOVE DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY, DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE POTENTIAL TAX CONSIDERATIONS RELATING TO OUR SHARES OR AMERICAN DEPOSITARY RECEIPTS AND IS NOT INTENDED TO BE CONSTRUED AS TAX ADVICE. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES OR AMERICAN DEPOSITARY RECEIPTS, INCLUDING THE APPLICABILITY AND EFFECT OF ANY UNITED STATES FEDERAL, STATE, LOCAL OR NON-UNITED STATES TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAW.
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on Displaydisplay
     We filed with Securities and Exchange Commission in Washington, D.C. a registration statement on Form F-1 (Registration No. 333-11012) under the Securities Act in connection with our global offering of American depositary shares in November 1999. The registration statement contains exhibits and schedules. For further information with respect to City Telecom and the American depositary shares, please refer to the registration statement and to the exhibits and schedules filed with the registration statement. In addition, whenever a reference is made in this annual report to a contract or other document of City Telecom, you should be aware that such reference is not necessarily complete and that you should refer to the exhibits and schedules that are a part of the registration statement for a copy of the contract or other document.
     The Company’s registration statements may be inspected and copied, including exhibits and schedules, and the reports and other information as filed with the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934 at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth100F Street Room 1024, N.W.,NE, Washington, D.C. 20549. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth100F Street N.W.,NE, Washington, D.C. 20549, at prescribed rates. Information may be obtained regarding the Washington D.C. Public Reference Room by calling the Securities

63


and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the Internet at its website at http://www.sec.gov.www.sec.gov/.
I. Subsidiary Informationinformation
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 11 Quantitative and qualitative disclosures about market risk
     Our functional currency is the Hong Kong dollar, the currency in which the majority of our revenueQuantitative and related accounts receivable and expenses are denominated. Certain of the expenses of our telecommunications business are payable in other currencies, primarily the U.S. dollar. Since the exchange rate between the Hong Kong and the U.S. dollar is pegged, our operations have not been significantly affected by exchange rate fluctuations. Therefore, we do not use derivative financial instruments to manage our exchange rate exposures.
     In the normal course of business, we also face other risks such as country risk, credit risk and legal risk and we do not use derivative financial instruments to hedge such risks.
     We are exposed toqualitative disclosures about market risk from changeshave been included in currency exchange rates.
Foreign Currency Risk
     The functional currency ofnote 24 to our operations, and ourconsolidated financial statement reporting currency, is the Hong Kong dollar. Our monetary assets and liabilities are primarily denominated in Hong Kong dollars. However, we have certain financial assets and liabilities which are primarily denominated in U.S. dollars.
     As of August 31, 2008, we had the following significant foreign currencies denominated account balances:
As of August 31, 2008
(Thousands of HK$)
Cash and bank balances:
Denominated in U.S. dollars174,397
Denominated in Canadian dollars1,311
Accounts payable and other payables:
Denominated in U.S. dollars46,001
     Further, our principal long-term debt obligations consist of the aggregate principal amount of US$125.0 million of 8.75% senior notes issued in January 2005, which are denominated in U.S. dollars. As of January 9, 2009, an aggregate principal amount of US$89.4 million of the notes were outstanding.
     As the exchange rate of the Hong Kong dollar to the U.S. dollar has remained close to the current pegged rate of HK$7.80=US$1.00 since 1983, we have not experienced significant foreign exchange gains or losses associated with that currency. The Hong Kong government could, however, change the pegged rate or abandon the peg altogether. Depreciation of the Hong Kong dollar against the U.S. dollar would generally increase our U.S. dollar expenses, and increase the amount of Hong Kong dollar revenue that we would be required to earn to meet our payment obligations under the 8.75% senior notes.statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESItem 12 Description of securities other than equity securities
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESItem 13 Defaults, dividend arrearages and delinquencies
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSItem 14 Material modifications to the rights of security holders and use of proceeds
None.
ITEM 15. CONTROLS AND PROCEDURES
DisclosureItem 15 Controls and Proceduresprocedures
     Within the 90-day period prior to the filing of this report, anA. Disclosure controls and procedures
     An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. BasedAs of the end of the period covered by this annual report, based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and

54


procedures are effective.effective to provide reasonable assurance that information the Company is required to disclose in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Subsequent to the date of their evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls.
B. Management’s Reportreport on Internal Control Over Financial Reporting
     As the Company is listed on Nasdaq, it is bound by the provision of the U.S. Sarbanes - Oxley Act 2002 (the “SOX Act”), which is a legislation seeking to enhance the transparency and accountability of the companies in the areas of corporate governance and financial reporting. Under Section 404(a) of the SOX Act, management of the Group is required to include its assessment of the effectiveness of the Group’s internal control procedures over financial reporting in the annual report on Form 20-F to be filed with the U.S. Securities and Exchange Commission beginning in the fiscal year ended 31 August 2008, while no external auditors’ report on such assessment is required in this fiscal year according to Section 404(b) of the SOX Act.
     Management of the CompanyOur management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purpose in accordance with generally accepted accounting principles (“GAAP”).principles. Under Section 404(a) of the Sarbanes-Oxley Act of 2002, our management is required to include its assessment of the effectiveness of our internal control procedures over financial reporting in our annual report on Form 20-F beginning in the fiscal year ended August 31, 2009. With the assistance of the Company’s internal audit department and external consultants, our management of the Group organizesorganized and conductsconducted a comprehensive assessment of internal control over financial reporting based on the control criteria in COSO framework. As ofBased on this assessment, the date of this annual report, management is not aware of any instances of material weaknesses on itsDirectors believe that, as at August 31, 2010, the internal control over financial reporting.reporting is effective.
C. Changes in Internal Control Over Financial Reportinginternal control over financial reporting
     The Company has performed an annual review of the effectiveness of its disclosure controls and procedures in 2008. Based on the review, management considers that the Group’s disclosure controls and procedures are effective in providing reasonable assurance that all material information is promptly recorded, processed and disclosed.
     During fiscal 2010, the period covered by this annual report, no change has occurred in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
D. Report of Independent Registered Public Accounting Firm
     The Board of Directors and Shareholders of City Telecom (H.K.) Limited:

64


     We have audited City Telecom (H.K.) Limited and its subsidiaries’ internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)”). The management of City Telecom (H.K.) Limited and its subsidiaries is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the City Telecom (H.K.) Limited and its subsidiaries’ internal control over financial reporting based on our audit.
     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     In our opinion, City Telecom (H.K.) Limited and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of City Telecom (H.K.) Limited and its subsidiaries as of August 31, 2009 and 2010, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity, and consolidated cash flow statements for each of the years in the three-year period ended August 31, 2010, and our report dated November 9, 2010 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG  
Hong Kong, China 
November 9, 2010 
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTItem 16A Audit committee financial expert
     Our board of directors established an audit committee to ensure the impartial supervision of our accounting and business operations. The audit committee is comprised of three independent non-executive directors, namely, Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu Jefferson.Lu. Mr. Peh was appointed to the audit committee on September 1, 2004 and is a “financial expert” within the meaning of, and as required by, the U.S. Sarbanes-Oxley Act of 2002.
ITEM 16B. CODE OF ETHICSItem 16B Code of ethics
     All of our employees,Talents, officers and directors are bound by our code of business ethics and conduct. We adopted our code of ethics and modified it following the passage of, and to comply with, the U.S. Sarbanes Oxley Act of 2002. Copies of our code of ethics are available for viewing on our website at http://www.ctigroup.com.hk and free of charge upon request made to our company secretary. We have not made any amendment to our code of ethics since our most recently completed fiscal year. We have never granted a waiver for non-compliance with the policies and procedures set forth in the code of ethics for any employeeTalent of our companyCompany or any of our subsidiaries.

65


ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESItem 16C Principal accountant fees and services
     The following table sets forth the remuneration that we paid to KPMG, our independent auditor in each of our previous two fiscal years.
        
         2010 2009 
Nature of the service 2007 2008 HK$
million
 HK$
million
 
 (HK$ million) (HK$ million)
Audit fees 2.2 2.8  2.3 2.6 
Audit-related fees 0.4 0.4  0.2 0.4 
Non-audit services fees 0.3  
          
  
Total 2.6 3.2  2.8 3.0 
          
Audit Feesfees
     Audit fees are the aggregate fees billed by our independent auditors for the annual financial statement audit, subsidiary audits and other procedures required to be performed for the auditors to form an opinion on our consolidated financial statements.
Audit-Related FeesAudit-related fees
     Audit-related fees are the aggregate fees billed by our independent auditors for the review of our interim financial statements and review of reports for compliance with telecommunications regulations and debt obligations.

55

Non-audit services fees


     Non-audit services fees are the aggregate fees billed by our independent auditors for the services provided for the ADS offering in April 2010.
Pre-approval Policespolices
     The engagement of KPMG and the services provided pursuant to such engagement were approved by our audit committee in accordance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X. The fees for all such services have been pre-approved by our audit committee. Our audit committee has satisfied itself that the provision of the above-stated non-audit services has not impaired the independence of KPMG.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESItem 16D Exemptions from the listing standards for audit committees
Not applicable.
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSItem 16E Purchase of equity securities by the issuer and affiliated purchasers
     By way of a general mandate granted to our directors, the maximum aggregate nominal amount of shares that may be purchased pursuant to a mandate corresponds to 10% of the aggregate nominal amount of our issued share capital at the date the mandate was granted. During the year ended August 31, 2010, we had not repurchased any of the ordinary shares on the HKSE.
Item 16F Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G Corporate Governance
     As our ordinary shares are listed on the HKSE and American depositary shares representing our ordinary shares are listed on the Nasdaq Global Market, we are subject to applicable Hong Kong laws and regulations, including the HKSE Listing Rules, and the Hong Kong Companies Ordinance, as well as applicable U.S. federal securities laws, including the Exchange Act and the Sarbanes-Oxley Act. In fiscal 2008, no shares were purchasedaddition, we are subject to the corporate governance requirements imposed by Nasdaq to the extent they apply to foreign private issuers. Under Nasdaq Stock Market Rule 5615(a)(3), a foreign private issuer such as us may follow its home country corporate governance practices in lieu of certain of the Nasdaq Stock Market Rules corporate governance requirements. Our current corporate governance practices differ from Nasdaq corporate governance requirements for U.S. companies in certain respects, as summarized below:
Nasdaq Stock Market Rule 5605(b)(1) requires a Nasdaq listed company to have a board of directors consisting of a majority of independent members, In this regard we have elected to adopt the practices of our home country, As a listed company in Hong Kong, we are subject to the requirement under the mandate then in force.HKSE Listing Rules that at least three members of our board of directors be independent as determined under the HKSE Listing Rules. In compliance with our home country practices, we currently have three independent

66


directors out of a total of eight directors. The standards for establishing independence under the HKSE Listing Rules also differ from those set forth in the Nasdaq Stock Market Rules.
Nasdaq Stock Market Rule 5605(b)(2) requires a Nasdaq listed company to schedule regular executive sessions in which non-management directors meet without management participation. In this regard we have elected to adopt the practices of our home country. Under the applicable Hong Kong law, our board of directors is required to meet regularly and at least four times a year and we are required to ensure that there is active participation by a majority of the directors and afford all directors an opportunity to include matters on the agenda. In addition, when a board meeting considers a matter in which a substantial shareholder or a director has a conflict of interest, the independent directors with no material interest in such matter must be present. In compliance with our home country practices, we do not organize exclusive meetings for our independent non-executive directors on a regular basis.
Nasdaq Stock Market Rule 5605(d)(1) requires a Nasdaq listed company to have the compensation of the chief executive officer and the other executive officers be determined, or recommended to the Board for determination, by a compensation committee comprised solely of independent directors. In this regard we have elected to adopt the practices of our home country. Under the HKSE Listing Rules, listed companies are required to establish a remuneration committee with a majority of independent non-executive directors. The compensation of our executive officers is determined by a remuneration committee consisting of six directors, three of whom are independent non-executive directors.
Nasdaq Stock Market Rule 5605(e)(1) requires a Nasdaq listed company to have a nominations committee consisting solely of independent directors to select or recommend for selection director nominees. In this regard we have elected to adopt the practices of our home country and do not have a nominations committee consisting solely of independent directors. Under the HKSE Listing Rules, listed companies are recommended but not required to establish a nomination committee consisting of the independent non-executive directors with majority vote. Our director nominees are selected by or recommended for selection by the Board. Our current practice is not inconsistent with our home country practices.
     Other than the above, we have followed and intend to continue to follow the applicable Nasdaq corporate governance standards.

67


PART III
ITEM 17. FINANCIAL STATEMENTSItem 17 Financial statements
     City Telecom hasWe have selected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.
ITEM 18. FINANCIAL STATEMENTSItem 18 Financial statements
See pages F-1 to F-92F-64 following Item 19.
ITEM 19. EXHIBITSItem 19 Exhibits
(a) Exhibit 12.1 — Section 302 Certifications of the Chief Executive Officer.
 
(b) Exhibit 12.2 — Section 302 Certifications of the Chief Financial Officer.
 
(c) Exhibit 13 — Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

5668


Index to Consolidated Financial Statements
   
Audited Consolidated Financial Statements Pages
 F-1
 F-2
F-3
 F-3, 4F-4
 F-5
 F-6, 7, 8F-7
 F-9F-8


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
City Telecom (H.K.) Limited
We have audited the accompanying consolidated balance sheetsstatements of financial position of City Telecom (H.K.) Limited and its subsidiaries (collectively referred to as the(the “Group”) as of August 31, 20072009 and 2008,2010, and the related consolidated income statements, consolidated statements of operations,comprehensive income, consolidated statements of changes in shareholders’ equity and the consolidated cash flowsflow statements for the each of the years in the three-year period ended August 31, 2008.2010. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of City Telecom (H.K.) Limited and its subsidiaries as of August 31, 20072009 and 2008,2010, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 2008,2010, in conformity with Hong Kong Financial Reporting Standards.
Hong Kongthe International Financial Reporting Standards varyas issued by the International Accounting Standards Board.
We have also audited, in certain significant respects from accounting principles generally acceptedaccordance with the standards of the Public Company Accounting Oversight Board (United States), the City Telecom (H.K.) Limited and its subsidiaries’ internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the United StatesCommittee of America. Information relating toSponsoring Organizations of the natureTreadway Commission (COSO), and effectour report dated November 9, 2010 expressed an unqualified opinion on the effectiveness of such differences is presented in note 31 to the consolidatedinternal control over financial statements.reporting of City Telecom (H.K.) Limited and its subsidiaries.
/s/ KPMG
Hong Kong, China
November 17, 20089, 2010

F-1


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
City Telecom (H.K.) Limited and its subsidiaries
Consolidated income statements of operations
(Expressed in Hong Kong dollars)
(Amounts in thousands except per share data)
               
    Year ended August 31,
  Note 2006 2007 2008
    HK$ HK$ HK$
Revenue
    1,134,876   1,141,270   1,302,981 
 
Operating expenses
              
 
Network costs, net 4  (300,593)  (214,591)  (178,367)
Salaries and related costs    (256,721)  (221,102)  (247,460)
Sales and marketing expenses    (204,952)  (203,673)  (307,743)
General and administrative expenses    (440,672)  (402,760)  (396,598)
Provision for doubtful accounts    (17,450)  (6,569)  (14,293)
               
 
(Loss)/income from operations
    (85,512)  92,575   158,520 
 
Interest income    20,378   22,671   15,596 
Interest expense 5  (88,637)  (87,504)  (75,137)
Other income, net 5  4,465   3,149   9,393 
               
 
(Loss)/income before taxation
 5  (149,306)  30,891   108,372 
Income tax credit/(expense) 6  7,244   (2,026)  16,818 
               
 
Net (loss)/income
    (142,062)  28,865   125,190 
               
 
(Loss)/Earnings per share
              
Basic 7  (23.1) cents   4.7 cents   19.7 cents 
               
 
Diluted 7  (23.1) cents   4.6 cents   19.0 cents 
               
                 
      For the year ended August 31, 
      2010  2009  2008 
  Note  HK$’000  HK$’000  HK $’000 
Revenue
  2   1,574,687   1,478,239   1,302,981 
Network costs  3   (195,292)  (175,129)  (178,367)
Other operating expenses  4(a)  (1,105,604)  (1,037,964)  (966,094)
Other income, net  4(b)  7,989   41,540   24,989 
Finance costs  4(c)  (22,235)  (55,127)  (75,137)
              
                 
Profit before taxation
  4   259,545   251,559   108,372 
Income tax (expense)/benefit  5   (42,679)  (38,730)  16,818 
              
                 
Profit attributable to shareholders
      216,866   212,829   125,190 
              
                 
Basic earnings per share
  7  HK30.7 cents  HK32.4 cents  HK19.7 cents
              
                 
Diluted earnings per share
  7  HK29.4 cents  HK31.8 cents  HK19.0 cents 
              
The accompany notes are an integral part of these consolidated financial statements.

F-2


City Telecom (H.K.) Limited
and its subsidiaries
Consolidated statement of comprehensive income
(Expressed in Hong Kong dollars)
             
  For the year ended August 31, 
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Profit for the year
  216,866   212,829   125,190 
             
Other comprehensive income
            
Exchange differences on translation of financial statements of overseas subsidiaries  (97)  70   1,619 
          
             
Total comprehensive income for the year
  216,769   212,899   126,809 
          
The accompany notes are integral part of these consolidated financial statements for the year ended August 31, 2008statements.

F-3


City Telecom (H.K.) Limited and its subsidiaries
Consolidated balance sheets
(AmountsExpressed in thousands except number of shares and per share amounts)Hong Kong dollars)
           
    August 31,
  Note 2007 2008
    HK$ HK$
ASSETS
          
           
Current assets
          
           
Cash and bank balances 20  532,894   421,610 
Pledged bank deposits 16  87,220   87,319 
Investment securities 17  3,779   27,997 
Trade receivables, net 8(a)  170,551   140,283 
Other receivables, deposits and prepayments 8(d)  59,372   82,726 
Inventories    477    
Deferred expenditure 13  13,584   40,704 
           
           
Total current assets
    867,877   800,639 
           
Goodwill 9  1,066   1,066 
Fixed assets, net 10  1,237,223   1,231,399 
Investment securities 17  39,213    
Derivative financial instrument 18  1,039    
Long term receivables and prepayment    6,932   5,586 
Deferred expenditure 13  7,783   15,391 
Deferred taxation 12     26,335 
           
           
Total assets
    2,161,133   2,080,416 
           
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
          
           
Current liabilities
          
           
Trade payables    76,019   52,324 
Deposits received    16,188   16,264 
Deferred services income    64,202   110,449 
Other payables and accrued charges 11  145,267   178,114 
Income tax payable    1,481   2,103 
Current portion of obligations under finance leases 14  835   121 
           
           
Total current liabilities
    303,992   359,375 
           
Long-term liabilities
          
           
Deferred taxation 12  291   4,937 
Long-term debt and obligations under finance leases, excluding current portion 14  952,968   683,497 
           
           
Total liabilities
    1,257,251   1,047,809 

F-3


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
City Telecom (H.K.) Limited and its subsidiaries
Consolidated balance sheets (continued)
(Amounts in thousands except number of shares and per share amounts)
           
    August 31,
  Note 2007 2008
    HK$ HK$
Commitments and contingencies
 15        
           
Shareholders’ equity
          
           
Ordinary shares, par value HK$0.10 per share          
— 2,000,000,000 shares authorized          
— 616,503,404 and 650,621,823 shares issued and outstanding at August 31, 2007 and 2008, respectively 19  61,650   65,062 
Share premium    622,433   670,717 
Retained profits    200,519   275,025 
Capital reserve    18,109   19,013 
Translation reserve    1,171   2,790 
           
 
Total shareholders’ equity
    903,882   1,032,607 
           
 
Total liabilities and shareholders’ equity
    2,161,133   2,080,416 
           
             
      As at August 31, 
      2010  2009 
  Note  HK$’000  HK$’000 
Non-current assets
            
             
Goodwill  11   1,066   1,066 
Fixed assets  12   1,431,813   1,302,380 
Long term receivable and prepayment      5,174   6,091 
Deferred expenditure  14   6,626   12,786 
           
             
       1,444,679   1,322,323 
           
             
Current assets
            
             
Accounts receivable  15   99,729   120,192 
Other receivables, deposits and prepayments  15   89,490   69,765 
Deferred expenditure  14   28,986   36,674 
Pledged bank deposits  27      15,038 
Cash at bank and in hand  16   588,665   226,416 
           
             
       806,870   468,085 
           
             
Current liabilities
            
             
Bank overdrafts — unsecured      10,490   5,364 
Accounts payable  17   35,128   37,555 
Other payables and accrued charges  17   195,931   206,487 
Deposits received      21,822   16,385 
Deferred service revenue  18   106,798   115,070 
Tax payable      1,533   1,993 
Current portion — obligations under finance leases  22   212   202 
           
             
       371,914   383,056 
           
             
Net current assets
      434,956   85,029 
           
             
Total assets less current liabilities
      1,879,635   1,407,352 
           
             
Non-current liabilities
            
             
Deferred tax liabilities  20   55,843   15,709 
Derivative financial instrument  21   11,293    
Long-term debt and other liabilities  22   123,960   163,116 
           
             
       191,096   178,825 
           
             
Net assets
      1,688,539   1,228,527 
           
             
Capital and reserves
            
             
Share capital  19   76,500   66,418 
Reserves  19   1,612,039   1,162,109 
           
             
Total equity attributable to equity shareholders of the Company
      1,688,539   1,228,527 
           
The accompany notes are an integral part of these consolidated financial statements.

F-4


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
City Telecom (H.K.) Limited and its subsidiaries
Consolidated statements of changes in shareholders’ equity
(Expressed in Hong Kong dollars)
(Amounts
                             
              Capital          
  Share  Share  Capital  redemption  Retained  Exchange    
  capital  premium  reserve  reserve  profits  reserve  Total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
At September 1, 2009  66,418   681,208   23,232   7   454,802   2,860   1,228,527 
Total comprehensive income for the year              216,866   (97)  216,769 
Dividend paid in respect of previous year              (108,735)     (108,735)
Dividend paid in respect of current year              (49,725)     (49,725)
Shares issued upon exercise of share option  2,032   22,227   (7,515)           16,744 
Equity settled share-based transactions        5,347            5,347 
Shares issued upon placement  8,050   371,562               379,612 
                      
                             
At August 31, 2010  76,500   1,074,997   21,064   7   513,208   2,763   1,688,539 
                      
                             
              Capital          
  Share  Share  Capital  redemption  Retained  Exchange    
  capital  premium  reserve  reserve  profits  reserve  Total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
At September 1, 2008  65,062   670,717   19,013      275,025   2,790   1,032,607 
Total comprehensive income for the year              212,829   70   212,899 
Dividend paid in respect of previous year              (3,108)     (3,108)
Shares issued in respect of scrip dividend of previous year  1,221   8,685         (9,906)      
Dividend paid in respect of current year              (19,904)     (19,904)
Shares issued upon exercise of share option  142   1,806   (549)           1,399 
Equity settled share-based transactions        4,768            4,768 
Repurchase and cancellation of ordinary shares  (7)        7   (134)     (134)
                      
                             
At August 31, 2009  66,418   681,208   23,232   7   454,802   2,860   1,228,527 
                      

F-5


City Telecom (H.K.) Limited and its subsidiaries
Consolidated statements of changes in thousands)equity (continued)
(Expressed in Hong Kong dollars)
                 
      Year ended August 31,
  Note 2006 2007 2008
      HK$ HK$ HK$
Total equity as of beginning of the year
                
                 
As previously reported      1,020,454   891,654   903,882 
Adjustment arising from adoption of HKAS 39      6,609       
                 
                 
After opening balance adjustment      1,027,063   891,654   903,882 
                 
Net (loss)/gain recognized directly in equity:
                
                 
Foreign currency translation adjustment      (183)  514   1,619 
                 
(Loss)/profit attributable to shareholders
      (142,062)  28,865   125,190 
                 
Dividend paid in respect of the current year         (24,635)  (11,371)
                 
Dividend paid in respect of the previous year            (5,915)
                 
Movements in equity arising from capital transactions:
                
                 
Equity settled share-based compensation      6,823   5,727   4,204 
Shares issued upon exercise of options      13   1,757   14,998 
                 
                 
Total equity as of the end of the year
  19   891,654   903,882   1,032,607 
                 
                         
  Share  Share  Capital  Retained  Exchange    
  capital  premium  reserve  profits  reserve  Total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
At September 1, 2007  61,650   622,433   18,109   200,519   1,171   903,882 
Total comprehensive income for the year           125,190   1,619   126,809 
Dividend paid in respect of previous year           (5,915)     (5,915)
Shares issued in respect of scrip dividend of previous year  1,123   18,044      (19,167)      
Dividend paid in respect of current year           (11,371)     (11,371)
Shares issued in respect of scrip dividend of current year  884   13,347      (14,231)      
Shares issued upon exercise of share option  1,405   16,893   (3,300)        14,998 
Equity settled share-based transactions        4,204         4,204 
                   
                         
At August 31, 2008  65,062   670,717   19,013   275,025   2,790   1,032,607 
                   
The accompany notes are an integral part of these consolidated financial statements.

F-5F-6


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
City Telecom (H.K.) Limited and its subsidiaries
Consolidated statements of cash flows
flow statements
(AmountsExpressed in thousands)
                 
      Year ended August 31,
  Note 2006 2007 2008
      HK$ HK$ HK$
Cash flows from operating activities
                
                 
(Loss)/income before taxation      (149,306)  30,891   108,372 
                 
Adjustments to reconcile
                
                 
(Loss)/income before taxation to net cash inflow from operating activities:
                
                 
—Depreciation of purchased fixed assets      275,538   257,052   209,464 
—Depreciation of fixed assets held under finance leases      926   1,051   587 
—Impairment loss on investment property      1,131       
—Amortization of deferred expenditure      13,973   15,580   33,777 
—Interest income      (20,378)  (22,671)  (15,596)
—Interest element of finance leases      54   62   34 
—Loss on disposal of fixed assets      9,621   1,714   1,431 
—Realized and unrealized gain on investment securities      (668)  (1,887)  (3,284)
—Interest, amortization and exchange difference on senior notes      86,664   89,879   72,640 
—Other borrowing costs      1,919   (739)  (1,185)
—Equity settled share-based compensation      6,823   5,727   4,204 
—Realized and unrealized loss on derivative financial instruments      125   806   1,039 
—Gain on extinguishment of 10-year senior notes            (2,582)
—Decrease in long-term receivable and prepayment      567   5,600   1,346 

F-6


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008Hong Kong dollars)
City Telecom (H.K.) Limited and its subsidiaries
Consolidated statements of cash flows (continued)
(Amounts in thousands)
                 
      Year ended August 31,
  Note 2006 2007 2008
      HK$ HK$ HK$
Cash flows from operating activities (continued)
                
                 
Adjustments to reconcile (continued)
                
                 
Changes in operating assets and liabilities:
                
                 
— (Increase)/decrease in trade receivables, other receivables, deposits and prepayments      (9,413)  (11,742)  6,914 
— Decrease in inventories      1,101   379   477 
— Increase in deferred expenditure      (5,287)  (24,502)  (68,505)
— (Decrease)/increase in trade payables, other payables, accrued charges, and deposits received      (23,652)  8,573   (12,567)
— (Decrease)/increase in deferred service income      (3,001)  30,459   46,247 
                 
                 
Net cash inflow generated from operations
      186,737   386,232   382,813 
                 
Interest element of finance leases      (54)  (62)  (34)
Hong Kong profits tax (paid)/recovered      (961)  (263)  42 
Overseas tax paid      (1,571)  (1,908)  (4,292)
                 
                 
Net cash inflow from operating activities
      184,151   383,999   378,529 
                 
                 
Investing activities
                
                 
Decrease/(Increase) in pledged bank deposits      3,425   (198)   
(Increase)/decrease in term bank deposits      (144,646)  237,496    
Purchases of fixed assets      (382,214)  (149,300)  (189,903)
Interest received      20,378   22,671   15,596 
Proceeds from disposal of fixed assets      5,676   3,384   7,057 
Net proceeds from maturity of derivative financial instruments      4,639      3,900 
Net proceeds from redemption of long-term bank deposit            15,600 
                 
                 
Net cash (outflow)/inflow from investing activities
      (492,742)  114,053   (147,750)
                 
                 
Net cash (outflow)/inflow before financing activities
      (308,591)  498,052   230,779 
                 

F-7


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
City Telecom (H.K.) Limited and its subsidiaries
Consolidated statements of cash flows (continued)
(Amounts in thousands)
                 
      Year ended August 31,
  Note 2006 2007 2008
      HK$ HK$ HK$
Financing activities
                
                 
Proceeds from exercise of share options      13   1,757   14,998 
Interest paid on senior notes      (85,235)  (85,313)  (70,010)
Repayment of capital element of finance leases      (1,210)  (1,321)  (834)
Repurchase of senior notes            (269,399)
Dividends paid         (24,627)  (17,271)
                 
                 
Net cash outflow from financing activities
      (86,432)  (109,504)  (342,516)
                 
                 
(Decrease)/increase in cash and bank balances
      (395,023)  388,548   (111,737)
                 
Cash and bank balances at the beginning of year
      539,591   144,917   532,894 
                 
Effect of foreign exchange rate changes on cash and bank balances
      349   (571)  453 
                 
                 
Cash and bank balances at the end of year
  19   144,917   532,894   421,610 
                 
                 
       For the year ended August 31, 
      2010  2009  2008 
  Note  HK$’000  HK$’000  HK$’000 
Net cash inflow from operations
  23(a)  488,353   538,503   386,241 
                 
Hong Kong profits tax (paid)/recovered      (456)     42 
Overseas tax paid      (2,557)  (1,732)  (4,292)
              
                 
Net cash inflow from operating activities
      485,340   536,771   381,991 
              
                 
Investing activities
                
                 
Increase in pledged bank deposits      15,038   72,281    
Interest received      11,372   4,869   15,596 
Purchases of fixed assets      (349,076)  (289,938)  (189,903)
Net proceeds from maturity of investment in debt securities         28,051   3,900 
Net proceeds from redemption of long-term bank deposit            15,600 
Proceeds from disposal of fixed assets      16,412   8,249   7,057 
              
                 
Net cash outflow from investing activities
      (306,254)  (176,488)  (147,750)
              
                 
Net cash inflow before financing activities
      179,086   360,283   234,241 
              
                 
Financing activities
                
                 
Repurchase of ordinary shares         (134)   
Proceeds from issuance of new shares  23(b)  396,356   1,399   14,998 
Proceeds from new bank loans      163,375       
Repayment of bank loan      (40,000)      
Repayment of capital element of finance leases  23(b)  (217)  (138)  (834)
Interest element of finance leases      (42)  (27)  (34)
Interest paid on bank loans      (1,166)      
Other borrowing costs paid      (3,260)  (885)  (3,428)
Interest paid on 10-year senior notes      (5,881)  (52,670)  (70,010)
Repurchase of 10-year senior notes  23(b)  (172,423)  (485,829)  (269,399)
Dividends paid      (158,435)  (23,008)  (17,271)
              
                 
Net cash inflow/(outflow) from financing activities
      178,307   (561,292)  (345,978)
              
                 
Increase/(decrease) in cash and cash equivalent
      357,393   (201,009)  (111,737)
                 
Cash and cash equivalent at September 1
      221,052   421,610   532,894 
                 
Effect of foreign exchange rate changes
      (270)  451   453 
              
                 
Cash and cash equivalent at August 31
      578,175   221,052   421,610 
              
                 
Analysis of the balances of cash and cash equivalents
                
Cash at bank and in hand      588,665   226,416   434,604 
Bank overdrafts — unsecured      (10,490)  (5,364)  (12,994)
              
                 
       578,175   221,052   421,610 
              
The accompany notes are an integral part of these consolidated financial statements.

F-8F-7


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
1 DescriptionSignificant accounting policies
(a)Statement of business and basis of presentationcompliance
  City Telecom (H.K.) Limited (the “Company”) was incorporated in Hong Kong on May 19, 1992 under the Hong Kong Companies Ordinance. City Telecom (H.K.) Limited and its subsidiaries (collectively referred to as the “Group”) are engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada.
 
  The following is a list of principal subsidiaries which principally affect the results, assets or liabilities of the Group as of August 31, 2008:
Percentage
holding
Place and date ofNature of
Nameestablishment/ operationIssued capitalDirectlyIndirectlyBusiness
963673 Ontario LimitedCanada
November 12, 1991
Common Canadian
dollar (“CAD”)
502,000
100Investment holding
in Canada
Attitude Holdings LimitedBritish Virgin Islands
November 3, 1997
Ordinary US$1100Inactive
Automedia Holdings LimitedBritish Virgin Islands
January 23, 2001
Ordinary US$1100Investment holding
in Hong Kong
City Telecom (B.C.) Inc.Canada
February 25, 1992
Common
CAD501,000
100Provision of international telecommunications and dial-up Internet access services in Canada
City Telecom (Canada) Inc.Canada
October 6, 1997
Common
CAD100
100Leasing and maintenance of switching equipment and provision of operational services in Canada

F-9


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
1Description of business and basis of presentation (continued)
Place andPercentage
date of establishment/holdingNature of
NameoperationIssued capitalDirectlyIndirectlybusiness
City Telecom Inc.Canada
September 19, 1991
Common
CAD1,000
100Provision of international telecommunications and dial-up Internet access services in Canada
City Telecom
International
Limited
British Virgin Islands
May 8, 1997
Ordinary
US$5,294
100Investment holding
in Hong Kong
City Telecom (U.S.A.) Inc.USA
May 5, 1997
Common
US$1
100Inactive
Credibility Holdings LimitedBritish Virgin Islands
December 18, 1998
Ordinary
US$1
100Investment holding
in Hong Kong
CTI Guangzhou Customer Service Co. Ltd (translated from the registered name in Chinese)The People’s Republic of China (“the PRC”) April 29, 2002Paid in capital of HK$8,000,000100Provision of administrative support services in the PRC
CTI International
Limited
Hong Kong
August 23, 1999
Ordinary
HK$10,000,000
100Inactive
CTI Marketing
Company Limited
Hong Kong
August 23, 1999
Ordinary
HK$10,000
100Provision of media marketing services in Hong Kong
Golden Trinity
Holdings Limited
British Virgin Islands June 11, 1997Ordinary
US$1
100Investment holding
in Hong Kong

F-10


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
1Description of business and basis of presentation (continued)
Place andPercentage
date of establishment/holdingNature of
NameoperationIssued capitalDirectlyIndirectlybusiness
Hong Kong Broadband
Network Limited
Hong Kong August 23, 1999Ordinary
HK$383,049
100Provision of international telecommunications and fixed telecommunications network services in Hong Kong
IDD 1600 Company
Limited
Hong Kong November 4, 1998Ordinary
HK$2
100Provision of international telecommunications services in Hong Kong
Global Courier Company Limited (formerly known as iStore.com Limited)Hong Kong
September 17, 1999
Ordinary
HK$10,000
100Inactive
SGBN Singapore Broadband Network Pte. LimitedSingapore
March 29, 2007
Ordinary
Singapore
dollar 1
100Inactive
2Basis of preparation and principal accounting policies
(a)Statement of compliance
The accompanying consolidated financial statements have been prepared in accordance with all applicable Hong KongInternational Financial Reporting Standards (“HKFRSs”IFRSs”) issued by the International Accounting Standards Board (“IASB”), which collective term includes all applicable individual Hong KongInternational Financial Reporting Standards, Hong KongInternational Accounting Standards (“HKASs”IASs”) and Interpretations issued by the Hong Kong InstituteIASB.
The IASB has issued a number a new or revised IFRSs that are first effective or available for early adoption for the current accounting period of Certified Public Accountants (“HKICPA”), as well as accounting principles generally accepted in Hong Kongthe Group and the requirementsCompany. The equivalent new or revised HKFRSs consequently issued by HKICPA as a result of these developments have the same effective date as those issued by the IASB and are in all material respects identical to the pronouncements issued by the IASB. Of these, the following developments are relevant to the Group’s financial statements:
IFRS/HKFRS 8,Operating segments
IAS/HKAS1 (revised 2007),Presentation of financial statements
Amendments to IFRS/HKFRS 7,Financial instruments: disclosure — improving disclosures about financial instruments
The impact of these developments is as follows:
IFRS/HKFRS 8 requires segment disclosure to be based on the way that the Group’s chief operating decision-maker regards and manages the Group, with the amounts reported for each reportable segment being the measures reported to the Group’s chief operating decision-marker for the purposes of assessing segment performance and making decisions about operating matters. The new requirement under IFRS/HKFRS 8 is consistent with the Group’s segment information presented in prior years. The adoption of HKFRS 8 had no material impact on the reportable segments being identified and disclosed.
As a results of the Hong Kong Companies Ordinance. HKFRSs differ in certain significant respects from accounting principles generally accepted in the United Statesadoption of America (“U.S. GAAP”)IAS/HKAS 1 (revised 2007), details of changes in equity during the period arising from transactions with equity shareholders in their capacity as such have been presented separately from all other income and expenses in a revised consolidated statement of changes in equity. All other items of income an expense are presented in the consolidated income statement, if they are recognized as part of profit or loss for the period, or otherwise in a new primary statement, the consolidated statement of comprehensive income. Corresponding amounts have been restated to conform to the new presentation. The change in presentation has no effect on reported profit or loss, total income and expense or net assets for any period presented.
As a result of the adoption of the amendments to IFRS/HKFRS 7, the financial statements include expanded disclosure in note 24(e)(i) about the fair value measurement of the Group’s financial instruments, categorizing these fair value measurements into a three-level fair value hierarchy accordingly to the extent to which they are based on observable market data.
The Group has taken advantage of the transitional provisions set out in note 31.the amendments to IFRS/HKFRS 7, under which comparative information for the newly required disclosures about the fair value measurements of financial instruments has not been provided.

F-11F-8


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
21 Basis of preparation and principalSignificant accounting policies (continued)
(b)(a) BasisStatement of preparationcompliance (continued)
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 32).
 
  The consolidated financial statements consistwere authorized for issue by the Board of Directors on November 9, 2010.
(b)Basis of preparation of the balance sheets of the Company and all its subsidiaries as of August 31, 2007, and 2008 and the relatedfinancial statements of operations, cash flows and changes in shareholders’ equity for the years ended August 31, 2006, 2007 and 2008.
 
  The measurement basis used in the preparation of the consolidated financial statements is the historical cost basis except that certain financial assets are stated at their fair valuevalues or amortized costcosts as explained in the accounting policies set out below (see notes 2(j)1(j), 2(k)1(l) and 2(s)1(r)).
 
  The preparation of financial statements in conformity with HKFRSsIFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
 
  All amountsJudgments made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are expresseddiscussed in Hong Kong Dollars, the functional currency of City Telecom (H.K.) Limited. Unless indicated otherwise, amounts in Hong Kong Dollars have been rounded to the nearest thousand.note 31.
(c) Subsidiaries and controlled entities
  Subsidiaries are entities controlled by the Company.Group. Control exists when the CompanyGroup has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

F-12


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2 Basis of preparation and principal accounting policies (continued)
(d) Group accounting
 
(i) Consolidation
 
  A controlledAn investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases.
 
  IntercompanyIntra-group balances and transactions and any unrealized profits arising from intercompanyintra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealized losses resulting from intercompanyintra-group transactions are eliminated in the same way as unrealized gains but only to the extent that there is no evidence of impairment.
 
(ii) Translation of foreign currencies
 
  Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities expresseddenominated in foreign currencies at the balance sheet date are translated at exchange rates of exchange ruling at the balance sheet date. Exchange differences arising fromin these transactionscases are dealt with in the consolidated statement of operations.profit or loss.
 
  For consolidation purposes, the balance sheets of foreign subsidiaries with functionaldenominated in foreign currencies other than Hong Kong Dollars are translated at the raterates of exchange ruling at the balance sheet date. Revenues and expenses aredate whilst the income statement is translated at thean average rate prevailing duringfor the year. The resulting exchangeExchange differences are dealt with in the consolidated statement of shareholders’ equity as translationa movement in reserves.
The accompanying consolidated financial statements are presented in Hong Kong Dollars, which is the Group’s functional currency. All financial information have been rounded to the nearest thousand.

F-9


1Significant accounting policies (continued)
(e) Goodwill
  Goodwill represents the excess of the cost of a business combination or an investment in an associate or a jointly controlled entity over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities at the acquisition date. Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate of a jointly controlled entity is recognized immediately in the consolidated statement of operations.liabilities.
 
  Goodwill is stated at cost less accumulated impairment losses, if any.losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (see note 2(i)1(i)). In respect of associates or jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the associate or jointly controlled entity.
 
  Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate or a jointly controlled entity is recognized immediately in profit or loss.
On disposal of a cash generating unit, an associate or a jointly controlled entity during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

F-13


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2 Basis of preparation and principal accounting policies (continued)
(f) Investment property
 
  Investment properties are land and/or buildings which are owned and held to earn rental income and/or for capital appreciation.
 
  Investment properties are stated in the balance sheet at cost less accumulated depreciation (see note 2(g)1(g)) and impairment losses (see note 2(i)1(i)), if any. Any gain or loss arising from the retirement or disposal of an investment property is recognized in the consolidated statement of operations.income statement. Rental income from investment property is accounted for in accordance with the accounting policy as describedset out in note 2(u)(vi)1(s)(v).
(g) Fixed assets
  Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses.
 
  Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:
Buildings situated on leasehold land are depreciated over the shorter of the unexpired term of lease and their estimated useful lives of 50 years
       
Buildings and investment property situated on leasehold landover the shorter of the unexpired term of the leases and their estimated useful lives of 50 years
  
 Furniture, fixtures and fittings 4 years
       
   Telecommunications, computer and office equipment -years — 20 years
       
   Motor vehicles 4 years
Leasehold improvementsover the shorter of the unexpired term of the leases and their estimated useful lives
Leasehold improvements are depreciated over the shorter of the unexpired term of the leases and their estimated useful lives.
  Where the parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.
 
  Major costs incurred in restoring fixed assets to their normal working condition are charged to the consolidated statement of operations.profit or loss. Major improvements are capitalized and depreciated over thetheir expected useful lives ofto the related asset.

F-14


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2Basis of preparation and principal accounting policies (continued)
(g)Fixed assets (continued)Group.
 
  The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognized in the consolidated statement of operationsprofit or loss on the date of disposal.

F-10


1Significant accounting policies (continued)
 During the year ended August 31, 2007, the Group changed the estimated useful lives of certain telecommunications equipment. The effect of such change is set out in note 10(d).
Under certain circumstances, the Group may have obligation to dismantle part of its network upon request by concerned parties. Owing to the absence of such history, no reliable estimate can be reasonably made in respect of such potential obligation.
(h) Assets held under leases
  An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.
 
(i) Classification of assets leased assetsto the Group
 
  Assets that are held by Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases.
 
  Land held for own use under an operating lease for which its fair value cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease (see note 2(h)1(h)(iii)).
 
(ii) Finance leases
 
  Where the Group acquired the use of assets under finance leases, the amounts representing the lower of the fair value of the leased asset or, if lower, the present value of the minimum lease payments is recordedof such assets, are included in fixed assets with the corresponding liability,liabilities, net of finance charges, recorded as obligations under finance leases. Depreciation and impairment losses are accounted for in accordance with the accounting policy as set out in note 2(g)1(g) and note 2(i)1(i). Finance charges implicit in the lease payments are charged to the consolidated statement of operationsprofit or loss over the period of the leases so as to produce an approximateapproximately constant periodic rate of charge on the remaining balance of the obligations.

F-15


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2Basis of preparation and principalobligations for each accounting policies (continued)
(h)Assets held under leases (continued)period.
 
(iii) Operating leases
 
  Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Receipts and payments made under operating leases net of any incentives received by/from the lessor are credited/charged to the consolidated statement of operationsprofit or loss on a straight-line basis over the lease periods.
 
(i) Impairment of assets
 
(i) Impairment of investmentinvestments in debt and equity securities and accounts and other receivables
 
  Investments in debt and equity securities and other current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events:
  significant financial difficulty of the debtor;
 
  a breach of contract, such as a default or delinquency in interest or principal payments;
 
  it becoming probable that a debtor will enter bankruptcy or other financial reorganization; and
 
  a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

F-11


1Significant accounting policies (continued)
(i)Impairment of assets (continued)
(i)Impairment of investments in debt and equity securities and accounts and other receivables (continued)
  If any such evidence exists, any impairment loss is determined and recognized as follows:
  For unquoted equity securitiestrade and other current receivables and non-current receivables that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for current and non-current receivables that are carried at cost are reversed if in a subsequent period the amount of the impairment loss decreases. Impairment losses for equity securities are not reversed.
Forother financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets). This assessment is made collectively where financial assets carried at amortized cost share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

F-16


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2Basis of preparation and principal accounting policies (continued)
 
(i)Impairment of assets (continued)
(i)Impairment of investment securities and other receivables (continued)
   If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the consolidated statement of operations.profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.
 
  For available-for-sale securities, the cumulative loss that has been recognized directly in equity is removed from equity and is recognized in consolidated statement of operations.profit or loss. The amount of the cumulative loss that is recognized in consolidated statement of operationsprofit or loss is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in consolidated statement of operations.profit or loss.
 
   Impairment losses recognized in consolidated statement of operationsprofit or loss in respect of available-for-sale equity securities are not reversed through consolidated statement of operations.profit or loss. Any subsequent increase in the fair value of such assets is recognized directly in equity.
 
   Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognised.recognized. Reversals of impairment losses in such circumstances are recognisedrecognized in profit orand loss.
 
 Impairment losses are written off against the corresponding assets directly, except for impairment losses recognisedrecognized in respect of trade debtors,accounts receivable, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtorsaccounts receivable and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognisedrecognized in profit or loss.
(ii) Impairment of other assets
 
  Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decrease:decreased:
  fixed assets;
 
  investment property; and
 
  goodwill.

F-17F-12


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
21 Basis of preparation and principalSignificant accounting policies (continued)
(i)Impairment of assets (continued)
 
(ii) Impairment of other assets (continued)
 
  If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.
  Calculation of recoverable amount
 
   The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).
 
  Recognition of impairment losses
 
   An impairment loss is recognized in consolidated statement of operationsprofit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.
 
  Reversals of impairment losses
 
   Except in the caseIn respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimateestimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.
 
   A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to consolidated statement of operationsprofit or loss in the year in which the reversals are recognized.

F-18


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
(j)Investment securities
The Group’s accounting policy for investments securities is as follows:
Financial assets at fair value through profit or loss comprise of financial assets held for trading and those designated as of fair value through profit or loss at inception. They are initially stated at fair value and are classified as current assets, if they are expected to be realized within 12 months. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized in the consolidated statement of operations. The net gain or loss recognized in the consolidated statement of operations does not include any interest earned on these investments as these are recognized in accordance with the policies set out in notes 2(u)(v).
Held-to-maturity securities are dated debt securities that the Group has the positive ability and intention to hold to maturity. They are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, they are stated in the balance sheet at amortized cost less impairment losses (see note 2(i)(i)).
Investment securities that are not classified as held for trading, financial assets at fair value through profit or loss, or held-to-maturity securities, are classified as available-for-sale securities. Available-for sale securities are initially recognized at fair value plus transaction costs. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized directly in equity, except for impairment losses (see note 2(i)(i)) and, in the case of monetary items such as debt securities, foreign exchange gains and losses that are recognized directly in the consolidated statement of operations. Where these investments are interest-bearing, interest calculated using the effective interest method is recognized in the consolidated statement of operations. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in the consolidated statement of operations.
Investments are recognized on the date the Group commits to purchase the investments. Investments are derecognized when:
(i)the contractual rights to the cash flows from the investment securities expire; or
(ii)the Group transfers the contractual rights to receive the cash flows of the investment securities.
(k) Derivative financial instruments
 
  Derivative financial instruments that are not designated as hedge are recognized initially at fair value. At each balance sheet date, the fair value is remeasured. The gain or loss on remeasurement to fair value is chargedrecognized immediately toin profit or loss, except where the derivatives qualify for cash flow hedge accounting or hedge of a net investment in a foreign operation, in which case recognition of any resultant gain or loss depends on the nature of the item being hedged. For the years presented in the consolidated statementfinancial statements, none of operations.the Group’s derivative financial instruments qualify as hedges or hedge accounting.
 
(l)(k) Deferred expenditure
 
  Deferred expenditure represents customer acquisition costs incurred for successful acquisition or origination of a service subscription agreement with a customer. Such costs are deferred and amortized on a straight-line basis over the period of the underlying service subscription agreements.

F-19F-13


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
21 Basis of preparation and principalSignificant accounting policies (continued)
 
(m)(l) Accounts receivablesreceivable
 
  Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less allowance for impairment losses forof doubtful debts (see note 2(i)1(i)(i)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad andof doubtful debts.debts (see note 1(i)(i)).
 
(n)Inventories
Inventories are carried at the lower of cost or net realizable value.
Cost is determined using the first in, first out method and comprises all costs of purchase.
Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
When inventories are sold, the carrying amount of the inventory is recognized in the consolidated statement of operations as cost of inventories sold in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value is recognized as an expense in the period the write-down occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction of network costs in the period in which the reversal occurs.
For the years ended August 31, 2006, 2007 and 2008, there was no write-down of inventories.
(o)(m) Cash, bank balances and pledged bank deposits
 
  Cash and bank balances consist of cash on hand, cash in bank accounts and interest-bearing savings accounts. Cash that is restricted for use or pledged as security is disclosed separately on the face of the consolidated balance sheet, and is not included in the cash and bank balances total in the consolidated statements of cash flows. The pledged bank deposits represent cash maintained at a bank as security for bank facility and bank guarantees issued by the bank to third party suppliers and utility vendors (see note 16)27).

F-20


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2Basis of preparation and principal accounting policies (continued)
(p)(n) ProvisionsFinancial guarantees issued, provisions and contingent liabilities
(i)Financial guarantees issued
Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.
Where the Group issues a financial guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially recognized as deferred income within trade and other payables. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognized in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognized in profit or loss on initial recognition of any deferred income.
The amount of the guarantee initially recognized as deferred income is amortized in profit or loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognized in accordance with note 1(n)(ii) if and when (i) it becomes probable that the holder of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognized, less accumulated amortization.
(ii)Other provisions and contingent liabilities
 
  Provisions are recognized for other liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.
 
  Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

F-14


1Significant accounting policies (continued)
(q)(o) EmployeeTalent benefits
(i) Employee leaveLeave entitlements
 
  Employee entitlementsEntitlements to annual leave and long service leave are recognized when they accrue to employees.individuals employed by the Group hereinafter (referred to as “Talents”), including directors of the Company. A provision is made for the estimated liability for annual leave and long-service leave as a result of services are rendered by employees. Employee entitlementsTalents up to the balance sheet date.
Entitlements to sick leave and maternity or paternity leave are not recognized until the time of leave.
 
(ii) Profit sharing and bonus plans
 
  Provisions for profit sharing and bonus plans are recognized when the Group has a present legal or constructive obligation as a result of services rendered by employeesTalents and a reliable estimate of the obligation can be made.

F-21


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2Basis of preparation and principal accounting policies (continued)
(q)Employee benefits (continued)
 
(iii) Retirement benefit costs
 
  The Group contributes to defined contribution retirement schemes which are available to certain employees.Talents. Contributions to the schemes by the Group are calculated as a percentage of employees’Talents’ basic salaries and charged to the consolidated statement of operations.profit or loss. The Group’s contributions are reduced by contributions forfeited by those employeesTalents who leave the scheme prior to beingvesting fully vested in the Group’s contributions.
 
  The assets of the scheme are held in an independently administered fund that is separated from the Group’s assets.
 
(iv) Share-based payments
 
  The fair value of share options granted to employeesTalents is recognized as an employeeTalent cost with a corresponding increase in a capital reserve within equity. The fair value is measured at grant date using the Black-Scholes option pricing model or Monte Carlo model, taking into account the terms and conditions upon which the options were granted. Where the employeesTalents have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.
 
  During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged/credited to the consolidated statement of operations in the year of the review,profit or loss, unless the original employee cost qualifiedTalent expenses qualify for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The amount relatingrelated to share options expense is recorded in the capital reserve until either the option is exercised or the option expires.
(r)(p) Deferred taxation
  Deferred tax assets and liabilities arise from deductible and taxabletaxation is provided, using the balance sheet liability method, on temporary differences respectively, being the differences between the carrying amountstax bases of assets and liabilities for financial reporting purposes and their tax bases.carrying amounts in the financial statements. Deferred tax assets also arise from unused tax losseslosses. Taxation rates enacted or substantively enacted at the balance sheet date are used to measure deferred tax assets and unused tax credits.liabilities.
 
  Deferred tax assets are recognized to the extent that it is probable that future taxable profitprofits will be available against which the temporary differences can be utilized.
Deferred taxation is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not be reversed in the foreseeable future.

F-22F-15


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
21 Basis of preparation and principalSignificant accounting policies (continued)
(s)(p) Senior notesDeferred taxation (continued)
 
  Senior notesThe following temporary differences, of which deferred taxes are not provided for: initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the temporary differences will not be reversed in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.
Deferred tax assets and deferred tax liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity.
(q)Interest-bearing borrowings
Interest-bearing borrowings are recognized initially at fair value less direct and incremental issuanceattributable transaction costs. Subsequent to initial recognition, the senior notesinterest-bearing borrowings are stated at amortized cost. Thecost with the difference between the original issuance priceamortized cost and redemption price of the notes isvalue recognized in the consolidated statement of operationsprofit or loss over the period of the notesborrowings using the effective interest method.
(t)(r) Trade and other payables
  Trade and other payables are initially recognized at fair valuevalue. Except for financial guarantee liabilities measured in accordance with note 1(n), trade and other payables are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
 
As at August 31, 2007 and 2008, the Group’s trade and other payables are stated at cost as the effect of discounting is immaterial.
(u)(s) Revenue recognition
(i) Revenue for the provision of international telecommunications and fixed telecommunications network services is recognized, when an arrangement exists, service is rendered, the fee is fixed or determinable, and collectabilitycollectibility is probable.
 
(ii) Tariff-free period granted to subscribers of fixed telecommunications network services are recognized in the consolidated statement of operations ratablyprofit or loss rateably over the term of the service subscription agreement. Unbilled revenue represents revenue recognized in accordance with the requirementsrequirement in 2(u)note 1(s)(i) that has not been billed to the subscriber.
 
(iii) Amount received in advance for the provision of fixed telecommunications network services is deferred and included under deferred services income,service revenue, and subsequently recognized as revenue on a straight-line basis over the related service period.
 
(iv) Revenue from the sales of products is recognized upon the transfer of risks and rewards of ownership to the customer, which generally coincides with the time when the goods are delivered to the customer and title has passed.

F-23


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2Basis of preparation and principal accounting policies (continued)
(u)Revenue recognition (continued)
(v)Interest income is recognized as it accrues using the effective interest method.
 
(vi)(v) Rental income receivable under operating leases is recognized in the consolidated statement of operationsprofit or loss in equal installments over the periods covered by the lease term. Lease incentives granted are recognized in the consolidated statement of operationsprofit or loss as an integral part of the aggregate net lease payments receivable.
(v)(t) Borrowing costs
  Borrowing costs are expensed in the consolidated statement of operations in the period which they are incurred, except to the extent that they are capitalized as being 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 capitalized as part of the cost of that asset.
 
  The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred,All other borrowing costs are being incurred and activities thatcharged to profit or loss in the year in which they are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.incurred.

F-16


1Significant accounting policies (continued)
 
No borrowing cost was capitalized for the years ended August 31, 2006, 2007 and 2008, respectively.
(w)(u) Segment reporting
  In accordance withOperating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s internal financial reporting,most senior executive management for the Group has determined that business segment ispurposes of allocating resources to, and assessing the primary reporting format and geographical isperformance of, the secondary reporting format.group’s two lines of business.
 
  SegmentGeographical information is not presented as the majority of the Group’s revenue is attributed to customers in Hong Kong and the majority of the assets consist primarily of goodwill, fixed assets, trade and other receivables and cash and bank deposits. Segment liabilities comprise operating liabilities and exclude items such as taxation and senior notes. Capital expenditure comprises purchases of fixed assets.are located in Hong Kong.
 
In respect of geographical segment reporting, sales are reported based on the country in which the customer is located. Total assets and capital expenditure are reported based on where the assets are located.

F-24


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
2Basis of preparation and principal accounting policies (continued)
(x)(v) Accounting for barter transactions
 
  When goods or services are exchanged for goods or services which are of a similar nature and value, the exchange is not regarded as a revenue generating transaction.
 
  When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the considerationgoods or services received, or receivable adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services provided,rendered, adjusted by the amount of any cash or cash equivalents transferred.
(y)(w) Related parties
  For the purposes of these financial statements, a party is considered to be related to the Group if:
 (i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group;
 
 (ii) the Group and the party are subject to common control;
 
 (iii) the party is an associate of the Group or a joint venture in which the Group is a venturer;
 
 (iv) the party is a member of key management personnel of the Group or the Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;
 
 (v) the party is a close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or
 
 (vi) the party is a post-employment benefit plan which is for the benefit of employeesTalents of the Group or of any entity that is a related party of the Group.
  Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

F-25F-17


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
32 Changes in accounting policiesTurnover and segment information
  The HKICPA has issuedGroup is principally engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada. Revenues recognized during the year are as follows:
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Turnover
            
             
International telecommunications services  218,589   247,359   291,943 
Fixed telecommunications network services (note 2(b))  1,356,098   1,230,880   1,011,038 
          
             
   1,574,687   1,478,239   1,302,981 
          
(a)Primary reporting format — business segments
The Group is organized on a numberworldwide basis into two business segments:
International telecommunications:provision of new and revised HKFRSs and Interpretations that are effective or available for early adoption for the current accounting period of the Group.international long distance calls services
 
  ThereFixed telecommunications network:provision of dial up and broadband Internet access services , local voice-over-IP services, IP-TV services and corporate data services
The Group’s inter-segment transactions mainly consist of provision of leased lines services. These transactions were entered into on similar terms as those contracted with third parties.
                 
  2010 
  International  Fixed       
  tele-  tele-       
  communications  communications       
  services  network services  Elimination  Group 
  HK$’000  HK$’000  HK$’000  HK$’000 
Turnover                
- External sales  218,589   1,356,098      1,574,687 
- Inter-segment sales  5,673   16,673   (22,346)   
             
                 
   224,262   1,372,771   (22,346)  1,574,687 
             
                 
Segment results  54,173   219,618       273,791 
               
                 
Other income, net              7,989 
Finance costs              (22,235)
                
                 
Profit before taxation              259,545 
Income tax expense              (42,679)
                
                 
Net profit              216,866 
                

F-18


2Revenue and segment information (continued)
(a)Primary reporting format — business segments (continued)
                 
  2009 
  International  Fixed       
  tele-  tele-       
  communications  communications       
  services  network services  Elimination  Group 
  HK$’000  HK$’000  HK$’000  HK$’000 
Turnover                
- External sales  247,359   1,230,880      1,478,239 
- Inter-segment sales  5,669   19,784   (25,453)   
             
                 
   253,028   1,250,664   (25,453)  1,478,239 
             
                 
Segment results  61,631   203,515       265,146 
               
                 
Other income, net              41,540 
Finance costs              (55,127)
                
                 
Profit before taxation              251,559 
Income tax expense              (38,730)
                
                 
Net profit              212,829 
                
                 
  2008 
  International  Fixed       
  tele-  tele-       
  communications  communications       
  services  network services  Elimination  Group 
  HK$’000  HK$’000  HK$’000  HK$’000 
Turnover                
- External sales  291,943   1,011,038      1,302,981 
- Inter-segment sales  5,692   22,680   (28,372)   
             
                 
   297,635   1,033,718   (28,372)  1,302,981 
             
                 
Segment results  63,225   95,295       158,520 
               
                 
Other income, net              24,989 
Finance costs              (75,137)
                
                 
Profit before taxation              108,372 
Income tax benefit              16,818 
                
                 
Net profit              125,190 
                

F-19


2Revenue and segment information (continued)
(a)Primary reporting format — business segments (continued)
             
  2010 
  International  Fixed    
  tele-  tele-    
  communications  communications    
  services  network services  Group 
  HK$’000  HK$’000  HK$’000 
Segment assets  590,888   1,660,661   2,551,549 
            
             
Segment liabilities  92,982   289,085   382,067 
Unallocated liabilities          180,943 
            
             
Total liabilities          563,010 
            
             
Capital expenditure incurred during the year  5,223   339,621   344,844 
Depreciation for the year  12,637   186,392   199,029 
             
  2009 
  International  Fixed    
  tele-  tele-    
  communications  communications    
  services  network services  Group 
  HK$’000  HK$’000  HK$’000 
Segment assets  298,412   1,491,996   1,790,408 
            
             
Segment liabilities  82,090   299,503   381,593 
Unallocated liabilities          180,288 
            
             
Total liabilities          561,881 
            
             
Capital expenditure incurred during the year  1,820   284,914   286,734 
Depreciation for the year  15,154   191,087   206,241 

F-20


2Revenue and segment information (continued)
(b)Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Company, is a Fixed Telecommunications Network Services (“FTNS”) licensee and provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the Telecommunication Authority (“TA”) and interconnection services have been no significant changes to the accounting policies applied in these financial statementsprovided, HKBN has been billing mobile operators for the interconnection services provided to them and recognizing revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts to be collected. In prior years, presented asmajority of the mobile operators rejected HKBN’s demand for payment of the mobile interconnection charges. As a result of adoptionnon-payment by certain mobile operators, in 2004, the Group requested the TA to make a determination (the “2004 Determination”) on the level of these new standards. However, as a resultmobile interconnection charges payable by one of the adoption of HKFRS 7, Financial instruments: Disclosuresmobile operators (“mobile operator under dispute”) to HKBN; and the amendment to HKAS 1, Presentationeffective date of financial statements: Capital disclosures, there have been some additional disclosures provided as follows:the determined mobile interconnection charges.
 
  As a resultIn June 2007, TA issued the 2004 Determination which set out the rates of mobile interconnection charge payable by the adoption of HKFRS 7 and as compared withmobile operator under dispute for interconnection services provided by HKBN for the information previously requiredperiod from April 1, 2002 to be disclosed by HKAS 32, Financial instruments: Disclosure and presentation, the financial statements include expanded disclosure about the significance of the Group’s financial instrumentsAugust 31, 2004 and the nature and extent of risks arising from those instruments. These disclosures are provided throughout these financial statements, in particular in note 27.mobile operator under dispute paid mobile interconnection charge for the relevant period accordingly.
 
  Subsequent to June 2007, HKBN entered into contractual agreements with several mobile operators which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from April 1, 2002 to August 31, 2004 and with respect to the period after August 31, 2004 at the interim rate stated in the contractual agreements. The amendmentinterim rate is subject to HKAS 1 introduces additional disclosure requirementsadjustment based on further determination to provide information aboutbe issued by the level of capital and the Group’s objectives, policies and processes for managing capital. These new disclosures are set out in note 19.TA.
 
  Both HKFRS 7 and the amendmentIn February 2008, since certain mobile operators had still not yet settled their mobile interconnection charges for interconnection services provided by HKBN, HKBN requested TA to HKAS 1 do not have any material impactmake a new determination on the classification, recognitionrate of mobile interconnection charge and measurement ofinterest thereon with the amounts recognized in the financial instruments.four mobile operators.
 
  The Group has not applied any new standard or interpretation that is not yet effectiveIn September 2008, TA accepted HKBN’s request for determination on the rate of mobile interconnection charges for the current accounting period (see note 30)from April 1, 2002 to April 26, 2009 payable by the mobile operators that have not reached contractual agreements with HKBN, and the rate for the period from September 1, 2004 to April 26, 2009 payable by those mobile operators that have reached contractual agreements with HKBN, and the interest rate thereon (the “2008 Determination”).
In May 2010, TA issued its decision on the 2008 Determination which set out the rates of mobile interconnection charges payable by the mobile operators under dispute.
Based on the 2008 determination, the Group reversed approximately HK$19,706,000 revenue related to mobile interconnection charges and recognized approximately HK$10,053,000 interest income during the year ended August 31, 2010.
Included in the accounts receivable balance as at August 31, 2010 were receivable relating to mobile interconnection charges of HK$39,763,000 (August 31, 2009: HK$68,802,000) representing the amount of mobile interconnection charges management expects to collect.

F-21


43 Network costs
  Network costs mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, and production costs for the pay-TV using Internet ProtocolIP-TV service, and costs of inventories sold, and excludedo not include depreciation charge which is included in general and administrationother operating expenses.
Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a Fixed Telecommunications Network Services (“FTNS”) licensee, is obligated to contribute Universal Services Contributions (“USC”) as compensation to PCCW-HKT Telephone Limited (“PCCW-HKT”) for the cost of network development in remote areas in Hong Kong.
 
  The Group estimates the USCUniversal Services Contributions (“USC”) payable to PCCW-HKT based onto fund the provisional rates announced bycosts of network development in remote areas in Hong Kong and includes such estimated costs as part of the Telecommunications Authority (“TA”). Thenetwork costs. TA periodically reviews the actual costs incurred by PCCW-HKT in the network developmentof such developments and revises the amounts owed to PCCW-HKT or to be refunded by PCCW-HKT to the respective USC contributing parties, including the HKBN (“the Rate Revisions”). Accordingly, the estimate made by the HKBN’s management is subject to change based on the Rate Revisions identified during a financial year and up to the date prior to the release of the financial statements of the Group. The Group adjusts such differences as an addition or reduction of the corresponding costs of services in that particular reporting period.parties.
 
  Any sum received in advance from PCCW-HKT as an estimated refund of the USC on a provisional basis, which is subject to the final confirmation and determination of TA, is recorded in other payables and accrued expenses in the Group’s consolidated balance sheet.
On November 13, 2006, TA issued a statement (the “2006 TA”) on the USC and confirmed the actual contribution level for calendar year 2004. In aggregate, an amount of HK$1,365,088 was recorded as a reduction against the network costs of the Group for the year ended August 31, 2006.
As of the date of issuance of the Group’s financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes, the actual contribution level for calendar year 2005, 2006 and 2007 had not yet been confirmed by the TA. For the year ended August 31, 2007, the Group recorded USC charges based on the provisional rates set out in the 2006 TA. On December 28, 2007, TA issued a statement (the “2007 TA”TA Statement”) on the USC and confirmed that the actual contribution level for the period from January 1, 2005 to June 30, 2007. Based on the 2007 TA an amount ofStatement, HK$7,617,000 was recoveredrecorded as a reduction against the network costcosts of the Group for the year ended August 31, 2008.
 
  TheOn April 8, 2009, TA issued a statement (the “2009 TA Statement”) on the USC and confirmed the actual contribution level for the period subsequentfrom July 1, 2007 to June 30, 2007 has not yet been confirmed by the TA. Therefore, for the year ended August 31, 2008, the Group recorded USC charges based2008. Based on the provisional rates set out in the 2007 TA.

F-26


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
5(Loss)/income before taxation
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
(Loss)/income before taxation is arrived at after charging:
            
 
Amortization of deferred expenditure  13,973   15,580   33,777 
Depreciation of purchased fixed assets  275,538   257,052   209,464 
Depreciation of fixed assets held under finance leases  926   1,051   587 
Impairment loss — investment property  1,131       
Operating lease charges in respect of:            
— Land and buildings  17,556   13,879   13,296 
— Computer equipment  840   32   50 
Research and development costs  9,605   4,977   9,593 
Retirement benefit costs — defined contribution plans (note 24)  27,956   23,933   29,738 
             
Interest expense comprises:
            
 
Interest element of finance leases  54   62   34 
Interest on senior notes  85,235   85,313   70,010 
Amortization of debt issuance cost  1,429   2,129   1,665 
Other borrowing costs  1,919      3,428 
             
             
Total interest expense  88,637   87,504   75,137 
             
             
Other income net, comprises:
            
             
Net exchange gain/(loss)  1,044   (114)  1,923 
Gain on extinguishment of 10-year senior notes        2,582 
Others  3,421   3,263   4,888 
             
             
   4,465   3,149   9,393 
             

F-27


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
6Income tax credit/(expense)2009 TA Statement, no additional payment or refund of USC from PCCW-HKT was required.
 
  (Loss)/income before taxation by geographical location is as follows:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Hong Kong (loss)/income  (150,624)  24,574   100,514 
Overseas income  1,318   6,317   7,858 
             
 
(Loss)/income before taxation  (149,306)  30,891   108,372 
             
Income tax credit/(expense) consist ofOn April 27, 2010, TA issued a statement (the “2010 TA Statement”) on the following:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Hong Kong income tax            
— current (note (a))  (24)  (121)  (391)
— under-provision of current tax in prior years  (552)      
— deferred (note 12)  10,046   47   21,757 
Overseas taxation            
— current (note (b))  (2,367)  (1,964)  (1,929)
— under-provision of current tax in prior years        (2,552)
— deferred (note 12)  141   12   (67)
             
   7,244   (2,026)  16,818 
             
Notes:
(a)The CompanyUSC and its subsidiaries operating in Hong Kong are subject to tax on an entity basis on income arising in or derived from Hong Kong. The rate of taxation of subsidiaries operating in Hong Kongconfirmed the actual contribution level for the years ended August 31, 2006 and 2007 was 17.5% and for the year ended August 31,period from July 1, 2008 was 16.5%.
(b)Taxation on overseas profits has been calculatedto April 30, 2009. Based on the estimated assessable profit for the year at the rate2010 TA Statement, no additional payment or refund of taxation prevailing in the countries in which the foreign subsidiaries operate.

F-28


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
6Income tax credit/(expense) (continued)
The income tax credit/ (expense) for the years ended August 31, 2006, 2007 and 2008 differsUSC from the amounts determined by applying the applicable statutory rate in Hong Kong of 17.5% (2008:16.5%) to income/ (loss) before taxation as a result of the following differences:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Computed “expected” income tax credit/(expense)  26,129   (5,406)  (17,881)
Difference in statutory tax rates of foreign subsidiaries  (459)  (1,006)  (1,046)
Effect of expenses not deductible for income taxes  (883)  (772)  (6,243)
Recognition of prior year unrecognized tax losses        26,335 
Effect of bank interest income not subject to income taxes  2,944   3,533   2,370 
Effect of other income not subject to income taxes  548   686   1,508 
Under-provision for Hong Kong current income tax in prior years  (552)      
Under provision for overseas current income tax in prior years        (2,552)
Adjustment for changes in new tax laws on share based payment        2,324 
Effect of prior year tax losses utilized  2,416   6,678   12,013 
Effect of tax loss not recognized  (20,597)  (4,539)  (74)
Effect of share based payment not recognized  (2,305)  (1,125)  (110)
Others  3   (75)  174 
             
             
Income tax credit/(expense)  7,244   (2,026)  16,818 
             

F-29


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
7(Loss)/earnings per share
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Net (loss)/income  (142,062)  28,865   125,190 
             
             
  Number of shares in thousands 
Weighted average number of shares in issue  614,134   614,840   634,015 
Incremental shares from assumed exercise of share options     16,479   23,982 
          
             
Diluted weighted average number of shares  614,134   631,319   657,997 
          
             
Basic (loss)/earnings per share HK(23.1) cents  HK4.7 cents  HK19.7 cents 
          
             
Diluted (loss)/earnings per share HK(23.1) cents  HK4.6 cents  HK19.0 cents 
          
Basic (loss)/earnings per share is calculated based on the weighted average number of issued ordinary shares and the related (loss)/income amount. Diluted (loss)/earnings per share is calculated based on the weighted average number of issued ordinary shares and the number of incremental shares from assumed exercise of share options has been determined using the treasury stock method and the related (loss)/income amount.
For the years ended August 31, 2006, the number of shares used in the calculation of diluted loss per sharePCCW-HKKT was equal to the number of shares used to calculate basic loss per share as the incremental effect of share options was anti-dilutive in a loss-making year.

F-30


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
8Receivables
(a)Trade receivables, net
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Trade receivables  192,943   152,227 
Less: Allowance for doubtful debts  (22,392)  (11,944)
         
         
   170,551   140,283 
         
The aging analysis of accounts receivable is as follows:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Current - 30 days  50,282   45,462 
31 - 60 days  15,619   17,507 
61 - 90 days  8,876   7,249 
Over 90 days  118,166   82,009 
         
         
   192,943   152,227 
         
The majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted.
(b)Impairment of trade receivables
Impairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly.
The movement in the allowance for doubtful debts during the year, including both specific and collective loss components is as follows:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Balance at beginning of the year  48,316   55,745   22,392 
Additions  17,450   15,973   14,293 
Reversals     (9,404)   
Write-off  (10,021)  (39,922)  (24,741)
             
             
Balance at the end of the year  55,745   22,392   11,944 
             
Allowance for doubtful debts as of August 31, 2006 includes allowance for mobile interconnection charges receivables of HK$20,809,000. Following TA’s 2004 Determination issued in June 2007 (note 26(c)), the Group has reversed HK$9,404,000 of the allowance for mobile interconnection charges to the consolidated statement of operations (note 26(c)) and has written off the remaining balance of the allowance of HK$11,405,000 against the related accounts receivable.

F-31


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
8Receivables (continued)
(c)Trade receivables that are not impaired
The aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Neither past due nor impaired  50,282   45,462 
0-30 past due  15,619   17,507 
31-60 past due  8,876   7,249 
Over 60 past due  95,774   70,065 
         
         
   170,551   140,283 
         
Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default.
Trade receivables over 60 days past due for the Group include receivable relating to mobile interconnection charges of HK$64,407,000 as of August 31, 2008 (August 31, 2007: HK$92,383,000) (See note 26(c)).
Other accounts receivable that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold collateral over these balances.
(d)Other receivables, deposits and prepayments
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Deposits for purchase of fixed assets  6,007   9,094 
Deposits for lease of land and building  7,256   10,528 
Interest receivable  1,344   757 
Prepayments  19,895   30,635 
Unbilled revenue  15,572   23,293 
Others  9,298   8,419 
         
         
   59,372   82,726 
         

F-32


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
9Goodwill
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Cost and carrying amount:
        
         
Beginning of the year/at the end of the year  1,066   1,066 
         
Goodwill has been allocated to the Group’s fixed telecommunications network services cash-generating unit (“CGU”) for purposes of the goodwill impairment test.required
 
  Based on management’s goodwill impairment test, the carrying amount2010 TA Statement, TA decided that USC contributing parties are not required to pay provisional USC from May 1, 2009 onwards until a further review of the fixed telecommunications network services CGU was lower than its recoverable amount. The recoverable amount was determined based on the value-in-use methodology. This methodology uses cash flow projections based on financial budgets approved by management covering a three-year period. Cash flows for the three-year period were estimated based on growth rates between 1% to 14% and a pre-tax discount rate of 14%. Cash flows beyond the three year period were assumed to remain constant. The estimated growth rates used were comparable to the growth rate for the industry. The key assumption used in the value-in-use methodology was the annual growth of the revenue of the fixed telecommunications network services CGU which is determined based on the past performance and management’s expectation for future performance. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessment of the time value of money and the risks specific to the fixed telecommunications services CGU. Any adverse change in the key assumption could reduce the recoverable amount below carrying amount.USC.

F-33F-22


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
104 Fixed assets
                             
              Furniture, Tele-    
      Leasehold     fixtures communications,    
  Investment land and Leasehold and computer and Motor  
  property buildings improvements fittings office equipment vehicles Total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
  (Note (a)) (Note (a))                    
Cost:
                            
                             
At September 1, 2006  5,197   79,598   78,241   17,770   2,352,253   6,956   2,540,015 
Exchange adjustments        773   253   2,560      3,586 
Additions        1,627   496   129,950   177   132,250 
Disposals        (3)  (1,100)  (8,988)  (315)  (10,406)
                             
                             
At August 31, 2007  5,197   79,598   80,638   17,419   2,475,775   6,818   2,665,445 
                             
                             
At September 1, 2007  5,197   79,598   80,638   17,419   2,475,775   6,818   2,665,445 
Exchange adjustments        1,470   445   2,840      4,755 
Additions     4,646   2,469   2,189   196,230   6,150   211,684 
Disposals           (478)  (30,564)  (344)  (31,386)
                             
                             
At August 31, 2008  5,197   84,244   84,577   19,575   2,644,281   12,624   2,850,498 
                             
                             
Accumulated depreciation:
                            
                             
At September 1, 2006  1,997   7,531   40,428   12,447   1,104,864   5,514   1,172,781 
Exchange adjustments        612   160   1,874      2,646 
Charge for the year  104   1,592   9,269   2,028   244,581   529   258,103 
Disposals           (683)  (4,465)  (160)  (5,308)
                             
                             
At August 31, 2007  2,101   9,123   50,309   13,952   1,346,854   5,883   1,428,222 
                             
                             
At September 1, 2007  2,101   9,123   50,309   13,952   1,346,854   5,883   1,428,222 
Exchange adjustments        1,334   313   2,077      3,724 
Charge for the year  104   1,604   9,626   1,617   196,198   902   210,051 
Disposals           (286)  (22,390)  (222)  (22,898)
                             
                             
At August 31, 2008  2,205   10,727   61,269   15,596   1,522,739   6,563   1,619,099 
                             
                             
Net book value:
                            
                             
At August 31, 2008  2,992   73,517   23,308   3,979   1,121,542   6,061   1,231,399 
                             
                             
At August 31, 2007  3,096   70,475   30,329   3,467   1,128,921   935   1,237,223 
                             

F-34


City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
10Fixed assets (continued)
Notes:
(a)The interests in leasehold land and buildings and investment property situated in Hong Kong at their net book values are analyzed as follows:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Leases of between 10 to 50 years  73,571   76,509 
         
Representing:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Leasehold land and building carried at cost  70,475   73,517 
Investment property at cost less accumulated depreciation and impairment loss  3,096   2,992 
         
         
   73,571   76,509 
         
During the year ended August 31, 2006, a property which had been held for own use was leased to a third party to earn rental income. Upon adoption of HKAS 40, the Group assessed the open market value of the property and based on such assessment, wrote down the carrying amount of the property by $1,131,000 (included in “other operating expenses”). The estimate of open market value was made by reference to net rental income allowing for reversionary income potential.Profit before taxation
 
  The estimated fair value ofProfit before taxation is arrived at after charging/(crediting) the investment property held by the Group as of August 31, 2007 and 2008 amounted to HK$3,096,000 and HK$2,992,000, respectively.following:
 (a)Other operating expenses
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Advertising and marketing expenses  372,727   299,794   307,743 
Amortization of deferred expenditure (note 14)  48,621   53,160   33,777 
Auditors’ remuneration  2,910   3,455   3,687 
Depreciation of owned fixed assets  198,323   205,624   209,464 
Depreciation of fixed assets held under finance lease  706   617   587 
Operating lease charges in respect of land and buildings  22,669   17,010   13,296 
Operating lease charges in respect of equipment  39   42   50 
Provision for doubtful debts (note 15(b))  14,742   12,103   14,293 
(Gain)/loss on disposal of fixed assets  (1,375)  1,016   1,431 
Talent costs (note 4(d))  301,760   302,279   247,460 
Others  144,482   142,864   134,306 
          
             
   1,105,604   1,037,964   966,094 
          
(b) The Group’s total future aggregate leaseOther income, receivable under non-cancellable operating lease are receivable as follows:net
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Lease in respect of investment property which are receivable:        
— within 1 year  228   258 
— after 1 year but within 5 years     258 
         
         
   228   516 
         
         
Leases in respect of telecommunications facilities and computer equipment which are receivable:        
— within 1 year  1,065   979 
— after 1 year but within 5 years  214   292 
         
         
   1,279   1,271 
         
         
   1,507   1,787 
         
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Interest income  (11,372)  (4,869)  (15,596)
Loss/(gain) on extinguishment of 10-year senior notes (note 22(a))  9,650   (31,371)  (2,582)
Net exchange gain  (324)  (3,038)  (1,923)
Others  (5,943)  (2,262)  (4,888)
          
             
   (7,989)  (41,540)  (24,989)
          
(c)Finance costs
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Interest element of finance leases  42   27   34 
Interest on 10-year senior notes  5,881   52,670   70,010 
Amortization of incidental issuance costs  188   1,545   1,665 
Interest on bank borrowings  1,379       
Amortization of upfront costs on bank borrowings  192       
Change in fair value of derivative financial instrument  11,293       
Other borrowing costs  3,260   885   3,428 
          
             
   22,235   55,127   75,137 
          

F-35F-23


City Telecom (H.K.4 Profit before taxation (continued)
(d)Talent costs
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Wages and salaries  277,883   278,905   226,097 
Provision for annual leave  561   613   2,642 
Equity settled share-based transaction  5,347   4,768   4,114 
Retirement benefit costs — defined contribution plans (note 8)  38,820   34,614   29,738 
Less: Talent costs capitalized as fixed assets  (20,851)  (16,621)  (15,131)
          
             
   301,760   302,279   247,460 
          
Talent costs include directors’ emoluments and research and development cost of HK$11,169,000 (2009: HK$10,824,000, 2008: HK$9,593,000) but exclude Talent costs of HK$11,098,000 (2009: HK$13,461,000, 2008: HK$14,482,000) recorded in network costs and HK$229,399,000 (2009: HK$214,272,000, 2008:HK$194,724,000) recorded in advertising and marketing expenses.
Talent costs include all compensation and benefits paid to and accrued for all individuals employed by the Group, including directors.
(e)Other items
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Realized loss on derivative financial instruments        1,039 
Realized gain on long-term bank deposit        (1,185)
Realized and unrealized gain on other financial assets     (189)  (3,284)
          
5 Income tax (expense)/benefit
Hong Kong profits tax has been provided at the rate of 16.5% (2009 and 2008: 16.5%) Limited
Consolidated financial statementson the estimated assessable profit for the year. Taxation on other jurisdictions has been calculated on the estimated assessable profit for the year ended August 31, 2008
at the income tax rates prevailing in the other jurisdictions in which the Group operates.
10Fixed assets (continued)
The amount of income tax (expense)/benefit in the consolidated income statement represents:
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Current taxation:            
             
Hong Kong            
- Provision for the year        (391)
- Over-provision in prior years  40       
Non-Hong Kong            
- Provision for the year  (2,585)  (1,622)  (1,929)
- Under-provision in prior years        (2,552)
             
Deferred taxation:            
             
- Origination and reversal of temporary differences (note 20)  (40,134)  (37,108)  (4,645)
- Recognition of previously unrecognized tax losses (note 20)        26,335 
          
             
Income tax (expense)/benefit  (42,679)  (38,730)  16,818 
          
Notes: (continued)
(c)The Group leases telecommunications, computer and office equipment for terms ranging from one to five years. At the end of the lease term the Group has the option to purchase the equipment at a price deemed to be a bargain purchase option and accordingly the lease arrangements have been classified as finance leases. None of the leases included contingent rental. The total cost of these assets and the related accumulated depreciation are as follows:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Cost  4,236   4,236 
Accumulated depreciation  2,238   2,825 
         
         
   1,998   1,411 
         
(d)Management reviews the estimated useful lives of fixed assets annually and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the estimate is changed to reflect the changed pattern. The depreciation expense for future period is adjusted if there are significant changes from previous estimates. Management determines the useful life of the Group’s fixed assets based on its historical experience with similar assets, expected usage of the assets and anticipated technological changes with respect to those assets. Estimates and assumptions used in setting depreciable lives require both judgment and estimation.
During the second half of fiscal 2007, taking into consideration of the current conditions and expected usage of existing telecommunications equipment, management engaged an external valuation firm to assist with its assessment of the estimated useful lives of such asset. As a result of this assessment, management revised the estimated useful lives of the fiber network and related peripherals from 4-15 years to 6-20 years.
The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. As a result of such change, depreciation expense decreased by HK$15,930,000, and both income before taxation and net income after taxation decreased by HK$15,930,000 for the year ended August 31, 2007. The increase in net income resulted in a HK2.6 cents increase in both the basic earnings per share and diluted earnings per share. Such change also increased each of total assets, retained profits and total shareholders’ equity at August 31, 2007 by HK$15,930,000.

F-36F-24


City Telecom (H.K.) Limited
Consolidated financial statements for5 Income tax (expense)/benefit (continued)
The Group’s income tax (expense)/benefit differs from the year August 31, 2008theoretical amount that would arise using profits before taxation at applicable tax rates as follows:
11Other payables and accrued charges
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Accrual for staff salaries and bonus  33,833   42,652 
Accrual for customer reward program  6,567   7,608 
Accrual for carrier fees and charges  11,264   7,495 
Accrual for international call forwarding service charges  5,784   6,305 
Payable for purchase of fixed assets  34,749   56,049 
Payable for advertising and promotional expenses  15,972   10,043 
Interest payable on senior notes  7,164   5,082 
Others accrual (note)  29,934   42,880 
         
         
   145,267   178,114 
         
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Profit before taxation  259,545   251,559   108,372 
          
             
Notional tax on profit before taxation, calculated at the prevailing tax rates applicable to profit in the jurisdictions concerned  (43,781)  (42,240)  (18,927)
Effect of non-taxable income  4,692   1,466   3,452 
Effect of (loss)/gain on extinguishment of 10-year senior notes not subject to taxation  (1,592)  5,176   426 
Effect of non-deductible expenses  (2,367)  (3,648)  (6,353)
Effect of recognition of prior year unrecognized tax losses (note)        26,335 
Over/(under)-provision in prior years  40      (2,552)
Effect of utilization of prior year unrecognized tax losses        12,013 
Effect of share based payment        2,324 
Effect of tax losses not recognized        (74)
Others  329   516   174 
          
             
Income tax (expense)/benefit  (42,679)  (38,730)  16,818 
          
 
Note:Amount of other accruals consisted of primarily accruals for utilities, rent and other administrative charges.
12Deferred taxation
  The components of deferred tax (liabilities)/assets recognized in the consolidated balance sheet and the movements of deferred tax assets/ (liabilities) are as follows:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
At the beginning of the year  (353)  (291)
Exchange differences  3   (1)
Deferred taxation credited/ (charged) to consolidated statement of operations        
— relating to the origination and reversal of temporary differences  59   (4,645)
— relating to the recognition of unrecognized tax losses in prior years     26,335 
         
         
At the end of the year  (291)  21,398 
         
Note: Management projects future taxable income by considering all available information, including tax planning strategies, historical taxable income, and the expiration period of the unused tax losses carry forwards of each of the Company and its subsidiaries. During the year ended August 31, 2008, taking into consideration of the current results of operations, management assessed that it is probable that sufficient future taxable profits will be generated to utilize the unused tax losses of HK$159,606,000 which resulted in the recognition of deferred tax assets of HK$26,335,000.

F-37F-25


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
126 Deferred taxation (continued)
As of August 31, 2007 and 2008, the Group had accumulated tax losses amounting to HK$1,037,141,000 and HK$905,341,000, respectively that can be carried forward to reduce future taxable income derived in Hong Kong, Canada and the United States, as applicable. As of August 31, 2007 and 2008, the tax effect of the accumulated tax losses amounted to HK$182,739,000 and HK$150,234,000, respectively. These tax losses expire in the following periods:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Within one year  737    
In the second year  395    
In the third year      
In the fourth year      
After five years  4,313   3,967 
No expiry date  1,031,696   901,374 
         
         
   1,037,141   905,341 
         
The tax losses of the Company and its Hong Kong subsidiaries can be carried forward indefinitely while tax loss carryforwards period of subsidiaries in Canada and the United States range between 10 to 20 years under the respective tax laws.
Deferred tax assets are recognized to the extent that realization of the related tax benefit is probable. The Group has unrecognized tax losses carried forward from prior years of HK$268,004,000 and HK$9,518,000 at August 31, 2007 and 2008 respectively which can offset against future taxable income. Accumulated tax losses for which deferred tax assets were not recognized expire in the following periods:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Within one year  737    
In the second year  395    
In the third year      
In the fourth year      
After five years  4,313   3,810 
No expiry date  262,559   5,708 
         
         
   268,004   9,518 
         

F-38


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
12Deferred taxation (continued)
The movements in deferred tax assets and (liabilities) (prior to offsetting of balances within the same taxation jurisdiction) during the years ended August 31, 2007 and 2008, are as follows:
         
  Accelerated
  depreciation allowances
  2007 2008
  HK$’000 HK$’000
Deferred tax liabilities
        
At the beginning of the year  (154,678)  (134,910)
Credited to consolidated statement of operations  19,772   8,463 
Exchange differences  (4)   
         
         
At the end of the year  (134,910)  (126,447)
         
                         
  Share-based payment Tax losses Total
  2007 2008 2007 2008 2007 2008
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Deferred tax assets:
                        
At the beginning of the year  123      154,202   134,619   154,325   134,619 
(Charged)/ credited to consolidated statement of operations  (123)     (19,590)  13,227   (19,713)  13,227 
Exchange differences        7   (1)  7   (1)
                         
                         
At the end of the year        134,619   147,845   134,619   147,845 
                         
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are reported in the consolidated balance sheet:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Deferred tax assets     26,335 
Deferred tax liabilities  (291)  (4,937)
         
         
   (291)  21,398 
         

F-39


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
13Deferred expenditure
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Balance at the beginning of the year  12,445   21,367 
Additions during the year  24,502   68,505 
Less: Amortization charge for the year (note 5)  (15,580)  (33,777)
         
         
Balance at the end of the year  21,367   56,095 
Current portion  (13,584)  (40,704)
         
         
   7,783   15,391 
         
14Long-term debt and obligations under finance leases, excluding current portion
The Group’s long-term debt and obligations under finance leases are repayable as follows:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
8.75% senior notes due 2015  952,593   683,242 
         
         
Obligation under finance leases        
— Within one year  835   121 
— In the second year  121   129 
— In the third year  254   126 
         
         
   1,210   376 
Less: Current portion of obligation under finance leases  (835)  (121)
         
         
   375   255 
         
         
   952,968   683,497 
         

F-40


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
14Long-term debt and other liabilities (continued)
On January 20, 2005, the Company issued unsecured 10-year senior fixed rates notes (the “10-year senior notes”) with a principle amount of US$125 million at par value. The 10-year senior notes mature on February 1, 2015 and bear interest at the fixed rate of 8.75% per annum and is payable semi-annually on February 1 and August 1 of each year, commencing August 1, 2005.
The 10-year senior notes are fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).
The net proceeds of 10-year senior notes were approximately US$121 million after issuance costs and commission. The Group used the net proceeds, in part, to repay in full an existing bank loan in the outstanding amount of HK$196.7 million. The remaining net proceeds is to be used for capital expenditures, including expanding and upgrading the Group’s Metro Ethernet network in Hong Kong, and for additional working capital and general corporate purposes.
The Company may redeem the 10-year senior notes, in whole or in part, on or after February 1, 2010, at the redemption price set forth in the indenture governing the 10-year senior notes. In addition, prior to February 1, 2008, using the proceeds from one or more specified public or private offerings of the Company’s common stock, the Company may redeem up to a maximum of 35% of the original aggregate principal amount of the 10-year senior notes at a redemption price equal to 108.75% of the principal amount of the 10-year senior notes. In all cases of redemption, the Company will pay principal at the redemption price specified plus accrued and unpaid interest through the date of redemption.
The indenture governing the 10-year senior notes contains covenants that limit, among other things, the Group’s ability and the ability of certain of its existing and future subsidiaries to:
(i)pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;
(ii)incur additional indebtedness or issue certain equity interests;
(iii)merge, consolidate or sell substantially all assets;
(iv)issue or sell capital stock of certain subsidiaries;
(v)sell or exchange assets or enter into new businesses;
(vi)create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;
(vii)create liens on assets;
(viii)enter into certain transactions with affiliates or relates persons; and
(ix)enter into sale and lease back transactions.
During the year ended August 31, 2008, the Group repurchased a portion of the 10-year senior notes with a cumulative principal value of US$35,647,000 in the open market. The total consideration paid was approximately US$35,352,000. The gain on extinguishment of the 10-year senior notes was US$332,000 (equivalent to HK$2,582,000) which has been recorded as other income in the consolidated income statement.
As of August 31, 2008, the remaining principal amount of the 10-year senior notes remaining in issued after the repurchase was US$89,353,000 (equivalent to HK$697,857,000).
At August 31, 2007 and 2008, the 10-year senior notes were stated at the amortized cost of US$122,127,000 (equivalent to HK$952,593,000) and US$87,483,000 (equivalent to HK$683,242,000) respectively.

F-41


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
15Commitments and contingenciesDividends
(a) Capital commitmentsDividends payable to equity shareholders of the Company attributable to the year
    ��    
  August 31,
  2007 2008
  HK$’000 HK$’000
Purchases of telecommunications, computer and office equipment contracted but not provided for  54,165   143,888 
         
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Interim dividend declared and paid of HK6.5 cents per ordinary share (2009: HK3 cents per ordinary share, 2008: HK4 cents per ordinary share)  49,725   19,904   25,602 
Final dividend proposed after the balance sheet date, of HK13.5 cents per ordinary share (2009: HK16 cents per ordinary share, 2008: HK2 cents per ordinary share)  103,275   106,269   13,012 
          
             
   153,000   126,173   38,614 
          
(b)Commitments under operating leases
As of August 31, 2007 and 2008, the Group had future aggregate minimum lease payments under non-cancellable operating leases as follows:
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Leases in respect of land and buildings:        
— within one year  12,562   16,472 
— in the second year  2,484   11,493 
— in the third year     152 
         
         
   15,046   28,117 
         

F-42


City Telecom (H.K.) Limited
Consolidated financial statements forThe final dividend proposed after the year August 31, 2008
15Commitments and contingencies (continued)
balance sheet date has not been recognized as a liability at the balance sheet date.
(b) Commitments under operating leases (continued)
At August 31, 2007Dividends attributable to the previous financial year, approved and 2008,paid during the Group had future aggregate minimum lease payments under non-cancellable operating leases as follows: (continued)
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Leases in respect of telecommunications and computer equipment:        
— within one year  31,004   38,623 
— in the second year  6,258   7,567 
— in the third year  5,016   1,865 
— in the fourth year  4,946   1,722 
— in the fifth year  4,946   1,722 
— within sixth year to twelve years  16,384   7,384 
         
         
   68,554   58,883 
         
         
   83,600   87,000 
         
(c)Program fee commitmentsyear:
The Group entered into several agreements with program content providers with respect to the Group’s IP-TV services. The amount of program fees payable by the Group is as follows:
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Final dividend in respect of the financial year ended August 31, 2009, approved and paid of HK16 cents per ordinary share (2009: HK2 cents per ordinary share in respect of financial year ended August 31, 2008, 2008:            
HK4 cents per ordinary share in respect of financial year ended August 31, 2007)  108,735   13,014   25,082 
          
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Program fee payable:        
— within one year  10,345   6,583 
— in the second year  3,633   219 
— in the third year  3   60 
         
         
   13,981   6,862 
         
During the year ended August 31, 2009, a scrip dividend option was offered to all shareholders of the Company, excluding shareholders with registered addresses outside Hong Kong, who were entitled to the final dividend in respect of the financial year ended August 31, 2008. 12,212,142 shares were issued during the year ended August 31, 2009 to the shareholders of the Company who had elected to receive all or part of their entitlement to dividends in the form of scrip.

F-43F-26


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
7 Earnings per share
15Commitments and contingencies (continued)
(d)Contingent liabilities
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Bank guarantees provided to suppliers (note 16(i) and (ii))  5,903   24,671 
Bank guarantee in lieu of payment of utility deposits (note 16(iii))  5,272   5,272 
         
         
   11,175   29,943 
         
16Pledge of assets
As of August 31, 2007 and 2008, the Group had pledged bank deposits of US$9,900,000 (equivalent to HK$77,220,000 and HK$77,319,000, respectively) and HK$10,000,000 as security for the following banking facilities:
(i)bank facility of US$9,000,000 (equivalent to HK$70,200,000) and US$9,900,000 (equivalent to HK$77,319,000) respectively granted by the bank for issuance of bank guarantees to third party suppliers, letters of credit, short term loan, overdraft, foreign exchange and interest rate hedging arrangements. As of August 31, 2007 and 2008, bank guarantees of HK$1,603,000 and HK$20,371,000, respectively were issued against this bank facility;
(ii)bank guarantees of HK$4,300,000 issued by a bank to third party suppliers of the Company and one of its subsidiaries as of August 31, 2007 and 2008 for payment of certain products and services procured by the Company from these third party suppliers; and
(iii)bank guarantees of HK$5,272,000 issued by a bank to certain utility vendors of the Company as of August 31, 2007 and 2008 in lieu of payment of utility deposits.
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Profit attributable to shareholders  216,866   212,829   125,190 
          
 
     Weighted average number of ordinary shares 
             
  2010  2009  2008 
  Number  Number  Number 
  of shares  of shares  of shares 
  ’000  ’000  ’000 
Issued ordinary shares at the beginning of the year  664,180   650,622   616,503 
Effect of scrip dividend issued     6,256   7,353 
Effect of share options exercised  14,856   329   10,159 
Effect of placement  27,569       
Effect of shares repurchased and cancelled     (6)   
          
             
Weighted average number of ordinary shares at the end of the year (basic)  706,605   657,201   634,015 
Incremental shares from assumed exercise of share options  30,011   11,183   23,982 
             
Weighted average number of ordinary shares at the end of the year (diluted)  736,616   668,384   657,997 
          
             
Basic earnings per share HK30.7 cents HK32.4 cents HK19.7 cents
          
             
Diluted earnings per share HK29.4 cents HK31.8 cents HK19.0 cents
          

F-44F-27


8 Retirement benefit costs
The Group contributes to an Occupational Retirement Scheme (the “ORSO Scheme”), a defined contribution retirement scheme, which is available to some of its Talents in Hong Kong. Under the ORSO Scheme, the Talents are required to contribute 5% of their monthly salaries, while the Group’s contributions are calculated at 10% and 5% of the monthly salaries of senior management Talents and all other Talents respectively. The Talents are entitled to 100% of the employer’s contributions after 10 years of completed service, or at a reduced scale after completion of 3 to 9 years’ service. Contributions to the ORSO Scheme are reduced by contributions forfeited by those Talents who leave the ORSO Scheme prior to vesting fully in the Group’s contributions.
A mandatory provident fund scheme (the “MPF Scheme”) has been established under the Hong Kong Mandatory Provident Fund Scheme Ordinance in December 2000. The then existing Talents of the Group in Hong Kong could elect to join the MPF Scheme, while all new Talents joining the Group in Hong Kong from then onwards are required to join the MPF Scheme. Both the Group and the Talents are required to contribute 5% of each individual’s relevant income with a maximum amount of HK$1,000 per month as a mandatory contribution. Employer’s mandatory contributions are 100% vested in the Talents as soon as they are paid to the MPF Scheme. Senior Talents may also elect to join a Mutual Voluntary Plan (the “Mutual Plan”) in which both the Group and the Talent, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the extent of contributions that would have been made under the ORSO Scheme.
Pursuant to the relevant regulations in People’s Republic of China (the “PRC”), the Group contributes to a defined contribution retirement scheme organized by the local social security bureau for each Talent of the subsidiary in PRC at the rate of 20% of a standard salary base as determined by the local social security bureau. The Group has no other obligation to make payments in respect of retirement benefits of these Talents.
The retirement schemes for Talents of the Group in other countries follow the local statutory requirements of the respective countries.
The aggregate employer’s contributions, net of forfeited contributions, which have been dealt with in the consolidated income statement during the year are as follows:
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Gross contributions  38,820   34,614   29,738 
          
At August 31, 2010, there was no forfeited contribution available to offset future contributions by the Group to the ORSO Scheme (2009 and 2008: Nil).
9 Directors’ and senior management’s emoluments
(a)Directors’ remuneration
City Telecom (H.K.) Limited
Consolidated financial statementsThe remuneration of each director for the year ended August 31, 2008
2010 is set out below:
                         
                  Employer's    
                  contribution    
                  to defined    
      Discretionary  Share-based  contribution    
  Fee  Salary  bonuses  payment  scheme  Total 
Name of director HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Wong Wai Kay, Ricky     6,707   1,800      670   9,177 
Cheung Chi Kin, Paul     6,709   1,800      670   9,179 
Yeung Chu Kwong, William     8,264   2,400   2,526   456   13,646 
Lai Ni Quiaque     2,642   750   2,455   264   6,111 
Cheng Mo Chi, Moses  168               168 
Lee Hon Ying, John  185               185 
Chan Kin Man  174               174 
Peh Jefferson Tun Lu  174               174 
                   
                         
Total  701   24,322   6,750   4,981   2,060   38,814 
                   

F-28


9 Directors’ and senior management’s emoluments (continued)
17(a) Investment securitiesDirectors’ remuneration (continued)
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Debt securities, at fair value and unlisted outside Hong Kong (note (a))  28,577   27,997 
Long term bank deposit, at amortized cost (note (b))  14,415    
         
         
   42,992   27,997 
         
Less: Current portion  (3,779)  (27,997)
         
         
   39,213    
         
The remuneration of each director for the year ended August 31, 2009 is set out below:
                         
                  Employer’s    
                  contribution    
                  to defined    
      Discretionary  Share-based  contribution    
  Fee  Salary  bonuses  payment  scheme  Total 
Name of director HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Wong Wai Kay, Ricky     6,712   1,500   193   670   9,075 
Cheung Chi Kin, Paul     6,714   1,500   193   670   9,077 
Yeung Chu Kwong, William     7,049   1,000   1,764   456   10,269 
Lai Ni Quiaque     2,403   550   1,141   240   4,334 
Cheng Mo Chi, Moses  160               160 
Lee Hon Ying, John  176               176 
Chan Kin Man  165               165 
Peh Jefferson Tun Lu  165               165 
                   
 
Total  666   22,878   4,550   3,291   2,036   33,421 
                   
No director waived any emoluments in respect of the years ended August 31, 2009 and 2010.
The share-based payment represents the expenses determined based on the fair value of share options granted to certain directors under the Company’s share option scheme. Fair value of share options is estimated in accordance with the Group’s significant accounting policies in note 1. The details of the share-based payment are disclosed in note 10.
Notes:
(a)(b) The Group maintained an investment portfolio of HK$28,577,000 and HK$27,997,000 as of August 31, 2007 and 2008, respectively, which primarily consisted of equity-linked mutual fund securities.
For the years ended August 31, 2006, 2007 and 2008 the net unrealized investment gains were HK$698,000, HK1,887,000 and HK$3,163,000 respectively. No realized investment gains or losses were recognized during the years ended August 31, 2006 and 2007. During the year ended August 31, 2008, a debt security with principal amount of US$500,000 (equivalent to HK$3,900,000) matured with a realized gain of HK$121,000.
(b)Represents a ten-year US$2 million (equivalent to HK$15,600,000 at August 31, 2007) deposit placed with a bank for which the Group receives a floating rate deposit interest. The deposit has a 10-year term maturing on August 22, 2013. An interest rate of 10% per annum has been guaranteed for the first year from the inception date on August 22, 2003. The deposit will terminate or mature once the cumulative interest reaches the predetermined accrued interest cap at 13% of the principal amount or an aggregate sum of US$260,000 (equivalent to HK$2,028,000 at August 31, 2007). During the year ended August 31, 2008, the Group early redeemed the deposit and recognized a gain of HK$1,185,000 in the consolidated statement of operations.Five highest paid individuals
18Derivative financial instrument
The five individuals whose emoluments were the highest in the Group for the year include four (2009: four) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining one (2009: one) individual during the year are as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Basic salaries, other allowances and benefits in kind  2,492   2,515 
Discretionary bonuses  300   150 
Share-based payments     332 
Retirement benefit costs — defined contribution plans  181   106 
       
         
   2,973   3,103 
       
The emoluments fell within the following band:
         
  August 31,Number of individual
  20102009
HK$2,500,001 — HK$3,000,0001
HK$3,000,001 — HK$3,500,0001

F-29


10 Equity settled share-based transactions
The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by shareholders of the Company on December 23, 2002 whereby the directors may, at their discretion, invite eligible participants to receive options to subscribe for shares subject to the terms and conditions stipulated therein.
Under the 2002 Share Option Scheme, the Company may grant options to Talents (including executive, non-executive and independent non-executive directors), suppliers and professional advisers to subscribe for shares of the Company. The maximum number of options authorized under the 2002 Share Option Scheme may not, when aggregated with any shares subject to any other executive and Talent share option scheme, exceed 10% of the Company’s issued share capital on the date of adoption. The exercise price of the option is determined by the Company’s board of directors at a price not less than the highest of (a) the par value of a share; (b) the average closing price of the Company’s shares for five trading days preceding the grant date; and (c) the closing price of the Company’s shares on the date of grant. The 2002 Share Option Scheme is valid and effective for a ten year period up to December 22, 2012 subject to earlier termination by the Company by resolution in general meeting or by the board of directors. The period during which the option may be exercised will be determined by the board of directors at its discretion, save that no option may be exercised after more than ten years from the date of grant.
2007(a) 2008The terms and conditions of the options
Options that existed during the year ended August 31, 2010 are as follows, whereby all options are settled by physical delivery of shares:
  HK$’000Number HK$’000VestingExercisable
of optionconditionsperiod
Non-current assets2002 Share Option Scheme
        
Interest rate swap, at fair value through profit or loss1,039     
Options granted to directors:
-January 5, 200516,183,208Condition 1On or prior to October 20, 2014
-May 22, 200615,178,466Condition 1On or prior to May 21, 2016
-February 6, 20086,044,791Condition 3On or prior to December 23, 2012
-February 11, 20086,044,791Condition 2On or prior to December 23, 2012
-February 5, 20106,000,000Condition 4On or prior to February 4, 2020
Options granted to Talents:
-October 21, 20046,909,527Condition 1On or prior to October 20, 2014
-May 22, 20066,414,433Condition 1On or prior to May 21, 2016
-August 3, 200640,540Condition 1On or prior to August 2, 2016
-November 22, 2006136,545Condition 1On or prior to November 14, 2016
-February 15, 20081,007,465Condition 5On or prior to December 23, 2012
-May 2, 20081,007,465Condition 5On or prior to December 23, 2012
Total share options
64,967,231

F-30


10Equity settled share-based transactions (continued)
(a)The terms and conditions of the options (continued)
Options that existed during the year ended August 31, 2009 are as follows, whereby all options are settled by physical delivery of shares:
NumberVestingExercisable
of optionconditionsperiod
2002 Share Option Scheme
Options granted to directors:
-January 5, 200516,183,208Condition 1On or prior to October 20, 2014
-May 22, 200615,178,466Condition 1On or prior to May 21, 2016
-February 6, 20086,044,791Condition 3On or prior to December 23, 2012
-February 11, 20086,044,791Condition 2On or prior to December 23, 2012
Options granted to Talents:
-October 21, 20047,606,712Condition 1On or prior to October 20, 2014
-May 22, 20067,314,455Condition 1On or prior to May 21, 2016
-August 3, 200640,540Condition 1On or prior to August 2, 2016
-November 22, 2006136,545Condition 1On or prior to November 14, 2016
-February 15, 20081,007,465Condition 5On or prior to December 23, 2012
-March 11, 2008302,240Condition 1On or prior to December 23, 2012
-May 2, 20081,007,465Condition 5On or prior to December 23, 2012
Total share options
60,866,678
         
  As of August 31, 2007, the Group has an outstanding interest rate swap contract with notional principal amount of HK$46,666,667. Under this arrangement, the Group pays a fixed rate interest of 2.675% per annum on the notional amount on a monthly basis, and receives a floating interest rate based on HIBOR rate. The maturity datevesting conditions of the contractrespective share option grant are as follows:
Condition 1
Options granted will be vested in one year or evenly vested over a period of two to three years. Options are awarded without performance conditions and are exercisable provided the participants have remained employed by the end of respective vesting periods.
Condition 2
Vesting of the options is December 1, 2009.conditional upon the performance of the Company’s shares over the period from the close of trading in Hong Kong on November 22, 2007 to November 21, 2010.
Upon fulfillment of the market conditions, certain options granted vest immediately, while other options affected by the same market conditions vest evenly over a period of three years.
 
  During the year ended August 31, 2008,2010, one of the Group early terminated the interest rate swap contract and recognized a loss of HK$1,039,000clauses in the consolidated statementoption agreement has been modified. As a result of operations.this modification, vesting of certain options is now conditional upon the Company reaching a non-market performance condition. Upon fulfillment of this non-market performance condition, a portion of the options affected by this condition vest immediately, while other options affected by this condition vest evenly over a period of three years.
The Group has accounted for the modification in accordance with IFRS/HKFRS 2 “Share-based payment” by measuring the incremental fair value which is the difference between the fair value of the modified share options and that of the original share options, both estimated as at the date of the modification, and recognizing the incremental fair value over the period from the modification date until the date when the modified share options vest. The balance of the original grant-date fair value as at the date of modification continues to be recognized over remaining original vesting period. For the year ended August 31, 2010, the amount of incremental fair value recognized in respect of the modification was HK$1,977,000.

F-45F-31


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
10Equity settled share-based transactions (continued)
(a)The terms and conditions of the options (continued)
The vesting conditions of the respective share option grant are as follows: (continued)
Condition 3
Vesting of the options is conditional upon the performance of the participants. Options granted are vested over a period of three to four years from the date of fulfillment of certain key performance indicators.
During the year ended August 31, 2010, one of the performance conditions has been modified. Such modification does not result in any incremental fair value, and therefore, there is no financial impact in the financial statements.
Condition 4
Vesting of the options is conditional upon the performance of the participants. Options granted are vested immediately from the date of fulfillment of the certain key performance indicators.
Condition 5
Vesting of the options is conditional upon the performance of the participants. Options granted are vested over a period of three to four years from the date of fulfillment of certain key performance indicators.
(b)The number and weighted average exercise prices of share options are as follows:
                 
  2010  2009 
  Weighted      Weighted    
  average      average    
  exercise      exercise    
  price  Number of  price  Number of 
  HK$  options  HK$  options 
2002 Share Option Scheme
                
                 
Outstanding at the beginning of the year  1.27   58,967,231   1.27   60,581,214 
Adjustment to number of options for 2008 Final Dividend (note)        1.27   285,464 
Granted during the year  4.24   6,000,000       
Exercised during the year  0.82   (20,317,374)  0.99   (1,416,005)
Lapsed during the year        1.65   (483,442)
             
                 
Outstanding at the end of the year  1.87   44,649,857   1.27   58,967,231 
             
                 
Exercisable at the end of the year  1.35   25,603,183   1.12   45,849,756 
             
The weighted average share price at the date of exercise for the share options exercised during the year was HK$3.85 (2009: HK$1.82).
The options outstanding at August 31, 2010 had a weighted exercise price of HK$1.87 (2009: HK$1.27) and a weighted average remaining contractual life of 4 years (2009: 5 years).
Note:
As a result of allotment of 12,212,142 new shares to shareholders who elected to receive the 2008 Final Dividend in shares on February 25, 2009, the exercise price of and the number of share subject to the 60,299,426 share options outstanding on December 19, 2008 (being the Record Date for determining the entitlement of 2008 Final Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from February 25, 2009. The closing price per ordinary share immediately before the date of the grant of the options was HK$0.88.

F-32


10Equity settled share-based transactions (continued)
(c)Fair value of share options and assumptions
In determining the value of the share options granted during the year ended August 31, 2010, the Black-Scholes option pricing model (the “Black-Scholes Model”) has been used. The Black-Scholes Model is one of the most generally accepted methodologies used to calculate the value of options. The variables of the Black-Scholes Model includes expected life of the options, risk-free interest rate, expected volatility and expected dividend yield of the shares of the Company.
In determining the value of the share options granted during the year, the following variables have been applied to the Black-Scholes Model:
Measurement dateFebruary 5, 2010
Variables
-Expected life8 years
-Risk-free rate2.33%
-Expected volatility61.49%
-Expected dividend yield2.99%
The above variables were determined as follows:
(i)The expected life is estimated to be 8 years from the date of grant (the “Measurement date”).
(ii)The risk-fee rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as at the Measurement date.
(iii)The expected volatility represents the annualized standard deviation of the return on the daily share price of the Company over the period commensurate to the expected life of the options (taking into account the remaining contractual life of the option and the effect of the expected early exercise of the option).
(iv)The expected dividend yield is based on the historical dividend yield over the last eight years.
The fair value of the options granted during the year is estimated as below:
Date of grantFebruary 5, 2010
Fair value per share optionHK$1.94
The Group recognizes the fair value of share options as an expense in the income statement over the vesting period, or as an asset, if the cost qualifies for recognition as an asset. The fair value of the share options is measured at the date of grant.
The Black-Scholes Model applied for the determination of the estimated value of the options granted under 2002 Share Option Scheme require input of highly subjective assumptions, including the expected stock volatility. As the Company’s share options have characteristics significantly different from those of traded options, changes in subjective inputs may materially affect the estimated fair value of the options granted.

F-33


11Goodwill
HK$’000
Cost and carrying amount:
At August 31, 2010/20091,066
Impairment tests for cash-generating units containing goodwill
Goodwill is allocated to the Group’s cash-generating units (“CGU”) identified according to country of operation and business segment as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Fixed telecommunications network service segment  1,066   1,066 
       
The recoverable amount of the CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows for the five-year period are estimated based on average growth rates of 15% and a pre-tax discount rate of 16%. Cash flows beyond the five year period are assumed to remain constant. The estimated growth rates used are comparable to the growth rate for the industry.
The key assumption used in the value-in-use calculation is the annual growth of the turnover of the fixed telecommunications network services, which is determined based on the past performance and management’s expectation for market development. The discount rate used is pre-tax and reflects specific risks relating to the fixed telecommunications services segment.
Any adverse change in the key assumption could reduce the recoverable amount below carrying amount.

F-34


12Fixed assets
                             
                  Telecom-       
                  munications,       
      Leasehold      Furniture,  computer       
  Investment  land and  Leasehold  fixtures  and office  Motor    
  property  buildings  improvements  and fittings  equipment  vehicles  Total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Cost:
                            
                             
At September 1, 2009  5,197   90,911   100,447   19,885   2,850,444   12,773   3,079,657 
Additions        12,885   1,343   330,441   175   344,844 
Disposals        (212)  (109)  (51,906)     (52,227)
Exchange adjustments        166   72   1,230      1,468 
                      
                             
At August 31, 2010  5,197   90,911   113,286   21,191   3,130,209   12,948   3,373,742 
                      
                             
Accumulated depreciation:
                            
                             
At September 1, 2009  2,309   12,466   69,102   17,017   1,668,160   8,223   1,777,277 
Charge for the year  104   1,818   11,270   1,166   183,052   1,619   199,029 
Disposals        (212)  (109)  (35,344)     (35,665)
Exchange adjustments        156   58   1,074      1,288 
��                     
                             
At August 31, 2010  2,413   14,284   80,316   18,132   1,816,942   9,842   1,941,929 
                      
                             
Net book value:
                            
                             
At August 31, 2010  2,784   76,627   32,970   3,059   1,313,267   3,106   1,431,813 
                      
                             
Cost:
                            
                             
At September 1, 2008  5,197   84,244   84,577   19,575   2,644,281   12,624   2,850,498 
Additions     6,667   16,663   416   262,796   192   286,734 
Disposals        (630)  (30)  (55,118)  (43)  (55,821)
Exchange adjustments        (163)  (76)  (1,515)     (1,754)
                      
                             
At August 31, 2009  5,197   90,911   100,447   19,885   2,850,444   12,773   3,079,657 
                      
                             
Accumulated depreciation:
                            
                             
At September 1, 2008  2,205   10,727   61,269   15,596   1,522,739   6,563   1,619,099 
Charge for the year  104   1,739   8,286   1,508   192,925   1,679   206,241 
Disposals        (294)  (29)  (46,214)  (19)  (46,556)
Exchange adjustments        (159)  (58)  (1,290)     (1,507)
                      
                             
At August 31, 2009  2,309   12,466   69,102   17,017   1,668,160   8,223   1,777,277 
                      
                             
Net book value:
                            
                             
At August 31, 2009  2,888   78,445   31,345   2,868   1,182,284   4,550   1,302,380 
                      

F-35


12Fixed assets (continued)
(a)The Group’s total future aggregate lease income receivable under non-cancellable operating lease are as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Leases in respect of investment property which are receivable:        
- Within 1 year  108   258 
- After 1 year but within 5 years      
       
         
   108   258 
       
         
Leases in respect of telecommunications facilities and computer equipment which are receivable:        
- Within 1 year  2,335   1,566 
- After 1 year but within 5 years  607   1,071 
       
         
   2,942   2,637 
       
         
   3,050   2,895 
       
(b)At August 31, 2010, the fair value of the investment property is HK$5,300,000. Management estimated the fair value of the investment property based on its open market value.
(c)The net book value of interests in leasehold land and buildings and investment property situated in Hong Kong are analyzed as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Leases of between 10 to 50 years  79,411   81,333 
       
         
Representing:        
         
Leasehold land and building carried at cost  76,627   78,445 
Investment property carried at cost less impairment loss  2,784   2,888 
       
         
   79,411   81,333 
       
(d)In addition to the leasehold land and buildings classified as being held under a finance lease, the Group leases telecommunications, computer and office equipment under finance leases expiring from one to five years. At the end of the lease term the Group has the option to purchase the equipment at a price deemed to be a bargain purchase option. None of the leases included contingent rental.
At August 31, 2010, the net book value of telecommunications, computer and office equipment under finance lease held by the Group amounted to HK$674,000 (2009: HK$1,289,000).

F-36


13Principal subsidiaries
The following is a list of the principal subsidiaries which principally affected the results, assets or liabilities of the Group at August 31, 2010:
Principal
activitiesParticulars
Place ofand place ofof issuedPercentage of
Nameincorporationoperationsshare capitalinterest held
Attitude Holdings LimitedBritish Virgin
Islands
InactiveOrdinary
US$1
100
Automedia Holdings LimitedBritish Virgin
Islands
Investment holding in Hong KongOrdinary
US$1
* 100
City Telecom (B.C.) Inc.#CanadaProvision of international telecommunications and dial-up internet access services in CanadaCommon Canadian dollar (“CAD”) 501,000100
City Telecom (Canada) Inc.#CanadaLeasing and maintenance of switching equipment and provision of operational services in CanadaCommon
CAD100
100
City Telecom Inc.#CanadaProvision of international telecommunications and dial-up internet access services in CanadaCommon
CAD1,000
100
City Telecom International LimitedBritish Virgin
Islands
Investment holding in Hong KongOrdinary
US$5,294
* 100
Credibility Holdings LimitedBritish Virgin
Islands
Investment holding in Hong KongOrdinary
US$1
* 100

F-37


13Principal subsidiaries (continued)
The following is a list of the principal subsidiaries which principally affected the results, assets or liabilities of the Group at August 31, 2010: (continued)
Principal
activitiesParticulars
Place ofand place ofof issuedPercentage of
Nameincorporationoperationsshare capitalinterest held
CTI Guangzhou Customer Services Co. Ltd. (translated from the registered name in Chinese)#PRCProvision of administrative support services in the PRCPaid in capital of
HK$8,000,000
* 100
CTI Marketing
Company Limited
Hong KongInactiveOrdinary
HK$10,000
100
Golden Trinity
Holdings Limited
British Virgin
Islands
Investment holding in
Hong Kong
Ordinary
US$1
* 100
Hong Kong
Broadband
Network Limited
Hong KongProvision of international telecommunications and fixed telecommunications network services in Hong KongOrdinary
HK$383,049
100
IDD1600 Company
Limited
Hong KongProvision of international telecommunications services in Hong KongOrdinary
HK$2
100
SGBN Singapore Broadband Network Pte. LimitedSingaporeInactiveOrdinary
Singapore
dollar (“SG$”) 1
* 100
*Shares held directly by the Company.
#Subsidiaries not audited by KPMG
14 Deferred expenditure
         
  2010  2009 
  HK$’000  HK$’000 
Balance as at the beginning of the year  49,460   56,095 
Additions during the year  34,773   46,525 
Less: amortization charge for the year (note 4(a))  (48,621)  (53,160)
       
         
   35,612   49,460 
Current portion  (28,986)  (36,674)
       
         
Balance as at the end of the year  6,626   12,786 
       
Deferred expenditure represents costs incurred to acquire subscribers of the services offered by the Group, which is treated as customer acquisition costs and are amortized over the period of the underlying service subscription agreements.

F-38


15 Accounts receivable, other receivables, deposits and prepayments
         
  2010  2009 
  HK$’000  HK$’000 
Accounts receivable  105,552   123,352 
Less: Allowance for doubtful debts  (5,823)  (3,160)
       
         
   99,729   120,192 
Other receivables, deposits and prepayments  89,490   69,765 
       
         
   189,219   189,957 
       
(a)Aging analysis
The aging analysis of accounts receivable is as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Current — 30 days  41,244   32,427 
31 — 60 days  9,024   13,663 
61 — 90 days  5,245   3,953 
Over 90 days  50,039   73,309 
       
         
   105,552   123,352 
       
The majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted.
(b)Impairment of accounts receivable
Impairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly (see note 1(i)(i)).
The movement in the allowance for doubtful debts during the year including both specific and collective loss components is as follows:
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Balance as at the beginning of the year  3,160   11,944   22,392 
Impairment loss recognized  14,742   12,103   14,293 
Uncollectible amounts written off  (12,079)  (20,887)  (24,741)
          
             
Balance as at the end of the year  5,823   3,160   11,944 
          

F-39


15Accounts receivable, other receivables, deposits and prepayments (continued)
(c)Accounts receivable that are not impaired
The aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Neither past due nor impaired  41,244   32,427 
0 — 30 past due  9,024   13,663 
31 — 60 past due  5,245   3,953 
Over 60 past due  44,216   70,149 
       
         
   99,729   120,192 
       
Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default.
The amounts over 60 days past due for the Group included receivable relating to mobile interconnection charges of HK$39,763,000 as at August 31, 2010 (August 31, 2009: HK$68,802,000) (see note 2(b)).
Other accounts receivable that were past due but not impaired relate to a number of independent customers that have a good track record of payment. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold collateral over these balances.
(d)Other receivables, deposits and prepayments
Other receivables, deposits and prepayments consist of deposits for purchase of fixed assets, rental deposit, interest receivable, unbilled revenue, prepayment and other receivables. All of the other receivables, except rental deposits are expected to be recovered within one year.

F-40


16 Cash at bank and in hand
         
  2010  2009 
  HK$’000  HK$’000 
Time deposits with banks and other financial institutions  262,280   77,500 
Cash at bank and in hand  326,385   148,916 
       
         
Cash at bank and in hand in the balance sheet  588,665   226,416 
       
17 Accounts payable, other payables and accrued charges
         
  2010  2009 
  HK$’000  HK$’000 
Accounts payable  35,128   37,555 
Other payables and accrued charges  195,931   206,487 
       
         
   231,059   244,042 
       
(a)The aging analysis of the accounts payable was as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Current — 30 days  6,838   12,621 
31 — 60 days  1,982   1,778 
61 — 90 days  1,647   189 
Over 90 days  24,661   22,967 
       
         
   35,128   37,555 
       
(b)Other payables and accrued charges
Other payables and accrued charges primarily consist of accrual for Talents salaries and bonus, carrier fees and charges, payable for purchase of fixed assets, advertising and promotional expenses as well as interest payable.
18Deferred service revenue
Deferred service revenue primarily includes service fees received from customers in advance for the Group’s fixed telecommunications network services. Service fees received in advance is deferred and recognized as revenue on a straight-line basis over the related contract period.

F-41


19 Capital and reserves
(a) Capital and reservesShare capital
                                                 
  Issued and fully paid (ordinary shares of HK$0.10 each)              
  Number of                     Total
  shares Amount Share Capital Translation Retained shareholders’
  outstanding outstanding premium reserve reserve profits equity
      HK$ HK$ HK$ HK$ HK$ HK$
      (Amounts in thousands, except number of shares)
Balance at September 1, 2005  614,125,404   61,412   619,408   7,052   840   338,351   1,027,063 
Shares issued upon exercise of share options (note (i))  50,000   5   8            13 
Equity settled share-based compensation        882   5,941         6,823 
Net loss                 (142,062)  (142,062)
Foreign currency translation adjustment              (183)     (183)
                             
                             
Balance at August 31, 2006  614,175,404   61,417   620,298   12,993   657   196,289   891,654 
Dividend paid in respect of previous year                 (24,635)  (24,635)
Shares issued upon exercise of share options (note (i))  2,328,000   233   2,135   (611)        1,757 
Equity settled share-based compensation           5,727         5,727 
Net income                 28,865   28,865 
Foreign currency translation adjustment              514      514 
                             
                             
Balance at August 31, 2007  616,503,404   61,650   622,433   18,109   1,171   200,519   903,882 
Dividend paid in respect of previous year                 (5,915)  (5,915)
Shares issued in respect of scrip dividend of previous year (note (ii))  11,227,213   1,123   18,044         (19,167)   
Dividend paid in respect of current year                 (11,371)  (11,371)
Shares issued in respect of scrip dividend of current year (note (iii))  8,838,938   884   13,347         (14,231)   
Shares issued upon exercise of share options (note (i))  14,052,268   1,405   16,893   (3,300)        14,998 
Equity settled share-based compensation           4,204         4,204 
Net income                 125,190   125,190 
Foreign currency translation adjustment              1,619      1,619 
                             
                             
Balance at August 31, 2008  650,621,823   65,062   670,717   19,013   2,790   275,025   1,032,607 
                             
                 
  2010      2009    
  No. of  Amount  No. of  Amount 
  Shares  HK$’000  shares  HK$’000 
Authorized:
                
Ordinary shares of HK$0.10 each  2,000,000,000   200,000   2,000,000,000   200,000 
             
                 
Issued and fully paid:
                
Ordinary shares of HK$0.10 each                
At the beginning of the year  664,179,970   66,418   650,621,823   65,062 
Shares issued in respect of scrip dividend of the previous year (note (i))        12,212,142   1,221 
Shares issued upon exercise of share options (note (ii))  20,317,374   2,032   1,416,005   142 
Shares issued upon placement (note (iii))  80,500,000   8,050       
Repurchase and cancellation of ordinary shares        (70,000)  (7)
             
                 
At the end of the year  764,997,344   76,500   664,179,970   66,418 
             

F-46


City Telecom (H.K.) Limited
Consolidated financial statements forThe holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per ordinary share at meetings of the year August 31, 2008
Company. All ordinary shares rank equally with regard to the Company’s residual assets.
19Notes: Capital and reserves (continued)
(a)Capital and reserves (continued)
         
  Authorized ordinary shares
  of HK$0.10 each
  No. of  
  Shares Amount
      HK$’000
At August 31, 2007 and August 31, 2008  2,000,000,000   200,000 
         
Notes:
(i) During the years ended August 31, 2006, 2007 and 2008, 50,000, 2,328,000 and 14,052,268 ordinary shares were issued at a weighted average price of HK$0.26 per share, HK$0.75 per share and HK$1.07 per share respectively, to share option holders who had exercised their subscription rights. These shares issued rank pari passu with the then existing ordinary shares in issue.
(ii)On 4 February 2008,25, 2009, the Company issued and allotted 11,227,21312,212,142 ordinary shares to shareholders who elected to receive the 20072008 final dividend in new shares pursuant to the scrip dividend scheme announced by the Company on 4 January 2008 under which shareholders may elect to receive the dividend in new shares in lieu of cash.9, 2009. These new shares rank pari passu with the existing shares of the Company in all respects.
 
(iii)(ii) On 23 July 2008,During the Company issued and allotted 8,838,938year ended August 31, 2010, 20,317,374 ordinary shares (2009: 1,416,005 ordinary shares) were issued at a weighted average exercise price of HK$0.82 per ordinary share (2009: HK$0.99 per ordinary share) to shareholder,share option holders who elected to receive the 2008 interim dividend in newhad exercised their options. These shares pursuant to the scrip dividend scheme announced by the Company on 19 June 2008 under which shareholders may elect to receive the dividend in new shares in lieu of cash. These new sharesso issued rank pari passu with the then existing ordinary shares in issue.
(iii)On April 28, 2010, the Company completed its public offering of 4,025,000 American Depositary Shares (ADSs). An aggregate of 80,500,000 ordinary shares (4,025,000 ADSs) were issued at a price of HK$5.0455 per ordinary share (US$13.00 per ADS) to independent professional, institutional and private investors. The Company raised net proceeds of approximately HK$379,612,000 from the ADS offering.

F-42


19Capital and reserves (continued)
(a) Share capital (continued)
      Notes: (continued)
(iv)The movement of outstanding share options during the year was as follows:
                         
      Number of              Number of 
      share options              share options 
  Exercise  outstanding at              outstanding 
  price  September 1,              at August 31, 
Date of grant per share  2009  Granted  Exercised  Lapsed  2010 
October 21, 2004 HK$1.5224   6,909,527      2,750,847      4,158,680 
January 5, 2005 HK$1.5224   16,183,208            16,183,208 
May 22, 2006 HK$0.6523   21,592,899      16,409,456      5,183,443 
August 3, 2006 HK$0.7018   40,540      40,540       
November 22, 2006 HK$0.7216   136,545      136,545       
February 6, 2008 HK$1.7568   6,044,791      502,000      5,542,791 
February 11, 2008 HK$1.8660   6,044,791            6,044,791 
February 15, 2008 HK$1.7568   1,007,465      402,986      604,479 
May 2, 2008 HK$1.7866   1,007,465      75,000      932,465 
February 5, 2010 HK$4.2400      6,000,000         6,000,000 
                   
                         
       58,967,231   6,000,000   20,317,374      44,649,857 
                   
During the year ended August 31, 2010, options were granted under the 2002 Share Option Scheme to eligible participant for the subscription of 6,000,000 shares of the Company in all respects.at an exercise price of HK$4.24 each.
 
(iv) DetailsEach option entitles the holder to subscribe for one share of HK$0.10 each in the share option scheme of the Group, the share options granted by the Group during the relevant years and options outstandingCompany at August 31, 2006, 2007 and 2008 are set out in note 25.a predetermined exercise price.
(b) Nature and purpose of reserves
(i) Share premium
 
  The application of the share premium account is governed by Sections 48B of the Hong Kong Companies Ordinance.
 
(ii) Capital reserve
 
  The capital reserve which comprises the fair value of the actual or estimated number of unexercised share options granted to employeesTalents of the Group that was recognisedrecognized in accordance with the accounting policy adopted for share based payment in note 2(q)1(o).
 
(iii) PRC statutory reserve
 
  In accordance with Accounting Regulations for Business Enterprises, foreign investment enterprises in the PRC are required to transfer at least 10% of their profit after taxation, as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to the general reserve until the balance of the general reserve is equal to 50% of their registered capital.
For the year ended August 31, 2007 and August 31, 2008,2010, CTI Guangzhou Customer Services Company LimitedCo Ltd (“CTIGZ”), a wholly ownedwholly-owned subsidiary of the Group, made appropriation to the statutory reserve of RMB379,000 and RMB324,000, respectively.RMB597,000 (2009: RMB510,000). The accumulated balance of the statutory reserve maintained at the CTIGZ as ofat August 31, 2007 and August 31, 2008 were RMB581,000 and RMB905,000, respectively.2010 was RMB2,012,000 (2009: RMB1,415,000). The statutory reserve can be used to reduce previous years’ losses and to increase the capital of the subsidiary.
 
(iv) Exchange reserve
 
  The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 2(d)1(d)(ii).

F-47F-43


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
19 Capital and reserves (continued)
(c) Capital management
 
  The Group’s primary objectives when managing capital are to maintain a reasonable capital structure, and safeguard the Group’s ability to continue as a going concern, in orderand to provide returns for shareholders.
 
  The Group manages the amount of capital in proportion to risk, and makes adjustments to its capital structure through the amount of dividend payment to shareholders, issuance of scrip and new shares, and managing its debt portfolio in conjunction with cash flow requirements, taking into account its future financial obligations and commitments.
 
  The Group monitors its capital structure by reviewing its net debt to net asset gearing ratio. For this purpose, the Group defines net debt as total loans less cash at bank and in hand and long-term bank deposits.
 
  The net debt to net asset gearing ratio as ofat August 31, 20072010 and 20082009 are as follows:
        
 August 31,        
 2007 2008 2010 2009 
 HK$’000 HK$’000 HK$’000 HK$’000 
Unsecured  
8.75% senior notes due 2015 952,593 683,242 
Obligation under finance lease 1,210 376 
- 10-year senior notes  162,586 
- Long-term bank loan 123,567  
- Obligations under finance leases 605 732 
          
  
Total loans 953,803 683,618  124,172 163,318 
Less: Cash at bank and in hand  (532,894)  (421,610)  (588,665)  (226,416)
Less: Long-term bank loan  (14,415)  
Add: Bank overdrafts — unsecured 10,490 5,364 
          
  
Net debt 406,494 262,008 
Net cash  (454,003)  (57,734)
Net asset 903,882 1,032,607  1,688,539 1,228,527 
          
  
Net debt to net asset gearing ratio 0.45 0.25    
          
Neither the Company nor any of its subsidiaries are currently subject to externally imposed capital requirements.
20 Cash and bank balancesDeferred taxation
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Cash at bank and in hand  50,164   156,667 
Time deposits with banks and other financial institution (note (a))  482,730   264,943 
         
         
   532,894   421,610 
         
Notes:
(a) Amounts represented time deposits with original maturitiesThe movements of less than three months.net deferred tax (liabilities)/assets recognized in the balance sheet are as follows:
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Balance as at the beginning of the year  (15,709)  21,398   (291)
Exchange differences     1   (1)
Deferred taxation (charged)/credited to income statement            
- relating to the origination and reversal of temporary differences  (40,134)  (37,108)  (4,645)
- relating to the recognition of unrecognized tax losses in prior years        26,335 
          
             
Balance as at the end of the year  (55,843)  (15,709)  21,398 
          

F-48F-44


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
2120 DividendsDeferred taxation (continued)
As at August 31, 2010, the Group has not recognized deferred tax assets in respect of unused tax losses of HK$8,242,000 (2009: HK$8,154,000) because it is not probable that future taxable profits can be generated to utilize the tax losses.
(a)Dividends payable to equity shareholders of the Company attributable to the year
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Interim dividend, declared and paid, of HK4 cents (2007: HK4 cents, 2006: HK$Nil) per ordinary share     24,635   25,602 
Final dividend proposed after the balance sheet date of HK2 cents (2007: HK4 cents, 2006: HK$Nil) per ordinary shares       —   24,660   13,012 
             
             
      49,295   38,614 
             
         
  2010  2009 
  HK$’000  HK$’000 
After 5 years  2,553   2,455 
No expiry date  5,689   5,699 
       
         
   8,242   8,154 
       
  DuringAccording to the year endedCorporate Income Tax (“CIT”) law and its relevant regulations, PRC-resident enterprises are levied withholding tax at 10% on dividends to their non-PRC-resident corporate investors for earnings accumulated beginning on January 1, 2008, and undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. In addition, under theArrangement between the Mainland of China and Hong Kong Special Administration Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasionand its related regulations, a qualified Hong Kong Company will be liable for withholding tax at the rate of 5% for the dividend income derived from the PRC, if the Hong Kong company is the “beneficial owner” and holds 25% of equity interest or more of the PRC company directly. At August 31, 2008, a scrip dividend option was offered to all shareholders with registered addresses in Hong Kong that were entitled to2010, the interim dividendGroup has not recognized deferred tax liabilities in respect of temporary differences relating to the six-month period ended February 29, 2008. 8,838,938 shares were issued duringundistributed earnings of its PRC subsidiary approximately amounting HK$12,283,000 (2009: HK$5,393,000) as the year ended August 31, 2008 to shareholders who had elected to receive all or partGroup controls the dividend policy of their entitlement to dividendsthe subsidiary and it does not consider that it is probable that profits will not be distributed in form of scrip.the foreseeable future.
 
  The final dividend proposed aftercomponents in deferred tax assets and liabilities recognized in the balance sheet date has not been recognizedand the related movements during the year are as a liability at August 31, 2007 and August 31, 2008.follows:
(b)Dividends attributable to the previous financial year, approved and paid during the year
             
  Accelerated depreciation allowance 
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Deferred tax liabilities
            
 
At the beginning of the year  (131,766)  (126,447)  (134,910)
Charged to consolidated income statement  (15,027)  (5,326)  8,463 
Exchange differences  (6)  7    
          
 
At the end of the year  (146,799)  (131,766)  (126,447)
          
             
     Tax losses    
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Deferred tax assets
            
 
At the beginning of the year  116,057   147,845   134,619 
Charged to consolidated income statement  (25,107)  (31,782)  13,227 
Exchange differences  6   (6)  (1)
          
 
At the end of the year  90,956   116,057   147,845 
          
  The following amounts, determined after appropriate offsetting, are shown in the balance sheet:
         
  2010  2009 
  HK$’000  HK$’000 
Deferred tax assets      
Deferred tax liabilities  (55,843)  (15,709)
       
   (55,843)  (15,709)
       

F-45


21 Derivative financial instrument
         
  Year ended August 31,2010
  20062009 20072008
  HK$’000 HK$’000 HK$’000
Final dividend in respect of the financial year ended August 31, 2007 approved and paid, of HK4 cents per ordinary share (2007: HK$Nil, 2006: HK$Nil)     —
Non-current liability
       25,082 
      
Interest rate swap, at fair value through profit or loss11,293
       
  During the year ended August 31, 2008, a scrip dividend option was offered to all shareholders with registered addresses in Hong Kong that were entitled to the final dividend in respect of the financial year ended August 31, 2007. 11,227,213 shares were issued during the year ended August 31, 2008 to the shareholders who had elected to receive all or part of their entitlement to dividends in the form of scrip.

F-49


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
22Banking facilities
The Group’s banking facilities were denominated in Hong Kong dollars as follows:
                     
                  Terms of facilities as
  Amount available Amount utilized at August 31, 2008
  August 31, August 31, Interest rate
  2007 2008 2007 2008    
  HK$’000 HK$’000 HK$’000 HK$’000    
Bank overdrafts/ bank loans  80,200   87,319   1,603   29,943  HIBOR or cost
                  of Funds + 0.8% per annum
The amounts utilized as of August 31, 2007 and 2008 represented bank guarantees and letter of credit issued against the banking facilities (see note 16) which the Group has not drawn upon. The utilized banking facilities as of August 31, 2007 and 2008 were denominated in Hong Kong dollar and Singaporean dollar.
23Related party transactions
In addition to the transactions and balances disclosed elsewhere in these financial statements,2010, the Group entered into a 5-year interest rate swap contract with a HK$175,000,000 notional amount to hedge against interest rate risk. Under this arrangement, the following material related party transactions.
Key management personnel remuneration
Remuneration for key management personnel, including amounts paid toGroup will pay a fixed rate interest on the Group’s directorsnotional amount on a quarterly basis, and certain of the highest paid employees,receive a floating interest rate at HIBOR rate. The contract is as follows:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Short-term employee benefits  21,443   26,791   28,850 
Post-employment benefits  1,916   2,197   2,425 
Equity compensation benefits  4,571   4,388   3,664 
             
             
   27,930   33,376   34,939 
             

F-50


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
24Retirement schemesrecognized initially at fair value and is remeasured at each balance sheet date.
 
  The Group contributes to an Occupational Retirement Scheme (the “ORSO Scheme”)Interest rate swap does not quality for hedge accounting under IAS/HKAS 39,Financial instruments: Recognition and measurement, a defined contribution retirement scheme, whichand therefore changes in its fair value is available to some of its employeesrecognized immediately in Hong Kong. Under the ORSO Scheme, the employees are required to contribute 5% of their monthly salaries, while the Group’s contributions are calculated at 10% and 5% of the monthly salaries of senior management staff and all other staff respectively. The employees are entitled to 100% of the employer’s contributions after 10 years of completed service,profit or at a reduced scale after completion of 3 to 9 years’ service. Contributions to the ORSO Scheme are reduced by contributions forfeited by those employees who leave the ORSO Scheme prior to vesting fully in the Group’s contributions.loss.
 
22 A mandatory provident fund scheme (the “MPF Scheme”) has been established under the Hong Kong Mandatory Provident Fund Scheme Ordinance in December 2000. The then existing employees of the Group in Hong Kong could elect to join the MPF Scheme, while all new employees joining the Group in Hong Kong from then onwards are required to join the MPF Scheme. Both the GroupLong-term debt and the employees are required to contribute 5% of each individual’s relevant income with a maximum amount of HK$1,000 per month as a mandatory contribution. Employer’s mandatory contributions are 100% vested in the employees as soon as they are paid to the MPF Scheme. Senior employees may also elect to join a Mutual Voluntary Plan (the “Mutual Plan”) in which both the Group and the employee, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the extent of contributions that would have been made under the ORSO Scheme.other liabilities
         
  2010  2009 
  HK$’000  HK$’000 
10-year senior notes (note (a))     162,586 
Long-term bank loan — unsecured (note (b))  123,567    
Obligations under finance leases (note (c))  605   732 
       
         
   124,172   163,318 
         
Current portion of — obligations under finance leases  (212)  (202)
       
         
   123,960   163,116 
       
  PursuantAt August 31, 2010, the Group’s long-term debt and other liabilities were repayable as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Long-term debt        
- after 2 years but within 5 years  123,567    
- after 5 years     162,586 
       
         
Obligations under finance leases        
- Within 1 year  212   202 
- After 1 year but within 2 years  105   197 
- After 2 years but within 5 years  288   263 
- After 5 years     70 
       
         
   605   732 
         
Less: Current portion of obligations under finance leases  (212)  (202)
       
         
   393   530 
       
         
   123,960   163,116 
       

F-46


22Long-term debt and other liabilities (continued)
Notes:
(a)On January 20, 2005, the Company issued unsecured 10-year senior fixed rates notes (the “10-year senior notes”) with a principle amount of US$125 million at an issue price equal to the relevant regulations in the People’s Republic of China (the “PRC”), the Group contributes to the defined contribution retirement scheme organised by the local social security bureau for each employee100 per cent of the subsidiary inprincipal amount. The 10-year senior notes have a maturity date on February 1, 2015 and bear interest at the PRC at afixed rate of 20%8.75% per annum payable semi-annually on February 1 and August 1 of a standard salary base as determined by the local social security bureau. The Group has no other obligation to make payments in respect of retirement benefits of these employees.each year, commencing August 1, 2005.
 
  The retirement schemes for staff of10-year senior notes are unconditionally and irrevocably guaranteed on a joint and several basis by the Group in other countries follow the local statutory requirements of the respective countries.Company’s subsidiaries (other than CTI Guangzhou Customer Services Co. Ltd.) as subsidiary guarantors.
 
  The aggregate employer’s contributions, netOn December 4, 2009, the Group repurchased a portion of forfeited contributions, which have been dealtthe 10-year senior notes with a cumulative principal value of US$1,500,000 (equivalent to HK$11,625,000) in the consolidated statementopen market. The total consideration paid including accrued interest was approximately US$1,562,000 (equivalent to HK$12,103,000). The loss on extinguishment of operations during the year are as follows:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Gross contributions  28,912   24,545   29,738 
Less: Forfeited contributions utilized to offset the Group’s contributions during the year  (956)  (612)   
             
             
Net contributions charged to the consolidated statement of operations  27,956   23,933   29,738 
             
At August 31, 2008, there is no forfeited contribution availablesenior notes was US$41,000 (equivalent to offset future contributions by the Group to the ORSO scheme and the Mutual Plan.
25Equity settled share-based transactions
2002 Share Option SchemeHK$318,000) which has been recorded in other income, net.
 
  TheOn February 1, 2010, the Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted byredeemed the shareholdersthen outstanding 10-year senior notes with principal value of US$19,863,000 (equivalent to HK$153,948,000) with the redemption price equal to 104.375% of the Companyprincipal amount. The total consideration paid including accrued interest was approximately US$21,601,000 (equivalent to HK$167,624,000). The loss on December 23, 2002 and where the directors may, at their discretion, invite eligible participants to take up options to subscribe for shares subject to the terms and conditions stipulated therein.
Under the 2002 Share Option Scheme, the Company may grant options to employees (including executive, non-executive and independent non-executive directors), suppliers and professional advisers to subscribe for sharesextinguishment of the Company. The maximum number of options authorized under the 2002 Share Option Scheme may not, when aggregated with any shares subject10-year senior notes was US$1,203,000 (equivalent to anyHK$9,332,000) which has been recorded in other executive and employee share option scheme, exceed 10% of the Company’s issued share capital on the date of adoption. The exercise price of the option is determined by the Company’s board of directors at a price not less than the highest of (a) the par value of a share; (b) the average closing price of the Company’s shares for five trading days preceding the grant date; and (c) the closing price of the Company’s shares on the date of grant. The 2002 Share Option Scheme is valid and effective for a ten year period up to December 22, 2012 subject to earlier termination by the Company by resolution in general meeting or by the board of directors. The period during which the option may be exercised will be determined by the board of directors at its discretion, save that no option may be exercised after more than ten years from the date of grant. During the year ended August 31, 2008, options were granted under the 2002 Share Option Scheme to eligible participants for the subscription of 18,300,000 shares (2007: 300,000 shares) of the Company at a weighted average exercise price of HK$1.84 (2007: HK$1.16) each.

F-51


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
25Equity settled share-based transactions (continued)
1997 Share Option Scheme
The Company also had a previous share option scheme (the “1997 Share Option Scheme”) adopted by shareholders on July 12, 1997 which was terminated on December 23, 2002 upon the adoption of the 2002 Share Option Scheme. Unexercised options granted under the 1997 Share Option Scheme lapsed automatically on 12 July 2007.
Each option issued under the 2002 Share Option Scheme or the 1997 Share Option Scheme entitles the holder to subscribe for one ordinary share in the Company at a predetermined exercise price.
Prior to September 1, 2005, under Hong Kong GAAP, no compensation cost was required to be recognized in respect of the grant of share options. At the time of exercise of the options, proceeds from issue of shares were credited to share capital and share premium account.
Effective from September 1, 2005, upon the adoption of HKFRS 2 “Share-based payment”, the Group recognizes the fair value of share options granted over the vesting period, or as an asset, if the cost qualifies for recognition as an asset. The fair value of share option is measured at the date of grant. The Group has taken advantage of the transitional provisions set out in paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not been applied to the following options:
(i)share options granted under the 1997 Share Option Scheme since all options were granted to employees before November 7, 2002; and
(ii)share options granted under the 2002 Share Option Scheme and vested before September 1, 2005.
Details of share options granted pursuant to the 2002 Share Option Scheme and 1997 Share Option Scheme that were outstanding at August 31, 2006, 2007 and 2008, are as follows:
1997 Share Option Scheme
             
  September 3, September 10, October 20,
Date of grant 1998 1999 2000
Exercise price per share (HK$) at date of grant  0.26   2.10   0.58 
             
             
Market price per share (HK$) at date of grant  0.26   2.10   0.58 
             
             
Outstanding at August 31, 2005  190,000   60,000   298,000 
Exercised  (50,000)      
Lapsed upon resignation of employees     (20,000)  (20,000)
             
             
Outstanding at August 31, 2006  140,000   40,000   278,000 
Exercised  (140,000)     (278,000)
Lapsed upon expiry of the options     (40,000)   
             
             
Outstanding at August 31, 2007 and August 31, 2008         
             

F-52


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
25Equity settled share-based transactions (continued)
2002 Share Option Scheme
                                                             
                            November              
  June 3, October 21, January 5, October 3, May 22, July 3, August 3, 22, May 23, December February 6, February February 15, March May 2,
Date of grant 2004 2004 2005 2005 2006 2006 2006 2006 2007 12, 2007 2008 11, 2008 2008 11, 2008 2008
  (note (a)) (note (b)) (note (c)) (note (d)) (note (e)) (note (f)) (note(g)) (note(h)) (note(i)) (note (j)) (note (k)) (note(l)) (note (m)) (note (n)) (note(o))
Exercise price per share (HK$) at date of grant  1.47   1.54   1.54   0.81   0.66   0.68   0.71   0.73   2.03   2.45   1.77   1.88   1.77   1.83   1.80 
                                                             
                                                             
Market price per share (HK$) at date of grant  1.47   1.49   1.48   0.81   0.64   0.68   0.71   0.73   2.10   2.40   1.86   1.76   1.80   1.70   1.75 
                                                             
                                                             
Outstanding at August 31, 2005  6,000,000   14,670,000   16,000,000                                     
Granted           1,000,000   32,210,000   1,000,000   100,000                         
Lapsed upon resignation of employees     (5,220,000)                                       
                                                             
                                                             
Outstanding at August 31, 2006  6,000,000   9,450,000   16,000,000   1,000,000   32,210,000   1,000,000   100,000                         
Granted                       200,000   100,000                   
Exercised     (330,000)        (1,250,000)  (300,000)  (30,000)                        
Lapsed upon resignation of employees     (780,000)        (2,020,000)                              
                                                             
                                                             
Outstanding at August 31, 2007  6,000,000   8,340,000   16,000,000   1,000,000   28,940,000   700,000   70,000   200,000   100,000                   
Adjustment to the number of options for 2007 Final Dividend (note p)     32,397   63,292      101,301   2,769   277   534   396   3,956                
Adjustment to the number of options for 2008 Interim Dividend (note q)     21,002   43,664      65,221      191   368         16,309   16,309   10,873   816   2,718 
Granted                             1,000,000   6,000,000   6,000,000   4,000,000   300,000   1,000,000 
Exercised  (6,000,000)  (821,344)     (1,000,000)  (6,135,805)     (30,119)  (65,000)                     
Lapsed upon resignation of employees     (473)        (583,162)  (702,769)        (100,396)  (1,003,956)        (3,008,155)      
                                                             
                                                             
Outstanding at August 31, 2008     7,571,582   16,106,956      22,387,555      40,349   135,902         6,016,309   6,016,309   1,002,718   300,816   1,002,718 
                                                             

F-53


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
25Equity settled share-based transactions (continued)
2002 Share Option Scheme
Notes:
(a)On June 3, 2004, an employee was granted options to subscribe for 6,000,000 shares at a price of HK$1.47 per share. The vesting period for the options is June 3, 2004 to April 30, 2006.income, net.
 
(b) On October 21, 2004, employees, including executive directors,As at August 31, 2010, HK$125,000,000 was drawn which bears floating interest rate and is repayable on December 23, 2014. The borrowing is subject to the fulfillment of covenants relating to certain of the Group’s balance sheet ratios, as are commonly found in lending arrangements with financial institutions. If the Group were granted options to subscribe for 14,670,000 sharesbreach the covenants the drawn down facilities would become payable on demand. The Group regularly monitors its compliance with these covenants. As at a priceAugust 31, 2010, none of HK$1.54 per share. The vesting period for the options is October 21, 2004covenants relating to December 31, 2006.drawn down facilities had been breached.
 
(c) On January 5, 2005, executive directors were granted options to subscribe for 16,000,000 shares at a price of HK$1.54 per share. The vesting period for the options is January 5, 2005 to December 31, 2006.
(d)On October 3, 2005, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$0.81 per share. The vesting period for the options is October 3, 2005 to September 30, 2006.
(e)On May 22, 2006, employees, including executive directors, were granted options to subscribe for 32,210,000 shares at a price of HK$0.66 per share. The vesting period for the options is May 22, 2006 to May 21, 2009.
(f)On July 3, 2006, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$0.68 per share. The vesting period for the options is July 3, 2006 to July 2, 2009.
(g)On August 3, 2006, an employee was granted options to subscribe for 100,000 shares at a price of HK$0.71 per share. The vesting period of the option is August 3, 2006 to August 2, 2009.
(h)On November 22, 2006, an employee was granted options to subscribe for 200,000 shares at a price of HK$0.73 per share. The vesting period of the option is November 22, 2006 to November 14, 2009.
(i)On May 23, 2007, an employee was granted options to subscribe for 100,000 shares at a price of HK$2.03 per share. The vesting period of the option is May 23, 2007 to June 11, 2010.
(j)On December 12, 2007, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$2.45 per share. The vesting period for the options is December 12, 2007 to December 11, 2010.
(k)On February 6, 2008, an employee was granted options to subscribe for 6,000,000 shares at a price of HK$1.77 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three to four years from the date of fulfillment of the performance condition.
(l)On February 11, 2008, an executive director was granted options to subscribe for 6,000,000 shares at a price of HK$1.88 per share. Vesting of the options is conditional upon the performance of the Company’s shares over the period from the close of trading in Hong Kong on November 22, 2007 to November 21, 2010. Options granted will be evenly vested immediately and over a period of three years from the date of fulfillment of the performance condition.
(m)On February 15, 2008, an employee was granted options to subscribe for 4,000,000 shares at a price of HK$1.77 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three years from the date of fulfillment of the performance condition.
(n)On March 11, 2008, an employee was granted options to subscribe for 300,000 shares at a price of HK$1.83 per share. The vesting period for the options is March 11, 2008 to March 10, 2011.
(o)On May 2, 2008, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$1.80 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three years from the date of fulfillment of the performance condition.
(p)As a result of allotment of 11,227,213 new shares to shareholders of the Company who elected to receive the 2007 Final Dividend in shares on February 4, 2008, the exercise price of and the number of share subject to the 51,805,000 options outstanding on December 21, 2007 (being the Record Date for determining the entitlement of 2007 Final Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from February 4, 2008. The closing price per ordinary share immediately before the date of the grant of the options was HK$1.70.

F-54


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
25Equity settled share-based transactions (continued)
2002 Share Option Scheme (continued)
Notes: (continued)
(q)As a result of allotment of 8,838,938 new shares to shareholders of the Company who elected to receive the 2008 Interim Dividend in shares on 23 July 2008, the exercise price of and the number of share subject to the 65,296,047 options outstanding on 6 June 2008 (being the Record Date for determining the entitlement of 2008 Interim Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from 23 July 2008. The closing price per ordinary share immediately before the date of the grant of the options was HK$1.79.
(r)The share options outstanding in respect of the 1997 Share Option Scheme and 2002 Share Options Scheme as ofAt August 31, 2006, 2007 and 2008 is summarized2010, the Group had obligations under finance leases repayable as follows:
             
      Weighted Weighted
  Number of average average
  share exercise market price
  options prices per at the date
  outstanding share of grant
  (thousands) HK$’000 HK$’000
Balance at August 31, 2005  37,218   1.51   1.46 
Granted during the year  34,310   0.67   0.74 
Exercised during the year  (50)  0.26   N/A 
Lapsed during the year  (5,260)  1.54   N/A 
             
             
Balance at August 31, 2006  66,218   1.08   1.04 
Granted during the year  300   1.16   1.19 
Exercised during the year  (2,328)  0.76   0.74 
Lapsed during the year  (2,840)  0.93   0.89 
             
             
Balance at August 31, 2007  61,350   1.09   1.06 
Adjustment to the number of options for 2007 Final Dividend  205   1.10   1.07 
Adjustment to the number of options for 2008 Interim Dividend  177   1.28   1.26 
Granted during the year  18,300   1.84   1.83 
Exercised during the year  (14,052)  1.07   1.06 
Lapsed during the year  (5,399)  1.63   1.64 
             
             
Balance at August 31, 2008  60,581   1.27   1.25 
             
                         
  2010  2009 
  Present          Present       
  value  Interest      value  Interest    
  of the  expense  Total  of the  expense  Total 
  minimum  relating to  minimum  minimum  relating to  minimum 
  lease  future  lease  lease  future  lease 
  payments  periods  payments  payments  periods  payments 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Within 1 year  212   30   242   202   35   237 
                   
                         
After 1 year but within 2 years  105   20   125   197   22   219 
After 2 years but within 5 years  288   22   310   263   30   293 
After 5 years           70   1   71 
                   
                         
   393   42   435   530   53   583 
                   
                         
   605   72   677   732   88   820 
                   

F-55


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
25Equity settled share-based transactions (continued)
2002 Share Option Scheme (continued)
Notes: (continued)
(s)The following table summarizes the information about share options outstanding at August 31, 2008:
                 
  Exercise Number of     Exercisable
  price at outstanding     options at
  August 31, at August 31, Remaining August 31,
Date of grant 2008 2008 life 2008
      (thousands) (months) (thousands)
October 21, 2004  1.5297   7,572   74   7,572 
January 5, 2005  1.5297   16,107   74   16,107 
May 22, 2006  0.6554   22,387   93   12,784 
August 3, 2006  0.7052   40   95    
November 22, 2006  0.7251   136   98    
February 6, 2008  1.7652   6,016   52    
February 11, 2008  1.8749   6,016   52    
February 15, 2008  1.7652   1,003   52    
March 11, 2008  1.8250   301   52    
May 2, 2008  1.7951   1,003   52    
                 
                 
       60,581       36,463 
                 
(t)Fair value of share options and assumptions:
In determining the value of the share options granted during the year ended August 31, 2008, the Black-Scholes option pricing model (the “Black-Scholes Model”) has been used except for the share options granted on February 11, 2008 which adopts the Monte Carlo model. Both models are the most generally accepted methodologies used to calculate the value of options. The variables of the models include expected life of the options, risk-free interest rate, expected volatility and expected dividend yield of the shares of the Company.

F-56F-47


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
2523 Equity settled share-based transactions (continued)
2002 Share Option Scheme (continued)
Notes: (continued)
(t)Fair value of share options and assumptions: (continued)
In determining the value of the share options granted during the year, the following variables have been appliedNotes to the models:
                                                             
  June 3, October 21, January 5, October 3, May 22, July 3, August 3, November 22, May 23, December 12, February 6, February 11, February 15, March 11, May 2,
Measurement date 2004 2004 2005 2005 2006 2006 2006 2006 2007 2007 2008 2008 2008 2008 2008
Variables                                                            
— Expected life (i) 5 years  5 years  5 years  5 years  5 years  5 years  5 years  5 years  5 years  5 years  5 years  Average
4 years
  3 years  5 years  5 years 
— Risk-free rate (ii)  3.78%  2.65%  2.75%  4.41%  4.63%  4.45%  4.06%  3.76%  4.45%  3.10%  2.16%  2.16%  2.16%  2.04%  2.88%
— Expected volatility (iii)  59.04%  72.06%  69.37%  58.29%  55.04%  53.56%  52.71%  51.02%  56.01%  61.86%  63.22%  63.32%  63.22%  63.35%  63.56%
— Expected dividend yield (iv)  1%  1%  1%  0%  0%  0%  0%  0%  0%  2%  2%  2%  2%  2%  2%
The above variables were determined as follows:
(i)The expected life is estimated to be 3 to 5 years from the date of grant (the “Measurement Date”).
(ii)The risk-free rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as of the Measurement Date.
(iii)The expected volatility represents the annualized standard deviation of the return on the daily share price of the Company over the period commensurate to the expected life of the options (taking into account the remaining contractual life of the option and the effect of the expected early exercise of the option).
(iv)The expected dividend yield is based on the historical dividend yield over the last five years.

F-57


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
25Equity settled share-based transactions (continued)
2002 Share Option Scheme (continued)
Notes: (continued)
(t)Fair value of share options and assumptions: (continued)
The fair value of the options granted during the year is estimated as below:
                                                             
  June 3, October 21, January 5, October 3, May 22, July 3, August 3 November 22, May 23, December 12, February 6, February 11, February 15, March 11, May 2,
Date of grant 2004 2004 2005 2005 2006 2006 2006 2006 2007 2007 2008 2008 2008 2008 2008
  HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$
Fair value per share option  0.70   0.84   0.80   0.44   0.33   0.35   0.36   0.35   1.13   1.13   0.90   0.41   0.72   0.87   0.83 
Both the Black-Scholes Model and Monte Carlo Model, applied for the determination of the estimated value of the options granted under 2002 Share Option Scheme require input of highly subjective assumptions, including the expected stock volatility. As the Company’s share options have characteristics significantly different from those of traded options, changes in subjective inputs may materially affect the estimated fair value of the options granted.

F-58


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
26Revenues and segmental information
Revenue recognized during the year is as follows:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Revenue
            
International telecommunications services  418,276   324,470   291,943 
Fixed telecommunications network services (note (c))  716,600   816,800   1,011,038 
             
             
   1,134,876   1,141,270   1,302,981 
             
             
Other income
            
Interest income  20,378   22,671   15,596 
Other income  4,465   3,149   9,393 
             
             
   24,843   25,820   24,989 
             
(a)Primary reporting format — business segments
The Group is organized on a worldwide basis into two business segments:
International telecommunications — provision of international long distance calls services.
Fixed telecommunications network — provision of dial up and broadband Internet access services, local voice-over-IP services and IP-TV services.
The Group’s reportable segments are strategic business units that offer different type of telecommunications services. Each of these business units are operated and managed separately.
The Group’s inter-segment transactions mainly consist of provision of leased lines services.

F-59


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
26Revenues and segmental information (continued)
(a)Primary reporting format — business segments (continued)
Segment results are income/(loss) from operations excluding interest expense and interest income, but includes other income, net. All segment measures are based on accounting policies that are consistent with those used in the preparation of the consolidated financial statements.
                 
  Year ended August 31, 2006
  International Fixed tele-    
  tele- communications    
  communications network    
  services services Elimination Group
  HK$’000 HK$’000 HK$’000 HK$’000
Revenue (note (c))                
— External sales  418,276   716,600      1,134,876 
— Inter-segment sales  5,670   31,275   (36,945)   
                 
                 
   423,946   747,875   (36,945)  1,134,876 
                 
                 
Segment results  22,095   (107,607)      (85,512)
                 
                 
Interest income  17,728   2,650      20,378 
Interest expense              (88,637)
Other income              4,465 
                 
                 
Loss before taxation              (149,306)
                 
                 
Segment assets  626,480   1,497,388      2,123,868 
Unallocated assets           347 
                 
                 
Total assets              2,124,215 
                 
                 
Segment liabilities  114,847   167,370      282,217 
Unallocated liabilities              950,344 
                 
                 
Total liabilities              1,232,561 
                 
                 
Capital expenditure  13,838   309,097      322,935 
Depreciation  23,598   252,866      276,464 

F-60


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
26Revenues and segmental information (continued)cash flow statement
(a) Primary reporting format — business segments (continued)Reconciliation of profit before taxation to net cash inflow from operations
                 
  Year ended August 31, 2007
  International Fixed tele-    
  tele- communications    
  communications network    
  services services Elimination Group
  HK$’000 HK$’000 HK$’000 HK$’000
Revenue (note (c))                
— External sales  324,470   816,800      1,141,270 
— Inter-segment sales  5,699   27,633   (33,332)   
                 
                 
   330,169   844,433   (33,332)  1,141,270 
                 
                 
Segment results  49,702   42,873       92,575 
                 
                 
Interest income  15,032   7,639      22,671 
Interest expense              (87,504)
Other income              3,149 
                 
                 
Profit before taxation              30,891 
                 
                 
Segment assets  541,502   1,619,631      2,161,133 
Unallocated assets               
                 
                 
Total assets              2,161,133 
                 
                 
Segment liabilities  101,148   201,738      302,886 
Unallocated liabilities              954,365 
                 
                 
Total liabilities              1,257,251 
                 
                 
Capital expenditure  4,060   128,190      132,250 
Depreciation  21,707   236,396      258,103 
             
  2010  2009  2008 
  HK$’000  HK$’000  HK$’000 
Profit before taxation  259,545   251,559   108,372 
Depreciation of owned fixed assets  198,323   205,624   209,464 
Depreciation of fixed assets held under finance lease  706   617   587 
Amortization of deferred expenditure  48,621   53,160   33,777 
Interest income  (11,372)  (4,869)  (15,596)
Interest element of finance lease  42   27   34 
(Gain)/loss on disposal of fixed assets  (1,375)  1,016   1,431 
Realized and unrealized gain on other financial assets     (189)  (3,284)
Realized gain on long term bank deposit        (1,185)
Realized loss on derivative financial instrument        1,039 
Equity settled share-based transactions  5,347   4,768   4,204 
Loss/(gain) on extinguishment of 10-year senior notes  9,650   (31,371)  (2,582)
Change in fair value of derivative financial instruments  11,293       
Interest, amortization and exchange difference on 10-year senior notes  6,069   49,214   72,640 
Interest on other borrowings  3,260   885   3,428 
Amortization of upfront cost on bank loans  192       
Interest expenses on bank loans  1,379       
          
             
Net cash inflow before working capital changes  531,680   530,441   412,329 
Decrease/(increase) in long-term receivable and prepayment  917   (505)  1,346 
Decrease in accounts receivable, other receivables, deposits and prepayments  738   33,052   6,914 
Decrease in inventories        477 
Increase in deferred expenditure  (34,773)  (46,525)  (68,505)
(Decrease)/increase in accounts payable, other payables, accrued charges and deposits received  (1,937)  17,419   (12,567)
(Decrease)/increase in deferred service revenue  (8,272)  4,621   46,247 
          
             
Net cash inflow generated from operations  488,353   538,503   386,241 
          

F-61F-48


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
2623 Revenues and segmental information (continued)
(a)Primary reporting format — business segments (continued)
                 
  Year ended August 31, 2008
  International Fixed tele-    
  tele- communications    
  communications network    
  services services Elimination Group
  HK$’000 HK$’000 HK$’000 HK$’000
Revenue (note (c))                
— External sales  291,943   1,011,038      1,302,981 
— Inter-segment sales  5,692   22,680   (28,372)   
                 
                 
   297,635   1,033,718   (28,372)  1,302,981 
                 
                 
Segment results  63,225   95,295       158,520 
                 
                 
Interest income  8,590   7,006      15,596 
Interest expense              (75,137)
Other income              9,393 
                 
                 
Profit before taxation              108,372 
                 
                 
Segment assets  426,781   1,627,300      2,054,081 
Unallocated assets              26,335 
                 
                 
Total assets              2,080,416 
                 
                 
Segment liabilities  80,756   276,771      357,527 
Unallocated liabilities              690,282 
                 
                 
Total liabilities              1,047,809 
                 
                 
Capital expenditure  4,293   207,391      211,684 
Depreciation  19,587   190,464      210,051 

F-62


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
26Revenues and segmental informationNotes to the consolidated cash flow statement (continued)
(b) Geographical segments
AlthoughAnalysis of changes in financing during the Group’s two business segments are managed on a worldwide basis, they operate in two main geographical areas:
Hong Kong
Canada
In disclosing information on the basis of geographical segments, revenue and segment results are disclosed based on the geographical location of customers. Total assets and capital expenditure are disclosed based on the geographical location of the assets.
There were no sales between the geographical segments.
                 
  August 31, 2006
      Total Capital Fixed
  Revenue assets expenditure assets, net
  HK$’000 HK$’000 HK$’000 HK$’000
Hong Kong  1,114,452   2,114,018   321,708   1,362,359 
Canada  20,424   9,850   1,227   4,875 
                 
                 
   1,134,876   2,123,868   322,935   1,367,234 
                 
                 
Unallocated assets      347         
                 
                 
       2,124,215         
                 
                 
  August 31, 2007
      Total Capital Fixed
  Revenue assets expenditure assets, net
  HK$’000 HK$’000 HK$’000 HK$’000
Hong Kong  1,120,538   2,149,728   132,031   1,233,100 
Canada  20,732   11,405   219   4,123 
                 
                 
   1,141,270   2,161,133   132,250   1,237,223 
      ��          
                 
Unallocated assets               
                 
                 
       2,161,133         
                 

F-63


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
26Revenues and segmental information (continued)
(b)Geographical segments (continued)
                 
  August 31, 2008
      Total Capital Fixed
  Revenue assets expenditure assets, net
  HK$’000 HK$’000 HK$’000 HK$’000
Hong Kong  1,281,069   2,040,496   211,482   1,227,907 
Canada  21,912   13,585   202   3,492 
                 
                 
   1,302,981   2,054,081   211,684   1,231,399 
                 
                 
Unallocated assets      26,335         
                 
                 
       2,080,416         
                 
(c)Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a FTNS licensee, provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the TA and interconnection services have been provided, HKBN has been billing mobile operators for the interconnection services provided to them and recognizing revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts it expected to collect. In prior years, majority of the mobile operators, however, rejected HKBN’s demand for payment. As a result of non-payment by certain mobile operators, in 2004, the Group asked TA to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile operators to HKBN; and the effective date of the determined mobile interconnection charges.
In March 2006, TA issued a preliminary analysis (the “2006 PA”) on the 2004 Determination with respect to the rates of mobile interconnection charges payable by the mobile operator under dispute. However, as of August 31, 2006, the final level of mobile interconnection charges was still subject to the 2004 Determination to be issued by TA.
For the year ended August 31, 2006, the Group recognized mobile interconnection charges of HK$22,037,000 based on the 2006 PA.
             
  Share capital       
  (including share  Obligations    
  premium and  under finance  10-year 
  capital reserve)  leases  senior notes 
  HK$’000  HK$’000  HK$’000 
Balance at September 1, 2007  702,192   1,210   952,593 
Share issued upon exercise of share options  14,998       
Share issued in respect of scrip dividend  33,398       
Repayment of capital element of finance lease     (834)   
Repurchase of 10-year senior notes        (269,399)
Gain on extinguishment of 10-year senior notes        (2,582)
Amortization of incidental issuance costs        1,665 
Equity settled share-based transactions  4,204       
Effect of foreign exchange rate changes        965 
          
             
Balance at August 31, 2008  754,792   376   683,242 
          
             
Balance at September 1, 2008  754,792   376   683,242 
Share issued upon exercise of share options  1,399       
Repurchase and cancellation of ordinary shares  (7)      
Share issued in respect of scrip dividend  9,906       
Purchase of fixed assets under finance lease     494    
Repayment of capital element of finance lease     (138)   
Repurchase of 10-year senior notes        (485,829)
Gain on extinguishment of 10-year senior notes        (31,371)
Amortization of incidental issuance costs        1,545 
Equity settled share-based transactions  4,768       
Effect of foreign exchange rate changes        (5,001)
          
             
Balance at August 31, 2009  770,858   732   162,586 
          
             
Balance at September 1, 2009  770,858   732   162,586 
Share issued upon exercise of share options  16,744       
Shares issued upon placement  379,612       
Purchase of fixed assets under finance lease     90    
Repayment of capital element of finance lease     (217)   
Repurchase and redemption of 10-year senior notes        (172,423)
Loss on extinguishment of 10-year senior notes        9,650 
Amortization of incidental issuance costs        188 
Equity settled share-based transactions  5,347       
Effect of foreign exchange rate changes        (1)
          
             
Balance at August 31, 2010  1,172,561   605    
          

F-64


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
26Revenues and segmental information (continued)
(c)(continued)
In March 2007, TA issued a revised preliminary analysis (the “2007 PA”) which superseded the 2006 PA. The 2007 PA set out the rates of mobile interconnection charges, which are different from those rates stated in the 2006 PA.
In June 2007, TA issued the 2004 Determination which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from April 1, 2002 to August 31, 2004, which superseded the rates stated in both the 2006 PA and 2007 PA issued by TA previously.
For the year ended August 31, 2007, the Group recognized revenue related to mobile interconnection charges of HK$40,877,000 based on the 2004 Determination which included charges for the year ended August 31, 2007 and additional charges for the years ended August 31, 2005 and 2006 previously measured based on the 2006 PA. The Group has also written back bad debt provision for mobile interconnection charges receivables of HK$9,404,000 to the consolidated statement of operations based on the amount it expected to collect for billings outstanding through that date.
During the year ended August 31, 2008, HKBN entered into contractual agreements with additional mobile operators which agreed to pay mobile interconnection charges based on the 2004 determination for period from April 1, 2002 to August 31, 2004 and for the subsequent period at an interim rate stated in the agreements which will be adjusted based on further determination to be issued by TA.
In February 2008, HKBN requested TA to make a new determination with four mobile operators (the “2008 Determination”) on the rate of mobile interconnection charge and interest thereon. In September 2008, TA indicated that it accepted HKBN’s request for determination, which covers the mobile interconnection charges payable by the mobile operators under the determination, for the period from April 1, 2002 to April 26, 2009 (for those mobile operators who have not reached the relevant contractual agreements with HKBN) or for the period from September 1, 2004 to April 26, 2009 (for those mobile operators who have reached the relevant contractual agreements with HKBN), and the interest rate thereon.
For the year ended August 31, 2008, the Group recognized revenue related to mobile interconnection charges of HK$29,568,000 representing the amount of mobile interconnection charges management expects to collect.

F-65F-49


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
2724 Financial instruments
  Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Group’s business. These risks are limited by the Group’s financial management policies and practices described below.
(a) Credit risk
 
  The Group’s credit risk is primarily attributable to tradeaccounts receivable and other receivables, and debt investments.receivables. Management has a credit policy in place and the exposure to the credit risk is monitored on an ongoing basis.
 
  In respect of tradeaccounts receivable and other receivables, credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer locates. These receivables are due within 30 days from the date of billing. Subscribers with receivables that are more than 3 months overdue are requested to settle all outstanding balances before any further credit is granted. The Group generally does not obtain collateral from customers.
 
  The Group’s exposure to credit risk is influenced mainly by individual characteristics of each customer. The default risk of the country in which customer locates also has an influence on credit risk but to a lesser extent. Concentrations of credit risk with respect to accounts receivable are limited due to the Group’s customer base being large and unrelated. As such, management does not expect any significant losses of accounts receivable that have not been provided for by way of allowances as disclosed in note 8.15.
 
  The maximum exposure to credit risk is represented by the carrying amount of each financial asset after deducting any impairment allowance, in the balance sheet. Except for the financial guarantee given by the Group as disclosed in note 15(d),25, the Group does not provide any other guarantees which expose the Group to credit risk. The maximum exposure to credit risk in respect of these financial guarantees at the balance sheet date is disclosed in note 15 (d).25.
 
  Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from accounts receivable are set out in note 8.15.

F-66F-50


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
2724 Financial instruments (continued)
(b) Liquidity risk
 
  The Group has a cash management policy, which includes the short term investment of cash surpluses and the raising of loans and other borrowings to cover expected cash demands. The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient cash and readily realizable marketable securities and adequate amount of committed credit facilities from major financial institutions to meet its liquidity requirements in the short and long term. Due to the dynamic nature of the underlying business, the Group aims to maintain flexibility in funding by maintaining committed credit lines available.

F-67


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
27Financial instruments (continued)
(b)Liquidity risk (continued)
 
The following table details the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on undiscounted cash flows (including interest) and the earliest date the Group are required to pay.
                                                                                                
 2007 2008  2010 2009 
 Total More than More than Total More than More than    Total More than More than Total More than More than   
 contractual Within 1 year but 2 years but contractual Within 1 year but 2 years but    contractual Within 1 year but 2 years but contractual Within 1 year but 2 years but   
 Carrying undiscounted 1 year or less than less than More than Carrying undiscounted 1 year or less than less than More than  Carrying undiscounted 1 year or less than less than More than Carrying undiscounted 1 year or less than Less than More than 
 amount cash flow on demand 2 years 5 years 5 years amount cash flow on demand 2 years 5 years 5 years  amount cash flow on demand 2 years 5 years 5 years amount cash flow on demand 2 years 5 years 5 years 
 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 
Current liabilities
  
  
Bank overdrafts - unsecured 10,490 10,490 10,490    5,364 5,364 5,364    
Accounts payable 76,019 76,019 76,019    52,324 52,324 52,324     35,128 35,128 35,128    37,555 37,555 37,555    
Other payables and accrued charges 145,267 145,267 145,267    178,114 178,114 178,114     195,931 195,931 195,931    206,487 206,487 206,487    
Deposits received 16,188 16,188 16,188    16,264 16,264 16,264     21,822 21,822 21,822    16,385 16,385 16,385    
Obligations under finance leases 835 869 869    121 142 142     212 242 242    202 237 237    
Tax payable 1,481 1,481 1,481    2,103 2,103 2,103     1,533 1,533 1,533    1,993 1,993 1,993    
Non current liabilities
 
  
8.75% senior notes 952,593 1,614,184 85,278 85,278 255,834 1,187,794 683,242 1,093,852 61,012 61,012 183,036 788,792 
Obligation under finance leases 375 414  142 272  255 272  142 130  
Non-current liabilities
 
 
Long-term bank loan 123,567 133,996 1,829 2,166 130,001        
Derivative financial instrument 11,293 11,435 4,580 3,441 3,414        
10-year senior notes       162,586 244,117 14,489 14,489 43,467 171,672 
Obligations under finance leases 393 435  125 310  530 583  219 293 71 
                                                  
  
 1,192,758 1,854,422 325,102 85,420 256,106 1,187,794 932,423 1,343,071 309,959 61,154 183,166 788,792  400,369 411,012 271,555 5,732 133,725  431,102 512,721 282,510 14,708 43,760 171,743 
                                                  

F-68F-51


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
2724 Financial instruments (continued)
(c) Interest rate risk
 
  The Group’s interest-rate risk arises mainly from its 10-year 8.75% senior notesthe HK$125,000,000 bank loan which bearbears floating interest rate. Bank loans at the fixed rate of 8.75% per annum. Borrowings issued at fixed ratevariable rates expose the Group to fair value interest-ratecash flow interest rate risk.
 
(i) Interest rate profile
 
  The following table details the interest rate profile of the Group’s net borrowings at the balance sheet date.
                 
  August 31,
  2008 2007
  Effective     Effective    
  interest rate   interest rate     
  %  HK$’000  %  HK$’000 
Fixed rate borrowings:                
8.75% senior notes  9.2   952,593   9.2   683,242 
Obligation under finance lease  6.8   1,210   6.8   376 
                 
                 
       953,803       683,618 
                 
                 
  2010  2009 
  Effective      Effective    
  interest      interest    
  rate      rate    
  %  HK$’000  %  HK$’000 
Fixed rate borrowings:
                
                 
10-year senior notes        9.2   162,586 
Obligations under finance leases  5.6   605   5.6   732 
               
                 
       605       163,318 
               
                 
Floating rate borrowings:
                
                 
Bank overdrafts — unsecured  5.3   10,490   5.3   5,364 
Long-term bank loan  1.7   123,567       
               
(ii) Sensitivity analysis
 
  Management determines that theThe Group’s exposure ofprofit attributable to shareholders would decrease by approximately HK$1,250,000 in response to a 100 basis-points increase in market interest rate risk was not significant and hence no sensitivity analysis is prepared.rates applicable as at August 31, 2010, with all other variables held constant.

F-52


24Financial instruments (continued)
(d) Foreign currency risk
 
  All the Group’s monetary assets and liabilities are primarily denominated in either Hong Kong dollars or United States dollars. Given the exchange rate of the Hong Kong dollar to the U.S. dollar has remained close to the current pegged rate of HKD7.80 = USD1.00 since 1983, management does not expect significant foreign exchange gains or losses between the two currenciescurrencies.
 
The Group is also exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollars and the Renminbi arising from its operations in the PRC. In order to limit this foreign currency risk exposure, the Group maintained Renminbi cash balance that approximate two to three months’ of operating cash flows.
(i) Exposure to currency risk
 
  The following table details the Group’s exposure at the balance sheet date to currency risk arising from recognized assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate.
                         
  August 31, 
  2007  2008 
  United          United       
  States  Japanese  Canadian  States  Japanese  Canadian 
  Dollars  Yen  Dollars  Dollars  Yen  Dollars 
  ’000  ’000  ’000  ’000  ’000  ’000 
Cash at bank and in hand and pledged bank deposits  21,172   2,218   111   22,330   1,099   176 
Accounts payable  (4,781)        (2,500)      
Other payables and accrued charges  (1,563)        (3,390)      
8.75% senior notes  (122,127)        (87,483)      
                         
                         
Overall net exposure  (107,299)  2,218   111   (71,043)  1,099   176 
                         

F-69


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
                         
  2010  2009 
  United          United       
  States  Japanese  Canadian  States  Japanese  Canadian 
  Dollars  Yen  Dollars  Dollars  Yen  Dollars 
  ‘000  ‘000  ‘000  ‘000  ‘000  ‘000 
Cash at bank and in hand and pledged bank deposits  30,443   591   435   11,599   696   282 
Bank overdrafts — unsecured  (294)        (161)      
Accounts payable  (1,350)        (3,183)      
Other payables and accrued charges  (1,075)        (390)      
10-year senior notes           (20,979)      
                   
                         
Overall net exposure  27,724   591   435   (13,114)  696   282 
                   
27Financial instruments (continued)
(d)Foreign currency risk (continued)
(ii) Sensitivity analysis
 
  Management determines that the Group’s exposure of foreign currency risk was not significant and hence no sensitivity analysis is prepared.
(e)Fair values
Except for the following instruments, all financial instruments are carried at amounts not materially different from their fair values as of August 31, 2007 and 2008:
                 
  August 31,
  2007 2008
  Carrying     Carrying  
  amount Fair value amount Fair value
  HK$’000 HK$’000 HK$’000 HK$’000
Long-term bank deposit  14,415   14,277       
8.75% senior notes  (952,593)  (970,125)  (683,242)  (672,236)
                 

F-70F-53


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
2724 Financial instruments (continued)
(e) Fair values (continued)
(i)Financial instrument carried at fair value
The following table presents the carrying value of financial instrument measured at fair value at the balance sheet date across the three levels of the fair value hierarchy defined in IFRS/HKFRS 7,Financial Instruments: Disclosures, with the fair value of each financial instrument categorized in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:
Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets for identical financial instruments
Level 2: fair values measured using quoted prices in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data
Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data
2010
                 
  Level 1  Level 2  Level 3  Total 
  HK$’000  HK$’000  HK$’000  HK$’000 
Liability
                
                 
Derivative financial instrument:                
- Interest rate swap     11,293      11,293 
             
The carrying amounts of the Group’s financial instruments carried at cost or amortized cost are not materially different from their fair values as at August 31, 2010 and 2009 except as follows:
                 
  2010  2009 
  Carrying      Carrying    
  amount  Fair value  amount  Fair value 
  HK$’000  HK$’000  HK$’000  HK$’000 
The Group                
                 
10-year senior notes        162,586   157,285 
             
(f)Estimation of fair values
 
  Fair value of financial instruments is estimated as follows:
 (i) The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The fair value of the 8.75%10-year senior notes iswas determined based on quoted market price. The fair value of the long term bank deposits are determined based on the issuer’s quoted price.
 
 (ii)The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date.
(iii) Trade receivables less impairment provision and account payables are assumed to approximate their fair values.
(iii)The fair value of the long-term bank loan is estimated as the present value of future cash flows, discounted at current market interest rate for similar financial instruments.
(iv)The fair value of the interest rate swap is determined based on the discounted cash flow technique which takes into account estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date.

F-54


25Contingent liabilities
         
  2010  2009 
  HK$’000  HK$’000 
Bank guarantees provided to suppliers (notes 27(i) and (ii))  2,770   2,490 
Bank guarantee in lieu of payment of utility deposits (note 27(iii))  5,572   5,272 
       
         
   8,342   7,762 
       
At August 31, 2010, HK$133,342,000 (2009: HK$7,762,000) of the HK$353,840,000 (2009: HK$205,038,000) total banking facility and revolving loan facility was utilized by the Company and its subsidiary.
26Commitments
(a)Capital commitments
         
  2010  2009 
  HK$’000  HK$’000 
Purchase of telecommunications, computer and office equipment - - contracted but not provided for  132,340   150,099 
       
(b)Commitments under operating leases
At August 31, 2010 and 2009, the Group has future aggregate minimum lease payments under non-cancellable operating leases as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Leases in respect of land and buildings which are payable:        
- Within 1 year  24,873   21,387 
- After 1 year but within 5 years  16,417   13,802 
       
         
   41,290   35,189 
       
         
Leases in respect of telecommunications facilities and computer equipment which are payable        
- Within 1 year  63,948   45,321 
- After 1 year but within 5 years  14,200   9,600 
- After 5 years  4,849   6,271 
       
         
   82,997   61,192 
       
         
   124,287   96,381 
       
(c)Program fee commitments
The Group entered into several long-term agreements with program content providers for the rights to use certain program contents in the Group’s IP-TV services. Minimum amounts of program fees to be paid by the Group are as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Program fee in respect of program rights which are payable:        
- Within 1 year  25,539   9,094 
- After 1 year but within 5 years  48,087   6,238 
       
         
   73,626   15,332 
       

F-55


27Pledge of assets
As at August 31, 2010, the Group has no pledged bank deposits.
As at August 31, 2009, the Group has pledged bank deposits of US$650,000 (equivalent to HK$5,038,000) and HK$10,000,000 as security for the following significant banking facilities:
(i)bank facility of US$650,000 (equivalent to HK$5,038,000) granted by a bank for issuance of bank guarantees to third party suppliers, letters of credit, short-term loan, overdraft, foreign exchange and interest rate hedging arrangements. As of August 31, 2009, bank guarantees of HK$500,000 were issued against this bank facility;
(ii)bank guarantees of HK$1,990,000 issued by the bank to third party suppliers of the Company and one of its subsidiaries for payment of certain products and services procured by the Group from these third party suppliers; and
(iii)bank guarantees of HK$5,272,000 issued by the bank to certain utility vendors of the Group in lieu of payment of utility deposits.
28 Barter transaction
  During the year ended August 31, 2004, Hong Kong Broadband Network (“HKBN”), a subsidiary of the Company2010, HKBN entered into two agreementsan agreement with a third party (the “Contract Party 1”Party”). Pursuant to firstthe agreement, (“First Agreement”), the Contract Party 1 agreed to sell to HKBN an telecommunications facility (the “Facility”) for cash consideration of approximately HK$42.4 million (the “Facility Consideration”), which was paid by HKBN during the year ended August 31, 2004. In conjunction with the First Agreement, HKBN also entered into an operations and maintenance agreement with the Contract Party 1 for the provision of ongoing operations and maintenance services for the Facility at a fee of approximately HK$1 million per annum, commencing September 1, 2007 onwards.
A second agreement (“Second Agreement”) was entered into on the same date by both parties whereby HKBN agree towould provide certain telecommunications servicesnetwork capacity to the Contract Party 1 (the “Services”) for an amount equal to the unita service charges specified in the Second Agreement. The Contract Party 1 is required to pay to HKBN a guarantee minimum service feeterm of approximately HK$42.4 million over a period of three10 years commencing Septemberon May 1, 2004. A prepayment2010 or after the respective activation of the service charges of HK$36.5 million (the “Prepaid Charges”) was paid byrelevant network capacity, and in exchange, the Contract Party would provide HKBN the right to use telecommunications facilities for a term of 10 years commencing on May 1, to HKBN during2010 or after the year ended August 31, 2004.respective activation of the relevant network capacity. The transaction has been entered into on a barter basis at no consideration being exchange. The agreement expires on April 30, 2020.
 
  The directorsDirectors of the GroupCompany made an assessment and determined that since the arrangement above involves exchange of services of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. Accordingly, the network capacity of the fair values ofContract Party under the goods and services exchanged and concluded that no fair values could be assigned to them. Accordingly, the Facility wasarrangement have not been recognized as an asset and no revenue or deferred revenue washave been recognized in the consolidated financial statements as of and for any of the periods presented. The difference between the Facility Consideration and the Prepaid Charges, amounting to approximately HK$5.9 million, was included in long-term receivable balance, and other receivables, deposits and prepayments as of August 31, 2006 and 2007 respectively. In accordance with the terms of agreement, the unpaid portionGroup since inception of the HK$42.2 million guarantee minimum service fee, amounting to approximately HK$5.9 million has been billed to the Contract Party 1 upon the end of service period on September 1, 2007 and subsequently settled.arrangement.

F-71


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2007
29 Comparative figuresMaterial related party transactions
  Certain comparative figures have been reclassifiedIn addition to conform with the current year presentation.
transactions and balances disclosed elsewhere in these financial statements, the Group entered into the following material related party transactions.
30
 Recent accounting pronouncements
(a) HKFRSsKey management personnel remuneration
 
Remuneration for key management personnel, including amounts paid to the Company’s directors as disclosed in note 9(a) and certain of the highest paid Talents as disclosed in note 9(b), is as follows:
         
  2010  2009 
  HK$’000  HK$’000 
Short-term Talent benefits  40,716   34,687 
Post-employment benefits  2,725   2,614 
Equity compensation benefits  5,347   4,071 
       
         
   48,788   41,372 
       
30Comparative figure
During the year, management performed a review of the presentation of the Group’s cash at bank and in hand balance. As a result of the review, the Group’s “bank overdrafts — unsecured” balances amounted to HK$5,364,000 and HK$12,994,000 which previously included in the cash at bank and in hand balance at August 31, 2009 and August 31, 2008 respectively have been reclassified as a current liability to conform to the current year’s presentation. This change in presentation had no effect on the reported results of the prior year.

F-56


31Accounting estimates and judgments
(a)Key sources of estimation uncertainty
Notes 10 and 24 contain information about the assumptions and risk factors relating to fair value of share options and financial instruments. Other key sources of estimation uncertainty are as follows:
(b)Impairment loss for doubtful accounts
The Group maintains impairment loss for doubtful accounts based upon evaluation of the recoverability of the accounts receivable and other receivables which takes into account the historical write-off experience and recovery rates. If the financial condition of the customers were to deteriorate, additional impairment may be required.
(c)Depreciation
Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The Group reviews the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and takes into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
(d)Income taxes
Determining income tax provisions involves judgment on the future tax treatment of certain transactions and interpretation of tax rules. The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislation and practices.
Deferred tax assets are recognized for certain unused tax losses as set out in note 20. In assessing the recognition of deferred tax assets, management considers all available evidence, including available taxable temporary differences, projected future taxable income, tax planning strategies, historical taxable income, and the expiration periods of the tax losses. For certain subsidiaries, deferred tax assets can only be recognized to the extent that it is probable that future taxable profits will be available against which they can be utilized. Management’s judgment is thus required to assess the probability of future taxable profits and this assessment is constantly reviewed and additional deferred tax assets are recognized if it becomes probable that future taxable profits will allow the deferred tax assets to be recovered.

F-57


32Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended August 31, 2010
  Up to the date of issuanceissue of the accompanying consolidatedthese financial statements, the IASB/HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended August 31, 20082010 and which have not been adopted in the accompanying consolidatedthese financial statements.
 
Effective for
accounting periods
beginning on or after
Amendment to IFRS/HKFRS 2Share-based payment — Group cash-settledJanuary 1, 2010
  share-based payment transactions
IFRSs/HKFRSs (Amendments)Improvements to IFRSs (2009)January 1, 2010
Amendment to IAS/HKAS 32Financial instruments: Presentation —February 1, 2010
  Classification of rights issues
IFRIC/HK (IFRIC) — Int 19Extinguishing financial liabilities with equityJuly 1, 2010
  instruments
IFRSs/HKFRSs (Amendments)Improvement to IFRSs/HKFRSs (2010)July 1, 2010 or
January 1, 2011
Amendments toIAS/HKAS 19 — The limitation on a definedJanuary 1, 2011
  IFRIC/HK (IFRIC) — Int 14  benefit asset, minimum funding requirements and
  their interaction — Prepayments of a minimum
  funding requirement
IAS/HKAS 24 (Revised)Related party disclosuresJanuary 1, 2011
Amendments to IFRS/HKFRS 7Financial instruments: Disclosures — Transfer ofJuly 1, 2011
  financial assets
IFRS/HKFRS 9Financial instrumentsJanuary 1, 2013
  The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of the following developments is unlikely to have significant impact on the Group’s results of operations and financial position:
Effective for
accounting periods
beginning on or after
HK(IFRIC) Interpretation 13Customer loyalty programmesJuly 1, 2008
HKAS 1 (Revised)Presentation of financial statementsJanuary 1, 2009
HKAS 23 (Revised)Borrowing costsJanuary 1, 2009
HKFRS 8Operating segmentsJanuary 1, 2009

F-72


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
30Recent accounting pronouncements (continued)
(b)U.S. GAAP
Statement of Financial Accounting Standards No. 157 (“SFAS 157”)
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosure required for fair value measurement. SFAS 157 applies to other accounting pronouncements that require fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and is effective for the Group on September 1, 2008. However, FASB Staff Position FAS 157-2 delayed the adoption date until January 1, 2009 for non-financial assets and liabilities, except for items that are recognized or disclosed at fair valueis not yet in the financial statements on a recurring basis. Management does not expect the initial adoption of SFAS 157position to state whether they would have a materialsignificant impact on the Group’s results of operations and financial position.
Statement of Financial Accounting Standards No. 159 (“SFAS 159”)
In February 2007, the FASB issued SFAS 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains or losses on items for which the fair value option has been elected be reported in earnings. Early adoption of SFAS 159 is permitted provided that the entity also adopts SFAS No. 157. Effective from September 1, 2008, management has elected not to adopt the fair value option for all the financial assets and financial liabilities held at September 1, 2008.

F-73F-58


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
3133 Summary of significant differences between HKFRSs and U.S. GAAPSupplemental guarantors consolidated financial information
  The Group’s consolidated financial statements are prepared in accordance with HKFRSs, which differ in certain significant respects from U.S. GAAP. The following are significant differences between HKFRSs and U.S. GAAP which pertain to the Group:
Net income/(loss)
               
    Year ended 31 August,
  Note 2006 2007 2008
    HK$’000 HK$’000 HK$’000
As reported under HKFRSs and U.S. GAAP    (142,062)  28,865   125,190 
               
               
Basic weighted average common shares issued and outstanding (in 000’s)    614,134   614,840   634,015 
Incremental shares from assumed exercise of share options (in 000’s)       16,479   23,982 
               
               
Diluted weighted average common and potential shares issued and outstanding (in 000’s)    614,134   631,319   657,997 
               
               
Earnings/(loss) per share under U.S. GAAP (note)              
— Basic    (23.1) cents   4.7 cents   19.7 cents 
               
               
— Diluted    (23.1) cents   4.6 cents   19.0 cents 
               
Note:The number of incremental shares from assumed exercise of stock options is determined using the treasury stock method. At August 31, 2006, the number of shares used in the calculation of diluted loss per share is equal to the basic weighted average common shares issued and outstanding as the incremental effect of outstanding share options would be anti-dilutive in a loss making year.
Total shareholders’ equity
               
    Year ended August 31,
  Note 2006 2007 2008
    HK$’000 HK$’000 HK$’000
Total shareholders’ equity
              
               
As reported under HKFRSs    891,654   903,882   1,032,607 
               
U.S. GAAP adjustments:              
— Goodwill (a)  5,092   5,092   5,092 
— Accumulated amortization of goodwill (a)  (3,735)  (3,735)  (3,735)
— Reversal of amortization of goodwill (a)  4,260   4,260   4,260 
               
               
Total shareholders’ equity under U.S. GAAP    897,271   909,499   1,038,224 
               

F-74


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
31Summary of significant differences between HKFRSs and U.S. GAAP (continued)
Condensed consolidated statements of operations under US GAAP
Under HKFRS, depreciation charges of network assets are included in general and administrative expenses.
Under US GAAP, however, depreciation charges of networks assets which are directly related to the generation of revenue are included in network costs. As a result, under US GAAP, the consolidated statements of operations would be reported as follows:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Revenue, net  1,134,876   1,141,270   1,302,981 
             
             
Operating expenses:            
— Network costs, net  (554,136)  (451,080)  (368,278)
— Salaries and related costs  (256,721)  (221,102)  (247,460)
— Sales and marketing expenses  (204,952)  (203,673)  (307,743)
— General and administrative expenses  (187,129)  (166,271)  (206,687)
— Provision for doubtful accounts  (17,450)  (6,569)  (14,293)
             
             
(Loss)/ income from operations  (85,512)  92,575   158,520 
Interest income  20,378   22,671   15,596 
Interest expense  (88,637)  (87,504)  (75,137)
Other income, net  4,465   3,149   9,393 
             
             
(Loss)/ income before income taxes  (149,306)  30,891   108,372 
Income tax credit/ (expense)  7,244   (2,026)  16,818 
             
             
Net (loss)/ income  (142,062)  28,865   125,190 
             

F-75


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
31Summary of significant differences between HKFRSs and U.S. GAAP (continued)
Statement of changes in shareholders’ equity under US GAAP
                             
  Ordinary shares                
              Accumulated          
  Number of     Additional other         Total
  shares Amount paid-in comprehensive Capital Retained shareholders’
  outstanding outstanding capital income reserve profits equity
      HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Balance at August 31, 2005  614,125,404   61,412   619,408   840   27,815   323,205   1,032,680 
Shares issued upon exercise of share options  50,000   5   8            13 
Compensation cost for share options        251      6,572      6,823 
Net loss                 (142,062)  (142,062)
Foreign currency translation adjustment           (183)        (183)
                             
                             
Balance at August 31, 2006  614,175,404   61,417   619,667   657   34,387   181,143   897,271 
Shares issued upon exercise of share options  2,328,000   233   2,135      (611)     1,757 
Compensation cost for share options              5,727      5,727 
Net income                 28,865   28,865 
Dividend paid in respect of previous year                 (24,635)  (24,635)
Foreign currency translation adjustment  ��        514         514 
                             
                             
Balance at August 31, 2007  616,503,404   61,650   621,802   1,171   39,503   185,373   909,499 
Shares issued upon exercise of share options  14,052,268   1,405   16,893      (3,300)     14,998 
Compensation cost for share options              4,204      4,204 
Net income                 125,190   125,190 
Dividend paid in respect of previous year                 (5,915)  (5,915)
Shares issued in respect of scrip dividend of previous year  11,227,213   1,123   18,044         (19,167)   
Dividend paid in respect of current year                 (11,371)  (11,371)
Shares issued in respect of scrip dividend of current year  8,838,938   884   13,347         (14,231)   
Foreign currency translation adjustment           1,619         1,619 
                             
                             
   650,621,823   65,062   670,086   2,790   40,407   259,879   1,038,224 
                             

F-76


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
31Summary of significant differences between HKFRSs and U.S. GAAP (continued)
Comprehensive (loss)/income under US GAAP
The comprehensive (loss)/income of the Group, determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130 “Reporting Comprehensive Income”, is set out as follows:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
(Loss)/Net income under U.S. GAAP  (142,062)  28,865   125,190 
Foreign currency translation adjustment (net of nil tax)  (183)  514   1,619 
             
             
Comprehensive (loss)/income  (142,245)  29,379   126,809 
             
Condensed consolidated statement of cash flows
Under HKFRSs, in adopting HKAS 7, three categories of activities are reported: operating activities; investing activities and financing activities, which is similar to U.S. GAAP. However, under HKFRSs, the difference is that cash flows from interest income would be included in investing activities whereas under U.S. GAAP it would be included in operating activities.
Summary cash flow information under U.S. GAAP is as follows:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Net cash provided by operating activities  204,583   406,732   394,159 
Net cash (used in)/provided by investing activities  (513,120)  91,382   (163,346)
Net cash used in financing activities  (86,486)  (109,566)  (342,550)
             
             
Increase/(decrease) in cash and bank balances  (395,023)  388,548   (111,737)
Cash and bank balances at the beginning of year  539,591   144,917   532,894 
Effect of foreign currency exchange rate changes on cash  349   (571)  453 
             
             
Cash and bank balances at the end of year  144,917   532,894   421,610 
             

F-77


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
31Summary of differences between HKFRSs and U.S. GAAP (continued)
(a)Goodwill
Prior to September 1, 2001, goodwill arising from a business combination was charged against available reserves. In January 2001, HKICPA issued Statement of Standard Accounting Practice (“SSAP”) No. 30 “Business Combinations” which applied to business combinations for which the agreement date is on or after September 1, 2001. As a result of the adoption of this SSAP in the fiscal year ended August 31, 2002 and up to September 1, 2005, goodwill on acquisitions occurring on or after September 1, 2001 was shown separately on the consolidated balance sheet and amortized using the straight-line method over its estimated useful life.
On September 1, 2005, the Group adopted HKFRS 3 “Business Combinations”. Under HKFRS 3, goodwill is recorded at cost less any accumulated impairment losses and is no longer amortized. Goodwill is subject to an annual impairment test and when there is an indication of impairment. An impairment loss is recognized when the carrying amount of the cash generating unit to which the goodwill has been allocated exceeds its recoverable amounts. In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken directly to reserves (i.e. goodwill which arose before September 1, 2001) is not recognized in the consolidated statement of operations on disposal or impairment of the acquired business, or under any other circumstances. The adoption of HKFRS 3 did not result in any restatement in the consolidated financial statements of prior years and therefore had no impact on U.S. GAAP adjustments of prior years.
Under U.S. GAAP, goodwill arising from a business combination is not amortized and is required to be tested annually for impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”.
As a result of the adoption of HKFRS 3, there were no U.S. GAAP adjustments to the net loss/ income pertaining to goodwill for the years ended August 31, 2006 ,2007 and 2008.

F-78


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
31Summary of differences between HKFRSs and U.S. GAAP (continued)
(b)Deferred taxes
Under HKFRSs, deferred taxes are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
Under U.S. GAAP, the Group is required to recognize deferred tax assets and liabilities for the expected future tax consequences of all events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future tax benefits in respect of tax loss carry forwards are also required to be recognized in full. A valuation allowance is required to be established for such assets if it is more likely than not that the Group will not be able to realize such benefits in the future.
Under HKFRS, deferred tax assets and liabilities shall be classified as noncurrent assets or noncurrent liabilities. Under U.S. GAAP, deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax asset related to tax loss carryforwards, are classified according to the expected reversal date of the temporary difference. The valuation allowance for a particular tax jurisdiction shall be allocated between current and non-current deferred tax assets for that tax jurisdiction on a pro rata basis.
Except for the presentation differences, there were no differences in the amount of deferred tax assets recognized under HKFRSs and U.S. GAAP. For the years ended August 31, 2006, 2007 and 2008, no adjustment was made for tax effects of U.S. GAAP adjustments because the U.S. GAAP adjustments in those years had no tax consequences under Hong Kong tax laws.
The following additional financial statements disclosures are required under U.S. GAAP and are presented on a U.S. GAAP basis.
         
  August 31,
  2007 2008
  HK$’000 HK$’000
Deferred tax assets:
        
         
Tax loss carryforwards  182,739   150,234 
         
         
Total gross deferred tax assets  182,739   150,234 
Valuation allowance  (48,120)  (2,389)
         
         
Net deferred tax assets  134,619   147,845 
         
         
Deferred tax liabilities:
        
         
Accelerated depreciation allowance  (134,910)  (126,447)
         
         
Total gross deferred tax liabilities  (134,910)  (126,447)
         
         
Net deferred tax asset /(liability)  (291)  21,398 
         
         
Net current deferred tax assets     11,399 
Net non-current deferred tax assets     16,630 
Net non-current deferred tax liabilities  (291)  (6,631)
         
         
Net deferred tax asset /(liability)  (291)  21,398 
         

F-79


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
31Summary of differences between HKFRSs and U.S. GAAP (continued)
(b)Deferred taxes (continued)
The valuation allowance for deferred tax assets as August 31, 2006, 2007 and 2008 was HK$52,404,000, HK$48,120,000 and HK$2,389,000 respectively. The valuation allowance as at August 31, 2006, 2007 and 2008 was primarily related to tax loss carryforwards that, in the judgement of management, are not more likely than not to be realized.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary difference are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryforward periods) and projected taxable income in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax rules. Based on the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences, net of existing valuation allowance at August 31, 2008. The amount of the deferred tax asset considered realizable; however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
Changes in the valuation allowance consist of:
             
  Year ended August 31,
  2006 2007 2008
  HK$’000 HK$’000 HK$’000
Balance at beginning of the year  29,804   52,404   48,120 
Addition/(reduction) to income tax expense  22,600   (1,979)  (37,834)
Valuation allowance written off     (2,305)  (7,897)
             
             
Balance at end of the year  52,404   48,120   2,389 
             
The net change in the total valuation allowance for the year ended August 31, 2008 was a decrease of HK$45,731,000 which primarily relates to the release of the valuation allowance of HK$12,013,000 due to the utilization of tax loss carryforwards during the year ended August 31, 2008 and the release of valuation allowance of HK$26,335,000 due to the changes in estimate of future taxable income of the Company’s major operating subsidiary. As at August 31, 2008, considering the operating results of this major operating subsidiary during the year ended August 31, 2008 and the previous years as well as the Company’s forecast for future years, management reassessed that it is more likely than not that this subsidiary will be able to generate sufficient future taxable income to realize the tax benefit of its tax loss carryforwards, which resulted in the release of the valuation allowance of HK$26,335,000. In addition, the write-off of the valuation allowance in the amount of HK$7,897,000 during the fiscal year ended August 31, 2008 was offset by a corresponding reduction in the gross deferred tax asset relating to tax loss carryforwards since management assessed that certain tax positions are not more likely than not sustainable upon examination by the relevant tax authority.

F-80


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
31Summary of differences between HKFRSs and U.S. GAAP (continued)
(b)Deferred taxes (continued)
Effective September 1, 2007, the Group adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. The Interpretation prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return. For each tax position, the enterprise must determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is then measured to determine the amount of benefit to recognize within the financial statements. No benefits may be recognized for tax positions that do not meet the more likely than not threshold. The benefit to be recognized is the largest amount that is more likely than not to be realized upon settlement.
The adoption of FIN 48 did not result in a change to the Group’s retained earnings. The aggregate changes in the balance of the Company’s gross unrecognized tax benefits were as follows:
HK$’000
Balance at September 1, 20077,897
Additions based on tax positions related to the current year1,797
Balance at August 31, 20089,694
All of these unrecognized tax benefits, if recognized, would affect the Group’s effective tax rate. As of August 31, 2008, the Group did not have any accrued interest and penalties related to the unrecognized tax benefits. The Company will recognize interest and penalties, if any, related to unrecognized tax benefits in financial expense and other operating expense, respectively.
The Group files income tax returns in Hong Kong, PRC, Canada and USA. The open tax years for the Company and its subsidiaries range between fiscal 2002 and fiscal 2008. The provisions made as a result of these open tax years are subject to the final agreement with the tax authorities. However, management does not believe there will be any material changes in the unrecognized tax benefits within the next 12 months.

F-81


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
31Summary of differences between HKFRSs and U.S. GAAP (continued)
(c)Investment securities
The Group’s investment securities consist of equity-indexed mutual fund securities and long-term bank deposits.
Under HKFRSs, the equity-linked mutual fund securities have been designated as financial asset at fair value through profit or loss as permitted under HKAS 39 “Financial Instruments: Recognition and Measurement”.
Under U.S. GAAP, the Group follows SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” which requires the embedded derivative in the equity-linked mutual fund securities to be separated and accounted for as a derivative instrument, and the host contract to be accounted for based on generally accepted accounting principles applicable to the instruments of that type that do not contain derivative instruments. Accordingly, the host contracts of the equity-linked mutual fund securities are classified as held-to-maturity securities under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” and measured at amortized cost while the embedded derivatives are accounted for in accordance with SFAS No. 133 and measured at fair value.
For the periods presented, there were no differences between i) the fair value of the equity-indexed debt securities; and ii) the aggregate of the amortized cost of the host contracts and the fair value of the embedded derivative instruments.
(d)Deposits for purchase of fixed assets and lease of land and building
Under HKFRSs, deposits for purchase of fixed assets and lease of land and buildings are classified as current assets if the amounts are expected to be realized within twelve months after the balance sheet date. Under U.S. GAAP, such deposits are classified as non-current assets. As of August 31, 2007 and 2008, deposits for purchase of fixed assets and lease of land and building were HK$13,263,000 and HK$19,622,000, respectively.
(e)Debt issue costs
Under HKFRSs, debt issue costs are reported as a reduction against the related debt proceeds and amortized over the life of the related debt using effective interest method. Under U.S. GAAP, such costs are disclosed separately as non-current asset and are similarly amortized. As of August 31, 2007 and 2008, the unamortized debt issue costs were HK$22,336,000 and HK$14,605,000, respectively.

F-82


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
32Supplemental guarantors consolidated financial information
The10-year senior notes describedmentioned above in note 1322 are fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).
 
  The condensed consolidated financial information is presented below and should be read in connection with the consolidated financial statements of City Telecom (H.K.) Limited prepared under HKFRSs.IFRSs. Separate financial statements of the Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries are wholly-owned and have fully and unconditionally guaranteed the Notes on a joint and several basis. Reconciliations
On February 1, 2010, we redeemed all the outstanding 10-year senior notes with a cumulative principal amount of HK$153.9 million (US$19.9 million) at the redemption price equal to U.S. GAAP are not presented because the majority104.375% of the reconciling items relateprincipal amount.
Since as of August 31, 2010, all the outstanding 10-year senior notes has been fully redeemed, the following condensed consolidated financial information is limited to City Telecom (H.K.) Limitedthe years ended August 31, 2009 and Guarantor Subsidiaries are already disclosed and explained in Note 29.2008.
 
  The following condensed consolidated financial information presents the condensed consolidated balance sheets as of August 31, 20072008 and 20082009 and the related condensed consolidated income statements of operations and statements of cash flowsflow statements for the years ended August 31, 2006, 20072008 and 20082009 of (a) City Telecom (H.K.) Limited, the parent; (b) the Guarantor Subsidiaries on a combined basis; (c) the Non-guarantor Subsidiary; (d) eliminating entries; and (e) the total consolidated amounts.

F-83F-59


City Telecom (H.K.) Limited
Consolidated33 Supplemental guarantors consolidated financial statements for the year August 31, 2008
information (continued)
32Supplemental guarantors consolidated financial information (continued)
  Condensed consolidatedConsolidated balance sheet as of August 31, 20082009
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Current assets
                    
                     
Cash and bank balances  90,386   263,386   67,838      421,610 
Pledged bank deposits  87,319             87,319 
Trade receivables, net  11,418   128,865          140,283 
Other receivables, deposits and prepayments  3,378   80,293   2,759   (3,704)  82,726 
Investment securities  27,997             27,997 
Deferred expenditure     40,704          40,704 
                     
                     
Total current assets  220,498   513,248   70,597       800,639 
Fixed assets, net  87,483   1,135,394   8,522       1,231,399 
Investments in subsidiaries (note)  1,499,437   260,399      (1,759,836)   
Other long-term assets     61,499      (13,121)  48,378 
                     
                     
Total assets  1,807,418   1,970,540   79,119       2,080,416 
                     
                     
Current liabilities
                    
                     
Amounts due to subsidiaries/ fellow subsidiaries  10,830   1,316,410   51,059   (1,378,299)   
Trade payables  26,440   25,884          52,324 
Deposits received  7,943   8,321          16,264 
Current portion of deferred service income  11,172   102,678      (3,401)  110,449 
Other payables and accrued charges  17,831   149,548   10,735       178,114 
Income tax payable  356   496   1,251       2,103 
Current portion of obligation under finance leases  112   9          121 
                     
                     
Total current liabilities  74,684   1,603,346   63,045       359,375 
Long-term liabilities  702,917   17      (14,500)  688,434 
                     
                     
Total liabilities  777,601   1,603,363   63,045       1,047,809 
                     
                     
  City              
  Telecom      Non-       
  (H.K.)  Guarantor  guarantor  Eliminating  Consolidated 
  Limited  subsidiaries  subsidiary  entries  total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Non-current assets
                    
                     
Investments in subsidiaries (note)  1,258,726   228,875      (1,487,601)   
Goodwill           1,066   1,066 
Fixed assets  74,688   1,221,172   6,520       1,302,380 
Long term receivable and prepayment     16,573      (10,482)  6,091 
Deferred expenditure     12,786          12,786 
                 
                     
   1,333,414   1,479,406   6,520       1,322,323 
                 
                     
Current assets
                    
                     
Accounts receivable  9,220   110,972          120,192 
Other receivables, deposits and prepayments  3,393   67,584   2,492   (3,704)  69,765 
Deferred expenditure     36,674          36,674 
Pledged bank deposits  15,038             15,038 
Cash at bank and in hand  120,315   78,665   27,436       226,416 
                 
                     
   147,966   293,895   29,928       468,085 
                 
                     
Current liabilities
                    
                     
Bank overdrafts — unsecured  896   4,468          5,364 
Amounts due to subsidiaries/ fellow subsidiaries  10,830   905,460   4,427   (920,717)   
Accounts payable  20,484   17,071          37,555 
Other payables and accrued charges  23,530   172,676   10,281       206,487 
Deposits received  7,886   8,499          16,385 
Deferred service revenue  10,848   107,904      (3,682)  115,070 
Tax payable  356   496   1,141       1,993 
Current portion — obligation under finance leases  193   9          202 
                 
                     
   75,023   1,216,583   15,849       383,056 
                 
                     
Net current assets/(liabilities)
  72,943   (922,688)  14,079       85,029 
                 

F-84F-60


City Telecom (H.K.) Limited
Consolidated33 Supplemental guarantors consolidated financial statements for the year August 31, 2008
information (continued)
32Supplemental guarantors consolidated financial information (continued)
  Condensed consolidatedConsolidated balance sheet as of August 31, 2008(continued)2009 (continued)
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Commitments and contingencies
                    
                     
Shareholders’ equity                    
— Ordinary shares, par value                    
HK$0.1 per share                    
— 2,000,000,000 shares authorized                    
— 650,621,823 shares issued and outstanding at August 31, 2008  65,062   15,485   8,131   (23,616)  65,062 
Share premium  670,717   470,836      (470,836)  670,717 
Retained profits/(accumulated losses)  275,025   (118,907)  5,006   113,901   275,025 
Other reserves  19,013   (237)  2,937   90   21,803 
                     
                     
Total shareholders’ equity  1,029,817   367,177   16,074       1,032,607 
                     
                     
Total liabilities and shareholders’ equity  1,807,418   1,970,540   79,119       2,080,416 
                     
                     
  City              
  Telecom      Non-       
  (H.K.)  Guarantor  guarantor  Eliminating  Consolidated 
  Limited  subsidiaries  subsidiary  entries  total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Total assets less current liabilities
  1,406,357   556,718   20,599       1,407,352 
                 
                     
Non-current liabilities
                    
Deferred tax liabilities  7,047   8,662          15,709 
Long-term deferred service revenue  10,535         (10,535)   
Long-term debt and other liabilities  163,108   8          163,116 
                 
                     
   180,690   8,670          178,825 
                 
                     
Net assets
  1,225,667   548,048   20,599       1,228,527 
                 
                     
Capital and reserves
                    
                     
Share capital  66,418   15,485   8,131   (23,616)  66,418 
Reserves  1,159,249   532,563   12,468   (542,171)  1,162,109 
                 
                     
Total equity attributable to equity shareholders of the Company  1,225,667   548,048   20,599       1,228,527 
                 
 
Note: The amounts of investment in subsidiaries and retained profits at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting.

F-85F-61


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
32Supplemental guarantors consolidated financial information (continued)
  Condensed consolidated balance sheet as of August 31, 2007
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Current assets
                    
                     
Cash and bank balances  220,531   303,227   9,136       532,894 
Pledged bank deposits  87,220             87,220 
Trade receivables, net  12,105   158,446          170,551 
Other receivables, deposits and prepayments  4,579   56,290   2,207   (3,704)  59,372 
Inventories  477             477 
Investment securities     3,779          3,779 
Deferred expenditure     13,584          13,584 
                     
                     
Total current assets  324,912   535,326   11,343       867,877 
Fixed assets, net  100,201   1,126,870   10,152       1,237,223 
Investments in subsidiaries (note)  1,495,935   274,449      (1,770,384)   
Investment securities  39,213             39,213 
Other long-term assets     33,645      (16,825)  16,820 
                     
                     
Total assets  1,960,261   1,970,290   21,495       2,161,133 
                     
                     
Current liabilities
                    
                     
Amounts due to subsidiaries/ fellow subsidiaries  10,830   1,490,567   (4,771)  (1,496,626)   
Trade payables  37,477   38,542          76,019 
Deposits received  7,876   8,312          16,188 
Current portion of deferred service income  11,380   56,532      (3,710)  64,202 
Other payables and accrued charges  18,694   119,642   6,931       145,267 
Income tax payable  356   62   1,063       1,481 
Current portion of obligation under finance leases  104   731          835 
         ��           
                     
Total current liabilities  86,717   1,714,388   3,223       303,992 
Long-term liabilities  970,833   386   (70)  (17,890)  953,259 
                     
                     
Total liabilities  1,057,550   1,714,774   3,153       1,257,251 
                     

F-86


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
32Supplemental guarantors consolidated financial information (continued)
Condensed consolidated balance sheet as of August 31, 2007(continued)
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Commitments and contingencies
                    
                     
Shareholders’ equity                    
— Ordinary shares, par value                    
HK$0.1 per share                    
— 2,000,000,000 shares authorized                    
— 616,503,404 shares issued and outstanding at August 31, 2007  61,650   15,485   8,131   (23,616)  61,650 
Share premium  622,433   470,836      (470,836)  622,433 
Retained profits/(accumulated losses)  200,519   (230,666)  9,033   221,633   200,519 
Other reserves  18,109   (139)  1,178   132   19,280 
                     
                     
Total shareholders’ equity  902,711   255,516   18,342       903,882 
                     
                     
Total liabilities and shareholders’ equity  1,960,261   1,970,290   21,495       2,161,133 
                     
Note:The amounts of investment in subsidiaries at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting.

F-87


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
32Supplemental guarantors consolidated financial information (continued)
Condensed consolidatedConsolidated income statement of operations for the year ended August 31, 20082009
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries Total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue  116,130   1,283,296   135,374   (231,819)  1,302,981 
Network costs  (28,398)  (184,851)     34,882   (178,367)
Operating expenses:                    
— Salaries and related costs  (35,057)  (231,196)  (102,067)  120,860   (247,460)
— Sales and marketing expenses  (5,743)  (403,425)     101,425   (307,743)
— General and administrative expenses  (45,797)  (331,030)  (28,414)  8,643   (396,598)
— Provision for doubtful accounts  (954)  (13,339)         (14,293)
                     
                     
Income from operations  181   119,455   4,893       158,520 
Interest income  6,817   7,518   1,261       15,596 
Interest expense  (71,702)  (71,753)     68,318   (75,137)
Other income, net  86,677   30,234   75   (107,593)  9,393 
Share of net income from subsidiaries (note)  108,154         (108,154)   
                     
                     
Income before taxation  130,127   85,454   6,229       108,372 
Income tax (expense)/credit  (4,937)  26,306   (4,551)      16,818 
                     
                     
Net income  125,190   111,760   1,678       125,190 
                     
                     
  City              
  Telecom      Non-       
  (H.K.)  Guarantor  guarantor  Eliminating  Consolidated 
  Limited  subsidiaries  subsidiary  entries  Total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Revenue  95,386   1,390,697   142,603   (150,447)  1,478,239 
Network costs  (29,973)  (177,655)     32,499   (175,129)
Other operating expenses  (90,557)  (959,960)  (136,750)  149,303   (1,037,964)
Other income, net  108,933   31,684   576   (99,653)  41,540 
Finance costs  (54,241)  (69,017)     68,131   (55,127)
Share of net profit from subsidiaries (note)  185,391         (185,391)   
                 
                     
Profit before taxation  214,939   215,749   6,429       251,559 
Income tax expense  (2,110)  (34,998)  (1,622)      (38,730)
                 
                     
Net profit  212,829   180,751   4,807       212,829 
                 
 
Note: The net incomeprofit amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses)profit of its subsidiaries using the equity method of accounting.

F-88


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
32Supplemental guarantors consolidated financial information (continued)
  Condensed consolidatedConsolidated income statement of operations for the year ended August 31, 20072008
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries Total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue  124,017   1,186,356   108,692   (277,795)  1,141,270 
Network costs  (50,522)  (203,506)     39,437   (214,591)
Operating expenses:                    
— Salaries and related costs  (30,475)  (209,065)  (77,594)  96,032   (221,102)
— Sales and marketing expenses  (12,601)  (362,975)     171,903   (203,673)
— General and administrative expenses  (43,149)  (344,162)  (26,050)  10,601   (402,760)
— Provision for doubtful accounts  (796)  (5,773)         (6,569)
                     
                     
Income/(loss) from operations  (13,526)  60,875   5,048       92,575 
Interest income  13,390   8,606   675       22,671 
Interest expense  (87,474)  (68,161)     68,131   (87,504)
Other income, net  50,031   59,200   43   (106,125)  3,149 
Share of net losses from subsidiaries (note)  66,444         (66,444)   
                     
                     
Income before taxation  28,865   60,520   5,766       30,891 
Income tax credit     (75)  (1,951)      (2,026)
                     
                     
Net income  28,865   60,445   3,815       28,865 
                     
                     
  City              
  Telecom      Non-       
  (H.K.)  Guarantor  guarantor  Eliminating  Consolidated 
  Limited  subsidiaries  subsidiary  entries  Total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Revenue  116,130   1,283,296   135,374   (231,819)  1,302,981 
Network costs  (28,398)  (184,851)     34,882   (178,367)
Other operating expenses  (87,551)  (978,990)  (130,481)  230,928   (966,094)
Other income, net  93,494   37,752   1,336   (107,593)  24,989 
Finance costs  (71,702)  (71,753)     68,318   (75,137)
Share of net profit from subsidiaries (note)  108,154         (108,154)   
                 
                     
Profit before taxation  130,127   85,454   6,229       108,372 
Income tax (expense)/benefit  (4,937)  26,306   (4,551)      16,818 
                 
                     
Net profit  125,190   111,760   1,678       125,190 
                 
 
Note: The net incomeprofit amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses)profit of its subsidiaries using the equity method of accounting.

F-89F-62


City Telecom (H.K.) Limited
Consolidated33 Supplemental guarantors consolidated financial statements for the year August 31, 2008
32Supplemental guarantors consolidated financial information (continued)
information (continued)
  Condensed consolidated cash flow statement of operations for the year ended August 31, 20062009
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue  174,113   1,110,256   116,355   (265,848)  1,134,876 
Network costs  (87,849)  (254,740)     41,996   (300,593)
Operating expenses:                    
— Salaries and related costs  (44,254)  (233,105)  (81,887)  102,525   (256,721)
— Sales and marketing expenses  (20,567)  (336,985)     152,600   (204,952)
— General and administrative expenses  (56,366)  (366,635)  (30,353)  12,682   (440,672)
— Provision for doubtful accounts  (1,090)  (16,360)         (17,450)
                     
                     
(Loss)/income from operations  (36,013)  (97,569)  4,115       (85,512)
Interest income  16,594   2,946   838       20,378 
Interest expense  (88,584)  (60,454)     60,401   (88,637)
Other income, net  67,672   39,201   2,245   (104,653)  4,465 
Share of net losses from subsidiaries (note)  (111,171)        111,171    
                     
                     
(Loss)/income before taxation  (151,502)  (115,876)  7,198       (149,306)
Income tax expense/(credit)  9,440   11   (2,207)      7,244 
                     
                     
Net (loss)/income  (142,062)  (115,865)  4,991       (142,062)
                     
                     
  City              
  Telecom      Non-       
  (H.K.)  Guarantor  guarantor  Eliminating  Consolidated 
  Limited  subsidiaries  subsidiary  entries  total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Net cash inflow/(outflow) from operating activities  487,691   88,243   (38,930)  (233)  536,771 
Net cash inflow/(outflow) from investing activities  101,605   (276,843)  (1,250)      (176,488)
Net cash outflow from financing activities  (560,397)  (895)         (561,292)
                 
                     
Increase/(decrease) in cash at bank and in hand  28,899   (189,495)  (40,180)      (201,009)
Cash at bank in hand at September 1, 2008  90,386   263,386   67,838       421,610 
Effects of foreign exchange rates changes  134   306   (222)  233   451 
                 
                     
Cash at bank and in hand at August 31, 2009  119,419   74,197   27,436       221,052 
                 
                     
Analysis of the balances of cash and cash equivalent:                    
                     
Cash at bank and in hand  120,315   78,665   27,436       226,416 
Bank overdrafts — unsecured  (896)  (4,468)         (5,364)
                 
                     
   119,419   74,197   27,436       221,052 
                 
Note:The net loss amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses) of its subsidiaries using the equity method of accounting.

F-90F-63


City Telecom (H.K.) Limited
Consolidated33 Supplemental guarantors consolidated financial statements for the year August 31, 2008
32Supplemental guarantors consolidated financial information (continued)
information (continued)
  Condensed consolidated statement of cash flowsflow statement for the year ended August 31, 2008
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Net cash provided by operating activities  193,001   125,504   59,866   158   378,529 
Net cash generated from/ (used in) investing activities  18,775   (164,222)  (2,303)      (147,750)
Net cash used in financing activities  (341,786)  (730)         (342,516)
                     
                     
Net (decrease)/increase in cash and bank balances  (130,010)  (39,448)  57,563       (111,737)
Cash and bank balances at beginning of year  220,531   303,227   9,136       532,894 
Effects of foreign exchange rates changes  (135)  (393)  1,139   (158)  453 
                     
                     
Cash and bank balances at end of year  90,386   263,386   67,838       421,610 
                     
Condensed consolidated statement of cash flows for the year ended August 31, 2007
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Net cash provided/(used in) by operating activities  110,190   342,627   (69,035)  217   383,999 
Net cash generated from/ (used in) investing activities  132,039   (69,197)  51,211       114,053 
Net cash used in financing activities  (108,277)  (1,227)         (109,504)
                     
                     
Net increase/(decrease) in cash and bank balances  133,952   272,203   (17,824)      388,548 
Cash and bank balances at beginning of year  86,670   31,349   26,898       144,917 
Effects of foreign exchange rates changes  (91)  (325)  62   (217)  (571)
                     
                     
Cash and bank balances at end of year  220,531   303,227   9,136       532,894 
                     
                     
  City              
  Telecom      Non-       
  (H.K.)  Guarantor  guarantor  Eliminating  Consolidated 
  Limited  subsidiaries  subsidiary  entries  total 
  HK$’000  HK$’000  HK$’000  HK$’000  HK$’000 
Net cash inflow from operating activities  193,028   128,939   59,866   158   381,991 
Net cash inflow/(outflow) from investing activities  18,775   (164,222)  (2,303)      (147,750)
Net cash outflow from financing activities  (341,813)  (4,165)         (345,978)
                 
                     
(Decrease)/increase in cash at bank and in hand  (130,010)  (39,448)  57,563       (111,737)
Cash at bank and in hand at September 1, 2007  220,531   303,227   9,136       532,894 
Effects of foreign exchange rates changes  (135)  (393)  1,139   (158)  453 
                 
                     
Cash at bank and in hand at August 31, 2008  90,386   263,386   67,838       421,610 
                 
                     
Analysis of the balances of cash and cash equivalent:                    
                     
Cash at bank and in hand  91,764   275,002   67,838       434,604 
Bank overdrafts — unsecured  (1,378)  (11,616)         (12,994)
                 
                     
   90,386   263,386   67,838       421,610 
                 

F-91


City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
32Supplemental guarantors consolidated financial information (continued)
Condensed consolidated statement of cash flows for the year ended August 31, 2006
                     
  City          
  Telecom     Non-    
  (H.K.) Guarantor guarantor Eliminating Consolidated
  Limited subsidiaries subsidiary entries total
  HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Net cash (used in)/provided by operating activities  (278,174)  403,086   58,994   245   184,151 
Net cash used in investing activities  (12,087)  (425,348)  (55,307)      (492,742)
Net cash provided by financing activities  (85,238)  (1,248)     54   (86,432)
                     
Net (decrease)/increase in cash and bank balances  (375,499)  (23,510)  3,687       (395,023)
Cash and bank balances at beginning of year  461,001   55,309   23,281       539,591 
Effects of foreign exchange rates changes  1,168   (450)  (70)  (299)  349 
                     
Cash and bank balances at end of year  86,670   31,349   26,898       144,917 
                     

F-92F-64


SIGNATURE
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
     
 CITY TELECOM (H.K.) LIMITED


 
 By:  /s/ Yeung Chu Kwong, William  
Name:  Yeung Chu Kwong, William 
Title:  Chief Executive Officer 
By:  /s/ Lai Ni Quiaque   
 Name:Name:  Lai Ni Quiaque  
 Title:Title:  Chief Financial Officer  
Date: January 16, 2009December 17, 2010