2009 Tower 1, Metroplaza or common stock as at the close of the period covered by the annual report:664,179,970 Ordinary Shares, par value HK$0.10 per share Noo
SECURITIES AND EXCHANGE COMMISSION¨o REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934 xþ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 2006¨o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ¨o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
The People’s Republic of China
(Jurisdiction of Incorporation or Organization)
No. 223 Hing Fong Road
Kwai Chung, New Territories
Hong Kong
(Address of Principal Executive Offices)
12th Floor, Trans Asia Centre
No.18 Kin Hong Street
Kwai Chung, New Territories
Hong Kong
Facsimile : (852) 2199 8445
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)N/ATitle 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* American Depositary Shares, representing 20 Ordinary Shares, par value HK$0.10 per share
NoneN/A
8.75% Senior Notes due 2015August 31, 2006: 614,175,404Yes o No¨þ No xYes o No¨þ No xIf 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).Yes ¨ No xYes xþ Noo¨onon-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filer or large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (CircleAct. (Check one):Large accelerated filer ¨ Accelerated Filer ¨ Non-accelerated filer xLarge accelerated filero Accelerated filero Non-accelerated filerþ
(Do not check if a smaller reporting company)Smaller reporting companyo US GAAPo International Financial Reporting Standards as issued by the International Accounting Standards Boardþ Othero ¨ Item 18xo* Not for trading, but only in connection with the registration of the American Depositary Shares
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• | technological changes; | ||
• | changes in our regulatory environment, including changes in rules and policies promulgated by regulatory agencies from time to time; | ||
• | increasing competition in the telecommunications, Internet access, local VoIP, pay-television and corporate data markets; | ||
• | the benefits we expect to derive from our Next Generation Network, which utilize Metro Ethernet and GPON technologies, in which we have been making significant capital investments; | ||
• | our ability to maintain growth and successfully introduce new 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 corporate data services are offered; and | ||
• | changes in the local and global economic 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
***********
3
A. Selected financial data |
City Telecom’s Historical Financial Information
historical financial information
As of and for the year ended August 31, | ||||||||||||
2008 | 2009 | 2009 | ||||||||||
HK$ | HK$ | US$ | ||||||||||
(Amounts in thousands except per share data) | ||||||||||||
Revenue: | ||||||||||||
- FTNS business | 1,011,038 | 1,230,880 | 158,813 | |||||||||
- IDD business | 291,943 | 247,359 | 31,915 | |||||||||
Total operating revenue | 1,302,981 | 1,478,239 | 190,728 | |||||||||
Network costs: | ||||||||||||
- FTNS business | (103,524 | ) | (107,670 | ) | (13,892 | ) | ||||||
- IDD business | (74,843 | ) | (67,459 | ) | (8,704 | ) | ||||||
Total network costs | (178,367 | ) | (175,129 | ) | (22,596 | ) | ||||||
Other operating expenses | (966,094 | ) | (1,037,964 | ) | (133,922 | ) | ||||||
Interest expense, net | (59,541 | ) | (50,258 | ) | (6,484 | ) | ||||||
Other income, net | 9,393 | 36,671 | 4,731 | |||||||||
Income taxes benefit/(expense) | 16,818 | (38,730 | ) | (4,997 | ) | |||||||
Net income | 125,190 | 212,829 | 27,460 | |||||||||
Basic earnings per share (HK cents) | 19.7 | 32.4 | 4.2 | |||||||||
Diluted earnings per share (HK cents) (note 1) | 19.0 | 31.8 | 4.1 | |||||||||
Dividends per share attributable to the year (HK cents) | 6.0 | 19.0 | 2.5 | |||||||||
Weighted average number of ordinary shares | 634,015 | 657,201 | 657,201 | |||||||||
Diluted weighted average number of ordinary shares (note 2) | 657,997 | 668,384 | 668,384 |
4
2004 (restated) (8) 2005 (restated) (8)(10) Consolidated Statement of Income Data: Hong Kong GAAP Revenues: Fixed telecommunications network services International telecommunications Total Operating Revenue Network Costs: Fixed telecommunications network services International telecommunications Total Network Costs Other Operating Expenses Income/(loss) from operations Interest income/(expense), net Other income, net Income taxes (expense)/credit Income/(loss) after taxation Minority interest Net income/(loss) Net income/(loss) per share (cents) Diluted net income/(loss) per share (cents)(1) Dividends declared per share (cents) Diluted weighted average number of shares(2) Weighted average number of shares As of and for the year ended August 31, 2002 2003 2006(10) 2006(10) HK$ HK$ HK$ HK$ HK$ US$ (Amounts in thousands except per share data) 241,219 423,107 541,902 629,464 716,600 92,147 908,981 875,802 627,978 532,595 418,276 53,786 1,150,200 1,298,909 1,169,880 1,162,059 1,134,876 145,933 (50,808 ) (76,845 ) (122,476 ) (118,383 ) (125,639 ) (16,156 ) (407,155 ) (245,908 ) (208,932 ) (221,019 ) (174,954 ) (22,497 ) (457,963 ) (322,753 ) (331,408 ) (339,402 ) (300,593 ) (38,653 ) (602,644 ) (704,796 ) (793,212 ) (958,031 ) (919,795 ) (118,276 ) 89,593 271,360 45,260 (135,374 ) (85,512 ) (10,996 ) 7,366 2,562 3,578 (40,884 ) (68,259 ) (8,777 ) 502 1,678 2,668 6,037 4,465 574 (15,190 ) (17,857 ) (2,043 ) 6,725 7,244 932 82,271 257,743 49,463 (163,496 ) (142,062 ) (18,267 ) 8,234 — — — — — 90,505 257,743 49,463 (163,496 ) (142,062 ) (18,267 ) 18.3 46.6 8.1 (26.6 ) (23.1 ) (3.0 ) 16.0 41.9 8.1 (26.6 ) (23.1 ) (3.0 ) — 5.0 9.0 — — — 565,889 615,102 614,365 613,525 614,134 614,134 495,181 552,600 610,095 613,525 614,134 614,134
As of and for the year ended August 31, | ||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | 2006 | |||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||
(Amounts in thousands except per share data) | ||||||||||||||||||
U.S. GAAP | ||||||||||||||||||
Total operating revenue | 1,141,814 | 1,291,119 | 1,169,880 | 1,162,059 | 1,134,876 | 145,933 | ||||||||||||
Total operating expenses | (1,073,283 | ) | (1,015,900 | ) | (1,123,198 | ) | (1,289,014 | ) | (1,220,388 | ) | (156,929 | ) | ||||||
Net income/(loss) from continuing operations | 69,317 | 264,151 | 51,565 | (149,148 | ) | (142,062 | ) | (18,267 | ) | |||||||||
Net income/(loss) from continuing operations per share (cents) | 14.0 | 47.8 | 8.5 | (24.3 | ) | (23.1 | ) | (3.0 | ) | |||||||||
Net income/(loss) from discontinued operations | (352 | ) | 83 | — | — | — | — | |||||||||||
Loss arising from disposal of discontinued operations | — | (2,695 | ) | — | — | — | — | |||||||||||
Net loss from discontinued operations per share (cents) | (0.1 | ) | (0.5 | ) | — | — | — | — | ||||||||||
Diluted net income/(loss) from continuing operations per share (cents)(3) | 12.3 | 42.9 | 8.4 | (24.3 | ) | (23.1 | ) | (3.0 | ) | |||||||||
Diluted net loss from discontinued operations per share (cents)(4) | (0.1 | ) | (0.4 | ) | — | — | — | — | ||||||||||
Dividends declared per share (cents) | — | 5.0 | 9.0 | — | — | — | ||||||||||||
Weighted average number of shares | 495,181 | 552,600 | 610,095 | 613,525 | 614,134 | 614,134 | ||||||||||||
Diluted weighted average number of shares(2) | 565,889 | 615,102 | 614,365 | 613,525 | 614,134 | 614,134 |
2004 2005 Consolidated Balance Sheet Data: Hong Kong GAAP Total assets Debt Finance lease obligation Other liabilities Total liabilities Net assets Minority interest Net assets employed Share capital Share premium Reserves Total shareholders’ equity As of and for the year ended August 31, 2002 2003 2006(10) 2006(10) HK$ HK$ HK$ HK$ HK$ US$ (Amounts in thousands) 1,327,285 1,548,534 1,683,408 2,347,428 2,124,215 273,151 — (18,174 ) (119,170 ) (945,348 ) (948,027 ) (121,906 ) (2,949 ) — — (3,135 ) (2,373 ) (305 ) (419,348 ) (351,185 ) (388,540 ) (378,491 ) (282,161 ) (36,283 ) (422,297 ) (369,359 ) (507,710 ) (1,326,974 ) (1,232,561 ) (158,494 ) 904,988 1,179,175 1,175,698 1,020,454 891,654 114,657 — — — — — — 904,988 1,179,175 1,175,698 1,020,454 891,654 114,657 50,086 60,496 61,057 61,412 61,417 7,898 572,656 615,886 617,986 619,408 620,298 79,764 282,246 502,793 496,655 339,634 209,939 26,995 904,988 1,179,175 1,175,698 1,020,454 891,654 114,657
As of and for the year ended August 31, | ||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | 2006 | |||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||
(Amounts in thousands) | ||||||||||||||||||
U.S. GAAP | ||||||||||||||||||
Total assets | 1,329,707 | 1,552,021 | 1,688,640 | 2,385,556 | 2,154,305 | 277,020 | ||||||||||||
Total liabilities | (422,297 | ) | (369,359 | ) | (507,710 | ) | (1,352,876 | ) | (1,257,034 | ) | (161,641 | ) | ||||||
Total shareholders’ equity | 907,410 | 1,182,662 | 1,180,930 | 1,032,680 | 897,271 | 115,379 |
As of and for the year ended August 31, | ||||||||||||||||||
2002 | 2003 | 2004 (restated) (8) | 2005 (restated) (8)(10) | 2006(10) | 2006(10) | |||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||
(Amounts in thousands) | ||||||||||||||||||
Other Financial Data: | ||||||||||||||||||
EBITDA(5) | 227,684 | 449,058 | 244,945 | 108,377 | 195,417 | 25,129 | ||||||||||||
Net cash provided by operating activities(9) | 288,444 | 414,500 | 203,763 | 77,383 | 184,151 | 23,680 | ||||||||||||
Net cash used in investing activities(9) | (475,212 | ) | (309,634 | ) | (406,244 | ) | (557,440 | ) | (492,742 | ) | (63,361 | ) | ||||||
Net cash provided by (used in) financing activities | 9,109 | (10,274 | ) | 47,221 | 792,216 | (86,432 | ) | (11,114 | ) | |||||||||
Capital expenditures(7) | 579,066 | 250,209 | 410,046 | 419,126 | 322,935 | 41,526 |
As of the year ended August 31, | ||||||||||||
2008 | 2009 | 2009 | ||||||||||
HK$ | HK$ | US$ | ||||||||||
(Amounts in thousands) | ||||||||||||
Total assets | 2,080,416 | 1,785,044 | 230,313 | |||||||||
Long-term debt and other liabilities | (683,242 | ) | (162,586 | ) | (20,977 | ) | ||||||
Finance lease obligations | (376 | ) | (732 | ) | (94 | ) | ||||||
Other liabilities | (364,191 | ) | (393,199 | ) | (50,733 | ) | ||||||
Total liabilities | (1,047,809 | ) | (556,517 | ) | (71,804 | ) | ||||||
Net assets | 1,032,607 | 1,228,527 | 158,509 | |||||||||
Share capital | 65,062 | 66,418 | 8,570 | |||||||||
Share premium | 670,717 | 681,208 | 87,892 | |||||||||
Reserves | 296,828 | 480,901 | 62,047 | |||||||||
Total shareholders’ equity | 1,032,607 | 1,228,527 | 158,509 | |||||||||
For the year ended August 31, | ||||||||||||
2008 | 2009 | 2009 | ||||||||||
HK$ | HK$ | US$ | ||||||||||
(Amounts in thousands) | ||||||||||||
EBITDA (note 3) | 377,964 | 508,058 | 65,551 | |||||||||
Net cash inflow from operating activities | 378,563 | 535,886 | 69,142 | |||||||||
Net cash outflow from investing activities | (147,750 | ) | (176,488 | ) | (22,771 | ) | ||||||
Net cash outflow from financing activities | (342,550 | ) | (560,407 | ) | (72,306 | ) | ||||||
Capital expenditures (note 4) | 211,684 | 286,734 | 36,996 |
For the year ended August 31, | ||||||||||||
2008 | 2009 | 2009 | ||||||||||
HK$ | HK$ | US$ | ||||||||||
(Amounts in thousands) | ||||||||||||
EBITDA | 377,964 | 508,058 | 65,551 | |||||||||
Depreciation and amortization | (210,051 | ) | (206,241 | ) | (26,610 | ) | ||||||
Interest expense, net | (59,541 | ) | (50,258 | ) | (6,484 | ) | ||||||
Income taxes benefit/(expense) | 16,818 | (38,730 | ) | (4,997 | ) | |||||||
Net income | 125,190 | 212,829 | 27,460 | |||||||||
Depreciation and amortization | 210,051 | 206,241 | 26,610 | |||||||||
Amortization of deferred expenditure | 33,777 | 53,160 | 6,859 | |||||||||
Income taxes (benefit)/expense | (16,818 | ) | 38,730 | 4,997 | ||||||||
Interest income | (15,596 | ) | (4,869 | ) | (628 | ) | ||||||
Interest element of finance lease | 34 | 27 | 3 | |||||||||
Interest, amortization and exchange difference on senior notes | 72,640 | 49,214 | 6,350 | |||||||||
Realized gain on long term bank deposit | (1,185 | ) | — | — | ||||||||
Loss on disposal of fixed assets | 1,431 | 1,016 | 131 | |||||||||
Equity settled share-based transaction | 4,204 | 4,768 | 615 | |||||||||
Realized loss on derivatives financial instruments | 1,039 | — | — | |||||||||
Realized and unrealized gain on other financial assets | (3,284 | ) | (189 | ) | (24 | ) | ||||||
Gain on extinguishment of senior notes | (2,582 | ) | (31,371 | ) | (4,048 | ) | ||||||
Taxation paid | (4,250 | ) | (1,732 | ) | (223 | ) | ||||||
Change in long term receivable and prepayments | 1,346 | (505 | ) | (65 | ) | |||||||
Change in working capital, net | (27,434 | ) | 8,567 | 1,105 | ||||||||
Net cash inflow from operating activities | 378,563 | 535,886 | 69,142 | |||||||||
5
EBITDA Depreciation and amortization Interest income/(expense), net Income taxes (expense)/credit Net income/(loss) Depreciation and amortization Impairment loss on investment property Amortization of deferred expenditure Income taxes (expense)/credit Interest income Interest on 10-year senior notes Amortization of debt issuance costs Other borrowing costs Minority interest Loss/(gain) on disposal of fixed assets Equity settled share-based transaction Realized and unrealized loss on derivatives financial instruments Unrealized losses/(gain) on other investments Loss on disposal of a subsidiary Taxation paid Change in long term receivable Change in working capital, net Net cash flow provided by operating activities(9) As of and for the year ended August 31, 2002 2003 2004 2005 2006 2006 (restated) (8) (restated) (8) HK$ HK$ HK$ HK$ HK$ US$ (Amounts in thousands) 227,684 449,058 244,945 108,377 195,417 25,129 (129,355 ) (176,020 ) (197,017 ) (237,714 ) (276,464 ) (35,551 ) 7,366 2,562 3,578 (40,884 ) (68,259 ) (8,777 ) (15,190 ) (17,857 ) (2,043 ) 6,725 7,244 932 90,505 257,743 49,463 (163,496 ) (142,062 ) (18,267 ) 129,355 176,020 197,017 237,714 276,464 35,550 — — — — 1,131 145 — — 1,828 12,927 13,973 1,797 15,190 17,857 2,043 (6,725 ) (7,244 ) (932 ) (10,870 ) (3,163 ) (3,753 ) (13,578 ) (20,378 ) (2,620 ) — — — 52,372 85,235 10,961 — — — 1,693 1,429 184 — — — — 1,919 247 (8,234 ) — — — — — 2,414 427 (34 ) (134 ) 9,621 1,237 — — 87 6,965 6,823 877 — — — — 125 16 — — 1,696 (300 ) (668 ) (86 ) — 2,695 — — — — (4,452 ) (19,861 ) (24,819 ) (1,393 ) (2,532 ) (326 ) — — (6,206 ) (6,893 ) 567 73 74,536 (17,218 ) (13,559 ) (41,769 ) (40,252 ) (5,176 ) 288,444 414,500 203,763 77,383 184,151 23,680
As of and for the year ended August 31, | ||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||
Operating Data: | ||||||||||
Fixed Telecommunications Network Services Subscriptions: | ||||||||||
Broadband Internet Access | 130,000 | 172,000 | 197,000 | 229,000 | 220,000 | |||||
Local VOIP | 21,000 | 140,000 | 237,000 | 293,000 | 281,000 | |||||
IP-TV | — | — | 31,000 | 109,000 | 116,000 | |||||
Total | 151,000 | 312,000 | 465,000 | 631,000 | 617,000 | |||||
Registered International Telecommunications Accounts(6) | 1,147,689 | 1,589,188 | 1,916,235 | 2,054,036 | 2,201,963 | |||||
IDD Outgoing Minutes (in thousands) | 916,000 | 888,000 | 1,007,000 | 947,100 | 788,000 |
As of and for the year ended August 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
FTNS subscriptions: | ||||||||||||
- Broadband Internet access | 247,000 | 316,000 | 391,000 | |||||||||
- Local VoIP | 308,000 | 329,000 | 382,000 | |||||||||
- IP-TV | 128,000 | 156,000 | 170,000 | |||||||||
Total | 683,000 | 801,000 | 943,000 | |||||||||
Registered international telecommunications accounts (note 5) | 2,331,000 | 2,336,000 | 2,383,000 | |||||||||
IDD outgoing minutes (in thousands) | 659,000 | 574,000 | 487,000 | |||||||||
Notes: | ||
(1) | Diluted |
(2) | For fiscal |
(3) |
EBITDA for any period means, without duplication, net |
(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. |
Our reassessment had the following effects on our consolidated statement of operations for the years ended August 31, 2005 and 2006:6
As previously reported in 2005 Hong Kong statutory financial statements | As reported in 2005 Form 20-F | As previously reported in 2006 Hong Kong statutory financial statements | As reported in 2006 Form 20-F | |||||||||
HK$ | HK$ | HK$ | HK$ | |||||||||
(Amounts in thousands except per share data) | ||||||||||||
Revenue from provision of telecommunication and other services, net | 1,137,356 | 1,162,059 | 1,159,579 | 1,134,876 | ||||||||
Provision for doubtful accounts receivable | (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 |
rate information 2001 2002 2003 2004 2005 2006 August 2006 September 2006 October 2006 November 2006 December 2006 January 2007 (through January 23, 2007) 7Rate InformationHowever, even with this official exchange rate, and despiteDespite the efforts of the Hong Kong Monetary Authority’s (“HKMA”) currency boardAuthority, or HKMA, 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.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: Average(1) High Low Period-End HK$ HK$ HK$ HK$ 7.7996 7.8004 7.7970 7.7980 7.7996 7.8095 7.7970 7.7988 7.7864 7.8001 7.7085 7.7640 7.7891 7.8010 7.7632 7.7723 7.7775 7.7999 7.7514 7.7718 7.7681 7.7928 7.7506 7.7767 7.7762 7.7796 7.7723 7.7767 7.7825 7.7913 7.7767 7.7913 7.7849 7.7928 7.7746 7.7780 7.7816 7.7875 7.7751 7.7779 7.7733 7.7787 7.7665 7.7771 7.7968 7.8100 7.7797 7.7998 Average High Low Period-end (note) HK$ HK$ HK$ HK$ 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 Fiscal 2009 7.7550 7.8094 7.7495 7.7505 July 2009 7.7500 7.7505 7.7495 7.7500 August 2009 7.7506 7.7516 7.7500 7.7505 September 2009 7.7503 7.7514 7.7498 7.7500 October 2009 7.7497 7.7502 7.7495 7.7497 November 2009 7.7497 7.7501 7.7495 7.7500 December 2009
(through December 14, 2009) 7.7501 7.7515 7.7495 7.7515 (1)Note: The average of the noon buying rates on the last business day of each month during the relevant annualfiscal 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.not applicablenotFactorsfactorsRelatingrelating to our business and operationsBusinessFTNS business primarily consists of broadband Internet access, local VoIP, IP-TV and OperationsWecorporate data services, while our IDD business primarily consists of direct dial, international calling cards and mobile call forwarding services. Our total revenues increased by 13.4% to HK$1,478.2 million in fiscal 2009 from HK$1,303.0 million in fiscal 2008, and our net profit increased by 70.0% to HK$212.8 million in fiscal 2009 from HK$125.2 million in fiscal 2008. The increase in net profit in fiscal 2009 was mainly due to increased contribution from our FTNS business, which carries high incremental margins than our IDD business, and a gain of HK$31.4 million on extinguishment of a portion of our outstanding senior notes.prevent total revenuesmaintain such revenue and operating results from continuing to decline.In fiscal 2006 ,profit growth. The increase in revenue of our total revenues decreased to HK$1,134.9 million from HK$1,162.1 million in fiscal 2005, and we experienced a net loss of HK$142.1 million versus net loss of HK$163.5 million in fiscal 2005. The loss in fiscal 2006FTNS business was primarily due to an increase in our subscription base of 17.7%, driven by growing demand for high bandwidth broadband Internet access service. Any further increase in such subscription base will highly depend on our ability to continue expand our network coverage and compete successfully in an intensely competitive market.
Our international telecommunications revenues declineddecreased by 21.5%15.3% in fiscal 2009. The decrease was primarily due to a decrease in the total number of airtime minutes carried by 16.8%. With15.2%, which reflected a reduction in the drop in average tariff ratesscale of operations. On our IDD service, our strategy is to focus on cash flow and reduced operating scale,profitability rather than market share. Due to increasing competition, we expect that the profit margins in our international telecommunications services will continue to be under pressure and lower revenue will be generated in future.
Our fixed telecommunications network services revenues increased by 13.8% in fiscal 2006 primarily due to an increase in our revenue per user, the effects of which was partially offset by a decrease in our subscription base of 2.2%. The decrease in our subscription base was due to assertive promotions by our competitors, especially the incumbent carrier. We, however, incurred operating losses of approximately HK$106.7 million in fiscal 2006 from such service operations. We expect our fixed telecommunications network serviceIDD business will continue to incur operating losses as we expend substantial resourcesexperience pressure on tariff rates and to contribute to a smaller portion of our revenue and net profit over time.
We have substantially less financialindustry and human resources to apply to the developmentcharacteristics of our target markets, we cannot assure you that our FTNS business than some ofwill continue to be profitable.
The telecommunications and pay-TV markets inFTNS business is Hong Kong are highly competitive. Some of our main competitors for Internet access, local telephony, pay-TV and international telecommunications services have longer operating histories and others are subsidiaries of large business conglomerates. Consequently, our competitors may have resource advantages over us including as follows:
In addition, certain areas of the fixed telecommunications network services 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 and Internet access markets.
Kong. The Hong Kong government continues to liberalize access into the telecommunications industry in Hong Kong, including issuing new wireless and wire-line fixed telecommunications network services licenses, which we refer to as FTNS Licenses. We expect the Hong Kong government to continue to open the telecommunications market in the next several years. Some of these changes may impact our company. As of December 4, 2006, 247 public non-exclusive telecommunications service licenses, which we refer to as PNETS Licenses, for the provision of external telecommunications services had been issued in Hong Kong. Some of these licenses are held by subsidiaries of major foreign telecommunications providers which have competitive advantage due their global presence and size.
Increasing liberalization of the telecommunications market 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 in our industry. Increasedis intensely 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 increase for the following reasons:
• | Increasing liberalization of the telecommunications industry in Hong Kong may continue to attract new local and foreign entrants and broaden the variety of telecommunications services available in the market, thereby increasing the overall level of competition in our industry. | ||
• | The Hong Kong government may continue to issue new wireless and wire-line FTNS Licenses. For instance, 261 PNETS Licenses had been issued in Hong Kong as of October 31, 2009 for the provision of “external telecommunications services” (as defined in the Telecommunications Authority’s Determination as of December 30, 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 territorial 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. As of December 15, 2009, their services offered a total of 11 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. |
• | To compete successfully, we must constantly increase the diversity and sophistication of the services we offered 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 or 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. Both may lead to a decline in our revenues from international telecommunications services and local telephony services. | ||
• | 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. |
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While we intend to fund such expenditures by using our currently available cash as well as cash flow from operations, and the net proceeds from our January 2005 offering of 8.75% senior notes due 2015, which we refer to in this annual report as the 8.75% notes or 10-year senior notes, 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 2009, we generated cash from operations of HK$535.9 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.
We have made significant investments in our network infrastructure to provide the services we offer. The launch ofdo not anticipate these changes and rapidly adopt new and commercially viable products andinnovative services is important to compete in our business. Commercial acceptance by consumers of the new services we offer may not occur at the rate or level expected, andresponse, we may not be able to successfully adaptfully capture the opportunities in the market. Development of new services, effectively and economicallyhowever, exposes us to meet consumers’ demand, which could limit the return from our investments.following risks:
• | Developing new telecommunications services can be complex. We may not be able to adapt the new services effectively and economically to meet customer demand. | ||
• | 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 flow 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 and adversely affect our financial condition and the results of our operations. |
As most of the services we provide through our Metro Ethernet network are still at an early stage of implementation, evaluation of our business and our prospects is difficult.
Due to the short operating history of most of our fixed telecommunications network services, especially our IP-TV services, our historical financial data may not provide a meaningful basis for you to evaluate us and our prospects. These services are still at an early stage of implementation, and the revenue, potential income and cash flows from these new businesses are unproven. Accordingly, evaluation of our businesses and our prospects is difficult, and we cannot give you any assurance that we will continue to succeed in these businesses.
service.
2010.
procedures.”
effective.
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• | improve our existing operational, administrative and technological systems and our financial and management controls; | ||
• | enhance our infrastructure to support the expansion; | ||
• | develop effective marketing plans; | ||
• | control operational costs and maintain effective quality controls; and | ||
• | offer competitive prices to customers for our services. |
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.
Expanding.
• | 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 FTNS providers, including us, may encounter a bottleneck when installing our own in-building wiring. | ||
• | Some single-owner commercial buildings may grant rights of access to our competitors while barring us from installing our own in-building wiring. | ||
• | Certain developers may have affiliations with our competitors and may attempt to delay our wiring installations. |
will also be limited as a result.
We intend
• | 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. |
We other harmful attacks, we may need to incur significant costs to protect us against the threat of security breaches or to alleviate problems caused by such breaches. In addition, alleviatingWe intend to continue to strengthen our network security to alleviate these problemsproblems. Our efforts, however, may cause interruptions, delays or cessation in service tocessations of our users, which could cause them toservices, and our customers may stop using our service or assert claims against us. While we continue to strengthen our network security, there is no assurances that computer viruses and other harmful attacks could not affect our business.us as a result.
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Risks Relating to Our Technological Infrastructure
Our internet access network has limited capacity.
experience failures or shutdownsshut downs relating to individual points of presence or even catastrophic failure of our entire network. Hong Kong’s weather patterns often result in heavy rainfall during certain periods of the year. Any sustained failure of our network, our servers, or any link in the delivery chain, whether from operational disruption, natural disaster or otherwise, resulting in an interruption in our operations, could have a material adverse effect on our business, financial condition and results of operations.
The earthquake in Taiwan on December 26, 2006 interrupted international capacity access to the carriers in Hong Kong. By redirecting our tariff under our contingency plan, we were able to minimize the impact of such interruption to our business by restoring basic international services within two days of the disaster. We, however, cannot assure that our contingency plan will be sufficient to overcome natural disasters and other disruptive regional events in the future.
subscribers.
Telecommunications businesses are characterized by rapidly changing technology and industry standards, evolving subscriber needs and the introduction of new services. The continuously changing nature of these services, and their increasingly shorter life cycles require us to continually improve our performance, services and network in order to compete successfully with the services offered by our competitors. 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 international telecommunications services revenues. 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. In addition, 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. To respond successfully to technological advances and emerging industry standards, we may require substantial capital expenditure and access to related or enabling technologies in order to integrate the new technology with our existing technology. 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 Relatingrelating to the Regulatory, Politicalregulatory, political and Economic Environment
economic environment
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MII Ministry of Information Industry 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 ourthe profit margins for international telecommunications services.
of our IDD business could be adversely affected.
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A major portion
• | 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. | ||
• | Payment of interest, principal and any other amounts due under the 10-year 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. |
In addition, the expenses that we incurmaintained 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.
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, and adversely affect our profitability.
Risks Relating to our Securities
Our ability to fund operating and capital expenditures and to service debt will depend significantly on our ability to generate cash from operations. In fiscal 2005 and 2006, we incurred net cash outflow before financing activities of HK$480.1 million and HK$308.6 million, respectively. We will need to turn around our operations in order to generate sufficient cash flows to meet our future debt service requirements. However, we cannot assure you that we will be able to do so.
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. We may not be successful in taking these actions. In particular, Standard & Poor’s and Moody’s Investors Services downgraded our credit rating during 2005, from ‘BB-’ to ‘B’ and from ‘Ba3’to B2’, respectively. These downgrades may limit our ability to obtain future financing or make such financing more costly. Further, our ability to take many of these steps may be subject to approval by future creditors in addition to holders of the 8.75% notes issued in January 2005.
The 8.75% notes that we issued in January 2005 contain covenants that limit our financial and operating flexibility.
Covenants under the 8.75% notes that we issued in January 2005 restrict our ability to, among other things:
All of these limitations are subject to exceptions and qualifications specified in the indenture governing the 8.75% 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.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Developmentdevelopment of the Company
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.
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.
• | 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, we launched our “bb50 and bb200” symmetric residential broadband service supported by “SDU” personalized customer care service. | ||
• | In June 2007, we were awarded “Best Retention Strategies” at the Hong Kong HR Awards 2007. | ||
• | In July 2007, we were awarded “Integrated Support Team” of the year at the Asia Pacific Customer Service Consortium Customer Relationship Excellence Awards. | ||
• | In September 2007, we launched “Fiber-To-The-Home” residential broadband service, “FiberHome100”, “FiberHome200” and “FiberHome1000”. As the same time, we upgraded our entry level service broadband Internet access from 10 Mbps to 25 Mbps. | ||
• | In January 2008, we 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, we were awarded contract for the provision of payphone service at the Hong Kong International Airport. |
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• | In September 2008, we 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 July 2009, we were awarded the 2009 Hong Kong Management Association Quality Award — Bronze. | ||
• | In November 2009, we accepted the Innovation in Recruitment award and Champion of HR award at the Hong Kong HRM Awards 2009. |
B. Business Overviewoverview
As of August 31, 2006, we had a total of approximately 617,000 fixed telecommunications network services subscriptions, consisting of 220,000 broadband Internet access, 281,000 local VOIP and 116,000 IP-TV services subscriptions.
In addition to providing fixed telecommunications network services, we also offer international telecommunications services in Hong Kong and Canada. We offer a variety of international telecommunications services and products including direct dial services, international calling cards and mobile call forwarding services. Our total international telecommunications services customer database comprises approximately 2.2 million registered accounts. Our international telecommunications business contributed 36.9% to our total revenues in fiscal 2006 as compared to 45.8% in fiscal 2005.
Revenues
A significantsegments. The majority of our revenues are derived from business conducted in Hong Kong.
Year ended August 31, | ||||||
Revenue | 2004 | 2005 | 2006 | |||
HK$ | HK$ | HK$ | ||||
(Amounts in thousands) | ||||||
Fixed telecommunications network services(1) | 541,902 | 629,464 | 716,600 | |||
International telecommunications services | 627,978 | 532,595 | 418,276 | |||
Total operating revenue | 1,169,880 | 1,162,059 | 1,134,876 | |||
For the year ended August 31, | ||||||||
2008 | 2009 | |||||||
HK$ | HK$ | |||||||
(Amounts in thousands) | ||||||||
Revenue | ||||||||
FTNS business | 1,011,038 | 1,230,880 | ||||||
IDD business | 291,943 | 247,359 | ||||||
Total operating revenue | 1,302,981 | 1,478,239 | ||||||
high-speed broadband Internet access services at symmetric upstream and downstream access speeds of 25 Mbps to 1,000 Mbps; | |||
- | fixed line local telephony services using VoIP technology; | ||
- | pay television services consisting of more than 80 channels, including self-produced news, children’s programming, international drama, movies and | ||
- | corporate data services, |
We
Seasonality
Our operations are not generally subject to significant seasonal fluctuations. Our international telecommunications business typically experience a slight decrease in revenue during the second fiscal quarter of each year (December through February) in connection with the Chinese New Year holiday. We do not believe that seasonality has had a material effect on our business, financial condition or results of operations.
Network infrastructure
Our self-owned network is one of the world’s largest Metro Ethernet networks and is cited as a global reference case by our two primary vendors, Cisco Systems, Inc. and Nortel Networks Limited. Our Metro Ethernet network conforms to the industry standards for 10/100/1000 Mbps Internet access speeds, and covers 1.3 million home passes, which represents coverage of approximately 60% of Hong Kong’s population. The coverage of our network is concentrated in Hong Kong’s most densely populated areas.
In most other markets, Metro Ethernet technology is primarily used in commercial buildings in metropolitan areas, as the technology is most cost effective in dense user populations where a provider can service a large number of users in a single building or cluster of buildings. We have deployed Metro Ethernet technology in densely populated residential areas in Hong Kong, where most of our customers live in high-rise apartment buildings with multiple apartments on each floor. Our strategy is to sell multiple fixed telecommunications network services using our Metro Ethernet network. All of our fixed telecommunications network services are offered through our single IP platform, unlike our competitors who use multiple platforms to provide comparable services. In addition, unlike most other new entrants, 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.
Our Competitive Strengths
entry barrier.
• | Focus on the Residential Mass and Small-To-Medium Corporate and Enterprise Market Segments.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-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 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 Network.We believe our self-owned Next Generation Network, a fiber-based backbone, gives us an inherent cost and performance advantage over our competitors. The 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 |
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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 1,000 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 1,000Mbps on our existing passive fiber infrastructure which existing technology cannot accomplish using legacy telephone lines. |
First Mover Advantage and High Barriers to Entry. 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 1.6 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 theysome would encounter
|
Metro Ethernet Network InfrastructureMobile Interconnection Charge
Our Metro Ethernet network is formed by using our own fiber-based backbone, wireless technology or leased wireline-based backbone
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,VoIP, IP-TV and corporate data services. We incurred capital expenditures forOur strategy is to leverage our broadband subscription base to up-sell our other fixed telecommunications network services such as local VoIP and IP-TV.
As of August 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Broadband Internet access | 247,000 | 316,000 | 391,000 | |||||||||
Local VoIP | 308,000 | 329,000 | 382,000 | |||||||||
IP-TV | 128,000 | 156,000 | 170,000 | |||||||||
Total FTNS subscriptions | 683,000 | 801,000 | 943,000 | |||||||||
• | 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 1,000 Mbps, but the majority of our customers currently have access speeds between 25 Mbps and 100 Mbps. We also offer Fiber-to-the-Home, or FTTH, broadband service for 100 Mbps, 200 Mbps and 1,000 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 “bbDrive,” an on-line virtual hard drive with up to 10Gb of storage; “bbGuard,” an anti-spam and anti-virus package; and “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 email address in Hong Kong and worldwide. A unique 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. |
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• | Pricing.We currently offer broadband service for bb25, bb50, bb100, FiberHome200 and FiberHome1000 at monthly fees ranging from HK$99 to HK$1,688 for unlimited service access. On November 1, 2009, we launched our “Member-Get-Member” series of marketing programs. Under this series, our existing customers may refer a new customer to use our broadband Internet Access services and both will enjoy access to our bb100 services for HK$99 per month. Our strategy is to reduce the market price to a more affordable level such that customers can focus on quality. When our broadband service becomes more affordable, we believe that our customers will not change their provider merely for a lower price. | ||
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 ranging from HK$128 to HK$24,000. 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, 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 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 number of homes pass. | |||
• | Market share.We had approximately 391,000 broadband Internet access subscriptions as at August 31, 2009, which represented a market share of approximately 20% with respect to the total number of broadband Internet access subscribers in Hong Kong. |
• | 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. | ||
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 HK$118 per month, on standalone basis, 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. | ||
• | 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, 2009. 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, 2009, we had 382,000 local VoIP subscriptions. Our market share with respect to local residential telephony services was approximately 20% as of August 31, 2009. |
• | 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 80 channels, including 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. 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 HK$168 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. |
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• | 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 English Premier League Football until June 2010, HBO, Cinemax, ESPN and others. We target a different market than these competitors by offering predominantly Chinese language contents 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 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, 2009, we had 170,000 subscriptions representing approximately 7% of the total pay-television subscription base in Hong Kong |
• | Scope of 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. | ||
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 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 code 1666 in Hong Kong. | ||
IDD 0030 | Provides subscribers with international direct dial using the access code 0030 in Hong Kong. | ||
Mobile call 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 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. 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 2009. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2010. | ||
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 12.9% to 574 million minutes in fiscal 2008 and a further reduction of 15.2% to 487 million minutes in fiscal 2009. 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. |
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The following table shows the profile of our fixed telecommunications network subscriptions over the past three years:
As of August 31, | ||||||
2004 | 2005 | 2006 | ||||
Fixed Telecommunications Network Services Subscriptions: | ||||||
Broadband Internet Access | 197,000 | 229,000 | 220,000 | |||
Local VOIP(1) | 237,000 | 293,000 | 281,000 | |||
IP-TV | 31,000 | 109,000 | 116,000 | |||
Total | 465,000 | 631,000 | 617,000 | |||
Internet Access
HKBN offers our broadband Internet services in Hong Kong using wireless technologies such as local multi-point distribution systems. We use 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 10 and 100 Mbps. We currently offer broadband service for bb10, bb25 and bb100 at monthly fees ranging from HK$158 to HK$238 for unlimited service. Currently, all of our broadband Internet access packages offer a free e-mail service and 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, and “bbWatch,” a full-screen IP-TV service that is viewed on a personal computer. We frequently change our promotions in response to market conditions or as a way of attracting additional subscribers.
In addition to the residential packages described above,November 2007, we have also developed broadband promotions that target corporate customers. We offer prepackaged plans that provide access at speeds up to 1,000 Mbps, which include on-site training, on-site maintenance support, high capacity data transfer and e-mail services. Corporate customers that subscribe to prepackaged plans pay fixed monthly subscription fees that range from HK$230 to HK$12,000.
Competition
There have been many new entrants to the Internet access business, but our main competitors are PCCW-HKT (through its subsidiary PCCW-IMS Limited), i-Cable and HGC. PCCW-HKT has been offering broadband Internet access services since May 1998 and 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. 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 symmetric access speeds up to 10 Mbps.
Our basic broadband Internet access service provides symmetric access speeds up to 1,000 Mbps. We believe that there is no other fixed telecommunications network service provider in Hong Kongcollaborating with an existing infrastructure that could offer broadband Internet access at speeds comparable to our high-speed offerings to the residential mass market at cost-effective prices. However, our largest 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 homes passed.
We had approximately 220,000 broadband Internet access subscriptions as of August 31, 2006, which represented a market share of approximately 12% 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. To provide local telephony service, we install IP-based voice switching equipment in locations already covered by our Metro Ethernet network. Voice signals are transmitted by the VOIP switches into the Ethernet network installed in the subscriber’s building. The capital cost of installing VOIP switches is small because the scalability of our Metro Ethernet network allows us to provide new services over existing infrastructure with only minimal additional equipment. In addition, we now install such voice switching equipment together with our new installations of broadband equipment in some buildings.
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, fixed line telephony subscribers switching to our local VOIP services are able to retain their existing local telephone number via fixed line number portability.
We currently charge from HK$58 to HK$99 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 began offering hardware-based off-network local VOIP services, which we refer to as “bb Phone” services. “bb 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 services branded as “2b”, which provides a global Hong Kong-telephone number service. This service is primarily targeted at the overseas Chinese community, which we believe will enable us to access a wider addressable market compared to the Hong Kong market for international telecommunications services. For HK$48 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 within Hong Kong and to other “2b” users around the world.
Competition
PCCW-HKT, the incumbent and largest fixed telecommunications network operator in Hong Kong, announced that it had a market share of approximately 68% with respect to local telephony services as of June 30, 2006. As the incumbent operator,
PCCW-HKT is required to allow interconnection to its fixed telecommunications network to other licensed fixed telecommunications network operators. 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. As of August 31, 2006, we had 281,000 local VOIP subscriptions. Our market share with respect to local residential telephony services amounts to approximately 13% as of August 31, 2006.
IP-TV
In August 2003 we introduced our IP-TV service that provides DVD quality video delivered via our Metro Ethernet network to an IP set-top-box connected to the subscriber’s television set. This monthly subscription-based pay television service offers 79 channels consisting 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. Our news production team consists of a staff of 90 employees and produces an average of 70-80 news stories per day for our 24-hour news cycle.
Because of the scalability of our Metro Ethernet 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, 2006, we had 116,000 subscriptions representing approximately 8% of the total Pay-TV subscription base in Hong Kong.
Competition
Our two main competitors in the pay-TV business are i-Cable and PCCW-HKT. The pay-TV 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 long-term 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. TVB and ATV are supported by advertising revenues and, therefore, must design their programming 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 were among the first companies to be granted a PNETS License by the Telecommunications Authority to provide international calling card services in Hong Kong. Since we first began providing international telecommunications services in 1992, we have greatly expanded the range of services that we offer. We now offer a variety of international direct dial services to our customers at competitive rates and are one of the largest network solution providers of international direct dial services in Hong Kong. We believe that our ability to deliver a range of calling plans with varying features that cater to different customer needs has been one offor the key factorsdeployment of our success.
The primary internationalNext Generation Network using GPON 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.
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We offer our international telecommunications service under the IDD 1666 and IDD 0030 brand names. These two brands provide us with flexibility in our marketing strategies. We charge our IDD 1666 and IDD 0030 users a per minute tariff rate that varies according to the destination of the call and calling prefixes, while IDD 0030 users are also provided discounts depending on the time of day or day of the week when the call is placed.
We actively promote our international telecommunications services to build our brand name awareness as one of Hong Kong’s leading telecommunications companies.network services. In fiscal 20042010 and 2005, in orderfiscal 2011, we plan to maintain our market share, we madefurther incur total capital expenditures about HK$300 million to HK$350 million per year to continue increasing the decision to price our international telecommunications services at competitive levels with other market players to compete with their aggressive pricing strategies.
During fiscal 2006, we experienced a reduction in total traffic volume of 16.8% to 788 million minutes in fiscal 2006. Competition during the year was intense as somecapacity of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentiveexisting network coverage and extending the coverage of our Next Generation Network to gain local fixed line2.0 million residential homes pass and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offers free PC-to-PC based international calls, is also becoming more prevalent. We are proactively migrating our legacy international1,800 commercial buildings.
International Telecommunications Networknetwork
• | 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 140 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. |
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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. Through the first contract, we invested in the Japan-U.S. undersea cable, which was completed 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 APCN 2 cable was completed, and commercial operation began, in May 2002. 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 telecommunication 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 150 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.
Sales and marketing monitoring Once a network fault is detected by our control room, we will either service 19• 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 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. 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. Interconnection ArrangementsWe 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 off-network customers. In choosing the local fixed network operators and overseas carriers with whom we cooperate, we take into account a number of factors 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 denominated in U.S. dollars.International Telecommunications Switching SystemsWe own three international telecommunications switching systems in Hong Kong and two in Canada, comprising one in each of Vancouver and Toronto.Our three international telecommunications switching systems in Hong Kong handle telephone calls originating and terminating in Hong Kong. Our telecommunications network mainly consists of Nortel Networks Limited switching equipment 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.CompetitionPCCW-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 2006. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2007. In order to maintain our market share and high traffic volume, 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. However, to offset 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.Marketingforce, door-to-door marketing team,kiosks, telemarketing and direct mailing, as well as through Chinese language television, radio, print media and on the Internet.developedplanned to open more shops in the future. We believe these shops can offer our customers convenient access to our wide range of services.theour sales representatives we use to promotein promoting City Telecom and HKBN. We provide commission based incentives to our residential sales force that sellfor our international and fixed telecommunications network services and international telecommunications services.Monitoringa year round, 24-hour, 7 days a week network operation center for real-time service monitoring and maintenance that is supported by over 90• two separate network operation centers in two different locations operate 24 hours a day, 7 days a week, network operation center providing real-time service monitoring and maintenance services and supported by about 130 operational and field staff; • 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. individual self-reporting mechanisms and centralized performance monitoring systems for our switches and equipment;an emergency self-reporting system that automatically contacts designated personnel; andback-up systems for our switches, critical software and hardware components.remotely rectify the situationproblem remotely or dispatch field staff to that location should physical interaction be required. After the situationproblem 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.Development ActivitiesWe commit considerable resources to our research and development department in order to continuously improve our services and improve our market position.activities2006,2009, our research and development department in Hong Kong consisted of 50approximately 21 staff members 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 Metro Ethernet network.Next Generation Network. To identify and develop new market opportunities, theour 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$6.0 million, HK$11.09.6 million and HK$9.610.8 million for fiscal 2004, 20052008 and 2006,2009, respectively.Service 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 internationalsubscribers of FTNS business and fixed telecommunications network services subscribers.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.
We were awarded as the winner of “Call Center of the Year” and “Customer Service Center of the Year” under Customer Relationship Excellence Awards 2005” by Asia Pacific Customer Service Consortium in July 2006 and the Bronze medal for “Contact Center of the Year (over 100 seats)” by the Hong Kong Call Center Association in October 2006.
collection
agencies will be taken.
matters
property rights
C. Regulatory Framework
Telecommunications Industry
industry
Currently, there are three Class Licenses within the telecommunications regulatory framework, one relating
The Telecommunications Authority recognizes that fixed and mobile services will convergewere regulated separately under four types of carrier license. Further, a number of other types of licenses permitted a licensee to establish facilities or services of a similar kind.
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or apply for UC Licenses upon the expiry of existing fixed or mobile licenses.
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.
We currently hold
An
- | 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. |
An A FTNS License is valid for a period of 15 years and is renewable for a further period of not exceeding 15 yearyears 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.
International Telecommunications Facilities and Services
CTI International Limited, our wholly owned subsidiary, currently holds a satellite-based fixed carrier license, which was issued to it in May 2001.
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be determined by commercial negotiation between carriers.
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.
22
USC under the new regime.
Authority.
Authority will not, for the time being, proceed with the complete deregulation of LAC.
broadcasting industry
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The validity period of a broadcasting license varies and will be determined by the Chief Executive in Council but it is unlikely that a license with a validity period exceeding 12 years would be approved. The license fee comprises a number of components, which include a fixed annual amount (e.g. for a domestic pay television program service license, the amount is currently set at around HK$1.4 million) and a variable component (e.g. for a domestic pay television program service license, HK$4 for each subscriber).
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City Telecom (H.K.) Limited(1) (Hong Kong) CTI Guangzhou Customer Services Company Limited(2) (People’s Republic of China) Automedia Holdings Limited(3) (British Virgin Islands) City Telecom International Limited (British Virgin Islands) Hong Kong Broadband Network Limited(4) (Hong Kong) Credibility Holdings Limited (British Virgin Islands) IDD1600 Company Limited (Hong Kong) CTI Marketing Company Limited (Hong Kong) City Telecom (Canada) Inc. (Canada) 963673 Ontario Limited (Canada) City Telecom Inc. (Canada) City Telecom (B.C.) Inc. (Canada) |
Notes: | ||
(1) | The other immediate |
(2) | The |
(3) | The other immediate subsidiaries of Automedia Holdings Limited are Global Courier Company Limited, |
(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, |
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Percentage of interest | ||||||||||
held by City Telecom | ||||||||||
| Jurisdiction of | Direct | Indirect | |||||||
Name | incorporation | % | % | |||||||
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 | — | |||||||
Credibility Holdings Limited | British Virgin Islands | 100 | — | |||||||
CTI Guangzhou Customer | 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 | — | 100 | |||||||
Hong Kong Broadband | Hong Kong | — | 100 | |||||||
Hong Kong Broadband | Hong Kong | — | 100 | |||||||
Hong Kong Broadband | Hong Kong | — | 100 | |||||||
Hong Kong | Hong Kong | — | 100 | |||||||
| Hong Kong | — | 100 | |||||||
| Singapore | 100 | — | |||||||
Warwick Gold Enterprises Limited | Hong Kong | — | 100 | |||||||
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August 31, 2009.
Mongkok, Kowloon, Hong Kong.
We depend on Cisco Systems, Inc.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSprospects
Our self-owned network is one of the world’s largest Metro Ethernet networks and is cited as a global reference case by our primary vendors, Cisco Systems, Inc. and Nortel Networks Limited. Our Metro Ethernet network has a current coverage of 1.3 million home passes, which represents approximately 60% of Hong Kong’s population. 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. In most other markets, Metro Ethernet is primarily used in commercial buildings in metropolitan areas, as the technology is most cost effective in dense user populations whereAs of August 31, 2009, our FTNS business had a provider can service a large numbersubscription base of users in a single building or cluster of buildings. We have applied this technology to densely populated residential areas in Hong Kong where most of our customers live in high-rise apartment buildings with multiple apartments per floor. Our Metro Ethernet network conforms to industry standards for 10/100/1,000 Mbps Internet access speeds. All of our fixed telecommunications network services are based on the single Internet Protocol, or IP, platform of our Metro Ethernet network, unlike our competitors who use multiple platforms to provide their services.approximately 943,000 subscriptions. In addition, unlike other new entrant operators, we operate an “end-to-end” network that transmits data between our subscribers’ premises, our IP network hub sites and our switching centers in Hong Kong.
We also offer a variety of international telecommunications services, toincluding direct dial services, international calling cards and mobile call forwarding services, in Hong Kong. As of August 31, 2009, our IDD business had a subscription base of approximately 2.4 million registered accounts.
Factors Affecting Our Results of Operations
Operation of Metro Ethernet network
The wireless-based FTNS License that HKBN obtained from the Telecommunications Authority in February 2000 provided HKBN with the authority to begin installation of the wireless network that we use to provide broadband Internet access services. To enable HKBN to provide fixed telecommunications network services using wire-line technology in addition to wireless technology, our FTNS License was amended in April 2002 to include provision of local fixed wireline network services. This amendment allowed us to develop our own fiber-based backbone to replace our existing wireless and leased wireline-based backbone. To maximize our return on investment, we have focused on building our Metro Ethernet network in Hong Kong’s most densely populated areas to achieve cost savings and provide additional bandwidth capacity for further growth. After our initial capital expenditure, our operating costs have declinedbusiness and our service quality has improved because we rely less on backbone transmission facilities owned by third parties and thereby decrease the leasing fees that we pay.
Having our own fiber-based backbone allows us to offerIDD business. Our FTNS business primarily consists of broadband Internet access, local VOIP,VoIP, IP-TV and corporate data services, over a single IP platform without being subject to network limitationswhile our IDD business primarily consists of other fixed telecommunications network operators. During fiscal 2006, we devoted considerable resources to marketing our broadband Internet access, local VOIP and IP-TV services. As a result, our revenues from fixed telecommunications network services grew by 13.8% to HK$716.6 million in fiscal 2006.
Competition from other international telecommunications service providers.
Our total international telecommunications services customer database comprises approximately 2.2 million registered accounts. During fiscal 2006, we experienced a reduction in total traffic volume of 16.8% to 788 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 lineservices, international calling cards and mobile market share. Further, technology substitutioncall forwarding services.
Our Revenues
Fixed Telecommunications Network Services. We charge our customers a monthly service charge for each of the fixed telecommunications network services that we provide, and the scalability of our network allows us to sell additional services to our existing customers, for example adding local VOIP or IP-TV services to our current broadband Internet subscribers, with minimal additional network and operating costs. As a result, each new service we add to our existing subscription base contributes significantly to our profitability. We have not generally sold our fixed telecommunications network services bundled together at discounted rates. Instead, we have focused on increasing our subscription base by offering a single service to new subscribers at an attractive entry price. After the customer has begun to use our service, we then try to up-sell additional services to the customer.
In addition to the monthly service charges generatedpayable by our fixed telecommunications network business, we also receive interconnection charges from other telecommunications operators in Hong Kong that use our network to deliver their customers’ telecommunications traffic.
As a Fixed Telecommunications Network Services, or FTNS, licensee, HKBN, a wholly-owned subsidiary of the Company, is obliged to provide interconnection services to enable delivery of telecommunications service to customers of different operators, including mobile network operators. Unless an agreement cannot be reached, the rate of such interconnection charges are subject to commercial agreement between interconnecting parties. Since the issuance of its FTNS license, HKBN has been charging mobile network operators for its interconnection services using the available rates under the existing calculation model (fully distributed cost model) for interconnection services between fixedsubscribers and mobile operators, which are based on historical cost data of PCCW-HKT, the incumbent FTNS operator. We have recognized all such mobile interconnection charges as revenue. As of August 31, 2006, the majority of the mobile interconnection charges billed to mobile network operators had not been collected.
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 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 effective date of the determined interconnection charges.
In November 2005, HKBN entered into contractual agreements with two other mobile network operators, who agreed to pay to HKBN 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 Telecommunications Authority made a confidential preliminary ruling in March 2006 but has not announced its final ruling.
In fiscal 2005 and 2006, we recorded mobile interconnection charges of HK$24.7 million and HK$22.0 million respectively. As of August 31, 2005 and 2006, our mobile interconnection charges receivable, net of provision for doubtful accounts, were HK$49.8 million and HK$62.1 million respectively. For the year ended August 31, 2006, due to the uncertainty of the final ruling, we recognized mobile interconnection charges of HK$22.0 million based on the preliminary rates from the Telecommunications Authority
For further discussion of our revenue recognition of mobile interconnection charges, please refer to the note 26(c) of the consolidated financial statements.
telecommunications operators.
- | Monthly service charges.We charge our subscribers a monthly service charge, which generally varies by the number and nature of the fixed telecommunications network services subscribed. Our strategy is to market additional services to our subscribers by leveraging our broadband Internet access subscription base of 391,000 as of August 31, 2009 and the scalability of our Next Generation Network. | ||
- | Interconnection charges.We offer fixed telecommunications network services through our self-owned Next Generation Network. Under the terms of HKBN’s fixed telecommunications network services license, we are required to provide interconnection services to other network operators, including mobile network operators. Because certain local mobile network operators disagreed with the level of interconnection charges computed by us, certain amount of these charges had not been collected as of August 31, 2009. |
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Network Costs. Network costs vary according to either our network capacity or our traffic volume. Such costs mainly include leased line rentals, program fees, production costs for the 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
• | 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 staff costs, advertising and marketing expenses, depreciation of owned fixed assets. |
- | Staff costs. Salaries and related costs incurred for services rendered by employees. | ||
- | 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. | ||
- | 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
Introduction
Our consolidated financial statements, which have been prepared in accordance with Hong Kong GAAP. Accounting principles generally accepted in Hong Kong differ in certain significant respects from accounting principles generally accepted inIFRSs for the United States of America (“U.S. GAAP”), details of which are set out in note 30 to our consolidated financial statements.fiscal years ended August 31, 2008 and 2009. Our significant accounting policies are more fully described in note 21 to our consolidated financial statements.
In developing accounting policies, in addition to Hong Kong GAAP requirements, we also consider telecommunications industry practice in other countries. Where there is no conflict with Hong Kong GAAP 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.
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• | 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. | ||
• | 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 was based also on the 2004 Determination issued by the Telecommunications Authority in June 2007. 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. As of December 15, 2009, the 2008 Determination is still in process. |
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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.
recognized.
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
(Thousands of HK$) | |||||||||
Balance at beginning of the year | 22,916 | 22,959 | 48,316 | ||||||
Additions charged to expense(1) | 11,502 | 35,445 | 17,450 | ||||||
Write-off | (11,459 | ) | (10,088 | ) | (10,021 | ) | |||
Balance at the end of the year | 22,959 | 48,316 | 55,745 | ||||||
For the year ended August 31, | ||||||||
2008 | 2009 | |||||||
HK$ | HK$ | |||||||
(Amounts in thousands) | ||||||||
Balance at beginning of the year | 22,392 | 11,944 | ||||||
Additions charged to expense | 14,293 | 12,103 | ||||||
Write-off | (24,741 | ) | (20,887 | ) | ||||
Balance at the end of the year | 11,944 | 3,160 | ||||||
Under Hong Kong GAAP, we
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.
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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.
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 Hong Kong GAAP and U.S. GAAP.
Revenue for the provision of telecommunications services is recognized when an arrangement exists, service is rendered, fee is fixed or determinable and collectibility 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 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, the majority of the mobile interconnection charges billed by HKBN had not been collected as of August 31, 2006. 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 for the 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 for fiscal year 2006 is based on the preliminary rates from the Telecommunications Authority. We are awaiting a final ruling by the Telecommunications Authority on the level of charges payable by one of the operators. The ruling is expected to affect the amounts of mobile interconnection charges that we may realize from other operators. For a discussion of our revenue recognition of mobile interconnection charges, please refer to “Our Revenues-Fixed Telecommunications Network Services” above in this Item 5 of this annual report and notes 26(c) to our consolidated financial statements. Actual amounts realized could be different from our estimate.
Fair value of share options
In assessing the value of the share options granted, 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 and the assumptions used in the Black-Scholes Model include expected life of the options, risk-free interest rate, expected volatility, expected dividend and the market value of the ordinary shares of the Company.
The Black-Scholes Model, applied for determination of the estimated fair value of the share options granted under the Company’s share option scheme was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Such an option pricing model requires input of subjective assumptions, including the expected stock volatility, and expected dividend. 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.
Legal contingencies
We are currently involved in certain legal proceedings. The assessment of the ultimate outcome of those proceedings is derived from consultation with outside counsel, as well as an assessment of litigation and settlement strategies. A future event or change in the facts and circumstances may require us to make accruals which would be charged to our income statement in the future.
A. Operating Results
In addition to our operations in Hong Kong, we also provide international telecommunications and Internet access services in Canada. We own all of the share capital of two telecommunications companies in Canada, City Telecom Inc. and City Telecom (B.C.) Inc., through a wholly owned subsidiary. 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.
Our consolidated financial statements reflect the consolidated results of operations and financial position of these subsidiary companies from the date of their acquisition by us. However, as of August 31, 2006, none of these subsidiary companies located outside of Hong Kong has made a material contribution to our revenues or results of operations, and in fiscal 2006, they contributed approximately 1.8% to our revenues.
For the year ended August 31, | ||||||||||||
2008 | 2009 | 2009 | ||||||||||
HK$ | HK$ | US$ | ||||||||||
(Amounts in thousands) | ||||||||||||
Revenue | ||||||||||||
FTNS business | 1,011,038 | 1,230,880 | 158,813 | |||||||||
IDD business | 291,943 | 247,359 | 31,915 | |||||||||
1,302,981 | 1,478,239 | 190,728 | ||||||||||
Network costs | (178,367 | ) | (175,129 | ) | (22,596 | ) | ||||||
Other operating expenses | (966,094 | ) | (1,037,964 | ) | (133,922 | ) | ||||||
Other revenues | 24,989 | 41,540 | 5,359 | |||||||||
Finance costs | (75,137 | ) | (55,127 | ) | (7,112 | ) | ||||||
Profit before taxation | 108,372 | 251,559 | 32,457 | |||||||||
Income taxes benefit/(expense) | 16,818 | (38,730 | ) | (4,997 | ) | |||||||
Net income | 125,190 | 212,829 | 27,460 | |||||||||
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2004 (restated)(1) 2005 (restated)(1) Hong Kong GAAP Revenues Fixed telecommunications network services International telecommunications Operating Expenses: Network costs Other operating expenses Salaries and related costs Sales and marketing expenses Office, general and administrative expenses Depreciation and amortization Provision for doubtful accounts receivable Total other operating expenses Total Operating Expenses Income/(loss) from operations Interest income Interest expense Other income, net Income/(loss) before taxation Income taxes (expense)/credit Net income/(loss) Year Ended August 31, 2006 2006 HK$ HK$ HK$ US$ (In thousands) 541,902 629,464 716,600 92,147 627,978 532,595 418,276 53,786 1,169,880 1,162,059 1,134,876 145,933 (331,408 ) (339,402 ) (300,593 ) (38,653 ) (226,737 ) (259,392 ) (256,721 ) (33,012 ) (228,169 ) (267,983 ) (204,952 ) (26,355 ) (129,787 ) (157,497 ) (164,208 ) (21,115 ) (197,017 ) (237,714 ) (276,464 ) (35,550 ) (11,502 ) (35,445 ) (17,450 ) (2,244 ) (793,212 ) (958,031 ) (919,795 ) (118,276 ) (1,124,620 ) (1,297,433 ) (1,220,388 ) (156,929 ) 45,260 (135,374 ) (85,512 ) (10,996 ) 3,753 13,578 20,378 2,620 (175 ) (54,462 ) (88,637 ) (11,397 ) 2,668 6,037 4,465 574 51,506 (170,221 ) (149,306 ) (19,199 ) (2,043 ) 6,725 7,244 932 49,463 (163,496 ) (142,062 ) (18,267 )
Year Ended August 31, 2006
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. |
o | 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. | ||
o | Local VoIP.The subscription base for our local VoIP services rose by 16.1%, to 382,000 as of August 31, 2009 from 329,000 as of August 31, 2008, mainly due to improved branding and our greater success in cross selling our VoIP services to subscribers of our Internet access services. | ||
o | IP-TV.The subscription base for our IP-TV services increased by 9.0% to 170,000 subscriptions, with the majority of the new subscriptions coming from existing subscribers of our Internet access and local VoIP services. |
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. |
Our fixed telecommunications network services continued to record significant revenue growth and increased their contribution to our total revenues, accounting for 63.1% of total revenues in fiscal 2006, compared to 54.2% and 46.3% in fiscal 2005 and fiscal 2004, respectively. During fiscal 2006, our FTNS subscription base declined 2.2% to 617,000 as of August 31, 2006 as we placed a priority on revenue yields by increasing revenue per user over subscription growth.
With respect to voice services, our VOIP subscription base fell by 4.1% year-on-year, to 281,000 subscriptions due to intensive competition.
With respect to broadband services, our subscription base fell by 3.9% year-on-year, to 220,000 subscriptions. During fiscal 2006, we focused on differentiating our services by emphasizing our high internet access speeds, which allow us to increase our revenue per user. By providing stable and high speed broadband services and good quality of customer service, we are able to acquire and retain customers with longer subscription period at higher price. This has significantly increased our revenue in fixed telecommunications network services despite a decrease in our subscription base.
With respect to IP-TV services, we grew our subscription base by 6.4% to 116,000 subscriptions, with the majority of the new subscriptions being an upsell to existing broadband and voice customers.
Our international telecommunications business revenues decreased by 21.5% to HK$418.3 million in fiscal 2006 due to the combined effects of lower volumes and lower revenues per minute. Competition during the year was intense as some of our integrated competitors offered international direct dial minutes free or at very low cost as a marketing 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 result, we expect that our international telecommunications business continues to decline in future.
Network costs. Network costs decreased 11.4% to HK$300.6 million in fiscal 20062008 mainly due to a reduction in international tariff volume.
carrier costs as IDD traffic decreased. The effects of the foregoing, however, were partially offset by the recovery of HK$7.6 million universal services contribution charges from PCCW-HK in fiscal 2008 pursuant to the TA Statement issued by the Telecommunications Authority on December 28, 2007. No similar recovery was recorded in fiscal 2009.
For the year ended August 31, | ||||||||||||
2008 | 2009 | 2009 | ||||||||||
HK$ | HK$ | US$ | ||||||||||
(Amounts in thousands) | ||||||||||||
Staff 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 | ) | ||||||
• | Staff costs.Staff costs increased by 22.1% to HK$302.3 million in fiscal 2009 from HK$247.5 in fiscal 2008. We increased our total work force by 4.0% to 3,173 employees as of August 31, 2009 from 3,051 employees 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 staff 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 |
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employees were increased by HK$19.5 million due to increases in total contract sum from substantial growth in subscription base. Moreover, our opening of more new shops caused shop related operating costs increased 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. |
Salaries and related costs. Salaries and related costs decreased by 1.0% to HK256.741.5 million in fiscal 2006. During fiscal 2006, we reduced our total work force by 34.2% to 2,565 employees with the majority of the reductions occurring towards the end of the fiscal year. The reduction in our work force was a result of our efforts to eliminate duplication of operational procedures and to enhance efficiency and improve quality of our work flows. The aggregate amount of severance payments made was not significant, as most of the terminations of employment were voluntary.
Sales and marketing expenses.Our sales and marketing expenses decreased by 23.5% to2009 from HK$205.025.0 million in fiscal 2006 as we switched2008. The increase was mainly contributed by the gain on extinguishment of our sales and marketing efforts10-year senior notes of HK$31.4 million, the effects of which were partially offset by a decrease in interest income from costlier mass media advertising to word-of-mouth efforts. Word-of-mouth results from existing customers sharing their positive service experience with their associates, thereby enhancing our brand value without the need for direct advertising expenditure.
Office, general and administrative expenses. Office, general and administrative expenses increased by 4.3% to HK$164.215.6 million in fiscal 2006 mainly due2008 to increaseHK$4.8 million in rental expensesfiscal 2009 as a result of inflationary pressures.
the decrease in our average cash balance in fiscal 2009 mainly due to senior notes buyback actions.
Provision for doubtful accounts receivable. Overall, our provision for doubtful accounts receivable decreased by 50.8% to2009 from HK$17.475.1 million in fiscal 2006 mainly due to the decrease in provision for mobile interconnection charges receivable. In fiscal 2005, we recorded2008 as a provision of HK$19.5 million for mobile interconnection charges receivable accumulated from previous years following our assessmentresult of the collectibilityredemption and cancellation of these charges. In fiscal 2006, we increased such provision by HK$1.3an aggregate principal amount of US$68.0 million to HK$20.8 million based on the preliminary ratesof our 10-year senior notes from the Telecommunications Authority. Provision for other trade receivables recordedmarket in fiscal 2006 was2009.
Loss from operations. We suffered loss from operations2009, compared to an income tax benefit of HK$85.516.8 million in fiscal 2006, compared2008. Included in the income tax benefit in fiscal 2008 was a tax credit of HK$26.3 million related to the deferred tax assets recognized in respect of the tax loss fromcarryforwards of our major operating subsidiary as at August 31, 2008. Based on the results of operations of our major operating subsidiary in recent years and our forecast for future years, we concluded it was probable that the subsidiary would generate sufficient taxable income to utilize the tax loss carryforwards. If such effect was excluded, the income tax expenses increase by HK$135.429.3 million, which was primarily caused by the increase of our income before taxation.
Interest income and expense. Our interest income was HK$20.4 million in fiscal 2006 compared to HK$13.6 million in fiscal 2005. The increase in interest income was due to the full year impact of investment return on proceeds from our 8.75% notes issued in January 2005 and a higher overall interest rate environment. We derive interest income from our deposit of surplus capital in interest-bearing accounts at commercial banks. Our interest expense increased to HK$88.6 million in fiscal 2006 compared to HK$54.5 million in fiscal 2005, predominantly due to the full year impact of interest expense of our 8.75% notes issued in January 2005.
Other income, net. Our other income, net consists of the roaming charges we receive from overseas carriers that deliver traffic over our network, exchange gains and losses, small penalties we have received from time to time from contractors that we employ, and management and other fees we receive from other fixed line operators in the ordinary course of our business. Other income, net of expenses was HK$4.5 million in fiscal 2006 compared to HK$6.0 million in fiscal 2005. The other income, net in 2006 mainly includes net exchange gains of HK$1.1 million, net realized and unrealized gains on investment securities and derivative financial instruments of HK$0.6 million and penalty received from contractors of HK$0.3 million.
Income tax( expense)/credit. We recognized income tax credit of HK$7.2 million for fiscal 2006 compared to income tax credit of HK$6.7 million in fiscal 2005. Our income tax credits in fiscal 2006 and fiscal 2005 were mainly related to the recognition of deferred tax assets in respect of the tax losses from our fixed telecommunications network services business offset by the income tax expense associated with the profit generated from our international telecommunications services.
Net loss. For the foregoing reasons, we incurred a net loss of HK$142.1 million in fiscal 2006 compared to a net loss of HK$163.5 million in fiscal 2005.
Year Ended August 31, 2005 Compared to Year Ended August 31, 2004
Revenues. Our total revenues decreased by 0.7% from HK$1,169.9 million in fiscal 2004 to HK$1,162.1 million in fiscal 2005, due to a significant decrease in revenues from our international telecommunications services. The 15.2% decline in our international telecommunications services revenues from HK$628.0 million in fiscal 2004 to HK$532.6 million in fiscal 2005 offset our 16.2% increase in FTNS revenues from HK$541.9 million in fiscal 2004 to HK$629.5 million in fiscal 2005.
Our fixed telecommunications network services continued to record significant revenue growth and increased contribution to our total revenues. Revenue from FTNS accounted for 54.2% of our total revenues in fiscal 2005, compared to 46.3% and 32.6% in fiscal 2004 and fiscal 2003, respectively. Revenues increased from HK$541.9 million in fiscal 2004 to HK$629.5 million in fiscal 2005, representing 16.2% growth. During the year we grew our FTNS subscription base by 166,000, or 35.7% year-on-year, to 631,000 as of August 31, 2005.
With respect to voice services, we grew our VOIP subscription base by 56,000, or 23.6% year-on-year, to 293,000 subscriptions.
With respect to broadband services, we grew our subscription base by 32,000, or 16.2% year-on-year, to 229,000 subscriptions. During fiscal 2005, we focused on differentiating our services by emphasizing our high bandwidth with the commercial launch of our “bb100” and “bb1000” supported by the Liu Xiang advertising campaign. Furthermore, we introduced value-added services such as “bbDrive” (an on-line virtual hard drive with up to 10 Gbps storage), “bbGuard” (an anti-spam and anti-virus package) and “bbWatch” (a full screen IP-TV experience via the PC).
With respect to IP-TV services, we grew our subscription base by 78,000, or 251.6% year-on-year, to 109,000 subscriptions, although the majority of the new subscriptions were from our free trial promotions for periods of six to twelve months.
Our international telecommunications business revenues decreased by 15.2% from HK$628.0 million in fiscal 2004 to HK$532.6 million in fiscal 2005 due to the combined effectsphasing out of lower volumes and lower revenues per minute. Competition during the year was intense as some of our integrated competitors offered international direct dial minutes free or at very low cost as a marketing 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.
margin customers.
Other operating expenses. Our other operating expenses, excluding network costs, increased by 20.8% from HK$793.2 million during fiscal 2004 to HK$958.0 million during fiscal 2005.
Salaries and related costs. Salaries and related costs increased by 14.4% from HK$226.7 million during fiscal 2004 to HK$259.4 million during fiscal 2005. Our total number of permanent full time employees increased from 3,583 as of August 31, 2004 to 3,896 as of August 31 2005.
Sales and marketing expenses. Our sales and marketing expenses increased by 17.4% from HK$228.2 million during fiscal 2004 to HK$268.0 million during fiscal 2005. Sales and marketing increased due to several marketing programs that we utilized to grow our FTNS subscription base. We also increased the number of sales and marketing personnel in marketing and servicing our various service offerings and launched a large scale branding campaign for our broadband Internet access and IP-TV services. This investment in sales and marketing was important to the continued expansion of our customer base for fixed telecommunications network services, which we believe will increase our revenues in the future. Additionally, during fiscal 2005 we introduced our “Liu Xiang” series of television, radio and print branding promotions. Liu Xiang is the first Chinese man to win an Olympic gold medal in a track and field event, having secured this honor in the 110 meter hurdles at the 2004 Olympic Games.
Office, general and administrative expenses. Office, general and administrative expenses increased by 21.4% from HK$129.8 million in fiscal 2004 to HK$157.5 million in fiscal 2005 due mainly to our expanded office and warehouse space and higher equipment maintenance costs.
Depreciation and amortization. Depreciation and amortization expenses increased by 20.7% from HK$197.0 million in fiscal 2004 to HK$237.7 million in fiscal 2005 due to the increased capital expenditures that we incurred for the upgrade and expansion of our Metro Ethernet Network.
Provision for doubtful accounts receivable. Our provision for doubtful accounts receivable increased by 208.2% from HK$11.5 million in fiscal 2004 to HK$35.4 million in fiscal 2005, which included a provision of HK$19.5 million for mobile interconnection charge receivables. We recorded a provision of HK$19.5 million for mobile interconnection charges receivable in fiscal 2005 given the uncertainty regarding the timing and amount of the ultimate collection of amounts due. For more information regarding our provision for mobile interconnection charges, see “Our Revenues—Fixed Telecommunications Network Services” above in this annual report. Provision for other trade receivables recorded in fiscal 2005 was HK$15.9 million compared to HK$11.5 million in fiscal 2004. The provision as a percentage of revenue was approximately 1% of our revenue for both years.
Loss from operations. We suffered loss from operations of HK$135.4 million in fiscal 2005, compared to profit from operations of HK$45.3 million in fiscal 2004. The loss from operations is due to reduced profitability of our international telecommunications business, provisions for mobile interconnection charges, increased acquisition and marketing costs for new fixed telecommunications network services subscriptions and early-stage operations of IP-TV services.
Interest income and expense. Our interest income was HK$13.6 million in fiscal 2005 compared to HK$3.8 million in fiscal 2004. We derive interest income from our deposit of surplus capital in interest-bearing accounts at commercial banks. The substantial increase in fiscal 2005 interest income is due to the temporary surplus cash from our US$125 million 8.75% senior notes issued in January 2005. Our interest expense increased to HK$54.5 million in fiscal 2005 compared to HK$0.2 million in fiscal 2004, predominantly due to the interest expense of our 8.75% notes issued in January 2005. We also capitalized our borrowing costs of HK$2.0 million of the funding for our network rollout.
Other income, net. Our other income, net consists of the roaming charges we receive from overseas carriers that deliver traffic over our network, exchange gains and losses, small penalties we have received from time to time from contractors that we employ, and management and other fees we receive from other fixed line operators in the ordinary course of our business. Other income, net of expenses was HK$6.0 million in fiscal 2005 compared to HK$2.7 million in fiscal 2004.
Income tax (expense)/credit. We recorded income tax credit of HK$6.7 million for fiscal 2005 compared to income tax expense of HK$2.0 million during fiscal 2004. Income tax is calculated based on our estimated assessable profit during each period, and our income tax credit in fiscal 2005 was mainly related to the recognition of deferred tax assets on current year’s unrecognized tax losses from our fixed telecommunications network services business that offset by the income tax expense associated with profit generated from our international telecommunications services in fiscal 2005.
Net loss. For the foregoing reasons, we incurred a net loss of HK$163.5 million in fiscal 2005 compared to a net income of HK$49.5 million in fiscal 2004.
U.S. GAAP Reconciliation
Our financial statements are prepared in accordance with Hong Kong GAAP, which differs in certain material respects from U.S. GAAP. The following tables provide a comparison of our net income/(loss) and shareholders’ equity in accordance with Hong Kong GAAP and U.S. GAAP
As of and for the Year Ended August 31, | |||||||||||
2004 (restated) | 2005 (restated) | 2006 | 2006 | ||||||||
HK$ | HK$ | HK$ | US$ | ||||||||
(in thousands) | |||||||||||
Net income/(loss) in accordance with: | |||||||||||
Hong Kong GAAP | 49,463 | (163,496 | ) | (142,062 | ) | (18,267 | ) | ||||
Net income/(loss) under U.S. GAAP | 51,565 | (149,148 | ) | (142,062 | ) | (18,267 | ) | ||||
Shareholders’ Equity | |||||||||||
Hong Kong GAAP | 1,175,698 | 1,020,454 | 891,654 | 114,657 | |||||||
Total shareholders’ equity under U.S. GAAP | 1,180,930 | 1,032,680 | 897,271 | 115,379 |
Differences between Hong Kong GAAP and U.S. GAAP for the periods presented relate primarily to:
Disclosure relating to those differences can be found in note 30 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 30 to our consolidated financial statements to reflect the impact of the significant differences between Hong Kong GAAP and U.S. GAAP.
Recent Accounting Pronouncements
Recentlyaccounting pronouncements
A principal source of our liquidity will be internally generatedcash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs, including working capital requirements, capital expenditures, repayment of our indebtedness when fall due and various contractual obligations, for at least the remaining net proceedsnext 12 months. Our cash flows from operations, however, may decrease due to lower customer demand resulting from rapid technological changes, increasing competition resulting from new local and foreign entrants into the US$125 million 8.75% senior notesmarket, or our failure to obtain or renew the necessary telecommunication licenses. A decrease in our operating cash flow could adversely affect our ability to make planned capital expenditures, to comply with our obligations under various operating and capital leases and to repay amounts due 2015 offering in January 2005.
under banking facilities.
flow
For the year ended August 31, | ||||||||||||
2008 | 2009 | 2009 | ||||||||||
HK$ | HK$ | US$ | ||||||||||
(Amounts in thousands) | ||||||||||||
Net cash inflow from operating activities | 378,563 | 535,886 | 69,142 | |||||||||
Net cash outflow from investing activities | (147,750 | ) | (176,488 | ) | (22,771 | ) | ||||||
Net cash outflow from financing activities | (342,550 | ) | (560,407 | ) | (72,306 | ) | ||||||
Decrease in cash and bank balances | (111,737 | ) | (201,009 | ) | (25,935 | ) | ||||||
Cash at bank and in hand, at the beginning of year | 532,894 | 421,610 | 54,398 | |||||||||
Effect of foreign exchange rate changes on cash | 453 | 451 | 58 | |||||||||
Cash at bank and in hand, at the end of the year | 421,610 | 221,052 | 28,521 | |||||||||
33
Year Ended August 31, | ||||||||||||
2004 | 2005 (restated) (1) | 2006 | 2006 | |||||||||
HK$ | HK$ | HK$ | US$ | |||||||||
(In thousands) | ||||||||||||
Net cash flow from operating activities | 203,763 | 77,383 | 184,151 | 23,680 | ||||||||
Net cash used in investing activities | (406,244 | ) | (557,440 | ) | (492,742 | ) | (63,361 | ) | ||||
Net cash (used in) provided by financing activities | 47,221 | 792,216 | (86,432 | ) | (11,114 | ) | ||||||
(Decrease)/increase in cash and bank balances | (155,260 | ) | 312,159 | (395,023 | ) | (50,795 | ) | |||||
Cash and bank balances, at the beginning of year | 383,860 | 228,347 | 539,591 | 69,385 | ||||||||
Effect of foreign exchange rate changes | (253 | ) | (915 | ) | 349 | 45 | ||||||
Cash and bank balances, at the end of the year | 228,347 | 539,591 | 144,917 | 18,635 | ||||||||
In fiscal 2006, we generated a net cash inflow from our operating activities that amountedincreased to HK$184.2 million.535.9 million in fiscal 2009 from HK$378.6 million in fiscal 2008. The net increase in operating cash flow was primarily due to the increased revenue from our FTNS business because of the increase in the subscription base.
Inin fiscal 2005, we generated a2008 was HK$147.8 million. The net cash inflow in our operating activities that amounted to HK$77.4 million. The reduced operating cash flow when compared with fiscal 2004outflow was principallymainly due to the significant cash we spent in sales and marketing expenses in offering incentives to acquire new subscriptions and retain our growing subscription base. Since such expenses were incurred before cash receipts from customers, it significantly reduced our operating cash flow. Moreover, increases in staff costs due to the expansion of our fixed telecommunications network services operations and increases in home equipment installation necessitated by the growth of our customer base also reduced our cash flow from operations. Cash from operating activities also decreased due to increased spending for early stage operations of our IP-TV service.
Net cash provided by operating activities amounted to HK$203.8 million during fiscal 2004, which represented a substantial decrease compared with fiscal 2003, principally as a result of the significant cash we continued to invest in our Metro Ethernet network. Cash from operating activities also decreased due to increased costs we incurred in promoting our new services, as well as decreased profitability of our international telecommunications business. In fiscal 2004, we recorded an increase in trade and other payables of HK$31.0 million that comprised amounts owed to our supplier of household appliances that we offered to new subscribers under our free appliance program. We also recorded an increase in deferred service income of HK$29.3 million in fiscal 2004 associated with our free appliance program, as we billed new subscribers’ credit cards a fee equivalent to 18 months of service charges upon their signing a 24 to 36 month contract with us. Net cash provided by operating activities in fiscal 2004 was offset by an increase in trade and other receivables of HK$50.4 million. The principal component of this receivable consisted of an increase in income of HK$38.7 million in connection with mobile interconnection charges that we believe are due to us by Hong Kong mobile telecommunications operators based on their use of our Metro Ethernet network to transmit mobile telecommunications traffic. We also recorded an increase in prepayments of HK$8.3 million in fiscal 2004 in connection with our use of the fiber ring owned and operated by the KCRC. Finally, our cash flows from operations were reduced by Hong Kong profits taxes paid of HK$24.0 million.
Investing Activities
Net cash used in investing activities was HK$492.7 million, HK$557.4 million and HK$406.2 million during fiscal 2006, 2005 and 2004, respectively. Throughout each of the three fiscal years, investing activities consisted primarily of purchasespurchase of fixed assets of HK$189.9 million for the development of our Metro Ethernet network and upgrading of our international telecommunications facilities. In fiscal 2006 and 2005, an increase in term deposits of HK$144.6 million and HK$92.9 million respectively also increased theNext Generation Network.
Financing Activities
Net cash provided byfrom financing activities in fiscal 2009 was HK$560.4 million. The net cash outflow was mainly due to our repurchase of 10-year senior notes for an outflowaggregate consideration of HK$86.4485.8 million in fiscal 2006 which mainly consisted(including transaction cost), payment of interest paid on our 8.75%the 10-year senior notes of HK$85.252.7 million and payment of cash dividends of HK$23.0 million.
Net cash provided by financing activities was HK$47.2 million in fiscal 2004, which consisted of our draw down of HK$100.0 million on our loan facility with HSBC, offset by our payment of HK$54.9 million in dividends during fiscal 2004.
Indebtedness
We may redeem all but not less than all of the 8.75% notes in the event we have to pay additional amounts
The indenture governing the 8.75% notes contains covenants that limit, among other things, our ability and the ability of certain of our existing and future subsidiaries to:
The net proceeds of the 8.75% 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 amount of HK$196.7 million. The remaining net proceeds will be used for capital expenditures, including costs incurred in expanding and upgrading our Metro Ethernet network in Hong Kong, and for additional working capital and general corporate purposes.
As of August 31, 2006,2009, we had available banking facilities of HK$80.0205.0 million of which HK$78.07.8 million was unutilized.
utilized.
34
Contractual Obligations and Commercial Commitments
As of August 31, 2006, we had capital commitments contracted but not provided for relating to the purchase of telecommunications, computer and office equipment of HK$80.2 million. In addition, we had commitments under non-cancelable operating leases relating to land, buildings, telecommunications facilities and computer equipment of HK$61.4 million, of which HK$40.1 million is due in fiscal 2007. We also had commitments on program fees of HK$12.5 million, of which HK$7.6 million is due in fiscal 2007. As of August 31, 2006 we utilized HK$2.0 million of the HK$80 million available banking facilities.
The following table sets forth information regarding our aggregate payment obligations in future years of the contractual obligations and commercial commitments that we had as of August 31, 2006.
Payments due by period | ||||||||||
Contractual Obligations | Total | Within 1 year | More than 1 year but within 3 years | More than within 5 | More 5 years | |||||
(Thousands of HK$) | ||||||||||
Capital expenditure items | 80,240 | 80,240 | — | — | — | |||||
Operating leases | 61,438 | 40,093 | 12,776 | 2,169 | 6,400 | |||||
Short-term and long-term debt (principal and interest payments) | 1,655,028 | 86,409 | 171,244 | 170,115 | 1,227,260 | |||||
Programming fees (IP-TV) | 12,526 | 7,638 | 4,888 | — | — | |||||
Total | 1,809,232 | 214,380 | 188,908 | 172,284 | 1,233,660 | |||||
Our working capital as of August 31, 2006 was HK$416.5 million, which we believe is sufficient for our current requirements. Further, 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, 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% notes, our various operating and capital leases commitments and amounts due under banking facilities.
352006,2009, our research and development team consisted of 50approximately 21 staff members 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 Metro Ethernet network.Next Generation Network. To identify and develop new market opportunities, the research and development team assesses new services offered by telecommunications and internetInternet companies in the United States and elsewhere and works closely with our marketing department. Our research and development expenditures were approximately HK$6.0 million, HK$11.09.6 million and HK$9.610.8 million for fiscal 2004, 20052008 and 2006,2009, respectively.During fiscal 2006,international telecommunicationsIDD business experienced a 16.8% decline in volumedecreased by 15.3% to 788.0 million minutes, which combined with the lower revenue per minute, resulted in a 21.5% reduction in our international telecommunications revenues to HK$418.3247.4 million in fiscal 2006.2009 from HK$292.0 million in fiscal 2008. The principal reason for this declinedecrease was the intense competition, as our key competitors introduced highly aggressive price cuts. Partly as a result, the traffic volume of our IDD business decreased by 15.2% to 487.0 million minutes in fiscal 2009 from 574.0 million minutes in fiscal 2008. We expect that such declinecompetition will continue to increase in future. Rather than directly competingthe future, creating further pressure on price, our strategy is to proactively migrate our international telecommunications customers tovolume and also pricing.global “2b” VOIP service which we believe will enable us to obtain higher margins and provide us with access to a wider addressable market.Our revenues from our fixed telecommunications network servicesbusiness grew by 13.8%21.8% to HK$716.61,230.9 million in fiscal 2006 despite a fall2009 from HK$1,011.0 million in thefiscal 2008. The principal reason for this increase was due to subscription basegrowth of our fixed telecommunications network services of 2.2%17.7% to 617,000 subscriptions943,000 accounts as of August 31, 2006.2009 from 801,000 subscription accounts as of August 31, 2008 and, to a lesser extent, an increase in average revenue per subscription account.revenue growth was attributable toglobal economic downturn has had a dampening effect on consumer sentiment and business activities across the globe. We believe that the impact of the downturn on our success in raising revenue yields per subscription.E Off-Balance Sheet ArrangementsOther thanoperations has been limited because our FTNS and IDD services are regarded as described above in “— Critical Accounting Policies” and note 28 to“semi-utility” services. However, if the global economic downturn continues for a long period of time, demand for our Consolidated Financial Statements, weservices may decrease.obligations.obligations Payments due by period More than More than 1 year 3 years Within but within but within More than Total 1 year 3 years 5 years 5 years Contractual obligations HK$ HK$ HK$ HK$ HK$ (Amounts in thousands) Capital expenditure items 150,099 150,099 — — — Operating leases 96,381 66,708 19,284 4,118 6,271 10-year senior notes 244,117 14,489 28,978 28,978 171,672 Obligation under finance leases 820 237 320 192 71 Other current liabilities 262,420 262,420 — — — Programming fees (IP-TV) 15,332 9,094 6,238 — — Total 769,169 503,047 54,820 33,288 178,014
See “Liquidity
employees
A. Directors and Senior Managementsenior management
Lu, are independent non-executive directors and one of whom, Dr. Cheung 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.
Name Position Board of Directors: WONG Wai Kay, Ricky CHEUNG Chi Kin, Paul LAI Ni Quiaque CHENG Mo Chi, Moses LEE Hon Ying, John CHAN Kin Man PEH Tun Lu, Jefferson Senior Management: CHONG Kin Chun, John LO Sui Lun YEUNG Chu Kwong, William CHANG, Stephen HARE Kai Tamara Age Date
Joined City
Telecom 45 Chairman 1992 49 Chief Executive Officer 1992 37 Chief Financial Officer 2004 56 Non-Executive Director 1997 60 Independent Non-Executive Director 1997 47 Independent Non-Executive Director 1997 47 Independent Non-Executive Director 2004 44 Director, Corporate Division 1996 42 Director, Network Development 1998 46 Chief Operating Officer 2005 43 Chief Technology Officer 2006 48 General Counsel 2007
December 15, 2009.
Date | ||||||||||
joined City | ||||||||||
Name | Age | Position | Telecom | |||||||
Board of directors: | ||||||||||
WONG Wai Kay, Ricky | 48 | Chairman | 1992 | |||||||
CHEUNG Chi Kin, Paul | 52 | Vice Chairman | 1992 | |||||||
YEUNG Chu Kwong, William | 49 | Executive Director and Chief Executive Officer | 2005 | |||||||
LAI Ni Quiaque | 40 | Executive Director, Chief Financial Officer, Company Secretary and Head of Talent Engagement | 2004 | |||||||
CHENG Mo Chi, Moses | 59 | Non-Executive Director | 1997 | |||||||
LEE Hon Ying, John | 63 | Independent Non-Executive Director | 1997 | |||||||
CHAN Kin Man | 50 | Independent Non-Executive Director | 1997 | |||||||
PEH Jefferson Tun Lu | 50 | Independent Non-Executive Director | 2004 | |||||||
Senior management: | ||||||||||
CHONG Kin Chun, John | 47 | Managing Director of Corporate Division | 1996 | |||||||
LO Sui Lun | 45 | Director of Corporate Affairs Department | 1998 | |||||||
TAM Ming Chit | 44 | Chief Technology Officer | 2008 | |||||||
TO Wai Bing | 47 | Managing Director of Business Development | 2007 |
directors
committee of the Digital Solidarity Fund of Hong Kong Council of Social Service.
36
Customer Engagement Department overseeing customer relationship management and was also in charge of our Network Development Department. Mr. Yeung has more than 18 years’ experience in the telecommunications industry. Prior to joining the 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. Mr. Yeung holds a Bachelor of Arts Degree from Hong Kong Baptist University, a Master of Business Administration Degree from University of Strathclyde, UK and a Master of Science Degree in Electronic Commerce and Internet Computing from The University of Hong Kong. He is also a graduate of the Senior Executive Program of the Columbia University Graduate School of Business in New York.
the Company.
Mr. CHENGdirector
ARA Assets Management (Singapore) Limited, which manages Fortune Real Estate Investment Trust, a real estate investment trust listed on Singapore Exchange Limited.
non-executive directors
Mr. Lee is also the chairman of the Audit Committee and Remuneration Committee of the Company.
Dr. Chan has also been appointed as a member of the Audit Committee and Remuneration Committee of the Company.
Mr. Peh has also been appointed as a member of the Audit Committee and Remuneration Committee of the Company.
management
37
Mr. YEUNG Chu Kwong, William,U.K.
Mr CHANG Wing Fu, Stephen, aged 43, is our chief technology officer. Mr Chang joined the group in July 2006 as Chief Information Officer and has taken up the role as the Group’s Chief Technology Officer since December 2006. He’s responsible to provide advicenetwork, information system development and assistance to the Group, to ensure that information technology is acquired and information resources are managed in a manner that is aligned with business strategy, supporting the goals and objectives of the Group and its various business units. He also overseas the Group’s Technology Development. Mr Chang graduated from Australia and holds a Masters in Information Systems Degree and a Bachelor of Science Degree from Monash University. Mr Chang has 18 years of experience in Systems Development, Project Management, Consulting and I.T.Management.operations including broadband networking, IPTV, wireless applications, as well as VoIP networks. Prior to joining the Group Mr Chang wasin 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 16 years of operational experience in the Asia Pacific/Japan VPinformation technologies and telecom industry. Dr. Tam holds a Bachelor of Worldwide Support forScience (Hons) in Computer Science from Imperial College, University of London, U.K. and a U.S. software company. Before that he wasDoctor of Philosophy in Computer Science from the General ManagerUniversity of I.T. at SmarTone-Vodafone.
Pennsylvania, U.S.A.
B. Compensationmanagement’s compensation
Directors’ and Senior Management’s Compensation
The aggregate amount We also granted share options to various directors and members of salaries or other compensation, housing allowances, discretionary bonuses, share-based payment, other allowancesour senior management. For more information regarding share options granted to directors and benefitsmembers of our senior management, see Item 6 “Directors, senior management and employees — Share ownership” below in kind paid by us to our directors (not including our non-executive directors) during fiscal 2006 was approximately HK$19.7 million. We paid approximately HK$1.4 million as our contribution to the pension schemes of the directors in the year ended August 31, 2006. In addition we paid our fiscal non-executive directors fees in the aggregate amount of approximately HK$605,000 during fiscal 2006.
Each executive director is entitled to receive anthis annual discretionary bonus of such amount as shall be determined by the board of directors upon recommendation and approval by the Remuneration Committee (as defined below). Additionally, ourreport.
The total number of ordinary shares representing outstanding options granted under the 2002 Scheme (as defined under “Share Option Schemes” below) as of January 17, 2006 was 36,520,000. On October 21, 2004, we granted to our directors and senior managers under our 2002 Scheme options to subscribe for 14,670,000 ordinary shares. On October 21, 2004, the board of directors also proposed to grant options to subscribe for 8,000,000 ordinary shares to each of Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul. The proposed grants of option were approved by shareholders at our annual general meeting held on December 29, 2004. On October 3, 2005, the board of directors granted options to subscribe for 1,000,000 ordinary shares to Mr. Yeung Chu Kwong, William. The total number of ordinary shares representing outstanding options under the 1997 Scheme (as defined under “Share Option Schemes” below) as of January 17, 2006 was 528,000.
Except as discussed herein, no other payments have been paid or are payable, in respect of fiscal 2006, by us or any of our subsidiaries to our directors and senior management.
For38.8 million for fiscal 2006, the2009, compared with HK$32.5 million for fiscal 2008. The aggregate amount accrued by usof contribution that we made to provide pensionthe retirement or similar benefits for our directors and members of our senior management was HK$2.6 million for fiscal 2009, compared with HK$2.4 million for fiscal 2008.
senior management.
contracts
committee
38
• | 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. |
Additionally, the Audit Committeeaudit committee is 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 preparingrequired to meet in person or issuing an audit report or performing other audit, review or attest services for City Telecom.
The Audit Committee shall meettelephonically at least twice a year. The Audit Committee shall haveyear 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 Committeeaudit committee deems necessary to carry out its duties.
- | Reviewed the Company’s consolidated financial statements for the year ended August 31, 2008 and for the six months ended February 28, 2009; |
- | Reviewed the internal audit progress, including the procedures required for the compliance with the Sarbanes-Oxley Act; |
- | Reviewed the external auditor’s report on the review of the Company’s interim financial report for the six months ended February 28, 2009 and the Company’s audited consolidated financial statements for the year ended August 31, 2008; and |
- | Pre-approved the audit and non-audit services provided by KPMG, the Company’s external auditor. |
committee
- |
- | Review and |
Recommend the |
- | Reviewed and | |
- | Reviewed and |
Employees | ||||
Information technology and engineering | 437 | |||
Sales and marketing, customer service and “Special Duty Unit”, or SDU | 2,433 | |||
| ||||
General administration and others | 303 | |||
| ||||
Total | 3,173 | |||
Employees | ||||
Hong Kong | 1,633 | |||
Guangzhou | 1,520 | |||
Canada | 20 | |||
| ||||
Total | 3,173 | |||
39
FTNS business.
ownership
Title of Class | Identity of Person or Group | Number of Shares Beneficially Owned(13) | Percentage of Shares Beneficially Owned (%)(3) | Share Options | ||||||
Ordinary Shares | Wong Wai Kay, Ricky | 318671261 | (1) | 51.89 | 14,000,000 | (4) | ||||
Ordinary Shares | Cheung Chi Kin, Paul | 34,275,738 | (2) | 5.6 | 14,000,000 | (5) | ||||
Ordinary Shares | Lai Ni Quiaque | 8,560,000 | 1.39 | 9,000,000 | (6) | |||||
Ordinary Shares | Chong Kin Chun, John | 1,574,000 | Less than 1.0 | 3,500,000 | (7) | |||||
Ordinary Shares | Lo Sui Lun | 700,000 | Less than 1.0 | 2,000,000 | (8) | |||||
Ordinary Shares | Yeung Chu Kwong, William | Nil | Nil | 4,000,000 | (9) | |||||
Ordinary Shares | Chang Wing Fu Stephen | Nil | Nil | 1,000,000 | (10) |
Number | Percentage | |||||||||||||
of shares | of shares | Outstanding | ||||||||||||
Identity of person | beneficially | beneficially | share | |||||||||||
Title of class | or Group | owned | owned | options | ||||||||||
(note 4) | (note 3) | |||||||||||||
% | ||||||||||||||
Ordinary shares | Wong Wai Kay, Ricky | 346,959,573 (note 1) | 51.05 | 8,091,604 | ||||||||||
Ordinary shares | Cheung Chi Kin, Paul | 382,100,443 (note 2) | 56.22 | 8,091,604 | ||||||||||
Ordinary shares | Yeung Chu Kwong, William | 3,000,000 | Less than 1.0 | 7,062,956 | ||||||||||
Ordinary shares | Lai Ni Quiaque | 10,392,506 | 1.53 | 8,067,690 | ||||||||||
Ordinary shares | Chong Kin Chun, John | 2,777,089 | Less than 1.0 | 2,022,900 | ||||||||||
Ordinary shares | Lo Sui Lun | Nil | Nil | 2,022,901 | ||||||||||
Ordinary shares | Tam Ming Chit | Nil | Nil | 1,007,465 | ||||||||||
Ordinary shares | To Wai Bing | Nil | Nil | 1,007,465 |
Notes: | ||
(1) | Of the |
(2) | Of the |
(3) | Percentage ownership is based on |
(4) |
Beneficial ownership is determined in accordance with the rules of the SEC. |
40
Adjustment | ||||||||||||||||||||||||||
Options | to number | Options | Options | |||||||||||||||||||||||
Balance | granted | of options | exercised | cancelled/ | Balance | |||||||||||||||||||||
as at | during | for 2008 | during | lapsed | as at | |||||||||||||||||||||
Date of | Exercise | January 9, | the | Exercise | Final | the | during | December 15, | ||||||||||||||||||
grant | price | 2009 | period | period | dividend | period | the period | 2009 | ||||||||||||||||||
(note 1) | ||||||||||||||||||||||||||
HK$ | ||||||||||||||||||||||||||
Directors | ||||||||||||||||||||||||||
Mr. Wong Wai Kay, Ricky | January 5, 2005 | 1.5224 (note 4) | 8,053,478 | — | January 5, 2005 to October 20, 2014 | 38,126 | — | — | 8,091,604 | |||||||||||||||||
May 22, 2006 | 0.6523 (note 5) | 6,040,108 | — | May 22, 2007 to May 21, 2016 | 28,593 | 6,068,701 | — | — | ||||||||||||||||||
Mr. Cheung Chi Kin, Paul | January 5, 2005 | 1.5224 (note 4) | 8,053,478 | — | January 5, 2005 to October 20, 2014 | 38,126 | — | — | 8,091,604 | |||||||||||||||||
May 22, 2006 | 0.6523 (note 5) | 6,040,108 | — | May 22, 2007 to May 21, 2016 | 28,593 | 6,068,701 | — | — | ||||||||||||||||||
Mr. Yeung Chu Kwong, William | May 22, 2006 | 0.6523 (note 5) | 1,013,369 | — | May 22, 2007 to May 21, 2016 | 4,796 | — | — | 1,018,165 | |||||||||||||||||
February 6, 2008 | 1.7568 (note 6) | 6,016,309 | — | (note 2) | 28,482 | — | — | 6,044,791 | ||||||||||||||||||
Mr. Lai Ni Quiaque | May 22, 2006 | 0.6523 (note 5) | 2,013,369 | — | May 22, 2007 to May 21, 2016 | 9,530 | — | — | 2,022,899 | |||||||||||||||||
February 11, 2008 | 1.8660 (note 7) | 6,016,309 | — | (note 3) | 28,482 | — | — | 6,044,791 | ||||||||||||||||||
Senior management | ||||||||||||||||||||||||||
Mr. Chong Kin Chun, John | October 21, 2004 | 1.5224 (note 4) | 2,013,368 | — | January 1, 2005 to October 20, 2014 | 9,532 | — | — | 2,022,900 | |||||||||||||||||
May 22, 2006 | 0.6523 (note 5) | 503,342 | — | May 22, 2007 to May 21, 2016 | 2,383 | 505,725 | — | — | ||||||||||||||||||
Mr. Lo Sui Lun | October 21, 2004 | 1.5224 (note 4) | 503,343 | — | January 1, 2005 to October 20, 2014 | 2,383 | — | — | 505,726 | |||||||||||||||||
May 22, 2006 | 0.6523 (note 5) | 1,510,026 | — | May 22, 2007 to May 21, 2016 | 7,149 | — | — | 1,517,175 | ||||||||||||||||||
Dr. Tam Ming Chit | May 2, 2008 | 1.7866 (note 8) | 1,002,718 | — | (note 2) | 4,747 | — | — | 1,007,465 | |||||||||||||||||
Ms. To Wai Bing | February 15, 2008 | 1.7568 (note 6) | 1,002,718 | — | (note 2) | 4,747 | — | — | 1,007,465 | |||||||||||||||||
41
Notes: | ||
(1) | As a result of allotment of 12,212,142 new shares to shareholders of the Company 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 share immediately before the date of the grant of the Options was HK$0.88. | |
(2) | The exercise of the Options is subject to certain conditions that must be achieved by the grantees. The Options shall be exercised not later than December 23, 2012. | |
(3) | The exercise of the Options is subject to the performance of the Company’s share. The Options shall be exercised not later than December 23, 2012. | |
(4) | Exercise price of the share options was adjusted from HK$1.5297 to HK$1.5224 per ordinary share as a result of our payment of the 2008 Final Dividend (see note 1). | |
(5) | Exercise price of the share options was adjusted from HK$0.6554 to HK$0.6523 per ordinary share as a result of our payment of the 2008 Final Dividend (see note 1). | |
(6) | Exercise price of the share options was adjusted from HK$1.7652 to HK$1.7568 per ordinary share as a result of our payment of the 2008 Final Dividend (see note 1). | |
(7) | Exercise price of the share options was adjusted from HK$1.8749 to HK$1.8660 per ordinary share as a result of our payment of the 2008 Final Dividend (see note 1). | |
(8) | Exercise price of the share options was adjusted from HK$1.7951 to HK$1.7866 per ordinary share as a result of our payment of the 2008 Final Dividend (see note 1). |
42
(a) | the expiry date relevant to that option; |
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 |
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 |
21 days following the date an effective resolution is passed for our voluntary winding-up; |
subject to |
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; |
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 |
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 |
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 |
Through January 17, 2007, the Board had adopted four resolutions pursuant to the 2002 Scheme. The
43
related party transactions
Title of Class | Identity of Person or Group | Beneficially Owned(6) | Percentages of Shares Beneficially Owned | ||||
Ordinary Shares | Wong Wai Kay, Ricky | 318,671,261 | (2) | 51.89 | |||
Ordinary Shares | Cheung Chi Kin, Paul | 34,275,738 | (3) | 5.6 | |||
Ordinary Shares | Top Group International Limited | 318,516,999 | 51.86 | ||||
Ordinary Shares | Leung Ka Pak | 318,516,999 | (4) | 51.86 | |||
Ordinary Shares | Yau Ming Yan, Andrew | 318,516,999 | (4) | 51.86 | |||
Ordinary Shares | EK Investment Management Limited | 67,900,000 | (5) | 11.06 |
Percentages | ||||||||||||
of shares | ||||||||||||
Identity of person | Beneficially | beneficially | ||||||||||
Title of class | or Group | owned | owned | |||||||||
(note 5) | (note 1) | |||||||||||
% | ||||||||||||
Ordinary shares | Wong Wai Kay, Ricky | 346,959,573 (note 2) | 51.05 | |||||||||
Ordinary shares | Cheung Chi Kin, Paul | 382,100,443 (note 3) | 56.22 | |||||||||
Ordinary shares | Top Group International Limited | 339,814,284 | 50.00 | |||||||||
Ordinary shares | Leung Ka Pak | 339,814,284 (note 4) | 50.00 | |||||||||
Ordinary shares | Yau Ming Yan, Andrew | 339,814,284 (note 4) | 50.00 |
Notes: | ||
(1) | Percentage ownership is based on |
(2) | Of the |
(3) | Of the |
(4) | The |
(5) |
Beneficial ownership is determined in accordance with the rules of the SEC. |
Top Group International Limited 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 chief executive officer. Mr. Leung Ka Pak and Mr. Yau Ming Yan, Andrew are the two other shareholders of Top Group.
Mr. Leung Ka Pak was an executive director and the president of our subsidiaries in Canada other than City Telecom (Canada) Inc. until October 2005 when he resigned. Mr. Yau Ming Yan, Andrew, is an executive director and the president of our subsidiaries in Canada other than City Telecom (Canada) Inc.
EK Investment Management Limited is not affiliated with us or our officers or directors.
Sale of City Telecom (Japan) Co., Ltd.
On July 15, 2003, Automedia Holdings Limited, a wholly-owned subsidiary of the Company, entered into a conditional agreement with Takua Corporation, or Takua, for the sale of the entire issued share capital of City Telecom (Japan) Co., Ltd., or City Telecom Japan, for an aggregate price of JPY30.0 million (approximately HK$2.0 million), which is to be paid by Takua in thirty monthly installments. Prior to the entering into the Agreement, City Telecom Japan was our wholly-owned subsidiary. Takua is wholly-owned by Mr. Masaaki Asai, who is a brother of Mr. Tatsushi Asai, a director of City Telecom Japan. Mr. Tatsushi Asai also acts as a guarantor for the due and punctual performance of Takua’s obligations under this agreement for no additional consideration.
As of August 31, 2006, we had received approximately HK$0.3 million from Takua.
The transaction has been completed as at August 31, 2006 and there was no outstanding amount due from Takua.
senior management
44
Financial Statements
regulatory proceedings
People’s Telecom.
Jade Com. Jade Com Development Limited, or Jade Com, a Hong Kong company, alleged in a claim filed in April 13, 1999 in the High Court of Hong Kong that we, as a principal of one of our wholly owned subsidiaries, wrongfully terminated
a telecommunications service agreement entered into on November 26, 1997. Jade Com claimed damages for breach of contract and misrepresentation, but did not state the specific amount of25, 2009 issued its claim. If the agreement had not been terminated, we would have had a remaining commitment of approximately US$3.6 million under the agreement. We filed a defense in May 24, 1999 asserting that we were not the principal of the wholly owned subsidiary which entered the agreement and alternatively, Jade Com had breached a condition of the agreement that they possess all the legal approvals and licenses necessaryPreliminary Analysis for the provision of their services. Specifically, our defense asserts that Jade Com did not have certain regulatory approvals required for the provision of the international telecommunications services that formed the basis of the agreement. As such, we asserted in our defense that our wholly owned subsidiary was entitled to terminate the agreement. In February 2001, the parties consented to adjourn the case indefinitely with liberty to restore. Accordingly, we have not made any reserve for this litigation.
parties’ comments. The determination proceedings will progress into 2010.
No dividends were
the annual general meeting held on December 18, 2009. The 2009 Final Dividend will be paid on or about December 30, 2009.
None
Price | ||||||||
High | Low | |||||||
(In HK$) | ||||||||
2004 | 2.975 | 1.310 | ||||||
2005 | 1.530 | 0.550 | ||||||
2006 | 0.830 | 0.570 | ||||||
2007 | 3.670 | 0.830 |
45
Price | ||||
High | Low | |||
(In HK$) | ||||
2001 | 0.890 | 0.420 | ||
2002 | 1.690 | 0.740 | ||
2003 | 3.375 | 1.320 | ||
2004 | 2.975 | 1.310 | ||
2005 | 1.530 | 0.550 | ||
2004 | ||||
January to March | 2.975 | 2.400 | ||
April to June | 2.525 | 1.310 | ||
July to September | 1.930 | 1.390 | ||
October to December | 1.690 | 1.460 |
2005 January to March April to June July to September October to December 2005 July August September October November December 2006 January February March April May June July August September October November December 2007 January (through January 23, 2007) 1.530 1.300 1.280 0.790 0.930 0.780 0.920 0.550 0.930 0.850 0.900 0.820 0.860 0.780 0.920 0.760 0.870 0.640 0.700 0.550 0.670 0.560 0.730 0.590 0.780 0.610 0.830 0.650 0.750 0.580 0.720 0.600 0.730 0.650 0.720 0.670 0.700 0.630 0.680 0.600 0.770 0.590 0.850 0.720 1.650 0.800
Price | ||||||||
High | Low | |||||||
(In HK$) | ||||||||
2008 | 2.170 | 0.750 | ||||||
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 | ||||||
2009 | ||||||||
January to March | 1.140 | 0.840 | ||||||
April to June | 1.780 | 1.100 | ||||||
July to September | 2.630 | 1.630 | ||||||
October to December (through December 15, 2009) | 3.950 | 2.500 | ||||||
2009 | ||||||||
June | 1.780 | 1.610 | ||||||
July | 1.860 | 1.630 | ||||||
August | 2.070 | 1.850 | ||||||
September | 2.630 | 2.030 | ||||||
October | 2.880 | 2.550 | ||||||
November | 3.920 | 2.500 | ||||||
December (through December 15, 2009) | 3.950 | 3.440 |
Price | ||||||||
High | Low | |||||||
(In US$) | ||||||||
2004 | 7.720 | 3.320 | ||||||
2005 | 3.980 | 1.370 | ||||||
2006 | 2.009 | 1.380 | ||||||
2007 | 10.750 | 2.010 | ||||||
2008 | 5.750 | 1.915 | ||||||
2007 | ||||||||
January to March | 4.350 | 2.010 | ||||||
April to June | 5.830 | 3.100 | ||||||
July to September | 5.600 | 4,050 | ||||||
October to December | 10.750 | 4.830 | ||||||
2008 | ||||||||
January to March | 5.580 | 4.250 | ||||||
April to June | 5.750 | 4.370 | ||||||
July to September | 4.910 | 2.950 | ||||||
October to December | 3.380 | 1.915 | ||||||
2009 | ||||||||
January to March | 2.870 | 2.000 | ||||||
April to June | 4.650 | 2.870 | ||||||
July to September | 7.023 | 4.050 | ||||||
October to December (through December 15, 2009) | 10.300 | 6.610 | ||||||
2009 | ||||||||
June | 4.650 | 4.010 | ||||||
July | 4.830 | 4.050 |
46
Price | ||||
High | Low | |||
(In US$) | ||||
2000 | 20.500 | 1.125 | ||
2001 | 2.400 | 1.030 | ||
2002 | 4.350 | 2.600 |
Price | ||||
High | Low | |||
(In US$) | ||||
2003 | 9.550 | 3.080 | ||
2004 | 7.720 | 3.320 | ||
2005 | 3.980 | 1.370 | ||
2004 | ||||
January to March | 7.720 | 5.900 | ||
April to June | 6.570 | 3.320 | ||
July to September | 4.960 | 3.410 | ||
October to December | 4.600 | 3.710 | ||
2005 | ||||
January to March | 3.980 | 3.190 | ||
April to June | 3.160 | 1.970 | ||
July to September | 2.320 | 1.900 | ||
October to December | 2.440 | 1.370 |
2005 July August September October November December 2006 January February March April May June July August September October November December 2007 January through (January 23, 2007) 2.300 2.100 2.320 2.060 2.140 1.900 2.440 1.910 2.080 1.640 1.700 1.370 1.590 1.440 1.890 1.460 1.970 1.670 2.010 1.750 1.880 1.350 2.610 1.400 1.790 1.510 1.800 1.570 1.780 1.510 1.700 1.270 1.850 1.400 2.500 1.510 7.100 1.900
applicable. applicable. applicable. applicable. applicable. therefore read our complete Articles if you would like additional information, which were filed with the U.S. Securities and Exchange Commission as an exhibit 1 to the annual report on Form 20-F for fiscal 2005 and is incorporated by reference herein. 47 Price High Low (In US$) August 5.240 4.560 September 7.023 5.290 October 7.750 6.750 November 10.000 6.610 December (through December 15, 2009) 10.300 8.800 applicableOur ordinary shares of common stock were listed under the number “1137” on the SEHK 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% notes were listed under the ISIN codes of US178677AA87 and USY16599AA30 on the SGX-ST on January 24, 2005. The 8.75% 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.applicableapplicableapplicableCapitalcapitalapplicable, as amended on December 29, 2004 and December 29, 2005 and currently in effect, and, where relevant, the Hong Kong Companies Ordinance (Chapter 32 of the laws of Hong Kong) (the “Companies Ordinance”).Ordinance. As this is a summary, it does not contain all the information that may be important to you. You shouldWe wereArticleClause 3 of the Memorandum of Association states that City Telecom’sthe Company’s objects are to carry on the business of telecommunications services in addition to various other related and unrelated business activities.Director’s Intereststheour 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) (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) (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) (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) (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.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) (e)any proposal or arrangement concerning the benefit of employees of the Company or its subsidiaries, including the adoption, modification or operation of any employees’ 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 employees 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 employees 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. |
Unless the relevant provisions of the Companies Ordinance require otherwise,
Unless the relevant provisions of the Companies Ordinance require otherwise,
justifies the payment.
(a) | such dividend be |
(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 |
Liquidation
If City Telecom commences liquidation,members’ winding up, the liquidator may, with the sanction of a special resolution of City Telecom and any other sanction required by the Companies Ordinance:
(a) | divide among the shareholders the whole or any part of the assets of |
(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. |
but no shareholder shall be compelled to accept any shares or other assets upon which there is any liability.
shareholders
(a) | the declaration and sanctioning of dividends; |
(b) | the consideration and adoption of the |
(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. |
48
Nasdaq’s
practice of its home country.
shares
Under the Companies Ordinance, any action to be takenrights
shareholder of the Company.
shares
Unless specifically restricted by
(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 |
(c) | the instrument of transfer is in respect of only one class of share; |
49
(d) | in the case of a transfer of a share |
(e) | the shares concerned are free of any lien in favor of us. |
unless extended by ordinary resolution.
50
(i) | such |
(ii) | such |
(iii) | the property in question, such as shares and American depositary shares, |
Gainsindividuals at the rate of 15%.
Gains
A
Upon
51
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 United States Internal Revenue Code.
- | 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. |
52
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.
Pursuant to recently-enacted legislation, a penalty in the amount of $10,000 in the case of a natural person and $50,000 in any other case is imposed on any taxpayer that fails to timely disclose its participation in a “reportable transaction” (as defined in Section 6011 of the Code). A taxpayer that has participated in a “reportable transaction” during the tax year must attach a disclosure statement to its United States federal income tax return. A “reportable transaction” includes a transaction generating a loss under Code Section 165 in excess of certain specified amounts (which amounts vary depending on several factors, including the status of the taxpayer as an individual, trust, partnership or corporation). Investment in shares and American depositary shares could be treated as a “reportable transaction” that must be disclosed on a U.S. Holder’s United States federal income tax return if the investment results in the taxpayer claiming a foreign currency loss on such tax return equal to or greater than the specified amount (e.g., $50,000 in the case of a taxpayer that is an individual or trust). U.S. Holders are urged to consult their own tax advisors regarding the circumstances in which an investment in shares or American depositary shares may result in a “reportable transaction” that is required to be disclosed.
- | 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. — source capital gains exceed non-U.S. — source capital losses. |
Backup Withholding and Information 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,
53
applicable.
applicable.
I. Subsidiary Information
Not applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our functional currency is the Hong Kong dollar, the currency in which the majority of our revenue
Inreports and other information as filed with the normal course of business, we also face other risks such as country risk, credit riskSecurities and legal risk and we do not use derivative financial instruments to hedge such risks.
We are exposed to market risk from changesExchange Commission in currency exchange rates and interest rates.
Foreign Currency Risk
The functional currency of our operations, and our financial statement reporting currency, isaccordance with the Hong Kong dollar. Our monetary assets and liabilities are primarily denominated in Hong Kong dollars, substantially all our net sales are denominated and received in Hong Kong dollars, and our labor and administrative costs are incurred primarily in Hong Kong dollars. However, we have certain current and long-term bank deposits, other investments and short-term bank loans which are primarily denominated in U.S. dollars.
As of August 31, 2006, we had the following significant foreign currencies denominated account balances:
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Further, our principal long-term debt obligations are the US$125.0 million 8.75% senior notes issued in January 2005, which are denominated in U.S. dollars.
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=$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% notes.
We also incur expenses denominated in Renminbi, the official currency of the People’s Republic of China, in connection with our Guangzhou call centre. These include the salaries that we pay to our personnel 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 and the Renminbi. If the Renminbi appreciates against the Hong Kong dollar, the amount of Hong Kong dollars we would be required to spend to maintain our call center would increase. Therefore, in order to limit our foreign currency risk exposure on Renminbi, we have entered into certain forward foreign exchange contracts during fiscal 2006 which matured as at August 31, 2006. In prior years, no recognition of such instrument is required under Hong Kong GAAP. However, with effect from September 1, 2005, under Hong Kong GAAP reporting, such instrument are also required to be recorded at fair value. Under U.S. GAAP reporting, all forward foreign exchange contracts are and have been recorded at fair value.
Interest Rate Risk
Prior to our repayment in full of our floating interest rate loan facility with HSBC, we were exposed to interest rate risks. In connection with this facility, we entered into an interest rate swap agreement to hedge the impact of fluctuations in interest rates, under which we make a monthly interest payment at a fixed rate of 2.675% per annum on a notional amount of HK$100.0 million (which is reduced by the principal repayment schedule during the loan period), and will receive monthly interest payments calculated at HIBOR during the period from March 2004 to December 2009 or until the facility is repaid and we terminate the swap agreement.
In prior years, no recognition of such instrument is required under Hong Kong GAAP. However, with effect from September 1, 2005, such interest rate swap instrument must be recorded at fair value, which we determined to be approximately HK$2,570,000 as of August 31, 2005 and HK$1,845,000 as of August 31, 2006. Under U.S. GAAP reporting, such interest rate swap instrument is and has been recorded at fair value. The interest rate swap agreement remains outstanding following the full repayment of our loan facility with HSBC.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
None
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by City Telecom in reports that we file or submit under the U.S. Securities Exchange Act of 1934 as amended, is recorded, processed, summarized and reported withinat the time periods specified inpublic reference facilities maintained by the Securities and Exchange Commission’s rules and forms. WithCommission at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549. Copies of such material may also be obtained from the passingPublic Reference Section of the U.S. Sarbanes-Oxley ActSecurities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Information may be obtained regarding the Washington D.C. Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the Internet at its website at http://www.sec.gov.
54
Within the 90-day period priorsecurities other than equity securities
55
With effect from May 13, 2005, PricewaterhouseCoopers, or PwC, tendered its resignation.
2008 | 2009 | |||||||
Nature of the service | HK$ million | HK$ million | ||||||
Audit fees | 2.8 | 2.6 | ||||||
Audit-related fees | 0.4 | 0.4 | ||||||
Total | 3.2 | 3.0 | ||||||
For KPMG
Nature of the service | 2005 | 2006 | ||
(HK$ million) | (HK$ million) | |||
Audit fees | 1.3 | 1.8 | ||
Audit-related fees | 0.2 | 0.3 | ||
Tax fees | — | — | ||
All other fees | 0.1 | 0.7 | ||
Total | 1.6 | 2.8 | ||
For PwC
| ||
| ||
| ||
| ||
| ||
| ||
Audit Fees
Audit-Related Fees
Tax Fees
Tax Fees are the aggregate fees billed by our independent auditors for tax compliance, tax planning and tax consultation services on domestic and international taxation matters.
All Other Fees
All other fees are the aggregate fees for agreed upon procedures performed in respect of our internal control procedures over financial reporting.
polices
56
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESaffiliated purchasers
None.
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Highest price | Lowest price | Total | ||||||||||||||
Number of | paid per | paid per | consideration | |||||||||||||
Date of repurchase | Ordinary Shares | Ordinary Share | Ordinary Share | paid | ||||||||||||
HK$ | HK$ | HK$ | ||||||||||||||
August 11, 2009 | 70,000 | 1.92 | 1.91 | 134,197 |
• | 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 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 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. |
57
City Telecom has
(a) |
Exhibit | ||
(b) | Exhibit 12.2 — Section 302 Certifications of the | |
(c) | Exhibit 13 — Section 906 Certification of Chief Executive Officer and Chief Financial Officer. |
58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements | Pages | |||
| F-1 | |||
F-2 | ||||
F-3 | ||||
| ||||
F-4 | ||||
F-5 | ||||
F-6 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
City Telecom (H.K.) Limited
As further described in note 3 (a)-(c), in order to comply with the new and revised Hong KongInternational Financial Reporting Standards (“HKFRSs”)as issued by the International Accounting Standards Board.
F-1
Accounting principles generally accepted in Hong Kong vary in certain significant respects from accounting principles generally accepted in the United States of America. Since prior period consolidated financial statements have been restated, the significant differences between HK GAAP and US GAAP are restated accordingly. Information relating to the nature and effect of such differences is presented in note 30 to the consolidated financial statements.
/s/ KPMG
HONG KONG, CHINA
January 26, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
City Telecom (H.K.) Limited
We have audited the consolidated statement of operations, of cash flows and of changes in shareholders’ equity of
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 the financial statements are free from 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the results of the Company’s operations and cash flows for the year ended August 31, 2004, in conformity with accounting principles generally accepted in Hong Kong.
As discussed in note 3 to the consolidated financial statements, the Company adopted a number of new or revised Hong Kong Financial Reporting Standards effective September 1, 2005 which resulted in significant changes in the accounting policies of the Company as set out in note 3 to the consolidated financial statements.
Accounting principles generally accepted in Hong Kong vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 30 to the consolidated financial statements.
/s/ PricewaterhouseCoopers
HONG KONG, CHINA
November 23, 2004, except for Note 31, as to which the date is January 20, 2005, and except for Note 3, as to which the date is January 26, 2007
CITY TELECOM (H.K.) LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended August 31, | |||||||||||
Note | 2004 (restated) | 2005 (restated) | 2006 | ||||||||
HK$ | HK$ | HK$ | |||||||||
(Amounts in thousands except per share data) | |||||||||||
Revenue from provision of telecommunication and related services | 1,169,880 | 1,162,059 | 1,134,876 | ||||||||
Operating expenses | |||||||||||
Network costs | 4 | (331,408 | ) | (339,402 | ) | (300,593 | ) | ||||
Salaries and related costs | (226,737 | ) | (259,392 | ) | (256,721 | ) | |||||
Sales and marketing expenses | (228,169 | ) | (267,983 | ) | (204,952 | ) | |||||
General and administrative expenses | (326,804 | ) | (395,211 | ) | (440,672 | ) | |||||
Provision for doubtful accounts receivable | (11,502 | ) | (35,445 | ) | (17,450 | ) | |||||
Income/(loss) from operations | 45,260 | (135,374 | ) | (85,512 | ) | ||||||
Interest income | 3,753 | 13,578 | 20,378 | ||||||||
Interest expense | (175 | ) | (54,462 | ) | (88,637 | ) | |||||
Other income, net | 2,668 | 6,037 | 4,465 | ||||||||
Income/(loss) before taxation | 5 | 51,506 | (170,221 | ) | (149,306 | ) | |||||
Income tax credit/(expense) | 6 | (2,043 | ) | 6,725 | 7,244 | ||||||
Net income/(loss) | 49,463 | (163,496 | ) | (142,062 | ) | ||||||
Earnings/(loss) per share | |||||||||||
Basic | 7 | 8.1 cents | (26.6) cents | (23.1) cents | |||||||
Diluted | 7 | 8.1 cents | (26.6) cents | (23.1) cents | |||||||
dollars)
For the year ended August 31, | ||||||||||||
Note | 2009 | 2008 | ||||||||||
HK$’000 | HK $’000 | |||||||||||
Revenue | 2 | 1,478,239 | 1,302,981 | |||||||||
Network costs | 3 | (175,129 | ) | (178,367 | ) | |||||||
Other operating expenses | 4 | (a) | (1,037,964 | ) | (966,094 | ) | ||||||
Other revenues | 4 | (b) | 41,540 | 24,989 | ||||||||
Finance costs | 4 | (c) | (55,127 | ) | (75,137 | ) | ||||||
Profit before taxation | 4 | 251,559 | 108,372 | |||||||||
Income tax (expense)/ benefit | 5 | (38,730 | ) | 16,818 | ||||||||
Profit attributable to shareholders | 212,829 | 125,190 | ||||||||||
Dividends | 6 | 126,173 | 38,614 | |||||||||
Basic earnings per share | 7 | HK32.4 cents | HK19.7 cents | |||||||||
Diluted earnings per share | 7 | HK31.8 cents | HK19.0 cents | |||||||||
F-2
CITY TELECOM
CONSOLIDATED BALANCE SHEETS
August 31, | ||||||
Note | 2005 (restated) | 2006 | ||||
HK$ | HK$ | |||||
(Amounts in thousands except number of shares and per share amounts) | ||||||
ASSETS | ||||||
Current assets | ||||||
Cash and bank balances | 20 | 539,591 | 144,917 | |||
Term bank deposits | 20 | 92,850 | 237,496 | |||
Pledged bank deposits | 16 | 90,447 | 87,022 | |||
Trade receivables, net | 8(a) | 130,010 | 140,598 | |||
Other receivables, deposits and prepayments | 8(b) | 78,758 | 77,583 | |||
Inventories | 1,957 | 856 | ||||
Deferred expenditure | 13 | 12,960 | 10,808 | |||
Income tax receivable | 535 | 347 | ||||
Total current assets | 947,108 | 699,627 | ||||
Goodwill | 9 | 1,066 | 1,066 | |||
Fixed assets, net | 10 | 1,336,543 | 1,367,234 | |||
Investment securities | 17 | 41,441 | 40,274 | |||
Derivative financial instruments | 18 | — | 1,845 | |||
Long term receivables and prepayment | 28 | 13,099 | 12,532 | |||
Deferred expenditure | 13 | 8,171 | 1,637 | |||
Total assets | 2,347,428 | 2,124,215 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Current liabilities | ||||||
Trade payables | 90,762 | 86,385 | ||||
Deposits received | 15,510 | 16,230 | ||||
Current portion of deferred services income | 36,744 | 33,743 | ||||
Other payables and accrued expenses | 11 | 223,208 | 143,486 | |||
Income taxes payable | 1,728 | 1,964 | ||||
Current portion of obligation under finance lease | 14 | 1,194 | 1,297 | |||
Total current liabilities | 369,146 | 283,105 | ||||
Long-term liabilities | ||||||
Deferred taxation | 12 | 10,539 | 353 | |||
Long-term debt and other liabilities | 14 | 947,289 | 949,103 | |||
Total liabilities | 1,326,974 | 1,232,561 | ||||
Commitments and contingencies | 15 | |||||
Shareholders’ equity | ||||||
Ordinary shares, par value $0.10 per share — 2,000,000,000 shares authorized — 614,125,404 shares issued and outstanding at August 31, 2005, 614,175,404 shares issued and outstanding at August 31, 2006 | 19 | 61,412 | 61,417 | |||
Share premium | 619,408 | 620,298 | ||||
Retained profits | 331,742 | 196,289 | ||||
Capital reserve | 7,052 | 12,993 | ||||
Translation reserve | 840 | 657 | ||||
Total shareholders’ equity | 1,020,454 | 891,654 | ||||
Total liabilities and shareholders’ equity | 2,347,428 | 2,124,215 | ||||
Limited and its subsidiaries
As at August 31, | ||||||||||||
Note | 2009 | 2008 | ||||||||||
HK$’000 | HK$’000 | |||||||||||
Non-current assets | ||||||||||||
Goodwill | 11 | 1,066 | 1,066 | |||||||||
Fixed assets | 12 | 1,302,380 | 1,231,399 | |||||||||
Long term receivable and prepayment | 6,091 | 5,586 | ||||||||||
Deferred expenditure | 15 | 12,786 | 15,391 | |||||||||
Deferred tax assets | 21 | — | 26,335 | |||||||||
1,322,323 | 1,279,777 | |||||||||||
Current assets | ||||||||||||
Accounts receivable | 16 | 120,192 | 140,283 | |||||||||
Other receivables, deposits and prepayments | 16 | 69,765 | 82,726 | |||||||||
Deferred expenditure | 15 | 36,674 | 40,704 | |||||||||
Other financial assets | 14 | — | 27,997 | |||||||||
Pledged bank deposits | 27 | 15,038 | 87,319 | |||||||||
Cash at bank and in hand | 17 | 221,052 | 421,610 | |||||||||
462,721 | 800,639 | |||||||||||
Current liabilities | ||||||||||||
Accounts payable | 18 | 37,555 | 52,324 | |||||||||
Other payables and accrued charges | 18 | 206,487 | 178,114 | |||||||||
Deposits received | 16,385 | 16,264 | ||||||||||
Deferred service revenue | 19 | 115,070 | 110,449 | |||||||||
Tax payable | 1,993 | 2,103 | ||||||||||
Current portion — obligations under finance leases | 22 | 202 | 121 | |||||||||
377,692 | 359,375 | |||||||||||
Net current assets | 85,029 | 441,264 | ||||||||||
Total assets less current liabilities | 1,407,352 | 1,721,041 | ||||||||||
Non-current liabilities | ||||||||||||
Deferred tax liabilities | 21 | 15,709 | 4,937 | |||||||||
Long-term debt and other liabilities | 22 | 163,116 | 683,497 | |||||||||
178,825 | 688,434 | |||||||||||
Net assets | 1,228,527 | 1,032,607 | ||||||||||
Capital and reserves | ||||||||||||
Share capital | 20 | 66,418 | 65,062 | |||||||||
Reserves | 20 | 1,162,109 | 967,545 | |||||||||
Total equity attributable to equity shareholders of the Company | 1,228,527 | 1,032,607 | ||||||||||
F-3
CITY TELECOM
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Year ended August 31, | ||||||||
Note | 2004 (restated) | 2005 (restated) | 2006 | |||||
HK$ | HK$ | HK$ | ||||||
Total equity as at beginning of the year | ||||||||
- as previously reported | 1,179,175 | 1,175,698 | 1,020,454 | |||||
- adjustment arising from adoption of HKAS 39 (Financial instruments) | 3(c) | — | — | 6,609 | ||||
As restated | 1,179,175 | 1,175,698 | 1,027,063 | |||||
Net loss recognized directly in equity: | ||||||||
Exchange adjustments on translation of the financial statements of subsidiaries | (248) | (143) | (183) | |||||
Profit/(loss) attributable to shareholders | ||||||||
- as previously reported | 49,550 | (156,531) | ||||||
- prior year adjustments arising from adoption of HKFRS 2 (Share-based payment) | 3(a) | (87) | (6,965) | |||||
Net profit/(loss) for the year (2005 and 2004:as restated) | 49,463 | (163,496) | (142,062) | |||||
2003 final dividends declared and paid | (45,789) | — | — | |||||
2004 interim dividends declared and paid | (9,158) | — | — | |||||
Movements in equity arising from capital transactions: | ||||||||
Equity settled share-based transaction | 3(a) | 87 | 6,965 | 6,823 | ||||
Shares issued upon exercise of options and warrants | 2,168 | 1,430 | 13 | |||||
Total equity as at the end of the year | 19 | 1,175,698 | 1,020,454 | 891,654 | ||||
Limited and its subsidiaries
For the year ended August 31, | ||||||||||||
Note | 2009 | 2008 | ||||||||||
HK$’000 | HK$’000 | |||||||||||
Total equity as at beginning of the year | 1,032,607 | 903,882 | ||||||||||
Net profit recognized directly in equity: | ||||||||||||
Exchange adjustments on translation of the financial statements of subsidiaries | 70 | 1,619 | ||||||||||
Net profit for the year | 212,829 | 125,190 | ||||||||||
Total recognized profit for the year | 212,899 | 126,809 | ||||||||||
Dividends declared and paid in respect of the current year | (19,904 | ) | (11,371 | ) | ||||||||
Dividends declared and paid in respect of the previous year | (3,108 | ) | (5,915 | ) | ||||||||
(23,012 | ) | (17,286 | ) | |||||||||
Movements in equity arising from capital transactions: | ||||||||||||
Repurchase and cancellation of ordinary shares | (134 | ) | — | |||||||||
Equity settled share-based transactions | 10 | 4,768 | 4,204 | |||||||||
Shares issued upon exercise of options | 1,399 | 14,998 | ||||||||||
6,033 | 19,202 | |||||||||||
Total equity as at the end of the year | 1,228,527 | 1,032,607 | ||||||||||
F-4
CITY TELECOM
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended August 31, | |||||||||
2004 (restated) | 2005 (restated) | 2006 | |||||||
HK$ | HK$ | HK$ | |||||||
(Amounts in thousands) | |||||||||
Cash flows from operating activities | |||||||||
Income/(loss) before taxation | 51,506 | (170,221 | ) | (149,306 | ) | ||||
Adjustments to reconcile | |||||||||
Income/(loss) before taxation to net cash inflow from operating activities: | |||||||||
Amortization of goodwill | 1,065 | 1,065 | — | ||||||
Depreciation of purchased fixed assets | 195,952 | 236,269 | 275,538 | ||||||
Depreciation of fixed assets held under finance leases | — | 380 | 926 | ||||||
Impairment loss on investment property | — | — | 1,131 | ||||||
Amortization of deferred expenditure | 1,828 | 12,927 | 13,973 | ||||||
Interest income | (3,753 | ) | (13,578 | ) | (20,378 | ) | |||
Interest expense | 175 | 374 | — | ||||||
Interest element of finance leases | — | 23 | 54 | ||||||
(Gain)/loss on disposal of fixed assets | (34 | ) | (134 | ) | 9,621 | ||||
Unrealized losses/(gain) on other investments | 1,696 | (300 | ) | (668 | ) | ||||
Amortization of incidental issuance cost | — | 1,693 | 1,429 | ||||||
Interest on 10-year senior notes | — | 52,372 | 85,235 | ||||||
Other borrowing costs | — | — | 1,919 | ||||||
Equity settled share-based transaction | 87 | 6,965 | 6,823 | ||||||
Realised and unrealized loss on derivative financial instruments | — | — | 125 | ||||||
(Decrease)/increase in long term receivable and prepayment | (6,206 | ) | (6,893 | ) | 567 | ||||
Changes in operating assets and liabilities: | |||||||||
Increase in trade receivables, other receivables, deposits and prepayments | (50,382 | ) | (29,890 | ) | (9,413 | ) | |||
(Increase)/decrease in inventories | — | (1,957 | ) | 1,101 | |||||
Increase in deferred expenditure | (23,391 | ) | (12,495 | ) | (5,287 | ) | |||
Increase/(decrease) in trade payables, other payables, accrued charges, deposits received | 30,957 | 5,258 | (23,652 | ) | |||||
Increase/(decrease) in deferred service income | 29,257 | (2,685 | ) | (3,001 | ) | ||||
Net cash inflow generated from operations | 228,757 | 79,173 | 186,737 | ||||||
Interest paid | (175 | ) | (374 | ) | — | ||||
Interest element of finance leases | — | (23 | ) | (54 | ) | ||||
Hong Kong profits tax paid | (24,011 | ) | (805 | ) | (961 | ) | |||
Overseas tax paid | (808 | ) | (588 | ) | (1,571 | ) | |||
Net cash inflow from operating activities | 203,763 | 77,383 | 184,151 | ||||||
Investing activities | |||||||||
Decrease/(increase) in pledged bank deposits | 2,803 | (63,642 | ) | 3,425 | |||||
Increase in term bank deposits | — | (92,850 | ) | (144,646 | ) | ||||
Purchases of fixed assets | (410,046 | ) | (415,494 | ) | (382,214 | ) | |||
Interest received | 3,753 | 13,578 | 20,378 | ||||||
Purchase of other investments | (3,900 | ) | — | — | |||||
Proceeds from disposal of fixed assets | 1,146 | 968 | 5,676 | ||||||
Net proceeds from maturity of derivative financial instruments (note a) | — | — | 4,639 | ||||||
Net cash outflow from investing activities | (406,244 | ) | (557,440 | ) | (492,742 | ) | |||
Net cash outflow before financing activities | (202,481 | ) | (480,057 | ) | (308,591 | ) | |||
Limited and its subsidiaries
For the year ended August 31, | ||||||||||||
Note | 2009 | 2008 | ||||||||||
HK$’000 | HK$’000 | |||||||||||
Net cash inflow from operations | 23 | (a) | 537,618 | 382,813 | ||||||||
Hong Kong profits tax recovered | — | 42 | ||||||||||
Overseas tax paid | (1,732 | ) | (4,292 | ) | ||||||||
Net cash inflow from operating activities | 535,886 | 378,563 | ||||||||||
Investing activities | ||||||||||||
Increase in pledged bank deposits | 72,281 | — | ||||||||||
Interest received | 4,869 | 15,596 | ||||||||||
Purchases of fixed assets | (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 | 8,249 | 7,057 | ||||||||||
Net cash outflow from investing activities | (176,488 | ) | (147,750 | ) | ||||||||
Net cash inflow before financing activities | 359,398 | 230,813 | ||||||||||
Financing activities | ||||||||||||
Repurchase of ordinary shares | (134 | ) | — | |||||||||
Proceeds from issuance of new shares | 23 | (b) | 1,399 | 14,998 | ||||||||
Repayment of capital element of finance leases | 23 | (b) | (138 | ) | (834 | ) | ||||||
Interest element of finance leases | (27 | ) | (34 | ) | ||||||||
Interest paid on 10-year senior notes | (52,670 | ) | (70,010 | ) | ||||||||
Repurchase of 10-year senior notes | 23 | (b) | (485,829 | ) | (269,399 | ) | ||||||
Dividends paid | (23,008 | ) | (17,271 | ) | ||||||||
Net cash outflow from financing activities | (560,407 | ) | (342,550 | ) | ||||||||
Decrease in cash at bank and in hand | (201,009 | ) | (111,737 | ) | ||||||||
Cash at bank and in hand at September 1 | 421,610 | 532,894 | ||||||||||
Effect of foreign exchange rate changes | 451 | 453 | ||||||||||
Cash at bank and in hand at August 31 | 221,052 | 421,610 | ||||||||||
F-5
2004 (restated) 2005 (restated) Financing activities Proceeds from exercise of share options and warrants Net proceeds from issuance of senior notes Interest paid on senior notes Proceeds from bank loan drawn Repayment of bank loan Repayment of capital element of finance leases Dividend paid Net cash inflow/(outflow) from financing activities (Decrease)/increase in cash and bank balances Cash and bank balances at the beginning of year Effect of foreign exchange rate changes on cash and bank balances Cash and bank balances at the end of year (note 20) Year ended August 31, 2006 HK$ HK$ HK$ (Amounts in thousands) 2,168 1,430 13 — 943,655 — — (52,372 ) (85,235 ) 100,000 100,000 — — (200,000 ) — — (497 ) (1,210 ) (54,947 ) — — 47,221 792,216 (86,432 ) (155,260 ) 312,159 (395,023 ) 383,860 228,347 539,591 (253 ) (915 ) 349 228,347 539,591 144,917
Note (a)
The amount relates to proceeds received upon maturity of the foreign exchange forward contracts during the year ended 31 August 2006.
The accompanying notes are an integral part of these consolidated financial statements.
1 Description of business and basis of presentation
City Telecom (H.K.) Limited was incorporated in Hong Kong on May 19, 1992 under the Hong Kong Companies Ordinance. The Company and its subsidiaries (collectively referred to as the “Company”) are engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada.
As of August 31, 2006 the Company had the following principal direct and indirect subsidiaries:
1 | Significant accounting policies | |
(a) | Statement of compliance | |
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 accompanying consolidated financial statements have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”), which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards (“IASs”) and Interpretations issued by the IASB. | ||
In prior periods, the Company prepared its consolidated financial statements in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and accounting principles generally accepted in Hong Kong. Although HKFRSs have been fully converged with IFRSs in all material respects since January 1, 2005, the accompanying consolidated financial statements are the first published financial statements in which the Company makes an explicit and unreserved statement of compliance with IFRSs. Therefore, in preparing these financial statements management has given due consideration to the requirements of IFRS 1, First-time Adoption of International Financial Reporting Standards. The date of the Company’s transition to IFRSs was determined to be September 1, 2007, being the beginning of the earliest period for which the Company presents full comparative information in these financial statements. | ||
With due regard to the Company’s accounting policies in previous periods and the requirements of IFRS 1, management has concluded that no adjustments to the amounts reported under HKFRSs as at the date of transition to IFRSs, or in respect of the year ended August 31, 2008, were required in order to enable the Company to make an explicit and unreserved statement of compliance with IFRSs in the first IFRS financial statements which included these amounts as comparatives. | ||
The IASB has issued a number of new or revised IFRSs that are first effective or available for early adoption for the current accounting period of the Company. However, none of these developments are relevant to the Company’s operations. | ||
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 31). | ||
The consolidated financial statements were authorized for issue by the Board of Directors on November 5, 2009. | ||
(b) | Basis of preparation of the financial statements | |
The measurement basis used in the preparation of the financial statements is the historical cost basis except that certain financial assets are stated at their fair values or amortized costs as explained in the accounting policies set out below (see notes 1(j), 1(k) and 1(r)). | ||
The preparation of financial statements in conformity with IFRSs 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. | ||
Judgments 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 discussed in note 30. | ||
(c) | Subsidiaries and controlled entities | |
Subsidiaries are entities controlled by the Group. Control exists when the Group 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-6
1 | Significant accounting policies (continued) | |
(d) | Group accounting | |
(i) | Consolidation | |
An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. | ||
Intra-group balances and transactions and any unrealized profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealized losses resulting from intra-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 denominated in foreign currencies are translated at exchange rates ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in profit or loss. | ||
For consolidation purposes, the balance sheets of foreign subsidiaries are translated at the rates of exchange ruling at the balance sheet date whilst the income statement is translated at an average rate for the year. Exchange differences are dealt with as a movement in reserves. | ||
The accompanying consolidated financial statements are presented in Hong Kong Dollars, which is the Company’s functional currency. All financial information have been rounded to the nearest thousand. | ||
(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. | ||
Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (see note 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 goodwill is included in the calculation of the profit or loss on disposal. | ||
(f) | Investment property | |
Investment properties are 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 1(g)) and impairment losses (see note 1(i)) if any. Any gain or loss arising from the retirement or disposal of an investment property is recognized in the income statement. Rental income from investment property is accounted for in accordance with the accounting policy as set out in note 1(t)(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 |
- Furniture, fixtures and fittings | 4 years | |||||||||
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2. Basis of preparation and principal accounting policies
(a) Statement of compliance
The accompanying consolidated financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”) which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. Accounting principles generally accepted in Hong Kong differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”), details of which are set out in note 30.
The HKICPA has issued certain new and revised HKFRSs that are effective or available for early adoption for accounting periods beginning on or after January 1, 2005. Information on the changes in accounting policies resulting from initial application of these new and revised HKFRSs for the current and prior accounting periods reflected in the accompanying consolidated financial statements is provided in Note 3.
(b) Basis of preparation
The consolidated financial statements consist of the balance sheets of the Company and all its subsidiaries as of August 31, 2005 and 2006, and the statements of operations, cash flows and changes in shareholders’ equity for the years ended August 31, 2004, 2005 and 2006.
The basis used in the preparation of the consolidated financial statements is the historical cost basis except that certain investment securities and derivative financial instruments are stated at their fair value as described in the accounting policies set out below (see Note 2(j) and 2(k)).
The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and underlying 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 judgements 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 amounts are expressed 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.
(c) Subsidiaries and controlled entities
A subsidiary, in accordance with the Hong Kong Companies Ordinance, is a company in which the City Telecom (H.K.) Limited, directly or indirectly, holds more than half of the issued share capital or controls more than half the voting power or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the Company has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.
(d) Group accounting
(i) Consolidation
A controlled subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases.
Intercompany balances and transactions and any unrealized profits arising from intercompany transactions are eliminated in full in preparing the consolidated financial statements. Unrealized losses resulting from intercompany 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 expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising from these translations are dealt with in the statement of operations.
For consolidation purposes, the balance sheets of subsidiaries with functional currencies other than Hong Kong Dollars, the functional currency of City Telecom (H.K.) Limited, are translated at the rates of exchange ruling at the balance sheet date whilst the statement of operations is translated at an average rate for the year. Such exchange differences are dealt with in the statement of shareholders’ equity as translation reserves.
(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 Company’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 entitiy is recognized immediately in profit or loss.
Goodwill is stated at cost less accumulated impairment losses, if any. Goodwill is allocated to cash-generating units and is tested annually for impairment (see Note 2(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.
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) Investment property
Investment properties are land and/or buildings 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)) and impairment losses (see Note 2(i)), if any. Any gain or loss arising from the retirement or disposal of an investment property is recognized in the statement of operations. Rental income from investment property is accounted for as described in Note 2(u)(vi).
(g) Fixed assets
Fixed assets are stated at cost less accumulated depreciation and 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:
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4 years – 20 years | ||||||
4 years |
- | ||||||
are depreciated over the shorter of the unexpired term of the leases and their estimated useful |
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 statement of operations. Major improvements are capitalized and depreciated over their expected useful lives.
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 statement of operations.
Under certain circumstances, the company 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
(i) Classification of assets leased to the Company
Assets that are held by the Company under leases which transfer to the Company 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 Company are classified as operating leases.
Land held for own use under an operating lease where 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)(iii)).
(ii) Finance leases
Where the Company acquired the use of assets under finance leases, the amount representing the lower of the fair value of the leased asset, or the present value of the minimum lease payments is recorded in fixed assets with the corresponding liability, net of finance charges, recorded as obligations under finance leases. Depreciation and impairment losses are accounted for in accordance with the accounting policy in Note 2(g) and Note 2(i). Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting 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 statement of operations on a straight-line basis over the lease periods.
(i) Impairment of assets
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. |
F-7
1 | Significant accounting policies (continued) | |
(g) | Fixed assets (continued) | |
Major costs incurred in restoring fixed assets to their normal working condition are charged to profit or loss. Major improvements are capitalized and depreciated over their expected useful lives to the 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 profit or loss on the date of disposal. | ||
(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 to 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 1(h)(iii)). | ||
(ii) | Finance leases | |
Where the Group acquired the use of assets under finance leases, the amounts representing the fair value of the leased asset or, if lower, the present value of the minimum lease payments of such assets, are included in fixed assets with the corresponding 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 1(g) and note 1(i). Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting 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 profit or loss on a straight-line basis over the lease periods. | ||
(i) | Impairment of assets | |
(i) | Impairment of | |
Investments in debt and equity securities that are stated at cost or amortized cost or are classified as available-for-sale securities, and other current and non-current receivables that are stated at cost or amortized cost 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: |
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 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.
- | 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. |
If any such evidence exists, any impairment loss is determined and recognized as follows: |
- | For unquoted equity securities and current 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. | ||
- | For 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-8
1 | Significant accounting policies (continued) | |
(i) | Impairment of assets (continued) | |
(i) | Impairment of investments in debt and equity securities and accounts receivable 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 profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that 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 profit or loss. The amount of the cumulative loss that is recognized in profit 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 profit or loss. | ||
Impairment losses recognized in profit or loss in respect of available-for-sale equity securities are not reversed through 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 recognized. Reversals of impairment losses in such circumstances are recognized in profit and loss. |
Impairment losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of 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 accounts 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 recognized 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 decreased: |
- | fixed assets; | ||
- | investment property; and | ||
- | goodwill. |
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 profit 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 | ||
In respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates 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 profit or loss in the year in which the reversals are recognized. |
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:F-9
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.
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).
An impairment loss is recognized in profit 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.
1 | Significant accounting policies (continued) | |
(j) | Other financial assets | |
The Group accounts for investments in debt and equity securities are as follows: | ||
Financial assets held for trading and those designated as at fair value through profit or loss at inception are accounted for at fair value. Such financial assets 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 of the financial assets is remeasured, with any resultant gain or loss being recognized in profit or loss. The net gain or loss recognized in profit or loss does not include any interest earned on these investments. Interest income is recognized in accordance with the policies set out in note 1(t)(iv). | ||
Held-to-maturity securities are dated debt securities that the Group has the positive ability and intent to hold to maturity. Such securities 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 1(i)(i)). | ||
Financial assets 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 of the assets is remeasured, with any resultant gain or loss recognized directly in equity, except for impairment losses (see note 1(i)(i)) and foreign exchange gains and losses, which are recognized directly in profit or loss. Where these investments are interest-bearing, interest calculated using the effective interest method is recognized in profit or loss. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in profit or loss. | ||
Investments are recognized on the date the Group commits to purchase the investments. Investments are derecognized when: |
Except in the case of goodwill, an impairment loss is reversed if there has been favorable change in the estimates 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 profit or loss in the year in which the reversals are recognized.
(j) Investment securities
The Company’s policies for investments in debt and equity securities are as follows:
Investments in securities held for trading are classified as current assets and are initially stated at fair value. At each balance sheet date the fair value is remeasured, with any resultant gain or loss recognized in profit or loss.
Dated debt securities that the Company has the positive ability and intention to hold to maturity are classified as held-to-maturity securities. Held-to-maturity securities are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, the securities are stated in the balance sheet at amortized cost less impairment losses (see Note 2(i)(i)).
Other investments in securities are classified as available-for-sale securities and 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 and foreign exchange gains and losses which are recognized directly in profit or loss. Where these investments are interest bearing, interest is calculated using the effective interest method and recognized in profit or loss. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in profit or loss.
Investments are recognized on the date the Company 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 |
(k) Derivative financial instruments
Derivative financial instruments 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 charged immediately to profit or loss, except where the derivatives qualify for cash flow hedge accounting or hedge the 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.
(l) Deferred expenditure
Deferred expenditure represents customer acquisition costs incurred for successful acquisition or origination of a long-term service agreements. Such costs are deferred and amortized on a straight-line basis over the period of the underlying service subscription agreements executed with the customers. All other related advertising and marketing costs are charged to the statement of operations as incurred.
(m) Accounts receivables
Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for bad and doubtful debts (see Note 2(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 doubtful debts (see Note 2(i)(i)).
(n) Inventories
Inventories are carried at the lower of cost and 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 those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss 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 in the amount of inventories recognized as an expense in the period in which the reversal occurs.
For the years ended August 31 2004, 2005 and 2006, there was no write-down or provision made against inventories.
(o) Cash and pledged bank deposits
Cash consists 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 balance sheet, and is not included in the cash 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).
(p) Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the time value of money is material, provisions are stated at present value of the expenditure expected to settle the obligation.
(q) Employee benefits
(i) Employee leave entitlements
Employee entitlements to annual leave and long service leave are recognized when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date. Employee 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 Company has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made.
(iii) Retirement benefit costs
The Company contributes to defined contribution retirement schemes which are available to certain employees. Contributions to the schemes by the Company and employees are calculated as a percentage of employees’ basic salaries. The retirement benefit scheme cost charged to the statement of operations represents contributions payable by the Company to the fund. The Company’s contributions are reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully in the contributions.
The assets of the scheme are held separately from those of the Company in an independently administered fund.
(iv) Share-based payments
The fair value of share options granted to employees is recognized as an employee 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, taking into account the terms and conditions upon which the options were granted. Where the employees 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 profit or loss in the year of the review, unless the original employee 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 equity amount is recognized in the capital reserve until either the option is exercised or the option expires.
(r) Deferred taxation
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.
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.
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.
(s) Senior notes
Long-term debt, representing senior notes, is recognized initially at fair value less direct and incremental issuance costs. Subsequent to initial recognition, the senior notes are stated at amortized cost with any difference between cost and redemption value being recognized in profit or loss over the period of the notes using the effective interest method.
In the event that the senior notes are redeemed prior to the maturity date, the unamortized notes issuance costs are charged immediately to the statement of operations.
(t) Contingent liabilities and assets
A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Company. It can also be a present obligation arising from past events that is not recognized because it is not probable that an outflow of economic resources will be required or the amount of obligation cannot be measured reliably.
A contingent liability is not recognized but is disclosed in the notes to the financial statements unless the probability of outflow of economic benefits is remote. When a change in the probability of an outflow occurs so that outflow is probable and the amount of obligation can be measured reliably, the amount is recognized as a liability.
(u) Revenue recognition
(k) | Derivative financial instruments | |
Derivative financial instruments that are not designated or do not qualify as hedges are recognized initially at fair value. At each balance sheet date the fair value of the derivative financial instruments is remeasured. The gain or loss on remeasurement to fair value is charged immediately to profit or loss. | ||
(l) | 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. | ||
(m) | Accounts receivable | |
Accounts receivable and other receivables are initially recognized at fair value and thereafter stated at amortized cost less allowance for impairment of doubtful debts (see note 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 of doubtful debts (see note 1(i)(i)). | ||
(n) | 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 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 27). | ||
(o) | Financial 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. |
F-10
1 | Significant accounting policies (continued) | |
(o) | Financial guarantees issued, provisions and contingent liabilities (continued) | |
(i) | Financial guarantees issued (continued) | |
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(o)(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. | ||
(p) | Employee benefits | |
(i) | Employee leave entitlements | |
Employee entitlements to annual leave and long service leave are recognized when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date. | ||
Employee 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 employees and a reliable estimate of the obligation can be made. | ||
(iii) | Retirement benefit costs | |
The Group contributes to defined contribution retirement schemes which are available to certain employees. Contributions to the schemes by the Group are calculated as a percentage of employees’ basic salaries and charged to profit or loss. The Group’s contributions are reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully in the contributions. | ||
The assets of the scheme are held 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 employees is recognized as an employee cost with a corresponding increase in 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 employees 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 profit or loss, unless the original employee 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 related to share options expense is recorded in the capital reserve until either the option is exercised or the option expires. |
F-11
1 | Significant accounting policies (continued) | |
(q) | Deferred taxation | |
Deferred taxation is 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. Taxation rates enacted or substantively enacted at the balance sheet date are used to measure deferred tax assets and liabilities. | ||
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. | ||
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. | ||
(r) | Senior notes | |
Long-term debt, representing senior notes, is recognized initially at fair value less incidental costs of issuance. Subsequent to initial recognition, the senior notes are stated at amortized cost with the difference between amortized cost and redemption value recognized in profit or loss over the period of borrowings using the effective interest method. | ||
(s) | Trade and other payables | |
Trade and other payables are initially recognized at fair value. Except for financial guarantee liabilities measured in accordance with note 1(o), 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. | ||
(t) | 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 collectibility is probable. |
(ii) | Tariff-free period granted to subscribers of fixed telecommunications network services |
(iii) | Amount received in advance for the provision of fixed telecommunications network services is deferred and included under deferred |
(iv) |
Interest income is recognized |
(v) | Rental income receivable under operating leases is recognized in |
(v) Borrowing costs
Borrowing costs are expensed in profit or loss in the period in 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 which necessarily takes a substantial period of time to get ready for its intended use or sale.
The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that 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.
No borrowing costs was capitalized for the year ended August 31, 2006 (2005: HK$2,047,000 and 2004: HK$3,053,000).
(w) Segment reporting
In accordance with the Company’s internal financial reporting, the Company has determined that business segment is the primary reporting format and geographical is the secondary reporting format.
Segment 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.
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.
(x) Accounting for barter transactions
When goods or services are exchanged or swapped 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 goods or services rendered, 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 given up, adjusted by the amount of any cash or cash equivalents transferred.
(y) Related parties
For the purposes of these financial statements, parties are considered to be related to the Company if the Company has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Company and the party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Company where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Company or of any entity that is a related party of the Company.
3. Changes in accounting policies and prior period adjustments
The HKICPA has issued a number of new and revised HKFRSs that are effective for accounting periods beginning on or after January 1, 2005. The Company has not applied any new standard or interpretation that is not yet effective for the current accounting period (see Note 29).
The accounting policies of the Company that are described in note 2 reflect the adoption of these new and revised HKFRSs. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in these financial statements.
(a) Employee share option scheme (HKFRS 2, Share-based payment)
In prior years, no amounts were recognized when employees (which term included directors) were granted share options of the Company. Upon the exercise of the options, the nominal amounts of share capital and share premium were credited by an amount equal to the option’s exercise price.
With effect from September 1, 2005, in order to comply with HKFRS 2, the Company recognizes the fair value of such share options as an expense in the statement of operations, or as an asset, if the cost qualifies for recognition as an asset with a corresponding amount credited to capital reserve within equity. The fair value of the share options is measured at the date of grant.
Where the employees are required to meet vesting conditions before they become entitled to the options, the Company recognizes the fair value of the options granted over the vesting period. Otherwise, the Company recognizes the fair value in the period in which the options are granted.
Upon exercise of the options, the related capital reserve is transferred to share capital and share premium. If the options lapse, the related capital reserve is transferred to share premium.
This new accounting standard has been applied retrospectively with comparatives restated in accordance with HKFRS 2, except that the Company 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) all options granted to employees on or before November 7, 2002; and
(ii) all options granted to employees after November 7, 2002 but which had vested before September 1, 2005.
As a result of the adoption of HKFRS 2, operating expenses for the year ended August 31, 2006 increased by HK$6,823,000 with the corresponding amount credited to capital reserve and HK$882,000 was transferred from capital reserve to share premium for vested share options that lapsed during the year.
The retrospective adoption of this accounting policy resulted in amounts previously reported to be restated as follows: (a) an increase in other operating expenses of HK$87,000 for the year ended August 31, 2004 and a corresponding increase in capital reserve; (b) a decrease of HK$87,000 in the opening balance of the retained profits at September 1, 2004 and a corresponding increase in capital reserve; (c) an increase in other operating expenses of HK$6,965,000 for the year ended August 31, 2005 and a corresponding increase in capital reserve and; (d) a decrease of HK$7,052,000 of the opening balance of the retained profits at September 1, 2005 and a corresponding increase in capital reserve. See note 7 for impact on previously reported earnings (loss) per share.
Details of the employee share option scheme can be found in note 25 to the consolidated financial statements.
(b) Accounting for goodwill (HKFRS 3, Business combinations and HKAS 36, Impairment of assets)
Prior to September 1, 2005,
With effect from September 1, 2005, in accordance with HKFRS 3 and HKAS 36, the Company no longer amortizes positive goodwill. Such goodwill is tested annually for impairment, as well as when there are indications of impairment. Impairment losses are recognized when the carrying amount of the cash generating unit to which the goodwill has been allocated exceeds its recoverable amount.
Also with effect from September 1, 2005 and in accordance with HKFRS 3, if the fair value of the net assets acquired in a business combination exceeds the consideration paid (i.e. an amount arises which would have been known as negative goodwill), (a) the acquirer shall reassess the identification and fair value measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the business combination and (b) recognize immediately in profit and loss any excess remaining after the reassessment. Further, 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) will not be recognized in the statement of operations on disposal or impairment of the acquired business, or under any other circumstances. The Company did not have any goodwill that arose before September 1, 2001 that was taken directly to reserves.
The new policy in respect of the amortization of positive goodwill has been applied prospectively in accordance with the transitional arrangements under HKFRS 3. As a result, comparative amounts have not been restated, the cumulative amount of amortization as at September 1, 2005 has been offset against the cost of the goodwill and, no amortization charge for goodwill has been recognized in the consolidated statement of operations for the year ended August 31, 2006. Goodwill amortization recognized in the consolidated statement of operations for each of the years ended August 31, 2005 and 2004 was HK$1,065,000. The change in policy relating to negative goodwill had no effect on the financial statements as no negative goodwill existed as at August 31, 2005.
(c) Financial instruments (HKAS 32, Financial instruments: Disclosure and presentation and HKAS 39, Financial instruments: Recognition and measurement)
With effect from September 1, 2005, in order to comply with HKAS 32 and HKAS 39, the Company has changed its accounting policies relating to financial instruments. Further details of the changes are as follows.
(i) Debt securities
The Company’s investments in debt securities consisting of mutual funds (included in investment securities) have been carried at fair value since inception. At each balance sheet date, the net unrealized gains or losses arising from the change in fair value of debt securities are recognized in statement of operations. Profits or losses on disposal of these investments, representing the difference between the net sales proceeds and the carrying amounts, are recognized in the statement of operations.
With effect from September 1, 2005, and in accordance with HKAS 39, these investments are carried at fair value with changes in fair value recognized in statement of operations. No adjustment arose from the adoption of the new policies for these securities because they have been carried at fair value prior to the adoption.
(ii) Loans and receivable
The Company’s long-term bank deposit (included in investment securities) has been carried at amortized cost since inception.
With effect from September 1, 2005, and in accordance with HKAS 39, loans and receivables that are non-derivative financial assets with fixed or determinable payments, and that are not quoted in an active market are included in current assets, except for maturities greater than 12 months after the balance sheet date. Financial assets classified under loans and receivables are carried at amortized cost. The Company’s long-term bank deposit is classified as loans and receivables and is included in investment securities. No adjustment arose from the adoption of the new policies for the long-term bank deposit because it has been carried at amortized cost prior to the adoption.
(iii) Derivative financial instruments
Prior to September 1, 2005, derivative financial instruments entered into by the Company to hedge the interest rate risk of a recognized asset or liability or the foreign currency risk of a committed future transaction were recognized on an accrual basis with reference to the timing of recognition of the hedged transaction.
With effect from September 1, 2005, and in accordance with HKAS 39, all derivative financial instruments entered into by the Company are stated at fair value. Changes in the fair value of derivatives held as hedging instruments in a cash flow hedge are recognized in equity to the extent that the hedge is effective and until the hedged transaction occurs. Any changes in the fair value of derivative financial instruments which do not qualify as cash flow hedges are recognized in profit or loss.
The adoption of this accounting policy resulted in recognition of derivative financial instruments as assets of HK$6,609,000 on September 1, 2005 and a corresponding increase in the opening balance of retained profits at September 1, 2005. In addition, the adoption resulted in a loss from change in fair value of derivative financial instruments of HK$725,000 for the year ended August 31, 2006 with a corresponding reduction in derivative financial instruments at August 31, 2006.
(iv) Financial liabilities
Prior to September 1, 2005, the Company’s 10-year senior notes payable (included in long-term debt and other liabilities) was initially measured at fair value (which is equivalent to the issuance price) less direct incremental issuance costs. After initial recognition, the senior notes were stated at amortized cost.
With effect from September 1, 2005, and in accordance with HKAS 39, financial liabilities, other than those held for trading purposes, are measured initially at fair value with transaction costs included in the initial measurement. Subsequent to initial recognition, financial liabilities are measured at amortized cost except for those liabilities (a) measured at fair value through profit or loss and (b) that arise when a transfer of a financial asset does not qualify for derecognition and therefore is accounted for using the continuing involvement approach. The adoption of this new accounting policy for the 10-year senior notes did not result in any adjustments because the notes have been carried at amortized cost prior to the adoption.
(d) Definition of related parties (HKAS 24, Related party disclosures)
As a result of the adoption of HKAS 24, Related party disclosures, the definition of related parties as disclosed in Note 2(y) has been expanded to include entities that are under the significant influence of a related party that is an individual (i.e. key management personnel, significant shareholders and/or their close family members) and post employment benefit plans which are for the benefit of employees of the Company or of any entity that is a related party of the Company. The expansion of the definition of related parties has not resulted in any material changes to the previously reported disclosures of related party transactions nor has it had any material effect on the disclosures made in the current period.
(e) Cash outflows for term bank deposits
For the year ended August 31, 2005, the Company made an adjustment to its consolidated statement of cash flows to classify the cash outflows for term bank deposits as investing activities instead of operating activities. The impact of this adjustment on the consolidated statement of cash flows for the year ended August 31, 2005 was as follows:
(u) | Borrowing costs | ||
| |||
| |||
(v) | Segment reporting | ||
In accordance with the Group’s internal financial reporting, the Group has determined that the primary reporting format is business segment and secondary reporting format is geographical segment. | |||
Segment assets consist primarily of goodwill, fixed assets, receivables and cash. Segment liabilities comprise operating liabilities and exclude items such as taxation and certain corporate borrowings. Capital expenditure comprises additions to fixed assets. | |||
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-12
1 | Significant accounting policies (continued) | |
(w) | 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 goods or services received, 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 rendered, adjusted by the amount of any cash or cash equivalents transferred. | ||
(x) | 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 employees 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. | ||
2 | Revenue and segment information | |
The Group 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: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Revenue | ||||||||
International telecommunications services | 247,359 | 291,943 | ||||||
Fixed telecommunications network services (note 2(c)) | 1,230,880 | 1,011,038 | ||||||
1,478,239 | 1,302,981 | |||||||
(a) | Primary reporting format — business segments | |
The Group is organized on a worldwide basis into two business segments: |
| provision of international long distance calls services | |||
- Fixed telecommunications network | : | provision of dial up and broadband Internet access services , local voice-over-IP services, IP-TV services and corporate data services |
F-13
2 | Revenue and segment information (continued) | |
(a) | Primary reporting format — business segments (continued) | |
The Group’s inter-segment transactions mainly consist of provision of leased lines services. These transactions were entered into on similar terms as those contracted with third parties. |
2009 | ||||||||||||||||
International | Fixed | |||||||||||||||
tele- | tele- | |||||||||||||||
communications | communications | |||||||||||||||
services | network services | Elimination | Group | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Revenue | ||||||||||||||||
- External sales | 247,359 | 1,230,880 | — | 1,478,239 | ||||||||||||
- Inter-segment sales | 5,669 | 19,784 | (25,453 | ) | — | |||||||||||
253,028 | 1,250,664 | (25,453 | ) | 1,478,239 | ||||||||||||
Segment results | 61,631 | 203,515 | 265,146 | |||||||||||||
Other revenues | 41,540 | |||||||||||||||
Finance costs | (55,127 | ) | ||||||||||||||
Profit before taxation | 251,559 | |||||||||||||||
Income tax expense | (38,730 | ) | ||||||||||||||
Net profit | 212,829 | |||||||||||||||
2008 | ||||||||||||||||
International | Fixed | |||||||||||||||
tele- | tele- | |||||||||||||||
communications | communications | |||||||||||||||
services | network services | Elimination | Group | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Revenue | ||||||||||||||||
- External sales | 291,943 | 1,011,038 | — | 1,302,981 | ||||||||||||
- Inter-segment sales | 5,692 | 22,680 | (28,372 | ) | — | |||||||||||
297,635 | 1,033,718 | (28,372 | ) | 1,302,981 | ||||||||||||
Segment results | 63,225 | 95,295 | 158,520 | |||||||||||||
Other revenues | 24,989 | |||||||||||||||
Finance costs | (75,137 | ) | ||||||||||||||
Profit before taxation | 108,372 | |||||||||||||||
Income tax benefit | 16,818 | |||||||||||||||
Net profit | 125,190 | |||||||||||||||
F-14
2 | Revenue and segment information (continued) | |
(a) | Primary reporting format — business segments (continued) |
2009 | ||||||||||||
International | Fixed | |||||||||||
tele- | tele- | |||||||||||
communications | communications | |||||||||||
services | network services | Group | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Segment assets | 297,516 | 1,487,528 | 1,785,044 | |||||||||
Segment liabilities | 81,194 | 295,035 | 376,229 | |||||||||
Unallocated liabilities | 180,288 | |||||||||||
Total liabilities | 556,517 | |||||||||||
Capital expenditure incurred during the year | 1,820 | 284,914 | 286,734 | |||||||||
Depreciation for the year | 15,154 | 191,087 | 206,241 |
2008 | ||||||||||||
International | Fixed | |||||||||||
tele- | tele- | |||||||||||
communications | communications | |||||||||||
services | network services | Group | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Segment assets | 426,781 | 1,627,300 | 2,054,081 | |||||||||
Unallocated assets | 26,335 | |||||||||||
Total assets | 2,080,416 | |||||||||||
Segment liabilities | 80,756 | 276,771 | 357,527 | |||||||||
Unallocated liabilities | 690,282 | |||||||||||
Total liabilities | 1,047,809 | |||||||||||
Capital expenditure incurred during the year | 4,293 | 207,391 | 211,684 | |||||||||
Depreciation for the year | 19,587 | 190,464 | 210,051 |
F-15
2 | Revenue and segment information (continued) |
(b) | Secondary reporting format — geographical segments | |
The Group’s two business segments are managed in two main geographical areas: |
In disclosing information on the basis of geographical segments, revenue and segment results are disclosed based on the geographical location of customers. Total assets and capital expenditure are disclosed based on the geographical location of the assets. |
There were no sales between the geographical segments. |
2009 | ||||||||||||||||
Segment | Total | Capital | ||||||||||||||
Revenue | results | assets | expenditure | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Hong Kong | 1,461,715 | 264,859 | 1,768,643 | 286,193 | ||||||||||||
Canada | 16,524 | 287 | 16,401 | 541 | ||||||||||||
1,478,239 | 265,146 | 1,785,044 | 286,734 | |||||||||||||
2008 | ||||||||||||||||
Segment | Total | Capital | ||||||||||||||
Revenue | results | assets | expenditure | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Hong Kong | 1,281,069 | 157,485 | 2,040,496 | 211,482 | ||||||||||||
Canada | 21,912 | 1,035 | 13,585 | 202 | ||||||||||||
1,302,981 | 158,520 | 2,054,081 | 211,684 | |||||||||||||
Unallocated assets | 26,335 | |||||||||||||||
Total assets | 2,080,416 | |||||||||||||||
F-16
2 | Revenue and segment information (continued) | |
(c) | 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 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 to be collected. In prior years, majority of the mobile operators rejected HKBN’s demand for payment of the mobile interconnection charges. As a result of non-payment by certain mobile operators, in 2004, the Group requested the TA to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile operators (“mobile operator under dispute”) to HKBN; and the effective date of the determined mobile interconnection charges. | |
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 and the 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 interim rate is subject to adjustment based on further determination to be issued by the TA. | ||
In 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 make a new determination on the rate of mobile interconnection charge and interest thereon with those operators. | ||
In September 2008, TA indicated that it accepted HKBN’s request for determination on the rate of mobile interconnection charges for the period 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”). As at August 31, 2009, the 2008 Determination was still in progress. | ||
For the year ended August 31, 2009, the Group recognized revenue related to mobile interconnection charges of HK$20,558,000 (2008: HK$29,568,000) representing the amount of mobile interconnection charges management expects to collect. | ||
3 | Network costs | |
Network costs mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, and production costs for the IP-TV service, and do not include depreciation charge which is included in other operating expenses. | ||
The Group estimates the Universal Services Contributions (“USC”) payable to PCCW-HKT to fund the costs of network development in remote areas in Hong Kong and includes such estimated costs as part of the network costs. TA periodically reviews that actual costs of such developments and revises the amounts owed to PCCW-HKT or to be refunded by PCCW-HKT to the USC contributing parties. | ||
On December 28, 2007, TA issued a statement (the “2007 TA Statement”) on the USC and confirmed the actual contribution level for the period from January 1, 2005 to June 30, 2007. Based on the 2007 TA Statement, HK$7,617,000 was recorded as a reduction against the network costs of the Group for the year ended August 31, 2008. | ||
On April 8, 2009, TA issued a statement (the “2009 TA Statement”) on the USC and confirmed the actual contribution level for the period from July 1, 2007 to June 30, 2008. Based on the 2009 TA Statement, no additional payment or refund of USC from PCCW-HKT was required. | ||
The actual contribution level for the period subsequent to June 30, 2008 has not yet been confirmed by TA. |
F-17
4 | Profit before taxation | |
Profit before taxation is arrived at after charging/(crediting) the following: |
(a) | Other operating expenses |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Advertising and marketing expenses | 299,794 | 307,743 | ||||||
Amortization of deferred expenditure (note 15) | 53,160 | 33,777 | ||||||
Auditors’ remuneration | 3,455 | 3,687 | ||||||
Depreciation of owned fixed assets | 205,624 | 209,464 | ||||||
Depreciation of fixed assets held under finance lease | 617 | 587 | ||||||
Operating lease charges in respect of land and buildings | 17,010 | 13,296 | ||||||
Operating lease charges in respect of equipment | 42 | 50 | ||||||
Provision for doubtful debts (note 16(b)) | 12,103 | 14,293 | ||||||
Loss on disposal of fixed assets | 1,016 | 1,431 | ||||||
Staff costs (note 4(d)) | 302,279 | 247,460 | ||||||
Others | 142,864 | 134,306 | ||||||
1,037,964 | 966,094 | |||||||
(b) | Other revenues |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Interest income | (4,869 | ) | (15,596 | ) | ||||
Other income (note) | (36,671 | ) | (9,393 | ) | ||||
(41,540 | ) | (24,989 | ) | |||||
Note: | Included in other income was the gain on extinguishment of the 10-year senior notes of HK$31,371,000 (2008: HK$2,582,000) for the year ended August 31, 2009. |
(c) | Finance costs |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Interest element of finance leases | 27 | 34 | ||||||
Interest on 10-year senior notes | 52,670 | 70,010 | ||||||
Amortization of incidental issuance costs | 1,545 | 1,665 | ||||||
Other borrowing cost | 885 | 3,428 | ||||||
55,127 | 75,137 | |||||||
(d) | Staff costs |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Wages and salaries | 278,905 | 226,097 | ||||||
Provision for annual leave | 613 | 2,642 | ||||||
Equity settled share-based transaction | 4,768 | 4,114 | ||||||
Retirement benefit costs — defined contribution plans (note 8) | 34,614 | 29,738 | ||||||
Less: staff costs capitalized as fixed assets | (16,621 | ) | (15,131 | ) | ||||
302,279 | 247,460 | |||||||
Staff costs include directors’ emoluments and research and development cost of HK$10,824,000 (2008: HK$9,593,000) but exclude staff costs of HK$13,461,000 (2008: HK$14,482,000) recorded in network costs and HK$214,272,000 (2008: HK$194,724,000) recorded in advertising and marketing expenses. |
F-18
4 | Profit before taxation (continued) |
|
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Gain on extinguishment of 10-year senior notes (note 22(a)) | (31,371 | ) | (2,582 | ) | ||||
Net exchange gain | (3,038 | ) | (1,923 | ) | ||||
Realized and unrealized gain on other financial assets | (189 | ) | (3,284 | ) | ||||
Realized loss on derivative financial instruments | — | 1,039 | ||||||
Realized gain on long-term bank deposit | — | (1,185 | ) | |||||
| |||
| |||
4 Network costs
Network costs mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, production costs forHong Kong profits tax has been provided at the IP-TV service and costs of inventories sold, and do not include depreciation charge which is included in general and administration expenses.
The Company estimates the Universal Services Contributions (“USC”) payable to PCCW-HKT Telephone Limited (“PCCW-HKT”) to fund the costs of network development in remote areas in Hong Kong and includes such estimated costs as part of its network costs.
Management of the Company makes its best estimates for charges of the USC payable to PCCW-HKT. The estimate is made based on the provisional rates announced by the Telecommunications Authority (“TA”) which is effective up to the date of the release of the consolidated financial statements of the Company. The TA periodically reviews the actual costs incurred by PCCW-HKT in the network development and revises the amounts owed to, or to be refunded by, PCCW-HKT to the respective USC contributing parties, including the Company (“the Rate Revisions”). Accordingly, the estimate made by the Company’s management is subject to changes 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 Company. The Company adjusts such differences as an addition 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 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 Company’s consolidated balance sheet.
On November 19, 2004, the TA issued a statement on the USC that confirmed the actual contribution level for calendar year 2002. In aggregate, an amount of HK$31,689,000 was recorded as a reduction against the network costs of the Company for the year ended August 31, 2004.
On November 11, 2005, the TA issued a statement on the USC and confirmed the actual contribution level for calendar year 2003. In aggregate, an amount of HK$6,448,000 was recorded as a reduction against the network cost of the Company for the year ended August 31, 2005.
On November 13, 2006, TA issued a statement on the USC and confirmed the actual contribution level for calendar year 2004. In aggregate, an amount of HK$1,365,088 was recorded as a reduction against the network costs of the Company for the year ended August 31, 2006.
The actual contribution level for calendar year 2005 and 2006 had not yet been confirmed by the TA.
5 Income/(loss) before taxation
Year ended August 31, | ||||||||
2004 (restated) | 2005 (restated) | 2006 | ||||||
HK$’000 | HK$’000 | HK$’000 | ||||||
Income/(loss) before taxation is arrived at after charging: | ||||||||
Goodwill amortization charges | 1,065 | 1,065 | — | |||||
Amortization of deferred expenditure | 1,828 | 12,927 | 13,973 | |||||
Depreciation of purchased fixed assets | 195,952 | 236,269 | 275,538 | |||||
Depreciation of fixed assets held under finance leases | — | 380 | 926 | |||||
Impairment loss – investment property | — | — | 1,131 | |||||
Operating lease charges in respect of: | ||||||||
— Land and buildings | 8,084 | 13,081 | 17,556 | |||||
— Computer equipment | 31 | 914 | 840 | |||||
Research and development costs | 5,962 | 11,023 | 9,605 | |||||
Retirement benefit costs — defined contribution plans (note 24) | 26,287 | 27,437 | 27,956 | |||||
Interest expense comprises: | ||||||||
Interest element of finance leases | — | 23 | 54 | |||||
Interest on 10-year senior notes | — | 52,372 | 85,235 | |||||
Interest on bank overdrafts | 3,228 | 2,421 | — | |||||
Amortization of debt issuance cost | — | 1,693 | 1,429 | |||||
Other borrowing costs | — | — | 1,919 | |||||
3,228 | 56,509 | 88,637 | ||||||
Less: amount capitalized as fixed assets | ||||||||
Interest capitalized | (2,553 | ) | (2,047 | ) | — | |||
Other incidental borrowing cost | (500 | ) | — | — | ||||
Total borrowing cost capitalized | (3,053 | ) | (2,047 | ) | — | |||
Total interest expense | 175 | 54,462 | 88,637 | |||||
Other income comprises: — | ||||||||
Exchange gains, net | 131 | 3,300 | 1,044 | |||||
Others | 2,537 | 2,737 | 3,421 | |||||
2,668 | 6,037 | 4,465 | ||||||
6 Income tax credit/(expense)
Income/(loss) before taxation by geographical location is as follows:
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
(restated) | (restated) | ||||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Hong Kong income/(loss) | 53,113 | (167,416 | ) | (150,624 | ) | ||||
Overseas (loss)/income | (1,607 | ) | (2,805 | ) | 1,318 | ||||
Income/(loss) before taxation | 51,506 | (170,221 | ) | (149,306 | ) | ||||
Income tax credit/(expense) consist of the following:
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Hong Kong income tax | |||||||||
current (note (a)) | (1,537 | ) | (147 | ) | (24 | ) | |||
under provision of current tax in prior years | (1,221 | ) | (333 | ) | (552 | ) | |||
deferred (note 12) | 1,412 | 8,325 | 10,046 | ||||||
Overseas taxation | |||||||||
current (note (b)) | (596 | ) | (919 | ) | (2,367 | ) | |||
deferred (note 12) | (101 | ) | (201 | ) | 141 | ||||
(2,043 | ) | 6,725 | 7,244 | ||||||
year. Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the income tax rates | ||
The amount of income tax (expense)/ benefit in the consolidated income statement represents: |
The income taxes attributable to income for the years ended August 31, 2004, 2005 and 2006 differs from the amount of income taxes determined by applying the applicable income tax rate prevailing in the countries in which the subsidiaries operate to pre-tax income as a result of the following differences:
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
(restated) | (restated) | ||||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Income tax (expense)/credit calculated at the prevailing taxation rate of respective countries | (9,681 | ) | 29,652 | 25,670 | |||||
Effect of expenses not deductible for income taxes | (730 | ) | (1,788 | ) | (883 | ) | |||
Effect of income not subject to income taxes | 825 | 3,963 | 3,492 | ||||||
Under-provision of Hong Kong current income tax in prior years | (1,221 | ) | (333 | ) | (552 | ) | |||
Recognition of deferred tax assets in respect of tax losses of prior years, net of other temporary difference | 9,066 | 4,981 | 2,416 | ||||||
Effect of tax loss not recognized | (27 | ) | (28,464 | ) | (20,597 | ) | |||
Effect of share based payment not recognized | (15 | ) | (1,219 | ) | (2,305 | ) | |||
Others | (260 | ) | (67 | ) | 3 | ||||
Income tax credit/(expense) | (2,043 | ) | 6,725 | 7,244 | |||||
7 Earnings/(loss) per share
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Net income/(loss), as previously reported | 49,550 | (156,531 | ) | ||||||
Prior year adjustment arising from adoption of HKFRS 2 (Share-based payment) (note 3(a)) | (87 | ) | (6,965 | ) | |||||
Net income/(loss) (2004 and 2005: as restated) | 49,463 | (163,496 | ) | �� | (142,062 | ) | |||
Number of shares in thousands: | |||||||||
Weighted average number of shares in issue | 610,095 | 613,525 | 614,134 | ||||||
Incremental shares from assumed exercise of share options | 604 | — | — | ||||||
Incremental shares from assumed exercise of warrants | 3,666 | — | — | ||||||
Diluted weighted average number of shares | 614,365 | 613,525 | 614,134 | ||||||
Basic earnings/(loss) per share, as previously reported | HK8.1 cents | HK(25.5 | ) cents | ||||||
Diluted earnings/(loss) per share, as previously reported | HK8.1 cents | HK(25.5 | ) cents | ||||||
Basic earnings/(loss) per share (2004 and 2005: as restated) | HK8.1 cents | HK(26.6 | ) cents | HK(23.1 | ) cents | ||||
Diluted earnings/(loss) per share (2004 and 2005: as restated) | HK8.1 cents | HK(26.6 | ) cents | HK(23.1 | ) cents |
Basic earnings/(loss) per share is calculated based on the weighted average number of issued ordinary shares and the related income/(loss) amount. Diluted earnings/(loss) 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 and warrants has been determined using the treasury stock method.
For the year ended August 31, 2005 and 2006, the number of shares used in the calculation of diluted loss per share was equal to the number of shares used to calculate basic loss per share as the incremental effect of share options and warrants was anti-dilutive in a loss-making year.
8 Receivables
(a) Trade receivables, net
August 31, | ||||||
2005 | 2006 | |||||
HK$’000 | HK$’000 | |||||
Trade receivables (note (a)) | 178,326 | 196,343 | ||||
Less: provision for doubtful debts (note (b)) | (48,316 | ) | (55,745 | ) | ||
130,010 | 140,598 | |||||
Note
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Current taxation: | ||||||||
- Hong Kong profits tax | — | (391 | ) | |||||
- Overseas taxation | (1,622 | ) | (1,929 | ) | ||||
- Under-provision of overseas taxation in prior years | — | (2,552 | ) | |||||
Deferred taxation: | ||||||||
- Origination and reversal of temporary differences (note 21) | (37,108 | ) | (4,645 | ) | ||||
- Recognition of previously unrecognized tax losses (note 21) | — | 26,335 | ||||||
Income tax (expense)/ benefit | (38,730 | ) | 16,818 | |||||
The Group’s income tax (expense)/ benefit differs from the theoretical amount that would arise using profits before taxation at applicable tax rates as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Profit before taxation | 251,559 | 108,372 | ||||||
Notional tax on profit before taxation, calculated at the prevailing tax rates applicable to profit in the countries concerned | (42,240 | ) | (18,927 | ) | ||||
Effect of gain on extinguishment of 10-year senior notes not subject to taxation | 5,176 | 426 | ||||||
Effect of non-taxable income | 1,466 | 3,452 | ||||||
Effect of non-deductible expenses | (3,648 | ) | (6,353 | ) | ||||
Effect of recognition of prior year unrecognized tax losses (note) | — | 26,335 | ||||||
Effect of utilization of prior year unrecognized tax losses | 518 | 12,013 | ||||||
Under-provision in prior years | — | (2,552 | ) | |||||
Effect of share based payment | — | 2,324 | ||||||
Effect of tax losses not recognized | — | (74 | ) | |||||
Others | (2 | ) | 174 | |||||
Income tax (expense)/ benefit | (38,730 | ) | 16,818 | |||||
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 results of operations, management assessed that it is probable that sufficient future taxable profits will be generated to |
F-19
6 | Dividends | |
(a) | Dividends payable to equity shareholders of the Company attributable to the year |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Interim dividend declared and paid of HK3 cents per ordinary share (2008: HK4 cents per ordinary share) | 19,904 | 25,602 | ||||||
Final dividend proposed after the balance sheet date, of 16 cents per ordinary share (2008: HK2 cents per ordinary share) | 106,269 | 13,012 | ||||||
126,173 | 38,614 | |||||||
The final dividend proposed after the balance sheet date has not been recognized as a liability at the balance sheet date. | ||
(b) | Dividends attributable to the previous financial year, approved and paid during the year: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Final dividend in respect of the financial year ended August 31, 2008, approved and paid of HK2 cents per ordinary share (2008: HK4 cents per ordinary share in respect of financial year ended August 31, 2007) | 13,014 | 25,082 | ||||||
During the year ended August 31, 2009, a scrip dividend option was offered to all shareholders 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 who had elected to receive all or part of their entitlement to dividends in the form of scrip. | ||
7 | Earnings per share |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Profit attributable to shareholders | 212,829 | 125,190 | ||||||
Weighted average number of ordinary shares |
2009 | 2008 | |||||||
Number | Number | |||||||
of shares | of shares | |||||||
’000 | ’000 | |||||||
Issued ordinary shares at the beginning of the year | 650,622 | 616,503 | ||||||
Effect of scrip dividend issued | 6,256 | 7,353 | ||||||
Effect of share options exercised | 329 | 10,159 | ||||||
Effect of shares repurchased and cancelled | (6 | ) | — | |||||
Weighted average number of ordinary shares at the end of the year (basic) | 657,201 | 634,015 | ||||||
Incremental shares from assumed exercise of share options | 11,183 | 23,982 | ||||||
Weighted average number of ordinary shares at the end of the year (diluted) | 668,384 | 657,997 | ||||||
Basic earnings per share | HK32.4 | cents | HK19.7 | cents | ||||
Diluted earnings per share | HK31.8 | cents | HK19.0 | cents | ||||
F-20
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 employees 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, 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. | ||
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 Group and the employees are required to contribute 5% of each individual’s relevant income with a maximum amount of HK$1,000 per month as a mandatory contribution. Employer’s mandatory contributions are 100% vested in the employees as soon as they are paid to the MPF Scheme. Senior employees may also elect to join a Mutual Voluntary Plan (the “Mutual Plan”) in which both the Group and the employee, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the extent of contributions that would have been made under the ORSO Scheme. | ||
Pursuant to the relevant regulations in People’s Republic of China (the “PRC”), the Group contributes to a defined contribution retirement scheme organized by the local social security bureau for each employee of the subsidiary in PRC at the rate of 20% of a standard salary base as determined by the local social security bureau. The Group has no other obligation to make payments in respect of retirement benefits of these employees. | ||
The retirement schemes for staff of the Group in other countries follow the local statutory requirements of the respective countries. | ||
The aggregate employer’s contributions, net of forfeited contributions, which have been dealt with in the consolidated income statement during the year are as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Gross contributions | 34,614 | 29,738 | ||||||
At August 31, 2009, there was no forfeited contribution available to offset future contributions by the Group to the ORSO Scheme (2008: Nil). | ||
9 | Directors’ and senior management’s emoluments | |
(a) | Directors’ remuneration | |
The remuneration of each director for the year ended August 31, |
Employer’s | ||||||||||||||||||||||||
contribution | ||||||||||||||||||||||||
to defined | ||||||||||||||||||||||||
Discretionary | Share-based | contribution | ||||||||||||||||||||||
Name of director | Fee | Salary | bonuses | payment | scheme | Total | ||||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||||||||
Wong Wai Kay, Ricky | — | 6,712 | 1,500 | 193 | 670 | 9,075 | ||||||||||||||||||
Cheung Chi Kin, Paul | — | 6,714 | 1,500 | 193 | 670 | 9,077 | ||||||||||||||||||
Yeung Chu Kwong, William | — | 7,049 | 1,000 | 1,764 | 456 | 10,269 | ||||||||||||||||||
Lai Ni Quiaque | — | 2,403 | 550 | 1,141 | 240 | 4,334 | ||||||||||||||||||
Cheng Mo Chi, Moses | 160 | — | — | — | — | 160 | ||||||||||||||||||
Lee Hon Ying, John | 176 | — | — | — | — | 176 | ||||||||||||||||||
Chan Kin Man | 165 | — | — | — | — | 165 | ||||||||||||||||||
Peh Jefferson Tun Lu | 165 | — | — | — | — | 165 | ||||||||||||||||||
Total | 666 | 22,878 | 4,550 | 3,291 | 2,036 | 33,421 | ||||||||||||||||||
F-21
Directors’ and senior management’s emoluments (continued) |
Changes in the provision for doubtful debts consist of:
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Balance at beginning of the year | 22,916 | 22,959 | 48,316 | ||||||
Additions charged to expense | 11,502 | 35,445 | 17,450 | ||||||
Write-off | (11,459 | ) | (10,088 | ) | (10,021 | ) | |||
Balance at the end of the year | 22,959 | 48,316 | 55,745 | ||||||
(b) Other receivables, deposits and prepayments
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Deposits for purchase of fixed assets | 20,275 | 8,636 | ||
Deposits for lease of land and building | 5,081 | 9,237 | ||
Interest receivables | 1,266 | 1,503 | ||
Prepayments | 20,929 | 17,207 | ||
Receivables from disposal of a subsidiary | 279 | — | ||
USC refund receivable | 6,448 | 1,364 | ||
Unbilled revenue | 16,193 | 35,700 | ||
Others | 8,287 | 3,936 | ||
78,758 | 77,583 | |||
9 Goodwill
August 31, | |||||
2005 | 2006 | ||||
HK$’000 | HK$’000 | ||||
Cost | |||||
At the beginning of the year | 5,326 | 5,326 | |||
Opening balance adjustment to eliminate accumulated amortization | — | (4,260 | ) | ||
At the end of the year | 5,326 | 1,066 | |||
Accumulated amortization | |||||
At the beginning of the year | 3,195 | 4,260 | |||
Charge for the year | 1,065 | — | |||
Eliminated against cost at the beginning of the year | — | (4,260 | ) | ||
At the end of the year | 4,260 | — | |||
Net book value | |||||
At the end of the year | 1,066 | 1,066 | |||
For the year ended August 31, 2005 goodwill was amortized on a straight-line basis over five years. The amortization of goodwill for the year ended August 31, 2005 was included in “general and administrative expenses” in the consolidated statement of operations.
As described in note 3(b), with effect from September 1, 2005 goodwill is no longer amortized in accordance with the transitional provisions set out in HKFRS 3 but tested for impairment on an annual basis as follows.
Goodwill has been allocated to the Company’s fixed telecommunications network services segment or cash-generating unit (GCU) for purposes of goodwill impairment test.
Based on the management’s goodwill impairment test, the carrying amount of the fixed telecommunications network services segment was lower than its recoverable amount. The recoverable amount was determined based on the value-in-use methodology. This methodology use 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 10% to 17% and a pre-tax discount rate of 18%. 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 turnover of the fixed telecommunications network services segment which is determined based on the past performance and management’s expectation for market development. 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 fixed telecommunication services segment. Any adverse change in the key assumption could reduce the recoverable amount below carrying amount.
10 Fixed assets, net
Investment (note (c)) | Leasehold land and buildings | Leasehold improvements | Furniture, fixtures and fittings | Telecommunications computers and office equipment | Motor vehicles | Total | ||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||
Cost | ||||||||||||||||||||
At September 1, 2004 | — | 83,708 | 64,699 | 13,238 | 1,660,799 | 7,773 | 1,830,217 | |||||||||||||
Exchange adjustments | — | — | 244 | 133 | 2,497 | — | 2,874 | |||||||||||||
Additions | — | 462 | 3,701 | 2,122 | 411,550 | 1,291 | 419,126 | |||||||||||||
Adjustment (note (b)) | — | — | — | — | (4,825 | ) | — | (4,825 | ) | |||||||||||
Disposals | — | — | (26 | ) | (1 | ) | (2,875 | ) | (692 | ) | (3,594 | ) | ||||||||
At August 31, 2005 | — | 84,170 | 68,618 | 15,492 | 2,067,146 | 8,372 | 2,243,798 | |||||||||||||
At September 1, 2005 | — | 84,170 | 68,618 | 15,492 | 2,067,146 | 8,372 | 2,243,798 | |||||||||||||
Exchange adjustments | — | — | 281 | 126 | 2,180 | — | 2,587 | |||||||||||||
Additions | — | 625 | 9,342 | 2,880 | 309,744 | 344 | 322,935 | |||||||||||||
Disposals | — | — | — | (728 | ) | (26,817 | ) | (1,760 | ) | (29,305 | ) | |||||||||
Transfer to investment property | 5,197 | (5,197 | ) | — | — | — | — | — | ||||||||||||
At August 31, 2006 | 5,197 | 79,598 | 78,241 | 17,770 | 2,352,253 | 6,956 | 2,540,015 | |||||||||||||
Accumulated depreciation: | ||||||||||||||||||||
At September 1, 2004 | — | 5,024 | 21,603 | 9,052 | 630,027 | 5,636 | 671,342 | |||||||||||||
Exchange adjustments | — | — | 188 | 68 | 1,768 | — | 2,024 | |||||||||||||
Charge for the year | — | 1,678 | 8,445 | 1,390 | 224,444 | 1,346 | 237,303 | |||||||||||||
Adjustment (note (b)) | — | — | — | — | (654 | ) | — | (654 | ) | |||||||||||
Disposals | — | — | (11 | ) | (1 | ) | (2,260 | ) | (488 | ) | (2,760 | ) | ||||||||
At August 31, 2005 | — | 6,702 | 30,225 | 10,509 | 853,325 | 6,494 | 907,255 | |||||||||||||
At September 1, 2005 | — | 6,702 | 30,225 | 10,509 | 853,325 | 6,494 | 907,255 | |||||||||||||
Exchange adjustments | — | — | 223 | 74 | 1,642 | — | 1,939 | |||||||||||||
Charge for the year | — | 1,695 | 9,980 | 2,190 | 261,819 | 780 | 276,464 | |||||||||||||
Disposals | — | — | — | (326 | ) | (11,922 | ) | (1,760 | ) | (14,008 | ) | |||||||||
Transfer to investment property | 866 | (866 | ) | — | — | — | — | — | ||||||||||||
Impairment loss (note (a)) | 1,131 | — | — | — | — | — | 1,131 | |||||||||||||
At August 31, 2006 | 1,997 | 7,531 | 40,428 | 12,447 | 1,104,864 | 5,514 | 1,172,781 | |||||||||||||
Net book value: | ||||||||||||||||||||
At August 31, 2006 | 3,200 | 72,067 | 37,813 | 5,323 | 1,247,389 | 1,442 | 1,367,234 | |||||||||||||
At August 31, 2005 | — | 77,468 | 38,393 | 4,983 | 1,213,821 | 1,878 | 1,336,543 | |||||||||||||
(a) | Directors’ remuneration (continued) |
The |
Employer’s | ||||||||||||||||||||||||
contribution | ||||||||||||||||||||||||
to defined | ||||||||||||||||||||||||
Discretionary | Share-based | contribution | ||||||||||||||||||||||
Name of director | Fee | Salary | bonuses | payment | scheme | Total | ||||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||||||||
Wong Wai Kay, Ricky | — | 6,482 | 1,054 | 558 | 648 | 8,742 | ||||||||||||||||||
Cheung Chi Kin, Paul | — | 6,482 | 1,054 | 558 | 648 | 8,742 | ||||||||||||||||||
Lai Ni Quiaque | — | 2,250 | 225 | 809 | 225 | 3,509 | ||||||||||||||||||
Cheng Mo Chi, Moses | 152 | — | — | — | — | 152 | ||||||||||||||||||
Lee Hon Ying, John | 168 | — | — | — | — | 168 | ||||||||||||||||||
Chan Kin Man | 158 | — | — | — | — | 158 | ||||||||||||||||||
Peh Jefferson Tun Lu | 158 | — | — | — | — | 158 | ||||||||||||||||||
Total | 636 | 15,214 | 2,333 | 1,925 | 1,521 | 21,629 | ||||||||||||||||||
No director waived any emoluments in respect of the years ended August 31, 2008 and 2009. | ||
The share-based payment represents the expenses determined based on the fair value of share options granted to | ||
(b) | Five highest paid individuals | |
The five individuals whose emoluments were the highest in the Group for the year include four (2008: three) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Basic salaries, other allowances and benefits in kind | 2,515 | 8,512 | ||||||
Discretionary bonuses | 150 | 1,137 | ||||||
Share-based payments | 332 | 1,316 | ||||||
Retirement benefit costs – defined contribution plans | 106 | 589 | ||||||
3,103 | 11,554 | |||||||
The emoluments fell within the following band: |
Number of individual | ||||||||
2009 | 2008 | |||||||
HK$2,500,001 – HK$3,000,000 | — | 1 | ||||||
HK$3,000,001 – HK$4,000,000 | 1 | — | ||||||
HK$9,000,001 – HK$10,000,000 | — | 1 |
F-22
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 | ||
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 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 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 | ||
(a) | The terms and conditions of the options | |
Options that existed during the year ended August 31, 2009 are as follows, whereby all options are settled by physical delivery of shares: |
Number | Vesting | Exercisable | ||||||||||
of option | conditions | period | ||||||||||
2002 Share Option Scheme | ||||||||||||
Options granted to directors: | ||||||||||||
-January 5, 2005 | 16,183,208 | Condition 1 | On or prior | |||||||||
-May 22, 2006 | 15,178,466 | Condition 1 | On or prior to May 21, 2016 | |||||||||
-February 6, 2008 | 6,044,791 | Condition 3 | On or prior to December 23, 2012 | |||||||||
-February 11, 2008 | 6,044,791 | Condition 2 | On or prior to December 23, 2012 | |||||||||
Options granted to employees: | ||||||||||||
-October 21, 2004 | 7,606,712 | Condition 1 | On or prior to October 20, 2014 | |||||||||
-May 22, 2006 | 7,314,455 | Condition 1 | On or prior to May 21, 2016 | |||||||||
-August 3, 2006 | 40,540 | Condition 1 | On or prior to August 2, 2016 | |||||||||
-November 22, 2006 | 136,545 | Condition 1 | On or prior to November 14, 2016 | |||||||||
-February 15, 2008 | 1,007,465 | Condition 3 | On or prior to December 23, 2012 | |||||||||
-March 11, 2008 | 302,240 | Condition 1 | On or prior to December 23, 2012 | |||||||||
-May 2, 2008 | 1,007,465 | Condition 3 | On or prior to December 23, 2012 | |||||||||
Total share options | 60,866,678 | |||||||||||
F-23
Equity settled share-based transactions (continued) | ||
(a) | The terms and conditions of the options (continued) | |
Options that existed during the year ended August 31, 2008 are as follows, whereby all options are settled by physical delivery of shares: |
Number | Vesting | Exercisable | ||||||||||
of option | conditions | period | ||||||||||
2002 Share Option Scheme | ||||||||||||
Options granted to directors: | ||||||||||||
-June 3, 2004 | 6,000,000 | Condition 1 | On or prior to June 2, 2014 | |||||||||
-January 5, 2005 | 16,106,956 | Condition 1 | On or prior to October 20, 2014 | |||||||||
-May 22, 2006 | 15,093,585 | Condition 1 | On or prior to May 21, 2016 | |||||||||
-February 11, 2008 | 6,016,309 | Condition 2 | On or prior to December 23, 2012 | |||||||||
Options granted to employees: | ||||||||||||
-October 21, 2004 | 8,393,399 | Condition 1 | On or prior to October 20, 2014 | |||||||||
-October 3, 2005 | 1,000,000 | Condition 1 | On or prior to September 30, 2015 | |||||||||
-May 22, 2006 | 14,012,937 | Condition 1 | On or prior to May 21, 2016 | |||||||||
-July 3, 2006 | 702,769 | Condition 1 | On or prior to July 2, 2016 | |||||||||
-August 3, 2006 | 70,468 | Condition 1 | On or prior to August 2, 2016 | |||||||||
-November 22, 2006 | 200,902 | Condition 1 | On or prior to November 14, 2016 | |||||||||
-May 23, 2007 | 100,396 | Condition 1 | On or prior to June 11, 2017 | |||||||||
-December 12, 2007 | 1,003,956 | Condition 1 | On or prior to December 23, 2012 | |||||||||
-February 6, 2008 | 6,016,309 | Condition 3 | On or prior to December 23, 2012 | |||||||||
-February 15, 2008 | 4,010,873 | Condition 3 | On or prior to December 23, 2012 | |||||||||
-March 11, 2008 | 300,816 | Condition 1 | On or prior to December 23, 2012 | |||||||||
-May 2, 2008 | 1,002,718 | Condition 3 | On or prior to December 23, 2012 | |||||||||
Total share options | 80,032,393 | |||||||||||
The vesting conditions of the respective 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 conditional upon the market price of the Company’s shares reaching a target level over the period from the close of trading in Hong Kong on November 22, 2007 to November 21, 2010. Options granted are vested immediately or evenly over a period of three years from the date of fulfillment of the market condition. | ||
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 the performance condition. |
F-24
10 | Equity settled share-based transactions (continued) | |
(b) | The number and weighted average exercise prices of share options are as follows: |
2009 | 2008 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
average | average | |||||||||||||||
exercise | Number of | exercise | Number of | |||||||||||||
price | options | price | options | |||||||||||||
HK$ | HK$ | |||||||||||||||
2002 Share Option Scheme | ||||||||||||||||
Outstanding at the beginning of the year | 1.27 | 60,581,214 | 1.09 | 61,350,000 | ||||||||||||
Adjustment to number of options for 2007 Final Dividend (note (i)) | — | — | 1.10 | 204,922 | ||||||||||||
Adjustment to number of options for 2008 Interim Dividend (note (ii)) | — | — | 1.28 | 177,471 | ||||||||||||
Adjustment to number of options for 2008 Final Dividend (note (iii)) | 1.27 | 285,464 | — | — | ||||||||||||
Granted during the year | — | — | 1.84 | 18,300,000 | ||||||||||||
Exercised during the year | 0.99 | (1,416,005 | ) | 1.07 | (14,052,268 | ) | ||||||||||
Lapsed during the year | 1.65 | (483,442 | ) | 1.63 | (5,398,911 | ) | ||||||||||
Outstanding at the end of the year | 1.27 | 58,967,231 | 1.27 | 60,581,214 | ||||||||||||
Exercisable at the end of the year | 1.12 | 45,849,756 | 1.22 | 36,463,198 | ||||||||||||
The weighted average share price at the date of exercise for the share options exercised during the year was HK$0.99 (2008: HK$1.07). | ||
The options outstanding at August 31, 2009 had a weighted exercise price of HK$1.27 (2008: HK$1.27) and a weighted average remaining contractual life of 5 years (2008: 7 years). |
(i) | 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. | |
(ii) | 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 65,296,047 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. | |
(iii) | 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. |
(c) | Fair value of share options and assumptions | |
In determining the value of the share options granted, the Black-Scholes Model has been used except for the option granted on February 11, 2008 which has adopted the Monte Carlo Model. Both models are one of 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 of the shares of the Company. | ||
Both models require input of highly subjective assumptions, including the expected stock volatility. Since 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-25
11 | Goodwill |
HK$’000 | ||||
Cost and carrying amount: | ||||
At August 31, 2009/2008 | 1,066 | |||
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: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Fixed telecommunications network service segment | 1,066 | 1,066 | ||||||
The recoverable amount of the CGU exceeds its carrying amount. 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 18%. 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 telecommunication services segment. | ||
Any adverse change in the key assumption could reduce the recoverable amount below carrying amount. |
F-26
12 | Fixed 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, 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 | |||||||||||||||||||||
Cost: | ||||||||||||||||||||||||||||
At September 1, 2007 | 5,197 | 79,598 | 80,638 | 17,419 | 2,475,775 | 6,818 | 2,665,445 | |||||||||||||||||||||
Additions | — | 4,646 | 2,469 | 2,189 | 196,230 | 6,150 | 211,684 | |||||||||||||||||||||
Disposals | — | — | — | (478 | ) | (30,564 | ) | (344 | ) | (31,386 | ) | |||||||||||||||||
Exchange adjustments | — | — | 1,470 | 445 | 2,840 | — | 4,755 | |||||||||||||||||||||
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, 2007 | 2,101 | 9,123 | 50,309 | 13,952 | 1,346,854 | 5,883 | 1,428,222 | |||||||||||||||||||||
Charge for the year | 104 | 1,604 | 9,626 | 1,617 | 196,198 | 902 | 210,051 | |||||||||||||||||||||
Disposals | — | — | — | (286 | ) | (22,390 | ) | (222 | ) | (22,898 | ) | |||||||||||||||||
Exchange adjustments | — | — | 1,334 | 313 | 2,077 | — | 3,724 | |||||||||||||||||||||
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 | |||||||||||||||||||||
F-27
12 | Fixed assets (continued) | |
(a) | The Group’s total future aggregate lease income receivable under |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Leases in respect of investment property which are receivable: | ||||||||
- Within 1 year | 258 | 258 | ||||||
- After 1 year but within 5 years | — | 258 | ||||||
258 | 516 | |||||||
Leases in respect of telecommunications facilities and computer equipment which are receivable: | ||||||||
- Within 1 year | 1,566 | 979 | ||||||
- After 1 year but within 5 years | 1,071 | 292 | ||||||
2,637 | 1,271 | |||||||
2,895 | 1,787 | |||||||
(b) | At August 31, 2009, the fair value of the investment property |
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Within 1 year | — | 228 | ||
In the second year | — | 228 | ||
— | 456 | |||
(c) | The net book value of interests in leasehold land and buildings and investment property situated in Hong Kong |
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Leases of between 10 to 50 years | 77,468 | 75,267 | ||
Representing:
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Leasehold land and building carried at cost | 77,468 | 72,067 | ||
Investment property at cost less impairment loss | — | 3,200 | ||
77,468 | 75,267 | |||
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Leases of between 10 to 50 years | 81,333 | 76,509 | ||||||
Representing: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Leasehold land and building carried at cost | 78,445 | 73,517 | ||||||
Investment property carried at cost less impairment loss | 2,888 | 2,992 | ||||||
81,333 | 76,509 | |||||||
(d) | In addition to the leasehold land and buildings classified as being held under a finance lease, the Group leases telecommunications, computer and office equipment under finance leases expiring from one to |
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Cost | 3,631 | 4,079 | ||
Accumulated depreciation | 380 | 1,307 | ||
3,251 | 2,772 | |||
11 Other payables and accrued charges
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Accrual for staff salaries and bonus | 36,034 | 27,747 | ||
Accrual for customer reward program | 1,752 | 2,636 | ||
Accrual for carrier fees and charges | 10,391 | 10,705 | ||
Accrual for international call forwarding service charges | 3,622 | 4,793 | ||
Payable for purchase of fixed assets | 116,201 | 51,862 | ||
Payable for advertising and promotional expenses | 16,241 | 11,966 | ||
Payable for USC | 428 | — | ||
Interest payable on 10-year senior notes | 7,109 | 7,109 | ||
Others accrual (note) | 31,430 | 26,668 | ||
223,208 | 143,486 | |||
Note : Amount of other accruals consisted of primarily accruals for utilities, rent and other carrier charges.
12 Deferred taxation
Deferred taxation is calculated in full on temporary differences under the liability method using the taxation rates prevailing in respective countries in which the subsidiaries operate. The movement of the deferred tax liabilities account is as follows:
August 31, | ||||||
2005 | 2006 | |||||
HK$’000 | HK$’000 | |||||
At the beginning of the year | 18,662 | 10,539 | ||||
Exchange differences | 1 | 1 | ||||
Deferred taxation credited to statements of operations — relating to the origination and reversal of temporary differences | (8,124 | ) | (10,187 | ) | ||
At the end of the year | 10,539 | 353 | ||||
As of August 31, 2006, the Company had accumulated tax losses amounting to HK$1,159,787,000 (2005: HK$1,011,475,000) that can be carried forward and applied to reduce future taxable income derived in Hong Kong, Canada and the United States, as applicable. The tax effect of the accumulated tax losses amounted to HK$204,300,000 (2005: HK$177,827,000). These tax losses will expire in the following fiscal periods ending August 31:
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Within one year | 1,089 | |||
In the second year | 1,405 | 1,512 | ||
In the third year | 368 | 396 | ||
in the fourth year | — | — | ||
After five years | 1,132 | 4,344 | ||
No expiry date | 1,007,481 | 1,153,535 | ||
1,011,475 | 1,159,787 | |||
The tax losses of Hong Kong subsidiaries can be carried forward indefinitely while tax losses of subsidiaries in the mainland China and Canadian and the United States expire within periods ranging from 2 to 20 years.
Deferred tax assets are recognized to the extent that realization of the related tax benefit is probable. The Company has unrecognized tax losses carried forward from prior years of HK$279,199,000 at August 31, 2006 (2005: HK$165,861,000) which can offset against future taxable income and unrecognized deferred tax assets in respect of equity settled share-based payment expenses of HK$13,171,000 at August 31, 2006. Accumulated tax losses for which deferred tax assets were not recognized will expire in the following fiscal periods ending August 31:
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Within one year | 1,089 | 1,513 | ||
In the second year | 1,405 | 396 | ||
In the third year | 368 | — | ||
In the fourth year | — | — | ||
After five years | 934 | 4,130 | ||
No expiry date | 162,065 | 286,331 | ||
165,861 | 292,370 | |||
The movement in deferred tax assets and liabilities (prior to offsetting of balances within the same taxation jurisdiction) during the year is as follows:
Accelerated depreciation allowances | Others | Total | |||||||||||||
Deferred tax liabilities | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | |||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||
At the beginning of the year | 140,202 | 158,477 | 49 | 85 | 140,251 | 158,562 | |||||||||
(Credited)/charged to statements of operations | 18,267 | (3,805 | ) | 35 | (86 | ) | 18,302 | (3,891 | ) | ||||||
Exchange differences | 8 | 6 | 1 | 1 | 9 | 7 | |||||||||
At the end of the year | 158,477 | 154,678 | 85 | — | 158,562 | 154,678 | |||||||||
Share-based payment | Tax losses | Total | |||||||||||||||
Deferred tax assets | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | |||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||
At the beginning of the year | — | — | (121,589 | ) | (148,023 | ) | (121,589 | ) | (148,023 | ) | |||||||
Credited to statements of operations | — | (123 | ) | (26,426 | ) | (6,173 | ) | (26,426 | ) | (6,296 | ) | ||||||
Exchange differences | — | — | (8 | ) | (6 | ) | (8 | ) | (6 | ) | |||||||
At the end of the year | — | (123 | ) | (148,023 | ) | (154,202 | ) | (148,023 | ) | (154,325 | ) | ||||||
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are reported in the consolidated balance sheet:
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Deferred tax assets | — | — | ||
Deferred tax liabilities | 10,539 | 353 | ||
10,539 | 353 | |||
13 Deferred expenditure
August 31, | ||||||
2005 | 2006 | |||||
HK$’000 | HK$’000 | |||||
Balance at the beginning of the year | 21,563 | 21,131 | ||||
Additions during the year | 12,495 | 5,287 | ||||
Less: Amortization charge for the year (note 5) | (12,927 | ) | (13,973 | ) | ||
Balance at the end of the year | 21,131 | 12,445 | ||||
Current portion | (12,960 | ) | (10,808 | ) | ||
8,171 | 1,637 | |||||
Deferred expenditure represents costs incurred to acquire subscribers and are amortized over the period of the underlying service subscription agreements.
14 Long-term debt and other liabilities
The Company’s long-term debt and other liabilities were repayable as follows:
August 31, | ||||||
2005 | 2006 | |||||
HK$’000 | HK$’000 | |||||
8.75% senior notes due 2015 | 945,348 | 948,027 | ||||
Obligation under finance leases | ||||||
Within one year | 1,194 | 1,297 | ||||
In the second year | 1,218 | 806 | ||||
In the third year | 723 | 270 | ||||
3,135 | 2,373 | |||||
Less: Current portion of obligations under finance leases | (1,194 | ) | (1,297 | ) | ||
1,941 | 1,076 | |||||
�� | 947,289 | 949,103 | ||||
(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 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 unconditionally and irrevocably guaranteed on a joint and several bases by the Company’s subsidiaries (other than CTI Guangzhou Customer Services Co. Limited).
The net proceeds of 10-year senior notes were approximately US$121 million after deduction of expenses and commissions. The Company 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 to be used for capital expenditures, including expanding and upgrading the Company’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 prices set forth in the indenture governing the 10-year senior notes. In addition, prior to February 1, 2008, the Company may redeem up to a maximum of 35% of the original aggregate principal amount of the 10-year senior notes with the proceeds from one or more specified public or private offerings of the Company’s common stock at a redemption price equal to 108.75% of the principal amount of the 10-year senior notes. In all cases of optional redemption, the Company 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 10-years senior notes contains covenants that limit, among other things, the Company’s ability and the ability of certain of its existing and future subsidiaries to:
At August 31, 2005 and 2006, the 10-year senior notes were stated at the amortized costs of US$121,660,000 (equivalent to HK$945,348,000) and US$121,854,000 (equivalent to HK$948,027,000), respectively.
15 Commitments and contingencies
(a) Capital commitments
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Purchases of telecommunications, computer and office equipment contracted but not provided for | 178,793 | 80,240 | ||
(b) Commitments under operating leases
(i) At August 31, 2005 and 2006, the Company had future aggregate lease income receivable under non-cancelable operating leases as follows:
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Leases in respect of telecommunications facilities and computer equipment which are receivable: | ||||
within one year | 934 | 1,980 | ||
in the second year | 583 | 798 | ||
1,517 | 2,778 | |||
(ii) At August 31, 2006 and 2005, the Company had future aggregate minimum lease payments under non-cancelable operating leases as follows:
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Leases in respect of land and buildings which are payable: | ||||
within one year | 17,759 | 15,212 | ||
in the second year | 14,977 | 8,041 | ||
in the third year | 7,348 | 760 | ||
in the fourth year | 298 | 431 | ||
in the fifth year | — | 138 | ||
40,382 | 24,582 | |||
Leases in respect of telecommunications facilities and computer equipment which are payable: | ||||
within one year | 25,895 | 24,881 | ||
in the second year | 4,727 | 3,100 | ||
in the third year | 800 | 875 | ||
in the fourth year | 800 | 800 | ||
in the fifth year | 800 | 800 | ||
within sixth year to twelve years | 7,111 | 6,400 | ||
40,133 | 36,856 | |||
80,515 | 61,438 | |||
(c) Program fee commitments
The Company entered into several long-term agreements with program content providers with respect to the Company’s IP-TV services. Minimum amounts of program fees to be paid by the Company are as follows:
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Program fee payable: | ||||
within one year | 13,055 | 7,638 | ||
in the second year | 5,682 | 4,340 | ||
in the third year | 577 | 548 | ||
19,314 | 12,526 | |||
(d) Contingent liabilities
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Bank guarantees provided to suppliers (note 16(a)(i) and (ii)) | 6,200 | 6,303 | ||
Bank guarantee in lieu of payment of utility deposits (note 16(a)(iii)) | 3,772 | 5,272 | ||
9,972 | 11,575 | |||
16 Pledge of assets
(a) As at August 31, 2006, the Company had pledged bank deposits of US$9,900,000 (equivalent to HK$77,022,000) and HK$10,000,000 as security of the following banking facilities:
(i) bank facility of US$9,000,000 (equivalent to HK$70,020,000) 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, 2006, bank guarantee of HK$2,003,000 were issued against this bank facility (August 31, 2005: bank guarantees of HK$1,900,000 and letters of credit of HK$11,350,000 were issued against this bank facility);
(ii) bank guarantees of HK$4,300,000 (August 31, 2005: HK$4,300,000) issued by a bank to third party suppliers of the Company and one of its subsidiaries for payment of certain products and services procured by the Company from these third party suppliers;
(iii) bank guarantees of HK$5,272,000 (August 31, 2005: HK$3,772,000) issued by a bank to certain utility vendors of the Company in lieu of payment of utility deposits; and
(iv) Forward foreign exchange contract of Nil (2005: RMB155,632,000).
As at August 31, 2005, the Group had pledged bank deposits of US$9,900,000 (equivalent to HK$76,923,000), RMB4,705,000 (equivalent to HK$4,524,000) and HK$9,000,000 as security for the above banking facilities and forward foreign exchange contract.
(b) On October 9, 2002, the Company entered into a HK$200,000,000 long-term loan facility (the “2002 facility”) with The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) to provide funding for further development of the fixed telecommunications network of a subsidiary of the Company. According to the agreement, all amounts under the 2002 facility were required to be drawn by December 31, 2004 and to be repaid in 60 equal monthly installments beginning in January 2005. On January 3, 2005, approximately HK$3.3 million of the 2002 facility was repaid. As disclosed in note 14, on January 20, 2005, the Group completed a US$125 million notes offering of 8.75% senior notes due 2015, and received net proceeds of approximately US$121 million after deduction of expenses and commissions. The Group used the net proceeds, in part, to repay in full the outstanding bank loan in the amount of HK$196.7 million on January 24, 2005.
On July 27, 2004, the Company entered into an additional HK$200,000,000 long-term loan facility (the “2004 facility”) with HSBC to provide funding for the same purpose. All amounts under the facility were required to be drawn by December 31, 2006 and to be repaid in 60 equal monthly installments beginning in January 2007. The Company had not drawn any amount under this facility during the years ended August 31, 2005 and 2006.
In January 2005, both the 2002 and 2004 facilities were cancelled upon the request of the Company, which was approved by HSBC and the fixed and floating charges covering all assets of the Company were released.
17 Investment securities
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Debt securities, at fair value and unlisted outside | ||||
Hong Kong (note a) | 25,901 | 26,633 | ||
Long term bank deposit, at amortized cost (note b) | 15,540 | 13,641 | ||
41,441 | 40,274 | |||
Note:
For the years ended August 31, 2004, 2005 and 2006 the net unrealized investment gains/ (losses) were (HK$1,696,000), HK$300,000 and HK$698,000 respectively. No realized investment gains or losses were recognized during the year ended August 31, 2004, 2005 and 2006.
18 Derivative Financial Instrument
At August 31, 2009, the net book value of telecommunications, computer and office equipment under finance lease held by the Group amounted to HK$1,289,000 (2008: HK$1,411,000). |
F-28
13 | Principal subsidiaries | |||
| ||||||||||
| ||||||||||
| Principal | |||||||||
activities | Particulars | |||||||||
Place of | and place of | of issued | Percentage of | |||||||
Name | incorporation | operations | share capital | interest held | ||||||
Attitude Holdings Limited | British Virgin Islands | Inactive | Ordinary US$1 | 100 | ||||||
Automedia Holdings Limited | British Virgin Islands | Investment holding in Hong Kong | Ordinary US$1 | * 100 | ||||||
City Telecom (B.C.) Inc. | Canada | Provision of international telecommunications and dial-up internet access services in Canada | Common Canadian dollar (“CAD”) 501,000 | 100 | ||||||
City Telecom (Canada) Inc. | Canada | Leasing and maintenance of switching equipment and provision of operational services in Canada | Common CAD100 | 100 | ||||||
City Telecom Inc. | Canada | Provision of international telecommunications and dial-up internet access services in Canada | Common CAD1,000 | 100 | ||||||
City Telecom International Limited | British Virgin Islands | Investment holding in Hong Kong | Ordinary US$5,294 | * 100 | ||||||
Credibility Holdings Limited | British Virgin Islands | Investment holding in Hong Kong | Ordinary US$1 | * 100 |
F-29
13 | Principal 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, 2009: (continued) |
Principal | ||||||||||
activities | Particulars | |||||||||
Place of | and place of | of issued | Percentage of | |||||||
Name | incorporation | operations | share capital | interest held | ||||||
CTI Guangzhou Customer Services Co. Ltd. (translated from the registered name in Chinese) | PRC | Provision of administrative support services in the PRC | Paid in capital of HK$8,000,000 | * 100 | ||||||
CTI Marketing Company Limited | Hong Kong | Inactive | Ordinary 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 Kong | Provision of international telecommunications and fixed telecommunications network services in Hong Kong | Ordinary HK$383,049 | 100 | ||||||
IDD 1600 Company Limited | Hong Kong | Provision of international telecommunications services in Hong Kong | Ordinary HK$2 | 100 | ||||||
SGBN Singapore Broadband Network Pte. Limited | Singapore | Inactive | Ordinary Singapore dollar (“SG$”) 1 | * 100 |
| Shares held directly by the Company. |
F-30
14 | Other financial assets |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Debt securities, at fair value | — | 27,997 | ||||||
Note: |
As at August 31, 2006, the Company has an outstanding interest rate swap contract with notional principle amount of HK$66,666,667 (2005: HK$86,666,667). Under this arrangement, the Company 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 date of the contract is December 1, 2009.
As at August 31, 2005, the Company had outstanding forward foreign exchange contracts of RMB155,632,000 and US$13,421,000 that matured during the year ended August 31, 2006. The purpose of arrangement was to manage the Company’s exposure to foreign currencies fluctuations. The Company had no outstanding forward foreign exchange contracts as at August 31, 2006.
15 | Deferred expenditure |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Balance as at the beginning of the year | 56,095 | 21,367 | ||||||
Additions during the year | 46,525 | 68,505 | ||||||
Less: amortization charge for the year (note 4(a)) | (53,160 | ) | (33,777 | ) | ||||
49,460 | 56,095 | |||||||
Current portion | (36,674 | ) | (40,704 | ) | ||||
Balance as at the end of the year | 12,786 | 15,391 | ||||||
Deferred expenditure represents costs incurred to acquire subscribers of the services offered by the Group, which is treated as customer acquisition costs and are | ||
16 | Accounts receivable, other receivables, deposits and prepayments |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Accounts receivable | 123,352 | 152,227 | ||||||
Less: Allowance for doubtful debts | (3,160 | ) | (11,944 | ) | ||||
120,192 | 140,283 | |||||||
Other receivables, deposits and prepayments | 69,765 | 82,726 | ||||||
189,957 | 223,009 | |||||||
F-31
16 | Accounts receivable, other receivables, deposits and prepayments (continued) | |
(a) | Aging analysis | |
The aging analysis of accounts receivable is as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Current - 30 days | 32,427 | 45,462 | ||||||
31 - 60 days | 13,663 | 17,507 | ||||||
61 - 90 days | 3,953 | 7,249 | ||||||
Over 90 days | 73,309 | 82,009 | ||||||
123,352 | 152,227 | |||||||
The majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted. | ||
(b) | Impairment of accounts receivable | |
Impairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly (see note 1(i)(i)). | ||
The movement in the allowance for doubtful debts during the year including both specific and collective loss components is as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Balance as at the beginning of the year | 11,944 | 22,392 | ||||||
Impairment loss recognized | 12,103 | 14,293 | ||||||
Uncollectible amounts written off | (20,887 | ) | (24,741 | ) | ||||
Balance as at the end of the year | 3,160 | 11,944 | ||||||
(c) | Accounts receivable that are not impaired | |
The aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Neither past due nor impaired | 32,427 | 45,462 | ||||||
0 - 30 past due | 13,663 | 17,507 | ||||||
31 - 60 past due | 3,953 | 7,249 | ||||||
Over 60 past due | 70,149 | 70,065 | ||||||
120,192 | 140,283 | |||||||
Receivables that were neither past duenor 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$68,802,000 as at August 31, 2009 (August 31, 2008: HK$64,407,000) (see note 2(c)). |
F-32
16 | Accounts receivable, other receivables, deposits and prepayments (continued) | |
(c) | Accounts receivable that are not impaired (continued) | |
Other accounts receivable that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold collateral over these balances. | ||
(d) | Other receivables, deposits and prepayments | |
Other receivables, deposits and prepayments consist of deposits for purchase of fixed assets, rental deposit, interest receivable, unbilled revenue, prepayment and other receivables. | ||
17 | Cash at bank and in hand |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Time deposits with banks and other financial institutions | 77,500 | 264,943 | ||||||
Cash at bank and in hand | 143,552 | 156,667 | ||||||
Cash at bank and in hand in the balance sheet | 221,052 | 421,610 | ||||||
18 | Accounts payable, other payables and accrued charges |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Accounts payable | 37,555 | 52,324 | ||||||
Other payables and accrued charges | 206,487 | 178,114 | ||||||
244,042 | 230,438 | |||||||
(a) | The aging analysis of the accounts payable was as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Current - 30 days | 12,621 | 18,802 | ||||||
31 - 60 days | 1,778 | 4,025 | ||||||
61 - 90 days | 189 | 8,334 | ||||||
Over 90 days | 22,967 | 21,163 | ||||||
37,555 | 52,324 | |||||||
(b) | Other payables and accrued charges | |
Other payables and accrued charges primarily consist of accrual for staff salaries and bonus, carrier fees and charges, payable for purchase of fixed assets, advertising and promotional expenses as well as interest payable in respect of the 10-year senior notes. | ||
19 | Deferred service revenue | |
Deferred service revenue primarily includes service fees received from customers in advance for the Group’s fixed telecommunications network services. Service fees received in advance is deferred and recognized as revenue on a straight-line basis over the related contract period. |
F-33
20 | Capital and reserves |
Capital | ||||||||||||||||||||||||||||
Share | Share | Capital | redemption | Retained | Exchange | |||||||||||||||||||||||
capital | premium | reserve | reserve | profits | reserve | Total | ||||||||||||||||||||||
HK$’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 | |||||||||||||||||||||
Profit attributable to shareholders | — | — | — | — | 212,829 | — | 212,829 | |||||||||||||||||||||
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 | |||||||||||||||||||||
Exchange adjustments on translation of the financial statements of subsidiaries | — | — | — | — | — | 70 | 70 | |||||||||||||||||||||
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 | |||||||||||||||||||||
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 | ||||||||||||||||||
Profit attributable to shareholders | — | — | — | 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 | 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 | ||||||||||||||||||
Exchange adjustments on translation of the financial statements of subsidiaries | — | — | — | — | 1,619 | 1,619 | ||||||||||||||||||
At August 31, 2008 | 65,062 | 670,717 | 19,013 | 275,025 | 2,790 | 1,032,607 | ||||||||||||||||||
F-34
20 | Capital and reserves (continued) | |
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 comprises the fair value of the actual or estimated number of unexercised share options granted to employees of the Group that was recognized in accordance with the accounting policy adopted for share based payment in note | ||
(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, 2009, CTI Guangzhou Customer Services Co Ltd (“CTIGZ”), a wholly-owned subsidiary of the Group, made appropriation to the statutory reserve of RMB510,000 (2008: RMB324,000). The accumulated balance of the statutory reserve maintained at the CTIGZ as at August 31, 2009 was RMB1,415,000 (2008: RMB905,000). 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 1(d)(ii). | ||
(a) | Share capital |
19 Capital
2009 | 2008 | |||||||||||||||
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$0.10 each | ||||||||||||||||
At the beginning of the year | 650,621,823 | 65,062 | 616,503,404 | 61,650 | ||||||||||||
Shares issued in respect of scrip dividend of the previous year (note (i)) | 12,212,142 | 1,221 | 11,227,213 | 1,123 | ||||||||||||
Shares issued in respect of scrip dividend of the current year (note (ii)) | — | — | 8,838,938 | 884 | ||||||||||||
Shares issued upon exercise of share options (note (iii)) | 1,416,005 | 142 | 14,052,268 | 1,405 | ||||||||||||
Repurchase and cancellation of ordinary shares | (70,000 | ) | (7 | ) | — | — | ||||||||||
At the end of the year | 664,179,970 | 66,418 | 650,621,823 | 65,062 | ||||||||||||
Ordinary shares | ||||||||||||||||||||
Number of shares outstanding | Amount Outstanding | Share premium | Capital reserve | Warrant reserve | Translation reserve | Retained (restated) | Total shareholders’ equity | |||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | ||||||||||||||
(Amount in thousands, except number of shares) | ||||||||||||||||||||
Balance at August 31, 2003 | 604,959,787 | 60,496 | 615,886 | — | 858 | 1,231 | 500,704 | 1,179,175 | ||||||||||||
2003 final dividends declared and paid | — | — | — | — | — | — | (45,789 | ) | (45,789 | ) | ||||||||||
2004 interim dividends declared and paid | — | — | — | — | — | — | (9,158 | ) | (9,158 | ) | ||||||||||
Shares issued upon exercise of warrants | 4,973,574 | 497 | 1,985 | — | (493 | ) | — | — | 1,989 | |||||||||||
Shares issued upon exercise of share options | 640,000 | 64 | 115 | — | — | — | — | 179 | ||||||||||||
Equity settled share-based transactions | — | — | — | 87 | — | — | — | 87 | ||||||||||||
Net income | — | — | — | — | — | — | 49,463 | 49,463 | ||||||||||||
Exchange adjustment on translation of the accounts of overseas subsidiaries | — | — | — | — | — | (248 | ) | — | (248 | ) | ||||||||||
Balance at August 31, 2004 | 610,573,361 | 61,057 | 617,986 | 87 | 365 | 983 | 495,220 | 1,175,698 | ||||||||||||
Realization of outstanding warrant reserve upon warrant expiration | — | — | — | — | (18 | ) | — | 18 | — | |||||||||||
Shares issued upon exercise of warrants | 3,500,043 | 350 | 1,397 | — | (347 | ) | — | — | 1,400 | |||||||||||
Shares issued upon exercise of share options | 52,000 | 5 | 25 | — | — | — | — | 30 | ||||||||||||
Equity settled share-based transactions | — | — | — | 6,965 | — | — | — | 6,965 | ||||||||||||
Net loss, as restated | — | — | — | — | — | — | (163,496 | ) | (163,496 | ) | ||||||||||
Exchange adjustment on translation of the accounts of overseas subsidiaries | — | — | — | — | — | (143 | ) | — | (143 | ) | ||||||||||
Balance at August 31, 2005, as restated | 614,125,404 | 61,412 | 619,408 | 7,052 | — | 840 | 331,742 | 1,020,454 | ||||||||||||
Changes in accounting policy | ||||||||||||||||||||
— opening balance adjustment arising from adoption of HKAS32 and HKAS 39 | — | — | — | — | — | — | 6,609 | 6,609 | ||||||||||||
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 | 50,000 | 5 | 8 | — | — | — | — | 13 | ||||||||||||
Equity settled share-based transactions | — | — | 882 | 5,941 | — | — | — | 6,823 | ||||||||||||
Net loss | — | — | — | — | — | — | (142,062 | ) | (142,062 | ) | ||||||||||
Exchange adjustment on translation of the accounts of overseas subsidiaries | — | — | — | — | — | (183 | ) | — | (183 | ) | ||||||||||
Balance at August 31, 2006 | 614,175,404 | 61,417 | 620,298 | 12,993 | — | 657 | 196,289 | 891,654 |
Authorized Ordinary shares of HK$0.10 each | ||||
No. of shares | HK$’000 | |||
At August 31, 2005 and August 31, 2006 | 2,000,000,000 | 200,000 | ||
At the beginning of the year Exercise of share options (note (a)) Exercise of warrants (note (b)) At the end of the year Issued and fully paid (Ordinary shares of HK$0.10 each) August 31, 2005 August 31, 2006 No. of shares HK$’000 No. of shares HK$’000 610,573,361 61,057 614,125,404 61,412 52,000 5 50,000 5 3,500,043 350 — — 614,125,404 61,412 614,175,404 61,417
(i) | On February 25, 2009, the Company issued and allotted 12,212,142 ordinary shares to shareholders who elected to receive the 2008 final dividend in shares pursuant to the scrip dividend scheme announced by the Company on January 9, 2009. These shares rank pari passu with the existing shares of the Company in all respects. | |
On February 4, 2008, the Company issued and allotted 11,227,213 ordinary shares to shareholders who elected to receive, the 2007 final dividend in shares pursuant to the scrip dividend scheme announced by the Company on January 4, 2008. These shares rank pari passu with the existing shares of the Company in all respects. |
F-35
20 | Capital and reserves (continued) | |
(a) | Share capital (continued) | |
Notes: (continued) |
(ii) | On July 23, 2008, the Company issued and allotted 8,838,938 ordinary shares to shareholder, who elected to receive the 2008 interim dividend in shares pursuant to the scrip dividend scheme announced by the Company on June 19, 2008. These shares rank pari passu with the existing shares of the Company in all respects. | ||
(iii) | During the year ended August 31, |
(iv) | The |
20 Cash and bank balances
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Cash at bank and in hand | 100,903 | 44,717 | ||
Time deposits with banks and other financial institution (note (a)) | 438,688 | 100,200 | ||
539,591 | 144,917 | |||
Term deposits with banks and other financial institution (note(b)) | 92,850 | 237,496 | ||
21 Dividends
Year ended August 31, | ||||||
2004 | 2005 | 2006 | ||||
HK$’000 | HK$’000 | HK$’000 | ||||
Interim, declared and paid, of HK$Nil (2005:HK$Nil, 2004: HK$0.015) per ordinary share | 9,158 | — | — | |||
Final, dividend paid, of HK$Nil (2005: HK$Nil, 2004: HK$Nil) per ordinary share | 45,789 | — | — | |||
54,947 | — | — | ||||
22 Banking facilities
The Company’s banking facilities as of each balance sheet date were, denominated in Hong Kong dollars and Japanese Yen, as follows:
Amount available | Amount utilized | |||||||||
August 31, | August 31, | Terms of facilities as of August 31, 2006 | ||||||||
2005 | 2006 | 2005 | 2006 | Interest rate | ||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||
Bank overdrafts/ bank loans | 78,930 | 80,020 | 13,250 | 2,003 | HIBOR or Cost of Funds + 0.8% per annum | |||||
The amounts utilized as of Aug 31, 2005 and 2006 represented bank guarantees and letter of credit issued against the banking facilities (see note 16). The utilized banking facilities as of August 31, 2005 and 2006 were denominated in Hong Kong Dollar.
23 Related party transactions
In addition to the transactions and balances disclosed elsewhere in these financial statements, the Company entered into the following material related party transactions.
Key management personnel remuneration
Remuneration for key management personnel, including amounts paid to the Company’s directors and certain of the highest paid employees is as follows:
August 31, | ||||
2005 | 2006 | |||
HK$’000 | HK$’000 | |||
Short-term employee benefits | 21,505 | 21,443 | ||
Post-employment benefits | 1,754 | 1,916 | ||
Equity compensation benefits | 4,937 | 4,571 | ||
28,196 | 27,930 | |||
24 Retirement schemes
The Company contributes to,the Occupational Retirement Scheme (“the ORSO Scheme”), a defined contribution retirement scheme, which is available to certain employees. Under the ORSO Scheme, the employees are required to contribute 5% of their monthly salaries, while the Company’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, or at a reduced scale after completion of 3 to 9 years of 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 Company’s contributions.
In December 2000, the Company established another defined contribution retirement scheme, Mandatory Provident Fund Scheme (“the MPF Scheme”) under the Hong Kong Mandatory Provident Fund Scheme Ordinance, where the then existing employees of the Company in Hong Kong could elect to join the MPF Scheme. All new employees who join the Company in Hong Kong after December 2000 are required to join the MPF Scheme. Both the Company and the employees are required to contribute 5% of each individual’s relevant income with a maximum amount of HK$1,000 per month as a mandatory contribution. The Company’s mandatory contributions are 100% vested in the employees as soon as they are paid to the MPF Scheme. Senior employees may also elect to join a Mutual Voluntary Plan (“the Mutual Plan”) in which both the Company and the employee, on top of the MPF mandatory contributions, make a voluntary contribution so that the amount of contribution by the Company and the employee is similar to the contribution made under the ORSO Scheme.
The Company also contributes to defined contribution pension schemes for staff in overseas countries as required by the respective local statutory requirements.
The aggregate employer’s contributions, net of forfeited contributions, which have been dealt with in the consolidated statements of operations during the year are as follows:
Year Ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Gross contributions | 26,922 | 27,789 | 28,912 | ||||||
Less: forfeited contributions utilized to offset the Company’s contributions during the year | (635 | ) | (352 | ) | (956 | ) | |||
Net contributions charged to the consolidated statements of operations | 26,287 | 27,437 | 27,956 | ||||||
At August 31, 2006, there is no forfeited contribution available to offset future contributions by the Company to the schemes (2005: HK$Nil, 2004: HK$12,000).
25 Equity settled share-based transactions
2002 Share Option Scheme
The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by the shareholders of the Company 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 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 employee share option scheme, exceed 10% of the Company’s issued share capital on the date of adoption. The exercise price of the option will be 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, 2006, options were granted under the 2002 Share Option Scheme to eligible participants for the subscription of 34,310,000 shares of the Company at a weighted average exercise price of HK$0.67 each.
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. Upon termination, no further options can be granted under the 1997 Share Option Scheme but the provisions of such scheme in all other respects remain in force and all options granted prior to termination continue to be valid and exercisable.
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. Proceeds from issue of shares upon the exercise of share options were credited to share capital and share premium account respectively at the time of exercise of the options.
Effective from September 1, 2005, upon the adoption of HKFRS 2 Share-based payment, the Company recognizes the fair value of share options granted under 2002 Share Option Scheme 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 Company 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, 2003, 2004, 2005 and 2006, are as follows:
1997 Share Option Scheme
Date of grant | September 3, 1998 | September 10, 1999 | October 20, 2000 | ||||||
Exercise price per Share (HK$) | 0.26 | 2.10 | 0.58 | ||||||
Market price per Share (HK$) at date of Grant | 0.26 | 2.10 | 0.58 | ||||||
Outstanding at August 31, 2003 | 790,000 | 60,000 | 390,000 | ||||||
Exercised | (600,000 | ) | — | (40,000 | ) | ||||
Outstanding at August 31, 2004 | 190,000 | 60,000 | 350,000 | ||||||
Exercised | — | — | (52,000 | ) | |||||
Outstanding at August 31, 2005 | 190,000 | 60,000 | 298,000 | ||||||
Exercised | (50,000 | ) | — | — | |||||
Lapsed upon resignation of employees | — | (20,000 | ) | (20,000 | ) | ||||
Outstanding at August 31, 2006 | 140,000 | 40,000 | 278,000 | ||||||
2002 Share Option Scheme
Date of grant | June 3, 2004 (note a) | October 21, 2004 (note b) | January 5, 2005 (note c) | October 3, 2005 (note d) | May 22, 2006, (note e) | July 3, 2006 (note f) | August 3, 2006 (note g) | ||||||||
Exercise price per Share (HK$) | 1.47 | 1.54 | 1.54 | 0.81 | 0.66 | 0.68 | 0.71 | ||||||||
Market price per Share (HK$) at date of Grant | 1.47 | 1.49 | 1.48 | 0.81 | 0.64 | 0.68 | 0.71 | ||||||||
Outstanding at August 31, 2003 | — | — | — | — | — | — | — | ||||||||
Granted | 6,000,000 | — | — | — | — | — | — | ||||||||
Exercised | — | — | — | — | — | — | — | ||||||||
Outstanding at August 31, 2004 | 6,000,000 | — | — | — | — | — | — | ||||||||
Granted | — | 14,670,000 | 16,000,000 | — | — | — | — | ||||||||
Exercised | — | — | — | — | — | — | — | ||||||||
Outstanding at August 31, 2005 | 6,000,000 | 14,670,000 | 16,000,000 | — | — | — | — | ||||||||
Granted | — | — | — | 1,000,000 | 32,210,000 | 1,000,000 | 100,000 | ||||||||
Lapsed upon resignation of employees | — | (5,220,000 | ) | — | — | — | — | — | |||||||
Outstanding at August 31, 2006 | 6,000,000 | 9,450,000 | 16,000,000 | 1,000,000 | 32,210,000 | 1,000,000 | 100,000 | ||||||||
Number of Share Options Outstanding | Average exercise price per Share | Weighted average market price at the date of grant | |||||
(Thousands) | HK$’000 | HK$’000 | |||||
Balance at August 31, 2003 | 1,240 | 0.45 | 0.45 | ||||
Granted during the year | 6,000 | 1.47 | 1.43 | ||||
Exercised during the year | (640 | ) | 0.28 | N/A | |||
Balance at August 31, 2004 | 6,600 | 1.39 | 1.36 | ||||
Granted during the year | 30,670 | 1.54 | 1.48 | ||||
Exercised during the year | (52 | ) | 0.58 | N/A | |||
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 | |||
Lapased upon resignation of employees during the year | (5,260 | ) | 1.54 | N/A | |||
Balance at August 31, 2006 | 66,218 | 1.08 | N/A | ||||
Adjustment | ||||||||||||||||||||||||||||
Number | to number | Number | ||||||||||||||||||||||||||
of share | of options | of share | ||||||||||||||||||||||||||
options | for 2008 | options | ||||||||||||||||||||||||||
Exercise | outstanding at | final | outstanding | |||||||||||||||||||||||||
price | September 1, | dividend | at August 31, | |||||||||||||||||||||||||
Date of grant | per share | 2008 | Granted | (note (i)) | Exercised | Lapsed | 2009 | |||||||||||||||||||||
October 21, 2004 | HK$1.5224 | 7,571,582 | — | 35,130 | 546,184 | 151,001 | 6,909,527 | |||||||||||||||||||||
January 5, 2005 | HK$1.5224 | 16,106,956 | — | 76,252 | — | — | 16,183,208 | |||||||||||||||||||||
May 22, 2006 | HK$0.6523 | 22,387,555 | — | 105,366 | 869,821 | 30,201 | 21,592,899 | |||||||||||||||||||||
August 3, 2006 | HK$0.7018 | 40,349 | — | 191 | — | — | 40,540 | |||||||||||||||||||||
November 22, 2006 | HK$0.7216 | 135,902 | — | 643 | — | — | 136,545 | |||||||||||||||||||||
February 6, 2008 | HK$1.7568 | 6,016,309 | — | 28,482 | — | — | 6,044,791 | |||||||||||||||||||||
February 11, 2008 | HK$1.8660 | 6,016,309 | — | 28,482 | — | — | 6,044,791 | |||||||||||||||||||||
February 15, 2008 | HK$1.7568 | 1,002,718 | — | 4,747 | — | — | 1,007,465 | |||||||||||||||||||||
March 11, 2008 | HK$1.8164 | 300,816 | — | 1,424 | — | 302,240 | — | |||||||||||||||||||||
May 2, 2008 | HK$1.7866 | 1,002,718 | — | 4,747 | — | — | 1,007,465 | |||||||||||||||||||||
60,581,214 | — | 285,464 | 1,416,005 | 483,442 | 58,967,231 | |||||||||||||||||||||||
Date of grant | Exercise price at August 31, 2005 | Number outstanding at August 31, 2006 | Remaining life | Exercisable options at August 31, 2006 | ||||
(Thousands) | (Years) | (Thousands) | ||||||
September 3, 1998 | 0.26 | 140 | 1.0 | 140 | ||||
September 10, 1999 | 2.10 | 40 | 1.0 | 40 | ||||
October 20, 2000 | 0.58 | 278 | 1.0 | 278 | ||||
June 3, 2004 | 1.47 | 6,000 | 8.0 | 6,000 | ||||
October 21, 2004 | 1.54 | 9,450 | 9.0 | 7,670 | ||||
January 5, 2005 | 1.54 | 16,000 | 9.0 | 12,000 | ||||
October 3, 2005 | 0.81 | 1,000 | 9.0 | — | ||||
May 3, 2006 | 0.66 | 32,210 | 10.0 | — | ||||
July 3, 2006 | 0.68 | 1,000 | 10.0 | — | ||||
August 3, 2006 | 0.71 | 100 | 10.0 | — | ||||
66,218 | 26,128 | |||||||
In assessing the value of the share options granted during the year ended 31 August 2006, 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 and is one of the recommended option pricing models as set out in Chapter 17 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. The variables of the Black-Scholes Model include expected life of the options, risk-free interest rate, expected volatility and expected dividend of the shares of the Company.
In assessing the value of the share options granted during the year, the following variables have been applied to the Black-Scholes Model:
Measurement date | June 3, 2004 | October 21, 2004 | January 5, 2005 | October 3, 2005 | May 22, 2006 | July 3, 2006 | August 3, 2006 | ||||||||||||||
Variables | |||||||||||||||||||||
- Expected life (i) | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | ||||||||||||||
- Risk-free rate (ii) | 3.78 | % | 2.65 | % | 2.75 | % | 4.41 | % | 4.63 | % | 4.45 | % | 4.06 | % | |||||||
- Expected volatility (iii) | 59.04 | % | 72.06 | % | 69.37 | % | 58.29 | % | 55.04 | % | 53.56 | % | 52.71 | % | |||||||
- Expected dividend yield (iv) | 1 | % | 1 | % | 1 | % | 0 | % | 0 | % | 0 | % | 0 | % |
Using the Black-Scholes Model in assessing the value of share options granted during the year, the fair value is estimated as below:
Date of grant | June 3, 2004 | October 21. 2004 | January 5, 2005 | October 3, 2005 | May 22, 2006 | July 3, 2006 | August 3, 2006 | ||||||||||||||
Fair value per share option | HK$ | 0.70 | HK$ | 0.84 | HK$ | 0.80 | HK$ | 0.44 | HK$ | 0.33 | HK$ | 0.35 | HK$ | 0.36 |
The Black-Scholes Model, applied for determination of the estimated fair value of the share options granted under the 2002 Share Option Scheme, was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Such an option pricing model requires 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.
26 Revenues and segmental information
The Company’s reportable segments are strategic business units that offer different type of telecommunication services. Each of these business units are operated and managed separately.
Revenue recognized during the year is as follows:
Year ended August 31, | ||||||
2004 | 2005 | 2006 | ||||
HK$’000 | HK$’000 | HK$’000 | ||||
Revenue | ||||||
International telecommunications services | 627,978 | 532,595 | 418,276 | |||
Fixed telecommunications network services (note (c)) | 541,902 | 629,464 | 716,600 | |||
1,169,880 | 1,162,059 | 1,134,876 | ||||
Other income | ||||||
Interest income | 3,753 | 13,578 | 20,378 | |||
Other income | 2,668 | 6,037 | 4,465 | |||
6,421 | 19,615 | 24,843 | ||||
(a) Primary reporting format — business segments
The Company is organized on a worldwide basis into two business segments:
The Company’s inter-segment transactions mainly consist of provision of leased lines services.
Segment results are income / (loss) from operations excluding interest expense and interest income, but includes other income, net. All segment measures are based on accounting policies that are consistent with those used in the preparation of the consolidated financial statements.
Year ended August 31, 2004 (restated) | |||||||||||
International telecommunications services | Fixed telecommunications network services | Elimination | Company | ||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||
Revenue (note (c)) | |||||||||||
External sales | 627,978 | 541,902 | — | 1,169,880 | |||||||
Inter-segment sales | 5,682 | 30,183 | (35,865 | ) | — | ||||||
633,660 | 572,085 | (35,865 | ) | 1,169,880 | |||||||
Segment results | 157,742 | (109,814 | ) | 47,928 | |||||||
Interest income | 3,634 | 119 | — | 3,753 | |||||||
Interest expense | (175 | ) | |||||||||
Income before taxation | 51,506 | ||||||||||
Segment assets | 532,161 | 1,151,018 | — | 1,683,179 | |||||||
Unallocated assets | 229 | ||||||||||
Total assets | 1,683,408 | ||||||||||
Segment liabilities | 128,304 | 340,172 | — | 468,476 | |||||||
Unallocated liabilities | 39,234 | ||||||||||
Total liabilities | 507,710 | ||||||||||
Capital expenditure | 17,164 | 392,882 | — | 410,046 | |||||||
Depreciation | 29,023 | 166,929 | — | 195,952 | |||||||
Goodwill amortization charge | — | 1,065 | — | 1,065 |
Revenue (note (c)) External sales Inter-segment sales Segment results Interest income Interest expense Loss before taxation Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure Depreciation Goodwill amortization charge Year ended August 31, 2005 (restated) International
telecommunications
services Fixed
telecommunications
network services Elimination Company HK$’000 HK$’000 HK$’000 HK$’000 532,595 629,464 — 1,162,059 4,108 33,188 (37,296 ) — 536,703 662,652 (37,296 ) 1,162,059 89,835 (219,172 ) (129,337 ) 13,240 338 — 13,578 (54,462 ) (170,221 ) 942,304 1,404,589 — 2,346,893 535 2,347,428 130,011 721,748 — 851,759 475,215 1,326,974 11,582 407,544 — 419,126 24,928 211,721 — 236,649 — 1,065 — 1,065
Year ended August 31, 2006 | |||||||||||
International telecommunications services | Fixed telecommunications network services | Elimination | Company | ||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||
Revenue (note (c)) | |||||||||||
External sales | 418,276 | 716,600 | — | 1,134,876 | |||||||
Inter-segment sales | 5,670 | 31,275 | (36,945 | ) | — | ||||||
423,946 | 747,875 | (36,945 | ) | 1,134,876 | |||||||
Segment results | 25,677 | (106,724 | ) | (81,047 | ) | ||||||
Interest income | 17,728 | 2,650 | — | 20,378 | |||||||
Interest expense | (88,637 | ) | |||||||||
Income before taxation | (149,306 | ) | |||||||||
Segment assets | 626,480 | 1,497,388 | — | 2,123,868 | |||||||
Unallocated assets | — | — | — | 347 | |||||||
Total assets | 2,124,215 | ||||||||||
Segment liabilities | 114,847 | 921,230 | — | 1,036,077 | |||||||
Unallocated liabilities | — | 196,484 | |||||||||
Total liabilities | 1,232,561 | ||||||||||
Capital expenditure | 13,838 | 309,097 | — | 322,935 | |||||||
Depreciation | 23,598 | 252,866 | — | 276,464 |
(b) Geographical segments
Although the Company’s two business segments are managed on a worldwide basis, they operate in two main geographical areas:
In presenting information on the basis of geographical segments, revenue and segment results are based on the geographical location of customers. Total assets and capital expenditure are based on the geographical location of the assets.
There were no sales between the geographical segments.
Revenue 2004 | Total assets 2004 | Capital expenditure 2004 | Fixed assets, net 2004 | |||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||
Hong Kong | 1,145,102 | 1,675,546 | 409,866 | 1,154,036 | ||||
Canada | 24,778 | 7,633 | 180 | 4,839 | ||||
1,169,880 | 1,683,179 | 410,046 | 1,158,875 | |||||
Unallocated assets | 229 | |||||||
1,683,408 | ||||||||
Revenue 2005 | Total assets 2005 | Capital expenditure 2005 | Fixed assets, net 2005 | |||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||
Hong Kong | 1,138,821 | 2,337,793 | 418,981 | 1,332,172 | ||||
Canada | 23,238 | 9,100 | 145 | 4,371 | ||||
1,162,059 | 2,346,893 | 419,126 | 1,336,543 | |||||
Unallocated assets | 535 | |||||||
2,347,428 | ||||||||
Revenue 2006 | Total assets 2006 | Capital expenditure 2006 | Fixed assets, net 2006 | |||||
HK$’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 | ||||||||
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 Telecommunication Authority (“TA”) and interconnection services have been provided, HKBN has been billing mobile operators for the interconnection services provided to them and recognizing the amounts billed as revenue (“mobile interconnection charges”). A majority of the mobile operators, however, rejected HKBN’s demand for payment. As a result of non-payment by the mobile operators, in 2004, the Company asked the TA to make a determination (the “Determination”) on the level of mobile and fixed interconnection charges payable by one of the mobile operators to HKBN; and the effective date of the determined interconnection charges.
In November 2005, HKBN entered into a contractual agreement with one of the mobile operators, which agreed to pay mobile interconnection charges at an interim rate. The final rate to be paid by this mobile operator will be adjusted based on the Determination issued by TA.
In March 2006, TA issued a preliminary analysis on the Determination with respect to the rates of mobile interconnection charges (“preliminary rates”) payable by the mobile operator under dispute and the timing of the Determination. The final level of mobile interconnection charges is still subject to the Determination to be issued by TA and the expected timing of the Determination was not known as of the year end.
For the years ended August 31, 2004 and 2005, the Company recognized revenue for mobile interconnection charges of HK$38,676,000 and HK$24,703,000, respectively, based on the Company’s best estimate of the amounts it expected to collect. For the year ended August 31, 2006, the Company recognized mobile interconnection charges of HK$22,037,000 based on the preliminary rates from TA.
27 Financial instruments
Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Company’s business. These risks are limited by the Company’s financial management policies and practices described below.
(a) Credit risk
The Company’s credit risk is primarily attributable to trade and other receivables, investments in debt securities , derivative financial instruments and term bank deposits. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet. Except for the financial guarantee given by the Company as disclosed in note 15(d), the Company does not provide any other guarantees which expose the Company to credit risk.
In respect of trade receivables, credit evaluations are performed on all customers requiring credit over a certain amount. Trade receivables are generally 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 Company generally does not obtain collateral from customers.
Cash deposits and transactions involving derivative financial instruments with counterparties are placed or limited to high credit-quality financial institutions. The Company has policies that limit the amount of credit exposure to any financial institution. Given the high credit ratings of these financial institutions, management does not expect any of the financial institutions to fail in meeting their obligations.
(b) Liquidity risk
The Company is responsible for the cash management, including the short term investment of cash surpluses and the raising of funds to cover expected cash demands. The Company regularly monitors current and expected liquidity requirements and compliance with lending covenants to ensure it maintains sufficient cash, readily realizable marketable securities and has adequate amount of committed credit facilities to meet the Company’s liquidity requirements in the short and long term.
(c) Interest rate risk
The Company’s interest-rate risk arises mainly from its 10-year senior notes which bear interest at the fixed rate of 8.75% per annum. Details of the 10-year senior note are disclosed in note 14.
d) Foreign currency risk
All the Company’s monetary assets and liabilities are primarily denominated in either Hong Kong dollars or United States dollars. Given the exchange rate of Hong Kong dollar to the U.S. dollar has remained close to the current pegged rate of HK$7.8 = US$1.00 since 1983, management does not expect significant foreign exchange gains or losses between the Hong Kong dollar and the United States dollar.
The Company is also exposed to a certain amount of foreign exchange risk in relation to fluctuations between the Hong Kong dollars and the Renminbi arising from its operations in the PRC. In order to limit this foreign currency risk exposure, the Company maintains Renminbi cash balance that approximates six months’ operating cash flows.
e) Fair values
Trade receivables less impairment provision and account payables approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments. The carrying value and the fair value of the Company’s investment securities, derivative financial instruments and the 8.75% senior notes as at August 31, 2006 and 2005 are as follows:
2005 Carrying amount 2006 Carrying amount Long-term bank deposit (a) Debt securities (b) Interest rate swap (c) Foreign currency forward contract (d) 8.75% senior notes (b) Fair Value Fair Value HK$’000 HK$’000 HK$’000 HK$’000 15,540 15,193 13,641 13,459 25,901 25,901 26.633 26,633 — 2,570 1,845 1,845 — 4,039 — — (945,348 ) (888,694 ) (948,027 ) 722,081
28 Barter transaction
During the year ended August 31, | ||
Each option entitles the holder to subscribe for one share of HK$0.10 each in the Company at a |
F-36
20 | Capital and reserves (continued) | |
(b) | Capital management | |
The Group’s primary objectives when managing capital are to maintain a reasonable capital structure, safeguard the Group’s ability to continue as a going concern, and to provide returns for shareholders. | ||
The Group manages the amount of capital in proportion to risk, and makes adjustments to its capital structure through the amount of dividend payment to shareholders, issuance of scrip and new shares, and managing its debt portfolio in conjunction with cash flow requirements, taking into account its future financial obligations and commitments. | ||
The Group monitors its capital structure by reviewing its net debt to net asset gearing ratio. For this purpose, the Group defines net debt as total loans less cash at bank and in hand and long-term bank deposits. | ||
The net debt to net asset gearing ratio as at August 31, 2009 and 2008 are as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Unsecured | ||||||||
- 10-year senior notes due 2015 | 162,586 | 683,242 | ||||||
- Obligation under finance lease | 732 | 376 | ||||||
Total loans | 163,318 | 683,618 | ||||||
Less: Cash and bank balances | (221,052 | ) | (421,610 | ) | ||||
Net (cash)/debt | (57,734 | ) | 262,008 | |||||
Net asset | 1,228,527 | 1,032,607 | ||||||
Net debt to net asset gearing ratio | — | 0.25 | ||||||
The decrease in net debt to net asset gearing ratio is mainly due to the repurchase of the 10-year senior notes (see note 22(a)). | ||
Neither the Company | ||
21 | Deferred taxation | |
Deferred tax assets are recognized to the extent it is probable that future taxable profits will be generated against which the temporary differences can be utilized. | ||
The components of deferred tax assets/(liabilities) recognized in the balance sheet and the movements are as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Balance as at the beginning of the year | 21,398 | (291 | ) | |||||
Exchange differences | 1 | (1 | ) | |||||
Deferred taxation (charged)/credited to income statement | ||||||||
- relating to the origination and reversal of temporary differences (note 5) | (37,108 | ) | (4,645 | ) | ||||
- relating to the recognition of unrecognized tax losses in prior years (note 5) | — | 26,335 | ||||||
Balance as at the end of the year | (15,709 | ) | 21,398 | |||||
F-37
21 | Deferred taxation (continued) | |
As at August 31, 2009, the Group has not recognized deferred tax assets in respect of unused tax losses of HK$8,154,000 (2008: HK$9,518,000) because it is not probable that future taxable profits can be generated to utilize the tax losses. All tax losses are subject to agreement with |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
After 5 years | 2,455 | 3,810 | ||||||
No expiry date | 5,699 | 5,708 | ||||||
8,154 | 9,518 | |||||||
The movement in deferred tax assets and liabilities (prior to |
Accelerated depreciation allowance | ||||||||
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Deferred tax liabilities | ||||||||
At the beginning of the year | (126,447 | ) | (134,910 | ) | ||||
(Charged)/credited to consolidated income statement | (5,326 | ) | 8,463 | |||||
Exchange differences | 7 | — | ||||||
At the end of the year | (131,766 | ) | (126,447 | ) | ||||
Tax losses | ||||||||
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Deferred tax assets | ||||||||
At the beginning of the year | 147,845 | 134,619 | ||||||
(Charged)/credited to consolidated income statement | (31,782 | ) | 13,227 | |||||
Exchange differences | (6 | ) | (1 | ) | ||||
At the end of the year | 116,057 | 147,845 | ||||||
Deferred tax assets and deferred tax liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity. The following amounts, determined after appropriate offsetting, are shown in the balance sheet: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Deferred tax assets | — | 26,335 | ||||||
Deferred tax liabilities | (15,709 | ) | (4,937 | ) | ||||
(15,709 | ) | 21,398 | ||||||
F-38
22 | Long-term debt and other liabilities |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
10-year senior notes due 2015 (note (a)) | 162,586 | 683,242 | ||||||
Obligation under finance lease (note (b)) | 732 | 376 | ||||||
163,318 | 683,618 | |||||||
Current portion of - - obligation under finance lease | (202 | ) | (121 | ) | ||||
163,116 | 683,497 | |||||||
At August 31, |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Long-term debt and other liabilities, repayable: | ||||||||
- 10-year senior notes due 2015 | ||||||||
- after the fifth year | 162,586 | 683,242 | ||||||
Obligations under finance lease | ||||||||
- Within 1 year | 202 | 121 | ||||||
- After 1 year but within 2 years | 197 | 129 | ||||||
- After 2 years but within 5 years | 263 | 126 | ||||||
- After 5 years | 70 | — | ||||||
732 | 376 | |||||||
Less: Current portion of obligations under finance lease | (202 | ) | (121 | ) | ||||
530 | 255 | |||||||
163,116 | 683,497 | |||||||
(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 100 per cent of the |
A second agreement (“Second Agreement”) was entered into on the same date by both parties whereby HKBN agree to provide certain telecommunication services to the Contract Party 1 (the “Services”) for an amount equal to the unit service charges specified in the Second Agreement. The Contract Party 1 is required to pay to HKBN a guarantee minimum service fee of approximately HK$42.4 million over a period of three years, commencing September 1, 2004. A prepayment of the service charges of HK$36.5 million (the “Prepaid Charges”) was paid by the Contract Party 1 to HKBN during the year ended August 31, 2004.
The directors of the Company made an assessment of the fair values of the goods and services exchanged and concluded that no fair values could be assigned to them. Accordingly, the Facility was not recognized as an asset and no revenue or deferred revenue was recognized in the financial statements of the Company as at and for the year ended August 31, 2005 and 2006. The difference between the amounts paid for the Facility Consideration and the Prepaid Charges received, amounting to approximately $5.9 million, was recorded as a long-term receivable balance in the balance sheet as at August 31, 2005 and 2006. The balance will be paid by the Contract Party 1 prior to the end of service period on September 1, 2007.
The 10-year senior notes are unconditionally and irrevocably guaranteed on a joint and several basis by the Company’s subsidiaries (other than CTI Guangzhou Customer Services Company Limited) as subsidiary guarantors. | ||
During the year ended August 31, | ||
As at August 31, 2009, the principal amount of the 10-year senior notes remaining in issue after the repurchase was US$21,363,000 (equivalent to HK$165,563,000). | ||
The effective interest rate of the 10-year senior notes for the year ended August 31, 2009 is 9.2% (2008: 9.2%) per annum. |
F-39
22 | Long-term debt and other liabilities (continued) | |
Notes: (continued) |
(b) | At August 31, 2009, the Group had obligations under finance leases repayable as follows: |
2009 | 2008 | |||||||||||||||||||||||
Present | Present | |||||||||||||||||||||||
value | Interest | value | Interest | |||||||||||||||||||||
of the | expense | Total | of the | expense | Total | |||||||||||||||||||
minimum | relating to | minimum | minimum | relating to | minimum | |||||||||||||||||||
lease | future | lease | lease | future | lease | |||||||||||||||||||
payments | periods | payments | payments | periods | payments | |||||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||||||||
Within 1 year | 202 | 35 | 237 | 121 | 21 | 142 | ||||||||||||||||||
After 1 year but within 2 years | 197 | 22 | 219 | 129 | 13 | 142 | ||||||||||||||||||
After 2 years but within 5 years | 263 | 30 | 293 | 126 | 4 | 130 | ||||||||||||||||||
After 5 years | 70 | 1 | 71 | — | — | — | ||||||||||||||||||
530 | 53 | 583 | 255 | 17 | 272 | |||||||||||||||||||
732 | 88 | 820 | 376 | 38 | 414 | |||||||||||||||||||
23 | Notes to the | |
(a) | Reconciliation of profit before taxation to net cash inflow from operations |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Profit before taxation | 251,559 | 108,372 | ||||||
Depreciation of owned fixed assets | 205,624 | 209,464 | ||||||
Depreciation of fixed assets held under finance lease | 617 | 587 | ||||||
Amortization of deferred expenditure | 53,160 | 33,777 | ||||||
Interest income | (4,869 | ) | (15,596 | ) | ||||
Interest element of finance lease | 27 | 34 | ||||||
Loss on disposal of fixed assets | 1,016 | 1,431 | ||||||
Realized and unrealized gain on other financial assets | (189 | ) | (3,284 | ) | ||||
Realized gain on long term bank deposit | — | (1,185 | ) | |||||
Realized loss on derivative financial instrument | — | 1,039 | ||||||
Equity settled share-based transactions | 4,768 | 4,204 | ||||||
Gain on extinguishment of 10-year senior notes | (31,371 | ) | (2,582 | ) | ||||
Interest, amortization and exchange difference on 10-year senior notes | 49,214 | 72,640 | ||||||
Net cash inflow before working capital changes | 529,556 | 408,901 | ||||||
(Increase)/ decrease in long-term receivable and prepayment | (505 | ) | 1,346 | |||||
Decrease in accounts receivable, other receivables, deposits and prepayments | 33,052 | 6,914 | ||||||
Decrease in inventories | — | 477 | ||||||
Increase in deferred expenditure | (46,525 | ) | (68,505 | ) | ||||
Increase/ (decrease) in accounts payable, other payables, accrued charges and deposits received | 17,419 | (12,567 | ) | |||||
Increase in deferred service revenue | 4,621 | 46,247 | ||||||
Net cash inflow from operations | 537,618 | 382,813 | ||||||
F-40
23 | Notes to the consolidated cash flow statement (continued) | |
(b) | Analysis of changes in financing during the year |
Share capital | ||||||||||||
(including share | Obligations | |||||||||||
premium and | Under finance | 10-year | ||||||||||
capital reserve) | lease | senior notes | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Balance at September 1, 2007 | 702,192 | 1,210 | 952,593 | |||||||||
Issue of new shares | 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 | |||||||||
Issue of new shares | 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 | |||||||||
24 | 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 accounts receivable and other receivables, and debt investments. Management has a credit policy in place and the exposure to the credit risk is monitored on an ongoing basis. | ||
In respect of accounts 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 16. | ||
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 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 25. | ||
Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from accounts receivable are set out in note 16. |
F-41
24 | 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. | ||
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. |
2009 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accounts payable | 37,555 | 37,555 | 37,555 | — | — | — | 52,324 | 52,324 | 52,324 | — | — | — | ||||||||||||||||||||||||||||||||||||
Other payables and accrued charges | 206,487 | 206,487 | 206,487 | — | — | — | 178,114 | 178,114 | 178,114 | — | — | — | ||||||||||||||||||||||||||||||||||||
Deposits received | 16,385 | 16,385 | 16,385 | — | — | — | 16,264 | 16,264 | 16,264 | — | — | — | ||||||||||||||||||||||||||||||||||||
Obligations under finance leases | 202 | 237 | 237 | — | — | — | 121 | 142 | 142 | — | — | — | ||||||||||||||||||||||||||||||||||||
Tax payable | 1,993 | 1,993 | 1,993 | — | — | — | 2,103 | 2,103 | 2,103 | — | — | — | ||||||||||||||||||||||||||||||||||||
Non current liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
10-year senior notes | 162,586 | 244,117 | 14,489 | 14,489 | 43,467 | 171,672 | 683,242 | 1,093,852 | 61,012 | 61,012 | 183,036 | 788,792 | ||||||||||||||||||||||||||||||||||||
Obligation under finance leases | 530 | 583 | — | 219 | 293 | 71 | 255 | 272 | — | 142 | 130 | — | ||||||||||||||||||||||||||||||||||||
425,738 | 507,357 | 277,146 | 14,708 | 43,760 | 171,743 | 932,423 | 1,343,071 | 309,959 | 61,154 | 183,166 | 788,792 | |||||||||||||||||||||||||||||||||||||
F-42
24 | Financial instruments (continued) | |
(c) | Interest rate risk | |
The Group’s interest-rate risk arises mainly from its 10-year senior notes which bear interest at the fixed rate of 8.75% per annum. Borrowings issued at fixed rate expose the Group to fair value interest-rate risk. | ||
(i) | Interest rate profile | |
The following table details the interest rate profile of the Group’s borrowings at the balance sheet date. |
2009 | 2008 | |||||||||||||||
Effective | Effective | |||||||||||||||
interest | interest | |||||||||||||||
rate | rate | |||||||||||||||
% | HK$’000 | % | HK$’000 | |||||||||||||
Fixed rate borrowings: | ||||||||||||||||
10-year senior notes | 9.2 | 162,586 | 9.2 | 683,242 | ||||||||||||
Obligations under finance lease | 5.6 | 732 | 6.8 | 376 | ||||||||||||
163,318 | 683,618 | |||||||||||||||
(ii) | Sensitivity analysis | |
Management determines that the Group’s exposure of interest rate risk was not significant and hence no sensitivity analysis is prepared. | ||
(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 currencies. | ||
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. |
2009 | 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 | 11,599 | 696 | 282 | 22,330 | 1,099 | 176 | ||||||||||||||||||
Accounts payable | (3,183 | ) | — | — | (2,500 | ) | — | — | ||||||||||||||||
Other payables and accrued charges | (390 | ) | — | — | (3,390 | ) | — | — | ||||||||||||||||
10-year senior notes | (20,979 | ) | — | — | (87,483 | ) | — | — | ||||||||||||||||
Overall net exposure | (12,953 | ) | 696 | 282 | (71,043 | ) | 1,099 | 176 | ||||||||||||||||
(ii) | Sensitivity analysis | |
Management determines that the Group’s exposure of foreign currency risk was not significant and hence no sensitivity analysis is prepared. |
F-43
24 | Financial instruments (continued) | |
(e) | Fair values | |
Except for the following instruments, all financial instruments are carried at amounts not materially different from their fair values as at August 31, 2009 and 2008: |
2009 | 2008 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
amount | Fair value | amount | Fair value | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
10-year senior notes | 162,586 | 157,285 | 683,242 | 672,236 | ||||||||||||
(f) | Estimation of fair values | |
Fair value of financial instruments is estimated as follows: |
(i) | The fair value of the |
(ii) | Accounts receivable, other receivables, deposits and prepayments, pledged bank deposit, cash at bank and in hand, accounts payable, and other payables and accrued charges are assumed to |
25 | Contingent liabilities |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Bank guarantees provided to suppliers (notes 27(i) and (ii)) | 2,490 | 24,671 | ||||||
Bank guarantee in lieu of payment of utility deposits (note 27(iii)) | 5,272 | 5,272 | ||||||
7,762 | 29,943 | |||||||
26 | Commitments | |
(a) | Capital commitments |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Purchase of telecommunications, computer and office equipment | ||||||||
- contracted but not provided for | 150,099 | 143,888 | ||||||
(b) | Commitments under operating leases | |
At August 31, 2009 and 2008, the Group has future aggregate minimum lease payments under non-cancellable operating leases as follows: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Leases in respect of land and buildings which are payable: | ||||||||
- Within 1 year | 21,387 | 16,472 | ||||||
- After 1 year but within 5 years | 13,802 | 11,645 | ||||||
35,189 | 28,117 | |||||||
Leases in respect of telecommunications facilities and computer equipment which are payable | ||||||||
- Within 1 year | 45,321 | 38,623 | ||||||
- After 1 year but within 5 years | 9,600 | 12,876 | ||||||
- After 5 years | 6,271 | 7,384 | ||||||
61,192 | 58,883 | |||||||
96,381 | 87,000 | |||||||
F-44
26 | Commitments (continued) | |
(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: |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Program fee in respect of program rights which are payable: | ||||||||
- Within 1 year | 9,094 | 6,583 | ||||||
- After 1 year but within 5 years | 6,238 | 279 | ||||||
15,332 | 6,862 | |||||||
27 | Pledge of assets | |
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 (2008: HK$20,371,000); | ||
(ii) | bank guarantees of HK$1,990,000 (2008: HK$4,300,000) 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 (2008: HK$5,272,000) issued by the bank to certain utility vendors of the Group in lieu of payment of utility deposits. |
As at August 31, 2008, the Group had pledged bank deposits of US$9,900,000 (equivalent of HK$77,319,000) and HK$10,000,000 as security of the above significant banking facilities. | ||
28 | Material related party transactions | |
In addition to the | ||
Key management personnel remuneration | ||
Remuneration for |
2009 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Short-term employee benefits | 34,687 | 28,850 | ||||||
Post-employment benefits | 2,614 | 2,425 | ||||||
Equity compensation benefits | 4,071 | 3,664 | ||||||
41,372 | 34,939 | |||||||
29 | Comparative figure | |
Certain comparative figures have been reclassified to conform with the current year’s presentation. |
F-45
30 | Accounting estimates and |
Key sources of estimation uncertainty | ||
Notes 10 and 24 contain information about the | ||
Impairment loss for | ||
The Group maintains impairment loss for doubtful accounts based upon evaluation of the |
The Directors of the Company made an assessment and concluded that since the Service Component for (i) above and Capacity Component for (ii) above involve exchange of services of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. Accordingly, both components were not recognized as an asset or expense and no revenue or deferred revenue was recognized in the financial statements of the Company as at and for the year ended August 31, 2004, 2005 and 2006.
29 New effective standards/recent accounting pronouncements
(i) Hong Kong GAAP
Up to the date of issue of these financial statements, the HKICPA has issued the following amendments, new standards and interpretations which are not yet effective for the accounting period ended August 31, 2006 and which have not been adopted in these financial statements:
account the historical write-off experience and recovery rates. If the financial condition of the customers were to deteriorate, additional impairment may be required. | ||||
At August 31, 2009, the Group has recognized a deferred tax asset in relation to tax losses carry forward as set out in note 21. The realisability of the deferred tax asset depends on whether it is probable that future taxable profits will be available against which the asset can be utilized. In assessing the need to recognize a deferred tax asset, management consider all available evidence, including projected future taxable income, tax planning strategies, historical taxable income, and the expiration periods of the tax losses. In cases where the actual future taxable profits are less than expected, a reversal of deferred tax asset may arise, which will be recognized in the income statement for the period in which such a reversal takes place. |
31 |
Up to the date of issue of these financial statements, the IASB has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended August 31, 2009 and which have not been adopted in these financial statements. | ||
| accounting periods | |||
beginning on or after | ||||
| Presentation of financial statements | January 1, | ||
| ||||
IAS 23 (Revised) | Borrowing costs | January 1, | ||
| ||||
IFRS 8 | Operating segments | January 1, |
F-46
F-47
32 | ||
In addition, the Hong Kong Companies (Amendment) Ordinance 2005 came into effect on December 1, 2005 that would apply to the Company’s financial statements for the period beginning September 1, 2006.
The Company is in the processConsolidated balance sheet as of making an assessment of the impact of these amendments, new standards and new Interpretations described above and so far it has concluded that the adoption of these amendments, standards and interpretations is unlikely to have a significant impact on the Company’s results of operations and financial position.
(ii) U.S. GAAP
The following are accounting standards recently issued in the United States which will be effective in the Company’s annual reporting period ending August 31, 2007:
FASB Interpretation No. 48 (“FIN 48”)
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statements No. 109, which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. FIN 48 will be effective for the accounting period from September 1, 2007. Management does not expect the adoption of this interpretation to have a material effect on the Company’s consolidated financial statements.
EITF Issue No. 04-13 (“EITF 04-13”)
In September 2005, the Emerging Issue Task Force issued EITF Issue No. 04-13 Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF 04-13 provides guidance as to when purchases and sales of inventory with the same counterparty should be accounted for as a single exchange transaction. EITF 04-13 also provides guidance as to when a nonmonetary exchange of inventory should be accounted for at fair value.
Statement of Financial Accounting Standards No. 157 (“FAS 157”)
In September 2006, the FASB issued FAS 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for the accounting period from September 1, 2008. The Company is in the process of evaluating the impact of this standard.
Staff Accounting Bulletin No. 108 (“SAB No. 108”)
In September 2006, the Securities and Exchange Commission released SAB No. 108 regarding the effects of prior year misstatements in considering current year misstatements for the purpose of a materiality assessment. The opinion in SAB 108 is that in the case of an error that has occurred and been immaterial in a number of previous years, the cumulative effect should be considered in assessing the materiality of the error in the current year. If the cumulative effect of the error is material, then the current year statements, as well as prior year statements should be restated. In the case of restated prior year statements, previously filed reports do not need to be amended, if the error was considered immaterial to previous year’s financial statements. However the statements should be amended the next time they are filed. The effects of this guidance should be applied cumulatively to fiscal years ending August 31, 2007. Additional disclosure should be made regarding any cumulative adjustments made in the current year financial statements. The Company does not believe the adoption of this SAB will have significant impact on the Company’s consolidated financial statements.
EITF 04-13 will be applied to new arrangements entered into, and modifications or renewals of existing arrangements occurring after September 1, 2006. The application of EITF 04-13 is not expected to have a significant impact on the Company’s consolidated financial statements.
30 Summary of significant differences between Hong Kong GAAP and U.S. GAAP
The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable in Hong Kong (“HK GAAP”), which differ in certain significant respects from accounting principles generally accepted in the United States (“U.S. GAAP”). The following are significant differences between HK GAAP and U.S. GAAP which pertain to the Company.
Net income/(loss)
Year ended August 31, | |||||||||||
Note | 2004 | 2005 | 2006 | ||||||||
HK$’000 | HK$’000 | HK$’000 | |||||||||
Net income/(loss) As stated under Hong Kong GAAP (2004 and 2005: as restated)(note 3) | 49,463 | (163,496 | ) | (142,062 | ) | ||||||
U.S. GAAP adjustments: — | |||||||||||
Share-based compensation under intrinsic value method | (a | ) | 270 | 389 | — | ||||||
Reversal of retrospective HK GAAP adjustment in respect of share-based compensation | (a | ) | 87 | 6,965 | — | ||||||
Reversal of amortization of goodwill (acquired after June 30, 2001) | (b | ) | 1,065 | 1,065 | — | ||||||
Fair value of interest rate swap | (c | ) | 680 | 1,890 | — | ||||||
Fair value of foreign forward exchange contracts | (c | ) | — | 4,039 | — | ||||||
Tax effects of U.S. GAAP adjustments | (d | ) | — | — | — | ||||||
Net income/(loss) under U.S. GAAP | 51,565 | (149,148 | ) | (142,062 | ) | ||||||
Basic weighted average common shares issued and outstanding (in 000’s) | 610,095 | 613,525 | 614,134 | ||||||||
Incremental shares from assumed exercise of share options (in 000’s) | 604 | — | — | ||||||||
Incremental shares from assumed exercise of warrants (in 000’s) | 3,666 | — | — | ||||||||
Diluted weighted average common and potential shares issued and outstanding (in 000’s) | 614,365 | 613,525 | 614,134 | ||||||||
Earnings/(loss) per share under U.S. GAAP (note A) | |||||||||||
Basic | HK8.5 cents | HK(24.3) cents | HK(23.1) cents | ||||||||
Diluted | HK8.4 cents | HK(24.3) cents | HK(23.1) cents | ||||||||
Total shareholders’ equity
August 31, | ||||||||||||
Note | 2004 | 2005 | 2006 | |||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Total shareholders’ equity | ||||||||||||
As stated under Hong Kong GAAP(2004 and 2005: as restated)(note 3) | 1,175,698 | 1,020,454 | 891,654 | |||||||||
U.S. GAAP adjustments: | ||||||||||||
Goodwill | (b | ) | 5,092 | 5,092 | 5,092 | |||||||
Accumulated amortization of goodwill | (b | ) | (3,735 | ) | (3,735 | ) | (3,735 | ) | ||||
Reversal of amortization of goodwill | (b | ) | 3,195 | 4,260 | 4,260 | |||||||
Fair value of interest rate swap | (c | ) | 680 | 2,570 | — | |||||||
Fair value of forward foreign exchange contracts | (c | ) | — | 4,039 | — | |||||||
Tax effects of U.S. GAAP adjustments | (d | ) | — | — | — | |||||||
Total shareholders’ equity under U.S. GAAP | 1,180,930 | 1,032,680 | 897,271 | |||||||||
Condensed consolidated statements of income
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Revenue, net | 1,169,880 | 1,162,059 | 1,134,876 | ||||||
�� | |||||||||
Operating expenses: | |||||||||
Network costs | (499,519 | ) | (550,029 | ) | (554,136 | ) | |||
Sales and marketing expenses | (228,169 | ) | (267,423 | ) | (204,952 | ) | |||
General and administrative expenses | (384,008 | ) | (436,117 | ) | (443,850 | ) | |||
Bad debt expense | (11,502 | ) | (35,445 | ) | (17,450 | ) | |||
Income/(loss) from operations | 46,682 | (126,955 | ) | (85,512 | ) | ||||
Interest income | 3,753 | 13,578 | 20,378 | ||||||
Interest expense | (175 | ) | (54,462 | ) | (88,637 | ) | |||
Other income, net | 3,348 | 11,966 | 4,465 | ||||||
Income/(loss) before income taxes | 53,608 | (155,873 | ) | (149,306 | ) | ||||
Income tax (expense)/credit | (2,043 | ) | 6,725 | 7,244 | |||||
Net income/(loss) | 51,565 | (149,148 | ) | (142,062 | ) | ||||
Statement of changes in shareholders’ equity
Ordinary shares | Additional paid-in capital | ||||||||||||||||||||
Number of shares outstanding | Amount outstanding | Share premium | Warrant reserve | Cumulative foreign currency translation adjustment | Capital reserve | Retained profits | Total shareholders’ equity | ||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||||
Balance at August 31, 2003 | 604,959,787 | 60,496 | 615,886 | 858 | 1,231 | 28,474 | 475,717 | 1,182,662 | |||||||||||||
Shares issued upon exercise of share options | 640,000 | 64 | 115 | — | — | — | — | 179 | |||||||||||||
Compensation cost for share options | — | — | — | — | — | (270 | ) | — | (270 | ) | |||||||||||
Shares issued upon exercise of warrants | 4,973,574 | 497 | 1,985 | (493 | ) | — | — | — | 1,989 | ||||||||||||
2003 final dividend declared and paid (note 21) | — | — | — | — | — | — | (45,789 | ) | (45,789 | ) | |||||||||||
2004 interim dividend declared and paid (note 21) | — | — | — | — | — | — | (9,158 | ) | (9,158 | ) | |||||||||||
Net income | — | — | — | — | — | — | 51,565 | 51,565 | |||||||||||||
Foreign currency translation adjustments | — | — | — | — | (248 | ) | — | — | (248 | ) | |||||||||||
Balance at August 31, 2004 | 610,573,361 | 61,057 | 617,986 | 365 | 983 | 28,204 | 472,335 | 1,180,930 | |||||||||||||
Shares issued upon exercise of share options | 52,000 | 5 | 25 | — | — | — | — | 30 | |||||||||||||
Compensation cost for outstanding share options | — | — | — | — | — | (389 | ) | — | (389 | ) | |||||||||||
Realization of outstanding warrant reserve upon warrant expiration | — | — | — | (18 | ) | — | — | 18 | — | ||||||||||||
Shares issued upon exercise of warrants | 3,500,043 | 350 | 1,397 | (347 | ) | — | — | — | 1,400 | ||||||||||||
Net loss | — | — | — | — | — | — | (149,148 | ) | (149,148 | ) | |||||||||||
Foreign currency translation adjustments | — | — | — | — | (143 | ) | — | — | (143 | ) | |||||||||||
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 outstanding share options | — | — | 251 | — | — | 6,572 | — | 6,823 | |||||||||||||
Net loss | — | — | — | — | — | — | (142,062 | ) | (142,062 | ) | |||||||||||
Foreign currency translation adjustments | — | — | — | — | (183 | ) | — | — | (183 | ) | |||||||||||
Balance at August 31,2006 | 614,175,404 | 61,417 | 619,667 | — | 657 | 34,387 | 181,143 | 897,271 | |||||||||||||
Comprehensive (loss)/income
The comprehensive income/(loss) of the Company, determined in accordance with SFAS No. 130 “Reporting Comprehensive Income”, is set out as follows:
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Net income/ (loss) under U.S. GAAP | 51,565 | (149,148 | ) | (142,062 | ) | ||||
Foreign currency translation adjustments | (248 | ) | (143 | ) | (183 | ) | |||
Comprehensive income/ (loss) | 51,317 | (149,291 | ) | (142,245 | ) | ||||
No deferred tax assets were recognized because the Company expects that the reported amount of the investment in subsidiaries can be recovered tax-free under HK tax laws.
Condensed consolidated statements of cash flows
Under Hong Kong GAAP, 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 HK GAAP, 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 US GAAP is as follows:
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
HK$’000 | HK$’000 | HK$’000 | |||||||
Net cash provided by operating activities | 207,516 | 90,984 | 204,583 | ||||||
Net cash used in investing activities | (409,997 | ) | (571,018 | ) | (513,120 | ) | |||
Net cash provided by (used in) financing activities | 48,217 | 773,023 | (86,486 | ) | |||||
(Decrease)/increase in cash and cash equivalents | (154,264 | ) | 292,989 | (395,023 | ) | ||||
Cash and cash equivalents at the beginning of year | 402,034 | 247,517 | 539,591 | ||||||
Effect of foreign exchange rate changes | (253 | ) | (915 | ) | 349 | ||||
Cash and cash equivalents at the end of year | 247,517 | 539,591 | 144,917 | ||||||
(a) Share-based compensation
Under HKGAAP, prior to HKFRS 2 “Share-based payment” became effective for the financial year beginning on September 1, 2005, no staff compensation cost was required to be recognized in respect of the grant of share options. Proceeds from issue of shares upon the exercise of share options were credited to share capital and share premium accounts respectively at the time of exercise of the options. With effect from September 1, 2005, in order to comply with HKFRS 2, the Company recognizes the fair value of share options, which is measured at the date of grant, as compensation expense in profit or loss, or an asset, if the cost qualifies for recognition as an asset. A corresponding increase is recognized in capital reserve within equity. The new accounting policy has been applied retrospectively with comparatives restated in accordance with HKFRS 2. The impact of the restatement for the years ended August 31, 2004 and 2005 was HK$87,000 and HK$6,965,000, respectively. Any expense recognized based on fair value of share options under HK GAAP for the years ended on or prior to August 31, 2005 is reversed under U.S. GAAP.
Under U.S. GAAP, for periods ended on or prior to August 31, 2005, the Company applied the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations to account for share options. Under APB 25, share-based compensation was recorded on the date of grant only if the then market price of the underlying stock exceeded the exercise price.
For the years ended August 31, 2004 and 2005, under U.S. GAAP, the Company recognized share-based compensation expenses of HK$270,000 and HK$389,000, respectively, because options were granted where the then market price of the
underlying ordinary share exceeded the exercise price of the share options as described in the following. On June 3, 2004, the Company issued 6,000,000 options to an employee at an exercise price of at HK$1.47. The market value of the ordinary shares on June 3, 2004 was HK$1.51. The difference of HK$0.04 per share between the exercise price and the market value of the ordinary shares was recognized in the statements of operations over the vesting period. On October 21, 2004, the Company issued 14,670,000 share options to employees at an exercise price of HK$1.54 each. The market value of the ordinary shares on October 21, 2004 was HK$1.49. The difference of HK$0.05 between the exercise price and the market value of the ordinary shares was recognized in the statements of earnings over the vesting period. On January 4, 2005, the Company issued 16,000,000 share options to certain directors of the Company at an exercise price of HK$1.54 each. The market value of the ordinary shares of the Company was HK$1.48. The difference of HK$0.06 between the exercise price and the market value of the ordinary shares was recognized in the statements of earnings over the vesting period.
On September 1, 2005, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004) (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes APB 25. Under SFAS No. 123(R), the Company is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize the cost over the period during which an employee is required to provide service in exchange for the award. In applying the transition provisions of SFAS No. 123, the Company used the modified prospective method in which the grant-date fair values of unvested awards that are outstanding on the date of adoption are charged to expense over their remaining vesting periods.
As a result of the adoption of HKFRS 2 and SFAS No. 123(R) on September 1, 2005, there was no difference arising from the recognition of share-based compensation because there was no difference in the results of applying the transitional provisions under HK GAAP and U.S. GAAP and the methods used to determined the share-based compensation were the same under HK GAAP and U.S. GAAP.
The following table illustrates the pro forma effect on net income if the fair-value-based method under SFAS No.123 had been applied to all outstanding and unvested share options for the years ended August 31, 2004 and 2005:
Year ended August 31 | ||||||
2004 | 2005 | |||||
HK$’000 | HK$’000 | |||||
Net income/(loss) | ||||||
As reported | 51,565 | (149,148 | ) | |||
Less: total share-based compensation expense determined under intrinsic value method for all awards | (270 | ) | (389 | ) | ||
Less: total share-based compensation expense determined under fair value method for all awards, net of tax | (1,904 | ) | (20,547 | ) | ||
49,391 | (170,084 | ) | ||||
Basic earnings/(loss) per share | ||||||
As reported | HK8.5 cents | HK(24.3) cents | ||||
Pro forma | HK8.1 cents | HK(27.7) cents | ||||
Diluted earnings/(loss) per share As reported | HK8.4 cents | HK(24.3) cents | ||||
Pro forma | HK8.0 cents | HK(27.7) cents |
The weighted average fair value of share options at the date of grant were HK$0.7 and HK$0.82 per option for the years ended August 31, 2004 and 2005, respectively. The values were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
Year ended August 31, | ||||||
Weighted average | 2004 | 2005 | ||||
Risk-free interest rates | 3.78 | % | 2.7 | % | ||
Dividend yield | 1.02 | % | 1.01 | % | ||
Volatility factor of the expected market price of the Company’s shares | 59.04 | % | 70.66 | % | ||
Expected life of the options | 5 years | 5 years |
(b) Goodwill
Under HKGAAP, prior to September 1, 2001, goodwill arising on acquisition of a business which represents the excess of the cost of investment over the fair value ascribed to the identifiable net underlying assets acquired is charged against available reserves. In January 2001, HKICPA issued the Statement of Standard Accounting Practice (“SSAP”) No. 30 “Business Combinations” which applies to intangible assets acquired in business combinations for which the agreement date is on or after September 1, 2001. As a result of the adoption of this standard in fiscal 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. (see note 1(c) of the notes to the consolidated financial statements). Where an indication of impairment exists, the carrying amount of goodwill, including goodwill previously written off against reserves, is assessed and written down immediately to its recoverable amount with the charges being recorded in the Company’s statement of operations.
On September 1, 2005, the Company adopted HKFRS 3 “Business Combinations” under which goodwill is recorded at cost less any accumulated impairment losses and goodwill is no longer amortized but subject to an annual test for impairment, including in the year of its initial recognition, as well as when there are indications of impairment. Impairment losses are 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 business combinations is not amortized and is instead 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 of the Company pertaining to goodwill for the year ended August 31, 2006.
(c) Derivative Instruments
Under HKGAAP, prior to September 1, 2005, derivative financial instruments entered into by the Company to hedge the interest rate risk of a recognized asset or liability or the foreign currency risk of a committed future transaction were recognized on an accrual basis with reference to the timing of the recognition of the hedged transaction.
With effect from September 1, 2005, and in accordance with HKAS 39, all derivative financial instruments entered into by the Company are stated at fair value. Changes in the fair value of derivatives held as hedging instruments in a cash flow hedge are recognized in equity to the extent that the hedge is effective and until the hedged transaction occurs. Any changes in fair value of derivative financial instruments which do not qualify as cash flow hedges are recognized in the statement of operations. The adoption of HKAS 39 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, the Company follows SFAS No. 133 “Accounting for Derivative Instruments and Hedge Activities”, as amended by SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, which requires all derivative instruments be recognized on the balance sheet at fair value. The accounting for changes in fair value depends on whether the derivative instrument qualifies as a hedge. Gains or losses on a derivative instrument designated and qualifying as a fair value hedge as well as the offsetting loss or gain on the hedged item attributable to the hedged risk shall be recognized currently in statement of operations. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument shall be reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged forecasted transaction impacts earnings. The ineffective portion of gain or loss on the derivative instrument, if any, shall be recognized currently in earnings. For derivative that does not qualify as a hedge, the gain or loss reflecting changes in fair value is recognized in earnings. As of the periods presented, none of the financial derivatives of the Company qualified as hedges.
As a result of the adoption of HKAS 39, there were no reconciling differences as of and for the year ended August 31, 2006.
(d) Deferred taxes
Under HK GAAP, 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 Company is required to recognize deferred tax assets and liabilities for the expected future tax consequences of all events that have been included in the account 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 losses carry forward 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 Company will not be able to utilize such benefits in the future.
There was no differences in the amount of deferred tax assets recognized under HK GAAP and U.S. GAAP. For the years ended August 31, 2004 and 2005, 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 statement disclosures are required under U.S. GAAP and are presented on a U.S. GAAP basis.
Year ended August 31, | ||||||
2005 | 2006 | |||||
(restated) | ||||||
HK$’000 | HK$’000 | |||||
Deferred tax assets: | ||||||
Tax losses | 177,827 | 204,300 | ||||
Share-based payment | — | 2,429 | ||||
Total gross deferred tax assets | 177,827 | 206,729 | ||||
Valuation allowance | (29,804 | ) | (52,404 | ) | ||
Net deferred tax assets | 148,023 | 154,325 | ||||
Deferred tax liabilities | ||||||
Accelerated depreciation allowance | (158,477 | ) | (154,678 | ) | ||
Others | (85 | ) | — | |||
Total gross deferred tax liabilities | (158,562 | ) | (154,678 | ) | ||
Net deferred tax liabilities | (10,539 | ) | (353 | ) | ||
The tax effect on the accumulated tax losses amounted to HK$204,300,000 (2005: HK$177,827,000). Realization of deferred tax assets associated with tax loss carry forwards is dependent upon generating sufficient taxable income. As of August 31, 2006, a valuation allowance of HK$52,404,000 (2005: HK$29,804,000) has been provided for against the remaining deferred tax assets since management believes it is more likely than not the Company will not be able to utilize such benefits in the foreseeable future.
Changes in the valuation allowance consist of:
Year ended August 31, | |||||||
2004 | 2005 | 2006 | |||||
HK$’000 | HK$’000 | HK$’000 | |||||
Balance at beginning of the year | 15,171 | 7,633 | 29,804 | ||||
(Reduction)/additions to income tax expense | (7,538 | ) | 22,171 | 22,600 | |||
Balance at end of the year | 7,633 | 29,804 | 52,404 | ||||
(e) Investment securities
The Company’s investment securities consist of debt securities and long-term bank deposit.
Under HK GAAP, prior to September 1, 2005, the debt securities had been carried at fair value with changes in fair value recognized in profit or loss. On September 1, 2005, upon adoption of HKAS 39, the Company designated the debt securities as a financial asset carried at fair value with changes in fair value charged to the profit or loss. Since the debt securities continue to be carried at fair value with changes in fair changes charged to profit or loss, there was no change in the accounting of the debt securities under HK GAAP. The adoption of HKAS 39 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, investment securities should be classified in one of three categories: trading, available-for-sale, or held-to-maturity, under SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. Given the Company has positive intent and the ability to hold the securities to maturity, the debt securities have been accounted for as held-to-maturity securities under U.S. GAAP and are recorded at amortized cost. For the periods presented, there were not differences between the fair value and the amortized cost of the debt securities.
(f) Deposits for purchase of fixed assets and lease of land and building
Under HK GAAP, 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 at August 31, 2005 and 2006, the deposits for purchase of fixed assets and lease of land and building totaling HK$25,356,000 and HK$17,873,000, respectively.
(g) Debt issue costs
Under HK GAAP, debt issue costs are shown as a reduction in the associated capital proceeds and amortized over the life of the related debt using effective interest method. Under U.S. GAAP, these costs are disclosed separately as non-current asset and are similarly amortized. As at August 31, 2005 and 2006, the unamortized debt issue costs were HK$25,902,000 and HK$24,473,000, respectively.
31 Supplemental Guarantors Consolidated Financial Information
The senior notes mentioned above in note 14(b) are irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).
The condensed consolidated financial information is presented below and should be read in connection with the consolidated financial statements of City Telecom (H.K.) Limited prepared under HK GAAP. Separate financial statements of the Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries are wholly-owned and will fully and unconditionally guarantee to the Notes on a joint and several basis. Reconciliations to U.S. GAAP are not presented because the majority of the reconciling items relate to City Telecom (H.K.) Limited and Guarantor Subsidiaries and such reconciling items are already disclosed and explained in Note 30.
The following condensed consolidated financial information presents the condensed consolidated balance sheets as of August 31, 2006 and 2005 and the related condensed consolidated statements of operations and statements of cash flows for the years ended August 31 2006, 2005 and 2004 of (a) City Telecom (H.K.) Limited, the parent; (b) the Guarantor Subsidiaries on a combined basis; (c) the Non-guarantor Subsidiary; (d) eliminating entries; and (e) the total consolidated amounts.
Condensed Consolidated Balance Sheet as of August 31, 2006
City Telecom (H.K.) | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | ||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||
Current assets | ||||||||||||
Cash and bank balances | 86,670 | 31,349 | 26,898 | 144,917 | ||||||||
Term deposits | 121,037 | 65,000 | 51,459 | 237,496 | ||||||||
Pledged bank deposits | 87,022 | — | — | 87,022 | ||||||||
Trade receivables, net | 12,506 | 128,092 | — | 140,598 | ||||||||
Other receivables, deposits and prepayments | 5,210 | 73,785 | 2,292 | (3,704 | ) | 77,583 | ||||||
Inventories | 812 | 44 | — | 856 | ||||||||
Deferred expenditures | — | 10,808 | — | 10,808 | ||||||||
Tax recoverable | — | 347 | — | 347 | ||||||||
Total current assets | 313,257 | 309,425 | 80,649 | 699,627 | ||||||||
Fixed assets, net | 115,014 | 1,236,269 | 15,951 | 1,367,234 | ||||||||
Investments in subsidiaries(1) | 1,502,480 | 245,819 | — | (1,748,299 | ) | — | ||||||
Investment securities | 36,645 | 3,629 | — | 40,274 | ||||||||
Other long-term assets | — | 37,609 | — | (20,529 | ) | 17,080 | ||||||
Total assets | 1,967,396 | 1,832,751 | 96,600 | 2,124,215 | ||||||||
Current liabilities | ||||||||||||
Amounts due to subsidiaries/fellow subsidiaries | 10,830 | 1,428,297 | 75,315 | (1,514,442 | ) | — | ||||||
Trade payables | 59,143 | 27,242 | — | 86,385 | ||||||||
Deposits received | 8,283 | 7,947 | — | 16,230 | ||||||||
Current portion of deferred service income | 8,157 | 29,282 | — | (3,696 | ) | 33,743 | ||||||
Other payables and accrued charges | 19,116 | 117,734 | 6,636 | 143,486 | ||||||||
Income tax payable | 908 | 18 | 1,038 | 1,964 | ||||||||
Current portion of obligations under finance leases | 71 | 1,226 | — | 1,297 | ||||||||
Total current liabilities | 106,508 | 1,611,746 | 82,989 | 283,105 | ||||||||
Long-term liabilities | 969,891 | 1,166 | (56 | ) | (21,545 | ) | 949,456 | |||||
Total liabilities | 1,076,399 | 1,612,912 | 82,933 | 1,232,561 |
Commitments and contingencies Shareholders’ equity Ordinary shares, par value $0.1 per share — 2,000,000,000 shares authorized at August 31, 2006 — 614,175,404 shares issued and outstanding at August 31, 2006 Share premium Retained profits/(accumulated losses) Other reserves Total shareholders’ equity Total liabilities and shareholders’ equity 61,417 15,485 8,131 (23,616 ) 61,417 620,298 470,836 — (470,836 ) 620,298 196,289 (266,477 ) 5,217 261,261 196,289 12,993 (5 ) 319 343 13,650 890,997 219,839 13,667 891,654 1,967,396 1,832,751 96,600 2,124,215
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’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 | 119,419 | 74,197 | 27,436 | 221,052 | ||||||||||||||||
147,070 | 289,427 | 29,928 | 462,721 | |||||||||||||||||
Current liabilities | ||||||||||||||||||||
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 | ||||||||||||||||
74,127 | 1,212,115 | 15,849 | 377,692 | |||||||||||||||||
Net current assets/ (liabilities) | 72,943 | (922,688 | ) | 14,079 | 85,029 | |||||||||||||||
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-48
Condensed Consolidated Balance Sheet as of August 31, 2005
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | ||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||
Current assets | ||||||||||||
Cash and bank balances | 461,001 | 55,309 | 23,281 | 539,591 | ||||||||
Term deposit | 92,850 | — | — | 92,850 | ||||||||
Pledged bank deposits | 85,923 | 4,524 | — | 90,447 | ||||||||
Trade receivables, net | 15,253 | 114,757 | — | 130,010 | ||||||||
Other receivables, deposits and prepayments | 8,395 | 67,171 | 6,896 | (3,704 | ) | 78,758 | ||||||
Inventories | 1,581 | 385 | — | (9 | ) | 1,957 | ||||||
Deferred expenditures | — | 12,960 | — | 12,960 | ||||||||
Tax recoverable | — | 535 | — | 535 | ||||||||
Total current assets | 665,003 | 255,641 | 30,177 | 947,108 | ||||||||
Fixed assets, net | 133,328 | 1,185,970 | 17,245 | 1,336,543 | ||||||||
Investments in subsidiaries(1) | 1,277,479 | 250,113 | — | (1,527,592 | ) | — | ||||||
Investment securities | 37,855 | 3,586 | — | 41,441 | ||||||||
Other long-term assets | — | 46,569 | — | (24,233 | ) | 22,336 | ||||||
Total assets | 2,113,665 | 1,741,879 | 47,422 | 2,347,428 | ||||||||
Current liabilities | ||||||||||||
Amounts due to subsidiaries/fellow subsidiaries | 10,830 | 1,151,379 | 23,662 | (1,185,871 | ) | — | ||||||
Trade payables | 58,728 | 32,034 | — | 90,762 | ||||||||
Deposits received | 8,770 | 6,740 | — | 15,510 | ||||||||
Current portion of deferred service income | 11,254 | 29,195 | — | (3,705 | ) | 36,744 | ||||||
Other payables and accrued charges | 22,343 | 185,678 | 14,992 | 195 | 223,208 | |||||||
Income tax payable | 1,481 | 17 | 230 | 1,728 | ||||||||
Current portion of obligation under finance leases | — | 1,194 | — | 1,194 | ||||||||
Total current liabilities | 113,406 | 1,406,237 | 38,884 | 369,146 | ||||||||
Long-term liabilities | 980,645 | 2,404 | 84 | (25,305 | ) | 957,828 | ||||||
Total liabilities | 1,094,051 | 1,408,641 | 38,968 | 1,326,974 | ||||||||
Commitments and contingencies | ||||||||||||
Shareholders’ equity | ||||||||||||
Ordinary shares, par value $0.1 per share | ||||||||||||
— 2,000,000,000 shares authorized at August 31, 2005 | ||||||||||||
— 614,125,404 shares issued and outstanding at August 31, 2005 | 61,412 | 15,485 | 8,131 | (23,616 | ) | 61,412 | ||||||
Share premium | 619,408 | 470,836 | — | (470,836 | ) | 619,408 | ||||||
Retained profits/(accumulated losses) | 331,742 | (153,183 | ) | 226 | 152,957 | 331,742 | ||||||
Other reserves | 7,052 | 100 | 97 | 643 | 7,892 | |||||||
Total shareholders’ equity | 1,019,614 | 333,238 | 8,454 | 1,020,454 | ||||||||
Total liabilities and shareholders’ equity | 2,113,665 | 1,741,879 | 47,422 | 2,347,428 | ||||||||
Supplemental guarantors consolidated financial information (continued) | ||
Consolidated balance sheet as of August 31, 2008 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Non-current assets | ||||||||||||||||||||
Investments in subsidiaries (note) | 1,499,437 | 260,399 | — | (1,759,836 | ) | — | ||||||||||||||
Goodwill | — | — | — | 1,066 | 1,066 | |||||||||||||||
Fixed assets | 87,483 | 1,135,394 | 8,522 | 1,231,399 | ||||||||||||||||
Long term receivable and prepayment | — | 19,773 | — | (14,187 | ) | 5,586 | ||||||||||||||
Deferred expenditure | — | 15,391 | — | 15,391 | ||||||||||||||||
Deferred tax assets | — | 26,335 | — | 26,335 | ||||||||||||||||
1,586,920 | 1,457,292 | 8,522 | 1,279,777 | |||||||||||||||||
Current assets | ||||||||||||||||||||
Accounts receivable | 11,418 | 128,865 | — | 140,283 | ||||||||||||||||
Other receivables, deposits and prepayments | 3,378 | 80,293 | 2,759 | (3,704 | ) | 82,726 | ||||||||||||||
Deferred expenditure | — | 40,704 | — | 40,704 | ||||||||||||||||
Other financial assets | 27,997 | — | — | 27,997 | ||||||||||||||||
Pledged bank deposits | 87,319 | — | — | 87,319 | ||||||||||||||||
Cash at bank and in hand | 90,386 | 263,386 | 67,838 | 421,610 | ||||||||||||||||
220,498 | 513,248 | 70,597 | 800,639 | |||||||||||||||||
Current liabilities | ||||||||||||||||||||
Amounts due to subsidiaries/ fellow subsidiaries | 10,830 | 1,316,410 | 51,059 | (1,378,299 | ) | — | ||||||||||||||
Accounts payable | 26,440 | 25,884 | — | 52,324 | ||||||||||||||||
Other payables and accrued charges | 17,831 | 149,548 | 10,735 | 178,114 | ||||||||||||||||
Deposits received | 7,943 | 8,321 | — | 16,264 | ||||||||||||||||
Deferred service revenue | 11,172 | 102,678 | — | (3,401 | ) | 110,449 | ||||||||||||||
Tax payable | 356 | 496 | 1,251 | 2,103 | ||||||||||||||||
Current portion — obligation under finance leases | 112 | 9 | — | 121 | ||||||||||||||||
74,684 | 1,603,346 | 63,045 | 359,375 | |||||||||||||||||
Net current assets/ (liabilities) | 145,814 | (1,090,098 | ) | 7,552 | 441,264 | |||||||||||||||
Total assets less current liabilities | 1,732,734 | 367,194 | 16,074 | 1,721,041 | ||||||||||||||||
Non-current liabilities | ||||||||||||||||||||
Deferred tax liabilities | 4,937 | — | — | �� | 4,937 | |||||||||||||||
Long-term deferred service revenue | 14,500 | — | — | (14,500 | ) | — | ||||||||||||||
Long-term debt and other liabilities | 683,480 | 17 | — | 683,497 | ||||||||||||||||
702,917 | 17 | — | 688,434 | |||||||||||||||||
Net assets | 1,029,817 | 367,177 | 16,074 | 1,032,607 | ||||||||||||||||
Capital and reserves | ||||||||||||||||||||
Share capital | 65,062 | 15,485 | 8,131 | (23,616 | ) | 65,062 | ||||||||||||||
Reserves | 964,755 | 351,692 | 7,943 | (356,845 | ) | 967,545 | ||||||||||||||
Total equity attributable to equity shareholders of the Company | 1,029,817 | 367,177 | 16,074 | 1,032,607 | ||||||||||||||||
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-49
Condensed Consolidated Statements of operations for the year ended August 31, 2006
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | |||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||
Revenue from provision of telecommunication and related services, net | 174,113 | 1,110,256 | 116,355 | (265,848 | ) | 1,134,876 | |||||||||
Network costs | (87,849 | ) | (254,740 | ) | — | 41,996 | (300,593 | ) | |||||||
Operating expenses: | |||||||||||||||
Salaries and related costs | (44,254 | ) | (233,105 | ) | (81,887 | ) | 102,525 | (256,721 | ) | ||||||
Sales and marketing expenses | (20,567 | ) | (336,985 | ) | — | 152,600 | (204,952 | ) | |||||||
General and administrative expenses | (56,366 | ) | (366,635 | ) | (30,353 | ) | 12,682 | (440,672 | ) | ||||||
Provision for doubtful accounts receivable | (1,090 | ) | (16,360 | ) | — | (17,450 | ) | ||||||||
(Loss)/income from operations | (36,013 | ) | (97,569 | ) | 4,115 | (85,512 | ) | ||||||||
Interest income | 16,594 | 2,946 | 838 | 20,378 | |||||||||||
Interest expenses | (88,584 | ) | (60,454 | ) | — | 60,401 | (88,637 | ) | |||||||
Other income, net | 67,672 | 39,201 | 2,245 | (104,653 | ) | 4,465 | |||||||||
Share of net losses from subsidiaries(2) | (111,171 | ) | — | 111,171 | — | ||||||||||
(Loss)/income before taxation | (151,502 | ) | (115,876 | ) | 7,198 | (149,306 | ) | ||||||||
Income tax expense/(credit) | 9,440 | 11 | (2,207 | ) | 7,244 | ||||||||||
Net (loss)/income | (142,062 | ) | (115,865 | ) | 4,991 | (142,062 | ) | ||||||||
Supplemental guarantors consolidated financial information (continued) | ||
Consolidated income statement for the year ended August 31, 2009 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | Total | ||||||||||||||||
HK$’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 revenues | 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 |
Condensed Consolidated Statements of operations for the year ended August 31, 2005
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | |||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||
(restated) | (restated) | (restated) | |||||||||||||
Revenue from provision of telecommunication and related services, net | 227,045 | 1,104,389 | 122,054 | (291,429 | ) | 1,162,059 | |||||||||
Network costs | (111,836 | ) | (271,203 | ) | — | 43,637 | (339,402 | ) | |||||||
Operating expenses: | |||||||||||||||
Salaries and related costs | (50,705 | ) | (224,799 | ) | (94,120 | ) | 110,232 | (259,392 | ) | ||||||
Sales and marketing expenses | (25,506 | ) | (416,728 | ) | — | 174,251 | (267,983 | ) | |||||||
General and administrative expenses | (65,552 | ) | (316,284 | ) | (26,132 | ) | 12,757 | (395,211 | ) | ||||||
Provision for doubtful accounts receivable | (1,814 | ) | (33,631 | ) | (35,445 | ) | |||||||||
(Loss)/income from operations | (28,368 | ) | (158,256 | ) | 1,802 | (135,374 | ) | ||||||||
Interest income | 13,061 | 403 | 114 | 13,578 | |||||||||||
Interest expenses | (54,167 | ) | (17,354 | ) | — | 17,059 | (54,462 | ) | |||||||
Other income, net | 25,617 | 43,515 | 99 | (63,194 | ) | 6,037 | |||||||||
Share of net losses from subsidiaries(2) | (128,156 | ) | — | 128,156 | — | ||||||||||
(Loss)/income before taxation | (172,013 | ) | (131,692 | ) | 2,015 | (170,221 | ) | ||||||||
Income tax expense/(credit) | 8,517 | (854 | ) | (938 | ) | 6,725 | |||||||||
Net (loss)/income | (163,496 | ) | (132,546 | ) | 1,077 | (163,496 | ) | ||||||||
Consolidated income statement for the year ended August 31, 2008 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | Total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
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 revenues | 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 |
F-50
Condensed Consolidated Statements of operations for the year ended August 31, 2004
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | |||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||
(restated) | (restated) | (restated) | |||||||||||||
Revenue from provision of telecommunication and related services, net | 260,675 | 1,081,591 | 113,953 | (286,339 | ) | 1,169,880 | |||||||||
Network costs | (90,520 | ) | (282,282 | ) | — | 41,394 | (331,408 | ) | |||||||
Operating expenses | |||||||||||||||
Salaries and related costs | (49,454 | ) | (191,751 | ) | (86,544 | ) | 101,012 | (226,737 | ) | ||||||
Sales and marketing expenses | (53,251 | ) | (351,518 | ) | — | 176,600 | (228,169 | ) | |||||||
General and administrative expenses | (71,124 | ) | (240,874 | ) | (23,342 | ) | 8,536 | (326,804 | ) | ||||||
Provision for doubtful accounts receivable | (1,683 | ) | (9,819 | ) | — | (11,502 | ) | ||||||||
(Loss)/income from operations | (5,357 | ) | 5,347 | 4,067 | 45,260 | ||||||||||
Interest income | 3,580 | 135 | 38 | 3,753 | |||||||||||
Interest expenses | (175 | ) | — | — | (175 | ) | |||||||||
Other income, net | 3,516 | 41,038 | 17 | (41,903 | ) | 2,668 | |||||||||
Share of income from subsidiaries(2) | 49,309 | — | — | (49,309 | ) | — | |||||||||
Income before taxation | 50,873 | 46,520 | 4,122 | 51,506 | |||||||||||
Income tax expense | (1,410 | ) | (464 | ) | (169 | ) | (2,043 | ) | |||||||
Net income | 49,463 | 46,056 | 3,953 | 49,463 | |||||||||||
Supplemental guarantors consolidated financial information (continued) |
Condensed Consolidated Statement of Cash Flow for the Year Ended August 31, 2006
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminating Entries | Consolidated Total | |||||||||||
HK$’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 cash equivalents | (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 years | 86,670 | 31,349 | 26,898 | 144,917 | |||||||||||
Condensed Consolidated Statement of Cash Flow for the Year Ended August 31, 2005
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminating Entries | Consolidated Total | |||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||
(restated) | (restated) | (restated) | |||||||||||||
Net cash (used in)/provided by operating activities(3) | (75,334 | ) | 135,503 | 23,094 | (5,880 | ) | 77,383 | ||||||||
Net cash used in investing activities(3) | (536,911 | ) | (497,143 | ) | (5,786 | ) | 482,400 | (557,440 | ) | ||||||
Net cash provided by financing activities | 892,713 | 381,903 | — | (482,400 | ) | 792,216 | |||||||||
Net increase in cash and bank balances | 280,468 | 20,263 | 17,308 | 312,159 | |||||||||||
Cash and bank balances at beginning of year | 180,473 | 41,691 | 6,183 | 228,347 | |||||||||||
Effects of foreign exchange rates changes | 60 | (405 | ) | (210 | ) | (360 | ) | (915 | ) | ||||||
Cash and cash equivalents at end of years | 461,001 | 61,549 | 23,281 | 539,591 | |||||||||||
Condensed consolidated cash |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Net cash inflow/(outflow) from operating activities | 487,691 | 87,358 | (38,930 | ) | (233 | ) | 535,886 | |||||||||||||
Net cash inflow/(outflow) from investing activities | 101,605 | (276,843 | ) | (1,250 | ) | (176,488 | ) | |||||||||||||
Net cash outflow from financing activities | (560,397 | ) | (10 | ) | — | (560,407 | ) | |||||||||||||
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 | ||||||||||||||||
Condensed consolidated cash flow statement for the |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Net cash inflow from operating activities | 193,028 | 125,511 | 59,866 | 158 | 378,563 | |||||||||||||||
Net cash inflow/(outflow) from investing activities | 18,775 | (164,222 | ) | (2,303 | ) | (147,750 | ) | |||||||||||||
Net cash outflow from financing activities | (341,813 | ) | (737 | ) | — | (342,550 | ) | |||||||||||||
(Decrease)/increase in cash at bank and in hand | (130,010 | ) | (39,448 | ) | 57,563 | (111,737 | ) | |||||||||||||
Cash at bank and in hand at September 1, 2007 | 220,531 | 303,227 | 9,136 | 532,894 | ||||||||||||||||
Effects of foreign exchange rates changes | (135 | ) | (393 | ) | 1,139 | (158 | ) | 453 | ||||||||||||
Cash at bank and in hand at August 31, 2008 | 90,386 | 263,386 | 67,838 | 421,610 | ||||||||||||||||
F-51
Condensed Consolidated Statement of Cash Flow for the Year Ended August 31, 2004
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | |||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||
(restated) | (restated) | (restated) | |||||||||||||
Net cash (used in)/provided by operating activities | (47,586 | ) | 237,247 | 13,476 | 626 | 203,763 | |||||||||
Net cash used in investing activities | (71,625 | ) | (374,577 | ) | (9,622 | ) | 49,580 | (406,244 | ) | ||||||
Net cash (used in)/provided by financing activities | (52,779 | ) | 150,000 | — | (50,000 | ) | 47,221 | ||||||||
Net (decrease)/increase in cash and cash equivalents | (171,990 | ) | 12,670 | 3,854 | (155,260 | ) | |||||||||
Cash and cash equivalents at beginning of year | 352,512 | 29,317 | 2,031 | 383,860 | |||||||||||
Effects of foreign exchange rates changes | (49 | ) | (296 | ) | 298 | (206 | ) | (253 | ) | ||||||
Cash and cash equivalents at end of year | 180,473 | 41,691 | 6,183 | 228,347 | |||||||||||
/s/ Yeung Chu Kwong, WilliamCITY TELECOM (H.K.) LIMITED By: Name: Yeung Chu Kwong, William Title: Chief Executive Officer By: /s/ Lai Ni Quiaque Name: Lai Ni Quiaque Title: Chief Financial Officer January 26, 2007December 18, 2009