Tower 1, Metroplaza or common stock as at the close of the period covered by the annual report:650,621,823 Ordinary Shares, par value HK$0.10 per share International Financial Reporting Standards as issued by the International Accounting Standards Board o Other þ
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 For the fiscal year ended August 31, 2006or¨For the fiscal year ended August 31, 2008 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromoror¨For the transition period fromor o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report
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
Telephone : (852) 3145 6068
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
NoneAugust 31, 2006: 614,175,404¨þ No x¨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 xxþ Noo¨(Circle(Check one):¨ Accelerated Filer o¨ Non-accelerated filer xþ¨ Item 18 xþ
• | “Hong Kong Companies Ordinance” are references to Chapter 32 of the laws of Hong Kong; | ||
• | “City Telecom” or the “Company” are references to City Telecom (H.K.) Limited; | ||
• | “fiscal year” or “fiscal” are references to the Company’s fiscal year ended August 31 for the year referenced; | ||
• | “FTNS Licenses” are references to fixed telecommunications network services licenses; | ||
• | “GPON” are references to our Gigabit Passive Optical Network; | ||
• | “HKBN” are references to Hong Kong Broadband Network Limited; | ||
• | “HKFRS” are references to Hong Kong Financial Reporting Standards; | ||
• | “IP-TV services” are references to pay-television services through Internet Protocol; | ||
• | “PNETS Licenses” are references to public non-exclusive telecommunications service licenses; | ||
• | “VoIP” are references to Voice over Internet Protocol. |
• | technology changes; | ||
• | changes in the regulatory environment in which we operate, including changes in rules and policies promulgated by regulatory agencies from time to time; | ||
• | the increasing competition in the local or international telecommunications, Internet access, local VoIP or pay-television markets; | ||
• | the benefits we expect to derive from our Next Generation Network, which consists of our Metro Ethernet Network and our newly-deployed GPON, in which we have been making significant capital investments; | ||
• | our ability to maintain growth and successfully introduce new products and services; | ||
• | the continued development and stability of our technological infrastructure platform through which our local and international telecommunications, Internet access, local VoIP and IP-TV services are offered; and | ||
• | changes in local and global economic and financial environment. |
When considering such forward-looking statements, you should keep in mind the factors described in Item 3 “Key Information—Risk Factors” and other cautionary statements appearing in Item 5 “Operating and Financial Review and 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.
1
***********
A. Selected Financial Data |
City Telecom’s Historical Financial Information
As of and for the year ended August 31, | ||||||||||||||||||||||||
2004 | 2005(6) | 2006(6) | 2007 | 2008 | 2008 | |||||||||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||||||||
(Amounts in thousands except per share data) | ||||||||||||||||||||||||
HKFRS | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Fixed telecommunications network services | 541,902 | 629,464 | 716,600 | 816,800 | 1,011,038 | 129,561 | ||||||||||||||||||
International telecommunications services | 627,978 | 532,595 | 418,276 | 324,470 | 291,943 | 37,411 | ||||||||||||||||||
Total operating revenue | 1,169,880 | 1,162,059 | 1,134,876 | 1,141,270 | 1,302,981 | 166,972 | ||||||||||||||||||
Network Costs: | ||||||||||||||||||||||||
Fixed telecommunications network services | (122,476 | ) | (118,383 | ) | (125,639 | ) | (103,795 | ) | (103,524 | ) | (13,266 | ) | ||||||||||||
International telecommunications services | (208,932 | ) | (221,019 | ) | (174,954 | ) | (110,796 | ) | (74,843 | ) | (9,591 | ) | ||||||||||||
Total network costs | (331,408 | ) | (339,402 | ) | (300,593 | ) | (214,591 | ) | (178,367 | ) | (22,857 | ) | ||||||||||||
Other operating expenses | (793,212 | ) | (958,031 | ) | (919,795 | ) | (834,104 | ) | (966,094 | ) | (123,801 | ) | ||||||||||||
Income/(loss) from operations | 45,260 | (135,374 | ) | (85,512 | ) | 92,575 | 158,520 | 20,314 | ||||||||||||||||
Interest income/(expense), net | 3,578 | (40,884 | ) | (68,259 | ) | (64,833 | ) | (59,541 | ) | (7,630 | ) | |||||||||||||
Other income, net | 2,668 | 6,037 | 4,465 | 3,149 | 9,393 | 1,204 | ||||||||||||||||||
Income taxes (expense)/credit | (2,043 | ) | 6,725 | 7,244 | (2,026 | ) | 16,818 | 2,155 | ||||||||||||||||
Net income/(loss) | 49,463 | (163,496 | ) | (142,062 | ) | 28,865 | 125,190 | 16,043 | ||||||||||||||||
Basic earnings/(loss) per share (cents) | 8.1 | (26.6 | ) | (23.1 | ) | 4.7 | 19.7 | 2.5 | ||||||||||||||||
Diluted earnings/(loss) per share (cents)(1) | 8.1 | (26.6 | ) | (23.1 | ) | 4.6 | 19.0 | 2.4 | ||||||||||||||||
Dividends declared per share (cents) | 9.0 | — | — | 8.0 | 6.0 | 0.8 | ||||||||||||||||||
Weighted average number of shares | 610,095 | 613,525 | 614,134 | 614,840 | 634,015 | 634,015 | ||||||||||||||||||
Diluted weighted average number of shares(2) | 614,365 | 613,525 | 614,134 | 631,319 | 657,997 | 657,997 |
As of and for the year ended August 31, | ||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | 2008 | |||||||||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||||||||
(Amounts in thousands except per share data) | ||||||||||||||||||||||||
U.S. GAAP | ||||||||||||||||||||||||
Total operating revenue | 1,169,880 | 1,162,059 | 1,134,876 | 1,141,270 | 1,302,981 | 166,972 | ||||||||||||||||||
Total operating expenses | (1,123,198 | ) | (1,289,014 | ) | (1,220,388 | ) | (1,048,695 | ) | (1,144,461 | ) | (146,658 | ) | ||||||||||||
Net income/(loss) | 51,565 | (149,148 | ) | (142,062 | ) | 28,865 | 125,190 | 16,043 | ||||||||||||||||
Basic earnings/(loss) per share (cents) | 8.5 | (24.3 | ) | (23.1 | ) | 4.7 | 19.7 | 2.5 | ||||||||||||||||
Diluted earnings/(loss) per share (cents) (1) | 8.4 | (24.3 | ) | (23.1 | ) | 4.6 | 19.0 | 2.4 | ||||||||||||||||
Dividends declared per share (cents) | 9.0 | — | — | 8.0 | 6.0 | 0.8 | ||||||||||||||||||
Weighted average number of shares | 610,095 | 613,525 | 614,134 | 614,840 | 634,015 | 634,015 | ||||||||||||||||||
Diluted weighted average number of shares(2) | 614,365 | 613,525 | 614,134 | 631,319 | 657,997 | 657,997 |
2
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 and for the year ended August 31, | ||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | 2008 | |||||||||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
HKFRS | ||||||||||||||||||||||||
Total assets | 1,683,408 | 2,347,428 | 2,124,215 | 2,161,133 | 2,080,416 | 266,597 | ||||||||||||||||||
Debt | (119,170 | ) | (945,348 | ) | (948,027 | ) | (952,593 | ) | (683,242 | ) | (87,555 | ) | ||||||||||||
Finance lease obligation | — | (3,135 | ) | (2,373 | ) | (1,210 | ) | (376 | ) | (48 | ) | |||||||||||||
Other liabilities | (388,540 | ) | (378,491 | ) | (282,161 | ) | (303,448 | ) | (364,191 | ) | (46,670 | ) | ||||||||||||
Total liabilities | (507,710 | ) | (1,326,974 | ) | (1,232,561 | ) | (1,257,251 | ) | (1,047,809 | ) | (134,273 | ) | ||||||||||||
Net assets employed | 1,175,698 | 1,020,454 | 891,654 | 903,882 | 1,032,607 | 132,324 | ||||||||||||||||||
Share capital | 61,057 | 61,412 | 61,417 | 61,650 | 65,062 | 8,337 | ||||||||||||||||||
Share premium | 617,986 | 619,408 | 620,298 | 622,433 | 670,717 | 85,950 | ||||||||||||||||||
Reserves | 496,655 | 339,634 | 209,939 | 219,799 | 296,828 | 38,037 | ||||||||||||||||||
Total shareholders’ equity | 1,175,698 | 1,020,454 | 891,654 | 903,882 | 1,032,607 | 132,324 | ||||||||||||||||||
As of and for the year ended August 31, | ||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | 2008 | |||||||||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
U.S. GAAP | ||||||||||||||||||||||||
Total assets | 1,688,640 | 2,385,556 | 2,154,305 | 2,189,086 | 2,100,638 | 269,188 | ||||||||||||||||||
Total liabilities | (507,710 | ) | (1,352,876 | ) | (1,257,034 | ) | (1,279,587 | ) | (1,062,414 | ) | (136,144 | ) | ||||||||||||
Net shareholders’ equity | 1,180,930 | 1,032,680 | 897,271 | 909,499 | 1,038,224 | 133,044 |
As of and for the year ended August 31, | ||||||||||||||||||||||||
2004 | 2005(6) | 2006(6) | 2007 | 2008 | 2008 | |||||||||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
HKFRS | ||||||||||||||||||||||||
EBITDA(3) | 244,945 | 108,377 | 195,417 | 353,827 | 377,964 | 48,435 | ||||||||||||||||||
Net cash provided by operating activities | 203,763 | 77,383 | 184,151 | 383,999 | 378,529 | 48,507 | ||||||||||||||||||
Net cash (used in) / provided by investing activities | (406,244 | ) | (557,440 | ) | (492,742 | ) | 114,053 | (147,750 | ) | (18,934 | ) | |||||||||||||
Net cash provided by /(used in) financing activities | 47,221 | 792,216 | (86,432 | ) | (109,504 | ) | (342,516 | ) | (43,892 | ) | ||||||||||||||
Capital expenditures(4) | 410,046 | 419,126 | 322,935 | 132,250 | 211,684 | 27,126 |
As of and for the year ended August 31, | ||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | 2008 | |||||||||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
EBITDA(3) | 244,945 | 108,377 | 195,417 | 353,827 | 377,964 | 48,435 | ||||||||||||||||||
Depreciation and amortization | (197,017 | ) | (237,714 | ) | (276,464 | ) | (258,103 | ) | (210,051 | ) | (26,917 | ) | ||||||||||||
Interest income/(expense), net | 3,578 | (40,884 | ) | (68,259 | ) | (64,833 | ) | (59,541 | ) | (7,630 | ) | |||||||||||||
Income taxes (expense)/credit | (2,043 | ) | 6,725 | 7,244 | (2,026 | ) | 16,818 | 2,155 | ||||||||||||||||
Net income/(loss) | 49,463 | (163,496 | ) | (142,062 | ) | 28,865 | 125,190 | 16,043 | ||||||||||||||||
Depreciation and amortization | 197,017 | 237,714 | 276,464 | 258,103 | 210,051 | 26,917 | ||||||||||||||||||
Impairment loss on investment property | — | — | 1,131 | — | — | — | ||||||||||||||||||
Amortization of deferred expenditure | 1,828 | 12,927 | 13,973 | 15,580 | 33,777 | 4,329 | ||||||||||||||||||
Income taxes expense/(credit) | 2,043 | (6,725 | ) | (7,244 | ) | 2,026 | (16,818 | ) | (2,155 | ) | ||||||||||||||
Interest income | (3,753 | ) | (13,578 | ) | (20,378 | ) | (22,671 | ) | (15,596 | ) | (1,999 | ) | ||||||||||||
Interest, amortization and exchange difference on senior notes | — | 54,065 | 86,664 | 89,879 | 72,640 | 9,309 | ||||||||||||||||||
Other borrowing costs | — | — | 1,919 | (739 | ) | (1,185 | ) | (152 | ) | |||||||||||||||
(Gain) / loss on disposal of fixed assets | (34 | ) | (134 | ) | 9,621 | 1,714 | 1,431 | 183 | ||||||||||||||||
Equity settled share-based transaction | 87 | 6,965 | 6,823 | 5,727 | 4,204 | 539 | ||||||||||||||||||
Realized and unrealized loss on derivatives financial instruments | — | — | 125 | 806 | 1,039 | 133 | ||||||||||||||||||
Unrealized losses/(gain) on other investments | 1,696 | (300 | ) | (668 | ) | (1,887 | ) | (3,284 | ) | (421 | ) | |||||||||||||
Gain on extinguishment of senior notes | — | — | — | — | (2,582 | ) | (331 | ) | ||||||||||||||||
Taxation paid | (24,819 | ) | (1,393 | ) | (2,532 | ) | (2,171 | ) | (4,250 | ) | (545 | ) | ||||||||||||
Change in long term receivable | (6,206 | ) | (6,893 | ) | 567 | 5,600 | 1,346 | 173 | ||||||||||||||||
Change in working capital, net | (13,559 | ) | (41,769 | ) | (40,252 | ) | 3,167 | (27,434 | ) | (3,516 | ) | |||||||||||||
3
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, | ||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | 2008 | |||||||||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Net cash flow provided by operating activities | 203,763 | 77,383 | 184,151 | 383,999 | 378,529 | 48,507 | ||||||||||||||||||
As of and for the year ended August 31, | ||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||
Fixed Telecommunications Network Services Subscriptions: | ||||||||||||||||||||
Broadband Internet Access | 197,000 | 229,000 | 220,000 | 247,000 | 316,000 | |||||||||||||||
Local VoIP | 237,000 | 293,000 | 281,000 | 308,000 | 329,000 | |||||||||||||||
IP-TV | 31,000 | 109,000 | 116,000 | 128,000 | 156,000 | |||||||||||||||
Total | 465,000 | 631,000 | 617,000 | 683,000 | 801,000 | |||||||||||||||
Registered international telecommunications accounts (5) | 1,916,235 | 2,054,036 | 2,201,963 | 2,331,000 | 2,336,000 | |||||||||||||||
IDD outgoing minutes (in thousands) | 1,007,000 | 947,100 | 788,000 | 659,000 | 574,000 |
(1) | Diluted |
(2) | For fiscal |
(3) |
EBITDA for any period means, without duplication, net income/(loss) for such period, plus the following to the extent deducted in calculating such net income/(loss): interest expense, income taxes, depreciation and amortization expense (excluding any such non cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period not included in the calculation), less interest income. EBITDA is not a measure of performance under |
(4) | Capital expenditures represent additions to fixed assets and include non-cash transactions. | |
(5) | Registered accounts refer to international telecommunications customers that have a valid account. Account holders may or may not be active users of our services. |
(6) |
Due to additional evidence and information received with respect to the | ||
Our reassessment had the following effects on our consolidated statement of operations for fiscal 2005 and |
As previously | ||||||||||||||||
reported in | ||||||||||||||||
As previously | 2006 Hong Kong | |||||||||||||||
reported in 2005 Hong | As reported | statutory | As reported | |||||||||||||
Kong statutory | in 2005 Form | financial | in 2006 | |||||||||||||
financial statements | 20-F | statements | Form 20-F | |||||||||||||
HK$ | HK$ | HK$ | HK$ | |||||||||||||
(Amounts in thousands except per share data) | ||||||||||||||||
Total operating revenue | 1,137,356 | 1,162,059 | 1,159,579 | 1,134,876 | ||||||||||||
Provision for doubtful debts | (60,563 | ) | (35,445 | ) | 7,668 | (17,450 | ) | |||||||||
Net loss after tax | (206,352 | ) | (156,531 | ) | (92,241 | ) | (142,062 | ) | ||||||||
Loss per share — basic and diluted | (33.6) cents | (25.5) cents | (15.0) cents | (23.1) cents |
Our reassessment had the following effects on our consolidated statement of operations for the years ended August 31, 2005 and 2006:4
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 |
2001 2002 2003 2004 2005 2006 August 2006 September 2006 October 2006 November 2006 December 2006 January 2007 (through January 23, 2007) 5Authority’s (“HKMA”)Authority, or HKMA’s currency board to keep such 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.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
indicated: Average(1) High Low Period-End HK$ HK$ HK$ HK$ Fiscal 2004 7.7821 7.8010 7.7085 7.8000 Fiscal 2005 7.7869 7.8002 7.7684 7.7718 Fiscal 2006 7.7601 7.7796 7.7506 7.7767 Fiscal 2007 7.8029 7.8289 7.7665 7.7968 Fiscal 2008 7.7915 7.8159 7.7497 7.8036 July 2008 7.8001 7.8039 7.7959 7.8017 August 2008 7.8076 7.8142 7.8036 7.8036 September 2008 7.7854 7.8094 7.7582 7.7659 October 2008 7.7589 7.7736 7.7503 7.7503 November 2008 7.7507 7.7560 7.7497 7.7501 December 2008 7.7504 7.7522 7.7497 7.7499 January 2009 (through January 9, 2009) 7.7533 7.7572 7.7504 7.7572 (1) 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.notnotpreventmaintain an increase in total revenues and operating results from continuing to decline.In fiscal 2006 , ourdecreasedincreased to HK$1,134.9 million from HK$1,162.11,303.0 million in fiscal 2005, and we experienced a net loss of2008 from HK$142.1 million versus net loss of HK$163.51,141.3 million in fiscal 2005.2007, and we recorded a net profit of HK$125.2 million in fiscal 2008 versus HK$28.9 million in fiscal 2007. The increased net profit in fiscal 2008 was mainly due to the benefit of shifting our business mix towards the more sustainable FTNS business, a change in the estimated useful lives for certain major telecommunications equipment effective from June 1, 2007, interest savings from senior-notes buyback and tax benefit from recognition of deferred tax asset on tax loss in fiscal 2006 was due to a decline in contributions from our international telecommunications services and continued losses from our fixed telecommunications network business. Weprior years. However, we cannot assure you that we will be able to turn around this lossmaintain our revenue and profit growth.decline.Ourwhich carries a higher margin than our international telecommunications revenues declinedbusiness. Revenues from our international telecommunications business decreased by 21.5%10.0% in fiscal 2008, primarily due to a decrease in the total number of airtime minutes carried by 16.8%12.9%, which reflected a reduction in the operating scale of our international telecommunications business.With the drop in averageexpected competitive pressure on tariff rates and a reduced operating scale, we expect that the profit margins in our international telecommunications services will continuebusiness to be under pressurecontribute a smaller portion of our revenue and lower revenue will be generated in future.net profit over time.
Our
• | greater financial, technical, marketing and other resources; | ||
• | greater existing infrastructure; | ||
• | greater name recognition; and | ||
• | larger customer bases. |
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.
following:
• | As of January 6, 2009, 246 PNETS Licenses had been issued in Hong Kong 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 due to their global presence and size. | ||
• | Around December 31, 2007, TVB and ATV, 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. The services offer a total of 13 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. |
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We have made significant investments in our network infrastructure
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.
2010.
Procedures”.
effective.
• | simultaneously manage implementation of our infrastructure development and marketing plans; | ||
• | effectively monitor our operations so as to contain costs and maintain effective quality controls; and | ||
• | continue to 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 services business could have an adverse effect on the quality of our services and increase our costs of operation.
7
Expanding
• | Because at least one of our competitors has already installed in-building wiring in virtually all buildings, other fixed telecommunications network service providers, including us, may encounter a bottleneck when installing our own in-building wiring because many buildings have limited physical space for additional in-building wiring. | ||
• | 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.
• | 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. |
business. We may 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 toof our users, which could cause them toservices, and our customers may stop using our service or assert claims against us. Whileus as a result.
technological difficulties and/or cost overruns.
• | the expansion and development of our own international telecommunications facilities; | ||
• | the availability of leased capacity from third party carriers at favorable rates; and | ||
• | the possible termination or cancellation of our existing contracts. |
If we fail to increase the capacity of our international bandwidth, our ability to increase our internet access business market share and revenuesrevenue in the Internet access business will be limited.
experience failures or 8shutdownsshut 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.
• | In July 2004, a new provision of the Telecommunications Ordinance came into force. This anti-competition provision specifically regulates the conduct of all carrier licensees (in particular merger and acquisition transactions) in the Hong Kong telecommunications industry by giving the Telecommunications Authority the power to review the conduct and transactions concerning carrier licensees and to take appropriate actions if it determines that the transaction would, or is likely to, prevent or substantially lessen competition in a telecommunications market. The Telecommunications Authority has the power under this provision to conduct an investigation into any questionable transaction. It might consent to the transaction (unconditionally or subject to any conditions it deems appropriate) or reject the transaction outright. The decision of the Telecommunications Authority will take into account of whether the transaction will adversely affect the public interest and benefit. This provision may have an adverse effect on our ability to grow our business through mergers and acquisitions. | ||
• | We offer local VoIP services through our Next Generation Network under HKBN’s FTNS License. Following the conclusion of a public consultation on the regulation of Internet Protocol Telephony Services, the Telecommunications Authority issued a statement on June 20, 2005, setting out its views and decisions on the regulatory and licensing framework for the provision of VoIP services, including the creation of a licensing framework, conformance to the existing system of assigning telephone numbers, imposition of interconnection charges and establishing guidelines with respect to the quality of services. | ||
• | We offer fixed but not mobile telecommunications network services. The Telecommunications Authority has implemented a new fixed-mobile convergence licensing practice by way of the Unified Carrier License (“UCL”). The implementation of the UCL regime started from August 1, 2008 and replaces the existing four classes of carrier licenses for the provision of fixed and mobile services. Going forward the UCL will be the only carrier licence to be issued for the provision of fixed, mobile and/or converged services. Existing carrier licenses will remain effective until their expiry date. Licensees can choose to apply to convert their existing licences to UCLs before then or apply for a UCL upon expiry. This regulatory change, together with the |
9
development of new technologies, may further accelerate the convergence of fixed and mobile telecommunications services, resulting in more structural competition between fixed-line and mobile telecommunications operators. As we do not have a mobile license, and are not currently authorised to provide mobile services, our ability to compete may be hindered by our inability to offer such services independently. | |||
• | We provide our IP-TV services over our Next Generation Network under HKBN’s FTNS License. The Hong Kong government has indicated that because our IP-TV services are carried over the Internet, we are exempt under the Broadcasting Ordinance from the requirement to obtain a domestic pay-television program service license. However, the government’s Communications and Technology Branch has informed us that the government is considering a review of the broadcasting regulatory regime and may introduce changes to the existing regulatory framework, including the existing exemption in the Broadcasting Ordinance. However, we cannot predict whether the government may require us to obtain a pay-television program service license in the future. |
We require licenses from the Telecommunications Authority to provide our services. If one of these licenses is revoked or not renewed, we would be unable to deliver the services authorized by that license.
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 our international telecommunications services.
In addition, themaintained in future.
10
due 2015.
• | pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments; | ||
• | incur additional indebtedness or issue certain equity interests; | ||
• | merge, consolidate or sell all or substantially all of our assets; | ||
• | issue or sell capital stock of some of our subsidiaries; | ||
• | sell or exchange assets or enter into new businesses; | ||
• | create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets; | ||
• | create liens on assets; | ||
• | enter into sale and lease back transactions; and | ||
• | enter into certain transactions with affiliates or related persons. |
All of these limitations are subject to exceptions and qualifications specified in the indenture governing the 8.75% senior notes. These restrictive covenants could limit our ability to pursue our growth plan, restrict our flexibility in planning for, or reacting to, changes in our business and industry and increase our vulnerability to general adverse economic and industry conditions.
We began offering international telecommunications services in September 1992. From that date, 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 January 1999, we became the first company in Hong Kong company to obtain a public non-exclusive telecommunications services license, which we referthe first PNETS License. The License gives us the right to in this annual report as a PNETS License, covering the provision ofoffer international telecommunications services using international simple resale whichand has had a significant positive impact on our international telecommunications revenues. We incorporated HKBN in Hong Kong in August 1999 and launched our broadband Internet access services in March 2000. In addition, we began providing local VOIPVoIP services in April 2002, IP-TV services in August 2003, and corporate data services in July 2004 using our Metro Ethernet network.
Next Generation Network.
• | In September 2005, HKBN was conferred as the winner of the Global Entrepolis@Singapore Award 2005, which was presented by the Asian Wall Street Journal in association with the Economic Development Board of Singapore. This award recognizes innovation in the application of technology to a strong business model with commercial potential to be an industry or market leader. | ||
• | In October 2005, HKBN became the first service provider in the world to achieve the Cisco Powered Network Metro Ethernet QoS Certified status. | ||
• | In October 2005, HKBN launched our “2b” Broadband Phone Service, providing VoIP services to local and overseas users via a software-based broadband phone. | ||
• | In November 2005, we announced cooperation with China Telecom Hong Kong Limited to provide Pan-China Internet Protocol Virtual Private Network services to corporate customers. |
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• | In March 2006, HKBN launched our “bb25” Internet access service with symmetric 25 Mbps access for the residential mass market. This supplemented our existing bb10, bb100 and bb1000 service offerings. | ||
• | In July 2006, HKBN was conferred “Call Center of the Year” & “Customer Service Center of the Year” awards at the Customer Relationship Excellence Awards 2005. | ||
• | In October 2006, Liu Xiang “Be Ahead of Yourself” marketing campaign won the “Certificate of Excellence” of HKMA/TVB Awards for Marketing Excellence 2006. | ||
• | In February 2007, HKBN launched bb50 and bb200 symmetric residential broadband service supported by “SDU” personalized customer care service. | ||
• | In June 2007, CTI Group was awarded “Best Retention Strategies” at the Hong Kong HR Awards 2007 | ||
• | In July 2007, HKBN was awarded “Integrated Support Team” of the year at the Asia Pacific Customer Service Consortium Customer Relationship Excellence Awards | ||
• | In September 2007, HKBN 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, HKBN launched “Dual Mode High Definition Terrestrial TV Receiver and IPTV Set-Top Box” to all customers in Hong Kong. | ||
• | In February 2008, HKBN was awarded the contract for the provision of payphone service at the Hong Kong International Airport. | ||
• | In September 2008, HKBN launched the National Geographic Channel’s first ever Interactive Channel. |
B. Business Overview
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. A breakdown of our revenues by category of activity is as follows:
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 | |||
Year ended August 31, | ||||||||||||
Revenue | 2006 | 2007 | 2008 | |||||||||
HK$ | HK$ | HK$ | ||||||||||
(Amounts in thousands) | ||||||||||||
Fixed telecommunications network services(1) | 716,600 | 816,800 | 1,011,038 | |||||||||
International telecommunications services | 418,276 | 324,470 | 291,943 | |||||||||
Total operating revenue | 1,134,876 | 1,141,270 | 1,302,981 | |||||||||
(1) | Includes Internet access, local telephony services, |
We
• | 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 88 channels, including self-produced news, children’s programming, international drama, movies and documentary and local interest programming, using our IP platform; and | ||
• | corporate data services, including the provision of dedicated bandwidth to corporate customers. |
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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.
First Mover Advantage and High Barriers to Entry. Our first mover advantage and the inherent characteristics of the Hong Kong telecommunications infrastructure, which present a natural barrier to entry, make it difficult for our competitors to replicate our business model. Metro Ethernet technology is not appropriate for our competitors who intend to offer a full coverage network that includes remote and difficult to reach areas of Hong Kong. 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 they would encounter
• | 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, 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. 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 Next Generation Network gives us an inherent cost and performance advantage over our competitors. Our IP platform is highly scalable, enabling us to offer broadband Internet access, local VoIP, IP-TV and corporate data services over a single network. It is also capable of providing up to 1,000 Mbps symmetric broadband Internet access. | ||
• | First Mover Advantage and High Barriers to Entry. Our first mover advantage and the inherent characteristics of the Hong Kong telecommunications infrastructure, which present a natural barrier to entry, make it difficult for our competitors to replicate our business model. Metro Ethernet technology is not appropriate for our competitors who intend to offer a full coverage network that includes remote and difficult to reach areas of Hong Kong. Attempting to deploy Metro Ethernet technology in such locations would significantly increase costs and completion time of such a network. While other telecommunications operators may lay their own fiber-to-the-building, we believe some would encounter significant in-building bottlenecks when attempting to complete an end-to-end network. This is because |
Metro Ethernet Network Infrastructure
Our Metro Ethernet
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 expendituresThe table below shows the profile of the subscriptions for our fixed telecommunications network infrastructureservices over the past three years:
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As of August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
Broadband Internet Access | 220,000 | 247,000 | 316,000 | |||||||||
Local VoIP | 281,000 | 308,000 | 329,000 | |||||||||
IP-TV | 116,000 | 128,000 | 156,000 | |||||||||
Total Subscriptions | 617,000 | 683,000 | 801,000 | |||||||||
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Service | Description | |
IDD 1666 | Provides subscribers with international direct dial using the access number 1666 in Hong Kong. | |
IDD 0030 | Provides subscribers with international direct dial using the access number 0030 in Hong Kong. | |
Mobile Call Forwarding Services | Allows call forwarding of Hong Kong mobile numbers so that subscribers can receive calls while overseas. |
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The following table shows the profile
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.are offered through a single IP platform. In addition, to broadband Internet access services, we also currently provide 56k dial-up Internet access and limited corporate Internet access via resale of another carrier’s service. However, we are focusing exclusively on growing our subscription base for our high bandwidth broadband Internet access services and are making no further investments in dial-up or resale services.
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, 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 beenunlike 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 coaxialindustry, we operate an “end-to-end” network that provides symmetric typical access speeds up to 8 Mbps shared by a cluster of buildings. HGC predominantly uses VDSL technologyextends from our IP network hub sites 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 providerour switching centers in Hong Kong 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.subscribers’ premises.
We had approximately 220,000 broadband Internet access subscriptions as of August 31, 2006, which represented a market share of approximately 12%November 2007, we collaborated 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 for the deployment of international direct dial servicesGPON in Hong Kong. We believe thatAs the reach of GPON is considerably more than 100 meters, it can be a more cost effective solution than our abilityEthernet setup for lower density deployments.
The primary international telecommunications services that we currently offer our customers areexisting network coverage and extending the following:
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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. In fiscal 2004 and 2005, in order to maintain our market share, we made 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 somereach of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offers free PC-to-PC based international calls, is also becoming more prevalent. We are proactively migrating our legacy international telecommunications services to our “2b” services, which we believe will enable us to achieve higher margins and access a wider addressable market.
Next Generation Network.
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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 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.
Sales and Marketing
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• | a year round, 24-hour a day, 7 days a week, network operation center providing real-time service monitoring and maintenance services and supported by about 120 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. |
We commit considerable resources to our research and development department in order to continuously improve our services and improve our market position.
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.
agencies will be taken.
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Currently, there are three Class Licenses within the telecommunications regulatory framework, one relating
The Telecommunications Authority recognizes that fixed and mobile services will convergewas regulated separately under four types of carrier licence. Further, a number of other types of licences permitted a licensee to establish facilities or services of a similar kind.
19
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 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.
20
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.
21
Authority.
Authority in November 2004. In June 2007, the Telecommunications Authority determined the FMIC rates for HKBN, our wholly owned subsidiary which is a Fixed Network Operator, with one of its Mobile Network Operators, China Resources Peoples Telephone Company Limited, or Peoples, at a rate of HK4.8 cents per occupancy minute for interconnection from April 1, 2002 to August 31, 2002, HK4.22 cents per occupancy minute for interconnection from September 1, 2002 to August 31, 2003 and HK2.89 cents per occupancy minute for interconnection from September 1, 2003 to August 31, 2004. In February 2008, HKBN requested Telecommunications Authority to make a new determination with four Mobile Network Operators on the rate of FMIC payable by these Mobile Network Operators for mobile interconnection service. In September 2008, the Telecommunications Authority indicated that it accepted HKBN’s request for determination. As of 9 January 2009, the new determination is still in process.
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).
22
both issued on May 4, 2007.
23
(1) | The other immediate |
(2) | The company has only registered its Chinese name. The English name is an unregistered translation. |
(3) | The other immediate subsidiaries of Automedia Holdings Limited are Global Courier Company Limited, |
(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, |
Percentage of interest | ||||||||||
held by City Telecom | ||||||||||
| (%) | |||||||||
Name | Jurisdiction of Incorporation | Direct | Indirect | |||||||
963673 Ontario Limited | Canada | 100 | ||||||||
Attitude Holdings Limited | British Virgin Islands | 100 | ||||||||
Automedia Holdings Limited | British Virgin Islands | 100 | ||||||||
BBTV Company Limited | Hong Kong | 100 | ||||||||
City Telecom (B.C.) Inc. | Canada | 100 | ||||||||
City Telecom (Canada) Inc. | Canada | 100 | ||||||||
City Telecom (Toronto) Inc. | Canada | 100 | ||||||||
City Telecom (U.S.A.) Inc. | United States of America | 100 | ||||||||
City Telecom (Vancouver) Inc. | Canada | 100 | ||||||||
City Telecom Inc. | Canada | 100 | ||||||||
City Telecom International Limited | British Virgin Islands | 100 |
24
Percentage of interest | ||||||||||
held by City Telecom | ||||||||||
(%) | ||||||||||
Name | Jurisdiction of Incorporation | Direct | Indirect | |||||||
Credibility Holdings Limited | British Virgin Islands | 100 | ||||||||
| 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 | ||||||||
|
(1) | The company has only registered its Chinese name. The English name is an unregistered translation. |
August 31, 2008. Mongkok, Kowloon, Hong Kong. 25Metro Ethernet network.Next Generation Network. The majority of the fiber-based backbone connecting our services are under public road, highways and streets. HKBN, our wholly owned subsidiary, owns two offices withIn Hong Kong, we own an aggregate of 147,000136,900 square feet and two switching centers comprisedpredominately for self use as of six switching systems in Hong Kong.each in Vancouver and the other in Toronto). We have invested and have rights to dedicated capacity in two undersea cables, the Japan-U.S. cable and the APCN 2 cable, for use as international transmission facilities, both of which were completed and have been operational since May 2002.fourtwo retail shops and for a 3,500 square footfeet customer service center in Mongkok. key supplier Cisco Systems Inc., Nortel Networks Limited and other suppliers to provide equipment, underground cables and other necessary components in building our Metro Ethernet networkNext Generation Network infrastructure, and for our VOIPVoIP equipment. In order for new subscribers to be able to access our IP-TV services, we must install an IP set-top-box in their homes. We must have an adequate supply of such installation equipment on hand to respond to new customer subscriptions in a timely manner. We purchase all of our IP set-top boxes and other equipment from our suppliers on a purchase order basis and have no long-term contracts. If our suppliers are unable to supply us with these products in a timely manner or the costs of these products increase due to unforeseen causes, this could negatively impact our operating results, especially if we are unable to acquire new subscribers or effectively appropriate our costs on to our customers.We depend on Cisco Systems, Inc. and other third parties for ongoing support and assistance with respect to maintenance and repairs. We are also dependent on certain Hong Kong rail transport providers to maintain and provide us with access to their infrastructure to support the proper functioning of our equipment and fiber-based backbone.VOIP,VoIP, IP-TV and corporate data services through our self-owned Metro Ethernet network.Next Generation Network. As of August 31, 20062008, we had a total of approximately 617,000801,000 subscriptions for our fixed telecommunications network services subscriptions.services. In addition, to providing fixed telecommunications network services, we are a provider of international telecommunications services in Hong Kong. We offer a variety of international telecommunications services, and products including direct dial services, international calling cards and mobile call forwarding services. Ourservices in Hong Kong. As of August 31, 2008, the customer database of our total international telecommunications services customer database comprisescomprised approximately 2.22.3 million registered accounts.self-owned network is oneNext Generation Network currently covers 1.5 million residential home passes, representing approximately 67% 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% ofpopulation in Hong Kong’s population.Kong. The coverage of our network is concentrated in Hong Kong’s most densely populated areas, which reduces our cost of network deployment per home pass. 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 where a provider can service a large number 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. 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 international telecommunications services to our FTNS customers 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, allowing us to generate a usage charge.
Operation
The wireless-based FTNS License that HKBN obtained fromaccounts receivable, goodwill, long-lived assets, and assumptions used in the Telecommunications Authoritycalculation of income taxes, among others. These estimates and assumptions are based on our management’s best estimates and judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Decreases in February 2000 provided HKBN with the authority to begin installationconsumer spending or deterioration 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 technologylocal economic conditions brought about by the global credit crisis have increased uncertainty inherent in addition to wireless technology,such estimates and assumptions including our FTNS License was amendedestimates of future operations. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Change 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 networkthose estimates resulting from continuing changes 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 declined and our service quality has improved because we rely less on backbone transmission facilities owned by third parties and thereby decreaseeconomic environment will be reflected in the leasing fees that we pay.
Having our own fiber-based backbone allows us to offer broadband Internet access, local VOIP, IP-TV and corporate data services over a single IP platform without being subject to network limitations 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 millionconsolidated financial statements 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 line and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent. As a consequence of reduced minutes and lower revenues per minute, our total international telecommunications revenues decreased by 21.5% to HK$418.3 million in fiscal 2006.
future periods.
In addition to theprimarily consist of monthly service charges generatedpayable by our fixed telecommunications network business, we also receivesubscribers and interconnection charges frompayable by other telecommunications operators in Hong Kong that use our network to deliver their customers’ telecommunications traffic.
operators.
• | Monthly service charges.We charge our customers a monthly service charge for each type of fixed telecommunications network services that we provide. After a customer has begun to use one of our services, we then try to up-sell additional services to the customer to generate more revenues. | ||
• | Interconnection charges.As a |
charges shall be applicable.
In fiscal 2005 and 2006, we recordedanalysis (the “2006 PA”) with respect to the rates of mobile interconnection charges payable by mobile operators under dispute and the timing of HK$24.7 million and HK$22.0 million respectively. Asthe determination. The final level 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, duewas then subject to the uncertaintydetermination to be issued by the authority. As a result of the final ruling,foregoing, in fiscal 2006, we recognized mobile interconnection charges of HK$22.0 million based on the preliminary rates from2006 PA.
For further discussion of our revenue recognition issued a revised preliminary analysis (the “2007 PA”) which superseded the 2006 PA. The 2007 PA set out the rates of mobile interconnection charges, please referwhich are different from those rates stated in the 2006 PA.
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Next Generation Network.
27
been revised from 4-15 years to 6-20 years effective from June 1, 2007.
28
Year ended August 31, | |||||||||
2004 | 2005 | 2006 | |||||||
(Thousands of HK$) | |||||||||
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 | ||||||
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
(Thousands of HK$) | ||||||||||||
Balance at beginning of the year | 48,316 | 55,745 | 22,392 | |||||||||
Additions charged to expense(1)(2) | 17,450 | 15,973 | 14,293 | |||||||||
Reversals | — | (9,404 | ) | — | ||||||||
Write-off(2) | (10,021 | ) | (39,922 | ) | (24,741 | ) | ||||||
Balance at the end of the year | 55,745 | 22,392 | 11,944 | |||||||||
(1) | Allowance for doubtful debts as at August 31, | |
(2) | Following the TA’s 2004 Determination issued in June 2007, in fiscal 2007 the Company has reversed HK$9.4 million of the allowance for doubtful debts previously recognized for mobile interconnection charges to the consolidated statement of operations and has written off the remaining balance of the allowance of HK$11.4 million against the accounts receivable relating to mobile interconnection charges. |
29Hong Kong GAAP,HKFRS, we recognized deferred tax assets for all deductible temporary differences, and operating loss carry forwards to the extent it is probable that future taxable profits will be available against which the asset can be utilized.Hong Kong GAAPHKFRS and U.S. GAAP.Kong (the “Development”).Kong. Such estimated costs are included as part of our costs of rendering services. The estimate is made based on the provisional rates announced by the Telecommunications Authority and is effective up to the date of the release of our financial statements. The Telecommunications Authority periodically reviews the actual costs incurred by PCCW-HKT in the Developmentdevelopment and adjusts the amounts owed to PCCW-HKT, or to be refunded by it, to the respective USC contributing parties, including our company (the “Rate Revisions”).company. Accordingly, the estimate made by our management for a financial year is subject to changes based on the Rate Revisions identified during a financial year andrevisions published by the Telecommunications Authority up to the date prior to the release of our financial statements. We adjust such differences as an addition to, or reduction of, the corresponding costs of services in that particular reporting period.collectibilitycollectability 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
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.
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 | 2007 | 2008 | 2008 | |||||||||||||
HK$ | HK$ | HK$ | US$ | |||||||||||||
(In thousands) | ||||||||||||||||
HKFRS | ||||||||||||||||
Revenues | ||||||||||||||||
Fixed telecommunications network services | 716,600 | 816,800 | 1,011,038 | 129,561 | ||||||||||||
International telecommunications | 418,276 | 324,470 | 291,943 | 37,411 | ||||||||||||
1,134,876 | 1,141,270 | 1,302,981 | 166,972 | |||||||||||||
Operating Expenses: | ||||||||||||||||
Network costs | (300,593 | ) | (214,591 | ) | (178,367 | ) | (22,857 | ) | ||||||||
Other operating expenses | ||||||||||||||||
Salaries and related costs | (256,721 | ) | (221,102 | ) | (247,460 | ) | (31,711 | ) | ||||||||
Sales and marketing expenses | (204,952 | ) | (203,673 | ) | (307,743 | ) | (39,436 | ) | ||||||||
Office, general and administrative expenses | (164,208 | ) | (144,657 | ) | (186,547 | ) | (23,905 | ) | ||||||||
Depreciation and amortization | (276,464 | ) | (258,103 | ) | (210,051 | ) | (26,917 | ) | ||||||||
Provision for doubtful accounts | (17,450 | ) | (6,569 | ) | (14,293 | ) | (1,832 | ) | ||||||||
Total other operating expenses | (919,795 | ) | (834,104 | ) | (966,094 | ) | (123,801 | ) | ||||||||
Total Operating Expenses | (1,220,388 | ) | (1,048,695 | ) | (1,144,461 | ) | (146,658 | ) | ||||||||
(Loss)/income from operations | (85,512 | ) | 92,575 | 158,520 | 20,314 | |||||||||||
Interest income | 20,378 | 22,671 | 15,596 | 1,999 | ||||||||||||
Interest expense | (88,637 | ) | (87,504 | ) | (75,137 | ) | (9,629 | ) | ||||||||
Other income, net | 4,465 | 3,149 | 9,393 | 1,204 | ||||||||||||
(Loss)/income before taxation | (149,306 | ) | 30,891 | 108,372 | 13,888 | |||||||||||
Income taxes (expense)/credit | 7,244 | (2,026 | ) | 16,818 | 2,155 | |||||||||||
Net (loss)/income | (142,062 | ) | 28,865 | 125,190 | 16,043 | |||||||||||
2007
• | Broadband Internet access.Subscription base for our Internet access services rose by 27.9%, to 316,000 as of August 31, 2008 from 247,000 as of August 31, 2007. During fiscal 2008, our average revenue per user increased, mainly because we focused on differentiating our services by emphasizing our ultra high Internet access speed. Our strategy was to acquire and retain customers who |
30
are willing to enter into subscription contracts with a longer service period and to pay higher prices in return for a more stable and higher speed broadband service and a reliable customer support. This strategy was proven successful as evidenced by the increase in revenues from our Internet access services. | |||
• | Local VoIP.Subscription base for our local VoIP services rose by 6.8%, to 329,000 as of August 31, 2008 from 308,000 as of August 31, 2007, mainly due to improved branding and our greater success in cross selling our VoIP services to subscribers of our Internet access services. | ||
• | IP-TV.Subscription base for our IP-TV services increased by 21.9% to 156,000 subscriptions, with the majority of the new subscriptions coming from existing subscribers of our Internet access and local VoIP services. |
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 subscriptions2007. The decrease was primarily 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, withlower volumes, 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 revenueswhich were partially offset by higher revenue per minute. Competition during the fiscal year was intense as some of our integrated competitors offered international direct dial minutes for free or at very low cost as a marketing incentive to gain local fixed line and
mobile market share.shares. Further, technology substitution from global VOIPVoIP providers such as Skype, which offer free PC-to-PC based international calls, iswas also becoming more prevalent. As
network costs.
volume and the recovery of HK$7.6 million Universal Services Contributions from PCCW-HK during fiscal 2008 pursuant to the TA Statement issued by the Telecommunications Authority. There was no recovery of Universal Services Contributions during fiscal 2007.
Salaries and related costs. Salaries and related costs decreased by 1.0% to HK256.7966.1 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% to2008 from HK$205.0834.1 million in fiscal 2006 as we switched our sales and marketing efforts 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.
2007.
• | Salaries and related costs.Salaries and related costs increased by 11.9% to HK247.5 million in fiscal 2008. We increased our total work force by 13.3% to 3,051 employees as of August 31, 2008 from 2,692 employees as of August 31, 2007, primarily due to the increased operating scale in fixed telecommunications network services. | ||
• | Sales and marketing expenses.Sales and marketing expenses increased by 51.1% to HK$307.7 million in fiscal 2008 from HK$203.7 million in fiscal 2007, as we increased our salaries and commissions for our sales and marketing employees of HK$59.9 million and the increased mass media advertising costs of HK$30.3 million. In fiscal 2008, we started a strategy of promoting the brand to a wider audience. | ||
• | Office, general and administrative expenses.Office, general and administrative expenses increased by 28.9% to HK$186.5 million in fiscal 2008 from HK$144.7 million in fiscal 2007, mainly due to the expanded operating scale of our fixed telecommunications network services. | ||
• | Depreciation and amortization.Depreciation and amortization expenses decreased by 18.6% to HK$210.1 million in fiscal 2008 from HK$258.1 million in fiscal 2007. Our management revised the estimated useful lives of our fiber network and related peripherals from 4-15 years to 6-20 years, and the revisions became effective from June 1, 2007. As a result, fiscal 2008 was the first full year in which the impact on depreciation charges resulting from such revision was realized. The effect of the decrease in depreciation expense for fiscal 2008 due to the changes in estimated useful lives which was estimated to be HK$63.6 million. | ||
• | Provision for doubtful accounts.Provision for doubtful accounts increased to HK$14.3 million in fiscal 2008 from HK$6.6 million in fiscal 2007. Included in the provision for fiscal 2007 was the reversal of HK$9.4 million of the allowance for doubtful debts previously recognized for mobile interconnection charges. If such effect was excluded, the provision for doubtful accounts decreased by HK$1.7 million due to better collection efforts. For more information regarding our provisions for mobile interconnection charges, see “Factors Affecting Our Results of Operations—Our Revenues” above in this annual report. |
Depreciation and amortization. Depreciation and amortization expenses increased by 16.3% to HK$276.5 million in fiscal 2006 mainly due to expansionthe phasing out of our Metro Ethernet network.
Provision for doubtful accounts receivable. Overall, our provision for doubtful accounts receivable decreased by 50.8% to HK$17.4 million in fiscal 2006 mainly due to the decrease in provision for mobile interconnection charges receivable. In fiscal 2005, we recorded a provision of HK$19.5 million for mobile interconnection charges receivable accumulated from previous years following our assessment of the collectibility of these charges. In fiscal 2006, we increased such provision by HK$1.3 million to HK$20.8 million based on the preliminary rates from the Telecommunications Authority. Provision for other trade receivables recorded in fiscal 2006 was HK$16.1 million which is comparable to the HK$15.9 million in fiscal 2005. For more information regarding our provision for mobile interconnection charges, see “Our Revenues—Fixed Telecommunications Network Services” above in this annual report.
Loss from operations. We suffered loss from operations of HK$85.5 million in fiscal 2006, compared to loss from operations of HK$135.4 million in fiscal 2005. The loss from operations is due to reduced profitability of our international telecommunications business as a result of intense competition from local telecommunication services companies and global VOIP providers and losses from our FTNS business.
lower margin customers.
31
fiscal 2007.
• | Internet access.Subscription base for our Internet access services rose by 12.3%, to 247,000 as of August 31, 2007 from 220,000 as of August 31, 2006. During fiscal 2007, we focused on differentiating our services by emphasizing our ultra high Internet access speed. which allow us to increase our average revenue per user. By providing stable and high speed broadband services and reliable customer service, we aim to acquire and retain customers with longer subscription period to higher price. This has significantly increased our revenue from Internet access services. | ||
• | Local VoIP.Subscription base for our local VoIP services rose by 9.6%, to 308,000 as of August 31, 2007 from 281,000 as of August 31, 2006, mainly due to improved branding and cross selling our VoIP services to subscribers of our Internet access services. | ||
• | IP-TV.Subscription base for our IP-TV services increased by 10.3% to 128,000 subscriptions, with the majority of the new subscriptions coming from existing subscribers of our Internet access and local VoIP services. |
• | Salaries and related costs.Salaries and related costs decreased by 13.9% to HK$221.1 million in fiscal 2007 from HK$256.7 million in fiscal 2006 mainly due to the benefits from streamlining the work force in fiscal 2006. | ||
• | Sales and marketing expenses.Sales and marketing expenses in fiscal 2007 was comparable to that in fiscal 2006. |
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• | Office, general and administrative expenses.Office, general and administrative expenses decreased by 13.6% to HK$144.6 million in fiscal 2007 from HK$164.2 million in fiscal 2006, mainly as a result of last year’s operational efficiency plan and cost savings due to the decentralization of authority to department heads. | ||
• | Depreciation and amortization.Depreciation and amortization expenses decreased by 6.7% to HK$258.1 million in fiscal 2007 from HK$276.5 million in fiscal 2006, mainly due to changes in the estimated useful lives of certain assets amounting to HK$15.9 million. Our management revised the estimated useful lives of our fiber network and related peripherals from 4-15 years to 6-20 years, effective on June 1, 2007. The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. This change does not have any effect on the total depreciation charges of those assets during their remaining useful lives. | ||
• | Provision for doubtful accounts.Provision for doubtful accounts decreased by 62.3% to HK$6.6 million in fiscal 2007, mainly due to the reversal of previously recognized provisions for mobile interconnection charges receivable. In fiscal 2006, we recorded a provision of HK$20.8 million for mobile interconnection charges receivable accumulated from previous years following our assessment of the collectability of these charges. In fiscal 2007, we reversed a portion of this provision by HK$9.4 million based on the rates set by the Telecommunications Authority in the 2004 determination issued in June 2007. Our provision for other trade receivables recorded in fiscal 2007 was HK$16.0 million compared to the HK$17.5 million in fiscal 2006. For more information regarding our provisions for mobile interconnection charges, see “Factors Affecting our Results of Operations—Our Revenues” above in this annual report. |
Year Ended August 31, 2005 Compared to Year Ended August 31, 2004
2006.
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 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.
Network costs. Network costs increased by 2.4% from HK$331.4 million in fiscal 2004 to HK$339.4 million in fiscal 2005. Our fixed telecommunications network costs declined by 3.3% from HK$122.5 million in fiscal 2004 to HK$118.4 million in fiscal 2005. The decline was mainly due to reduction in our backbone expenses as our network became more self-reliant as we continue to roll out self-owned fiber based backbone. International telecommunications network costs increased by 5.8% from HK$208.9 million in fiscal 2004 to HK$221.0 million in fiscal 2005, which was principally due to an increase in sales volume for products offered through CTImall and INCmall.
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$49.5 million in fiscal 2004.
U.S. GAAP Reconciliation
As of and for the Year Ended August 31, | |||||||||||
2004 (restated) | 2005 (restated) | 2006 | 2006 | ||||||||
HK$ | 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 |
GAAP.
As of and for the Year Ended August 31, | ||||||||||||||||
2006 | 2007 | 2008 | 2008 | |||||||||||||
HK$ | HK$ | HK$ | US$ | |||||||||||||
(in thousands) | ||||||||||||||||
Shareholders’ Equity | ||||||||||||||||
HKFRS | 891,654 | 903,882 | 1,032,607 | 132,324 | ||||||||||||
U.S. GAAP | 897,271 | 909,499 | 1,038,224 | 133,044 |
33
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 for working capital, capital expenditure, repayment of our indebtedness when fall due and various contractual obligations, for at least the remaining net proceedsnext 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 US$125 millionTelecommunications Authority, this could have a significant adverse impact on our cash flows from operations, which could effect our ability to make planned capital expenditures as well as meet scheduled payments on the 8.75% senior notes, our various operating and capital leases commitments and amounts due 2015 offering inunder banking facilities.
9, 2009, we are not aware of any significant factors that would change our credit ratings.
Year Ended August 31, | ||||||||||||
2004 | 2005 (restated) (1) | 2006 | 2006 | |||||||||
HK$ | 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 | ||||||||
2008:
Year Ended August 31, | ||||||||||||||||
2006 | 2007 | 2008 | 2008 | |||||||||||||
HK$ | HK$ | HK$ | US$ | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash flow from operating activities | 184,151 | 383,999 | 378,529 | 48,507 | ||||||||||||
Net cash (used in)/provided by investing activities | (492,742 | ) | 114,053 | (147,750 | ) | (18,934 | ) | |||||||||
Net cash used in financing activities | (86,432 | ) | (109,504 | ) | (342,516 | ) | (43,892 | ) | ||||||||
(Decrease)/increase in cash and bank balances | (395,023 | ) | 388,548 | (111,737 | ) | (14,319 | ) | |||||||||
Cash and bank balances, at the beginning of year | 539,591 | 144,917 | 532,894 | 68,289 | ||||||||||||
Effect of foreign exchange rate changes on cash | 349 | (571 | ) | 453 | 58 | |||||||||||
Cash and bank balances, at the end of the year | 144,917 | 532,894 | 421,610 | 54,028 | ||||||||||||
Inservices.
34
In fiscal 2005, we generated a net cash inflow in our operating activities that amounted to HK$77.4 million. The reduced operating cash flow when compared with fiscal 2004 was principally 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.
in 2006. Senior Notes 35Netmillion, HK$557.4 million and HK$406.2 million during fiscal 2006, 2005 and 2004, respectively. Throughout each of the three fiscal years, investing activitiesmillion. The net cash outflow consisted primarily of purchases of fixed assets of HK$382.2 million for the development of our Metro Ethernet networkNext Generation Network and upgrading of our international telecommunications facilities. In fiscal 2006 and 2005, anAn increase in term deposits of HK$144.6 million and HK$92.9 million respectively alsofurther increased the cash outflow for investing activities accordingly.provided byused in financing activities was an outflowin fiscal 2008 consisting mainly of considerations paid in the repurchase of 8.75% senior notes of HK$86.4269.4 million, interest paid on 8.75% senior notes of HK$70.0 million and dividend of HK$17.3 million.Net cash provided by financing activities was an inflow792.2 million in fiscal 2005, which683.6 million. Our long term liability consists mainly consisted of our net proceeds of US$121.0 million from our 8.75% senior notes issued in the amount ofdue 2015, which amounted to HK$943.7 million and a bank loan of HK$100.0683.2 million. The cash inflow was offset by our repayment of a bank loan in the amount of HK$200.0 million and interest payments for the notes in the aggregate amount of HK$52.4 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.IndebtednessWe may redeem the notes, in whole or in part, on or after February 1, 2010, at the redemption prices set forth in the indenture governing the notes. In addition, priorPrior to February 1, 2008, we may redeem up to a maximum of 35% of the original aggregate principal amount of the notes, with the proceeds from one or more specified public or private offerings of our common stock, at a redemption price equal to 108.75% of the principal amount of the notes. On or after February 1, 2010, we may redeem the notes, in whole or in part, at the redemption prices set forth in the indenture governing the notes. In all cases of optional redemption, we will pay principal at the redemption price specified plus accrued and unpaid interest, additional amounts, if any, thereon to, but not including, the date of redemption. Ÿ• pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments; Ÿ• incur additional indebtedness or issue certain equity interests; Ÿ• merge, consolidate or sell all or substantially all of our assets; Ÿ• issue or sell capital stock of some of our subsidiaries; Ÿ• sell or exchange assets or enter into new businesses; Ÿ• create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets; Ÿ• create liens on assets; Ÿ• enter into certain transactions with affiliates or related persons; and Ÿ• enter into sale and lease back transactions. Metro Ethernet networkNext Generation Network in Hong Kong, and for additional working capital and general corporate purposes.
2007.
utilized.
Expenditures
respective year.
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$80 million available banking facilities.
Payments due by period | ||||||||||
Contractual Obligations | Total | Within 1 year | More than 1 year but within 3 years | More than within 5 | More 5 years | |||||
(Thousands of HK$) | ||||||||||
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 as2008.
Payments due by period | ||||||||||||||||||||
More than 1 | More than | |||||||||||||||||||
year but | 3 years but | More | ||||||||||||||||||
Within | within 3 | within 5 | than | |||||||||||||||||
Contractual Obligations | Total | 1 year | years | years | 5 years | |||||||||||||||
(Thousands of HK$) | ||||||||||||||||||||
Capital expenditure items | 143,888 | 143,888 | — | — | — | |||||||||||||||
Operating leases | 87,000 | 55,095 | 21,077 | 3,444 | 7,384 | |||||||||||||||
8.75% senior notes | 1,093,852 | 61,012 | 122,024 | 122,024 | 788,792 | |||||||||||||||
Obligation under finance leases | 414 | 142 | 272 | |||||||||||||||||
Other current liabilities | 248,805 | 248,805 | — | — | — | |||||||||||||||
Programming fees (IP-TV) | 6,862 | 6,583 | 219 | 60 | — | |||||||||||||||
Total | 1,580,821 | 515,525 | 143,592 | 125,528 | 796,176 | |||||||||||||||
36
Lu are independent non-executive directors and one of whom, Mr. Cheng Mo Chi, Moses, is a non-executive director. The remaining four, Mr. Wong Wai Kay, Ricky, Mr. Cheung Chi Kin, Paul, Mr. Yeung Chu Kwong, William and Mr. Lai Ni Quiaque, are executive directors.
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
9, 2009.
Date | ||||||||||
Joined City | ||||||||||
Name | Age | Position | Telecom | |||||||
Board of Directors : | ||||||||||
WONG Wai Kay, Ricky | 47 | Chairman | 1992 | |||||||
CHEUNG Chi Kin, Paul | 51 | Vice Chairman | 1992 | |||||||
YEUNG Chu Kwong, William | 48 | Executive Director and Chief Executive Officer | 2005 | |||||||
LAI Ni Quiaque | 39 | Executive Director, Chief Financial Officer, Company Secretary and Head of Staff Engagement | 2004 | |||||||
CHENG Mo Chi, Moses | 58 | Non-Executive Director | 1997 | |||||||
LEE Hon Ying, John | 62 | Independent Non-Executive Director | 1997 | |||||||
CHAN Kin Man | 49 | Independent Non-Executive Director | 1997 | |||||||
PEH Jefferson Tun Lu | 49 | Independent Non-Executive Director | 2004 | |||||||
Senior Management : | ||||||||||
CHONG Kin Chun, John | 46 | Director of Corporate Division | 1996 | |||||||
LO Sui Lun | 44 | Director of Infrastructure Development | 1998 | |||||||
TAM Ming Chit | 42 | Chief Technology Officer | 2008 | |||||||
TO Wai Bing | 46 | Managing Director of Business Development | 2007 |
officer of ATV, a free-to-air broadcaster in Hong Kong. On December 18, 2008, Mr. Wong resigned from ATV as the chief executive officer due to inconsolable differences in ATV strategic turnaround plan.
37
Customer Engagement Department to oversee customer relationship management. Mr. Yeung was also responsible to head Network Development Department. Mr. Yeung has more than 17 years’ experience in the telecommunications industry. Prior to joining the Company, 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. He 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.
Non-executivethe Company.
Mr. Cheng currently also serves as an independent non-executive director of another six companies listed on the Main Board, namely China COSCO Holdings Company Limited, China Mobile Limited, China Resources Enterprise, Limited, Hong Kong Exchanges and Clearing Limited, Liu Chong Hing Investment Limited and Towngas China Company Limited. He currently also serves as a non-executive director of another four companies listed on the Main Board, namely Galaxy Entertainment Group Limited, Guangdong Investment Limited, Kader Holdings Company Limited and Tian An China Investments Company Limited. Mr. Cheng has also been appointed as a member of the remuneration committee of the Company.
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.
38
Mr. YEUNG Chu Kwong, William,U.K.
Mr CHANG Wing Fu, Stephen, aged 43, is our chief technology officer. Mr Chang joinedTelecom Group for 16 years after graduating from the groupHong Kong Polytechnic University with a Diploma in Electronic Engineering and subsequently a Higher Certificate in Electronic Engineering. Ms. To rejoined the Company in May 2007 after her previous service with the Company from September 1998 to 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 advice 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. Prior to joining the Group, Mr Chang was the Asia Pacific/Japan VP of Worldwide Support for a U.S. software company. Before that he was the General Manager of I.T. at SmarTone-Vodafone.
Ms. HARE Kai Tamara, aged 48, is the General Counsel –Head of Legal Department & Corporate Secretary Office. Ms. Hare has over 25 years of legal and senior management experience. For the past 6 years, she was Chief Executive Officer for a venture backed risk management software company in San Francisco. She has served several times as General Counsel and held other senior management positions for multinational companies with business focus in Asia and Western Europe. Additionally, she has extensive private legal practice work with emphasis on corporate finance and intellectual property. She was associated with well known international U.S. based law firms after receiving her Juris Doctor in 1985 from Georgetown University Law Center and Bachelors of Arts from U.C. Berkeley in 1982. Ms. Hare is a frequent lecturer and writer on the topics of cyber security and commercial practice. She is duly admitted to practice in the States of New York and California and to appear before the Southern District Court of New York.
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 5 “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.
For32.5 million for fiscal 2006, the2008, compared with HK$31.2 million for fiscal 2007. 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$2.4 million for fiscal 2008, compared with HK$2.2 million for fiscal 2007.
senior management.
39
directors.
The Audit Committee shall
• | Reviewed the Company’s financial statements for the year ended August 31, 2007 and for the six months ended February 29, 2008; | ||
• | Reviewed the internal audit progress, especially on the compliance of 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 29, 2008 and the Company’s audited consolidated financial statements for the year ended August 31, 2007; and | ||
• | Pre-approved the audit and non-audit services provided by KPMG, the Company’s external auditor. |
Establish formal, fair and transparent procedures for developing policy and structure | |||
• | Review and | ||
• | Recommend the remuneration packages of non-executive directors (including independent non-executive directors). |
Reviewed and approved the | |||
• | Reviewed and approved the remuneration packages | ||
• | Reviewed and |
40
Employees | ||||
Information technology and engineering | 380 | |||
Sales and marketing, customer service and “Special Duty Unit”, or SDU | 2,367 | |||
| ||||
General administration and others | 304 | |||
| ||||
Total | 3,051 | |||
Employees | ||||
Hong Kong | 1,538 | |||
Guangzhou | 1,489 | |||
Canada | 24 | |||
| ||||
Total | 3,051 | |||
fixed telecommunications network business.
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 of Shares | Percentage of | Outstanding | ||||||||||||
Beneficially | Shares Beneficially | Share | ||||||||||||
Title of Class | Identity of Person or Group | Owned (4) | Owned (%) (3) | Options | ||||||||||
Ordinary Shares | Wong Wai Kay, Ricky | 332,688,495 | (1) | 51.13 | 14,093,586 | |||||||||
Ordinary Shares | Cheung Chi Kin, Paul | 366,983,820 | (2) | 56.40 | 14,093,586 | |||||||||
Ordinary Shares | Yeung Chu Kwong, William | 3,000,000 | Less than 1.0 | 7,029,678 | ||||||||||
Ordinary Shares | Lai Ni Quiaque | 10,142,446 | 1.56 | 8,029,678 | ||||||||||
Ordinary Shares | Chong Kin Chun, John | 2,271,364 | Less than 1.0 | 2,516,710 | ||||||||||
Ordinary Shares | Lo Sui Lun | 700,000 | Less than 1.0 | 2,013,369 | ||||||||||
Ordinary Shares | Tam Ming Chit | Nil | Nil | 1,002,718 | ||||||||||
Ordinary Shares | To Wai Bing | Nil | Nil | 1,002,718 |
(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. |
41
Adjustment | Adjustment | ||||||||||||||||||||||||||||||||||||
Options | to number | to number | Options | Options | |||||||||||||||||||||||||||||||||
Balance | granted | of options | of options | exercised | cancelled/ | Balance | |||||||||||||||||||||||||||||||
as at | during | for 2007 | for 2008 | during | lapsed | as at | |||||||||||||||||||||||||||||||
Date of | Exercise | January | the | Exercise | Final | Interim | the | during | January | ||||||||||||||||||||||||||||
grant | price | 21 ,2008 | period | period | Dividend | Dividend | period | the period | 9, 2009 | ||||||||||||||||||||||||||||
HK$ | (note 1) | (note 2) | |||||||||||||||||||||||||||||||||||
Directors | |||||||||||||||||||||||||||||||||||||
Mr. Wong Wai Kay, Ricky | January 5, 2005 | 1.5297 (note 5) | 8,000,000 | — | January 5, 2005 to October 20, 2014 | 31,646 | 21,832 | — | — | 8,053,478 | |||||||||||||||||||||||||||
May 22, 2006 | 0.6554 (note 6) | 6,000,000 | — | May 22, 2007 to May 21, 2016 | 23,734 | 16,374 | — | — | 6,040,108 | ||||||||||||||||||||||||||||
Mr. Cheung Chi Kin,Paul | January 5, 2005 | 1.5297 (note 5) | 8,000,000 | — | January 5, 2005 to October 20, 2014 | 31,646 | 21,832 | — | — | 8,053,478 | |||||||||||||||||||||||||||
May 22, 2006 | 0.6554 (note 6) | 6,000,000 | — | May 22, 2007 to May 21, 2016 | 23,734 | 16,374 | — | — | 6,040,108 | ||||||||||||||||||||||||||||
Mr. Yeung Chu Kwong, William | May 22, 2006 | 0.6554 (note 6) | 2,000,000 | — | May 22, 2007 to May 21, 2016 | 7,911 | 5,458 | 1,000,000 | — | 1,013,369 | |||||||||||||||||||||||||||
February 6, 2008 | 1.7652 (note 7) | — | 6,000,000 | (note 3) | — | 16,309 | — | — | 6,016,309 | ||||||||||||||||||||||||||||
Mr. Lai Ni Quiaque | June 3, 2004 | 1.4700 | 6,000,000 | — | May 1, 2005 to June 2,2014 | — | — | 6,000,000 | — | — | |||||||||||||||||||||||||||
May 22, 2006 | 0.6554 (note 6) | 3,000,000 | — | May 22, 2007 to May 21, 2016 | 7,911 | 5,458 | 1,000,000 | — | 2,013,369 | ||||||||||||||||||||||||||||
February 11, 2008 | 1.8749 (note 8) | — | 6,000,000 | (note 4) | — | 16,309 | — | — | 6,016,309 | ||||||||||||||||||||||||||||
Senior Management | |||||||||||||||||||||||||||||||||||||
Mr. Chong Kin Chun, John | October 21, 2004 | 1.5297 (note 5) | 2,000,000 | — | January 1, 2005 to October 20, 2014 | 7,911 | 5,457 | — | — | 2,013,368 | |||||||||||||||||||||||||||
May 22, 2006 | 0.6554 (note 6) | 1,000,000 | — | May 22, 2007 to May 21, 2016 | 3,956 | 1,364 | 501,978 | — | 503,342 | ||||||||||||||||||||||||||||
Mr. Lo Sui Lun | October 21, 2004 | 1.5297 (note 5) | 500,000 | — | January 1, 2005 to October 20, 2014 | 1,978 | 1,365 | — | — | 503,343 | |||||||||||||||||||||||||||
May 22, 2006 | 0.6554 (note 6) | 1,500,000 | — | May 22, 2007 to May 21, 2016 | 5,934 | 4,092 | — | — | 1,510,026 | ||||||||||||||||||||||||||||
Dr. Tam Ming Chit | May 2, 2008 | 1.7951 (note 9) | — | 1,000,000 | (note 3) | — | 2,718 | — | — | 1,002,718 | |||||||||||||||||||||||||||
Ms. To Wai Bing | February 15, 2008 | 1.7652 (note 7) | — | 4,000,000 | (note 3) | — | 10,873 | — | 3,008,155 | 1,002,718 |
Notes: | ||
(1) | As a result of allotment of 11,227,213 new shares to shareholders who elected to receive the 2007 Final Dividend in shares on February 4, 2008, the exercise price of and the number of share subject to the 51,805,000 share options outstanding on December 21, 2007 (being the Record Date for determining the entitlement of 2007 Final Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from February 4, 2008. The closing price per share immediately before the date of the grant of the Options was HK$1.70. |
42
(2) | As a result of allotment of 8,838,938 new shares to shareholders who elected to receive the 2008 Interim Dividend in shares on July 23, 2008, the exercise price of and the number of share subject to the 65,235,809 share options outstanding on June 6, 2008 (being the Record Date for determining the entitlement of 2008 Interim Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from July 23, 2008. The closing price per share immediately before the date of the grant of the Options was HK$1.79. | |
(3) | The exercise of the Options is subject to certain conditions that must be achieved by the employee. The Options shall be exercised not later than December 23, 2012. | |
(4) | The exercise of the Options is subject to the performance of the Company’s share. The Options shall be exercised not later than 23 December 2012. | |
(5) | Exercise price of the share options was adjusted from HK$1.54 to HK$1.5339 per ordinary share as a result of our payment of the 2007 Final Dividend (see Note 1). Exercise price of the share options was adjusted from HK$1.5339 to HK$1.5297 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2). | |
(6) | Exercise price of the share options was adjusted from HK$0.66 to HK$0.6573 per ordinary share as a result of our payment of the 2007 Final Dividend (see Note 1). Exercise price of the share options was adjusted from HK$0.6573 to HK$0.6554 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2). | |
(7) | Exercise price of the share options was adjusted from HK$1.77 to HK$1.7652 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2). | |
(8) | Exercise price of the share options was adjusted from HK$1.88 to HK$1.8749 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2). | |
(9) | Exercise price of the share options was adjusted from HK$1.80 to HK$1.7951 per ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2). |
43
(i) | the expiry date relevant to that option; |
(ii) | one month following the date a grantee ceases to be an eligible participant for any reason other than death or termination of his relationship with us (or the relevant subsidiary, as the case may be) on any of the grounds specified in (vii) below; |
(iii) | 12 months, or such longer period as the Board may determine, following the death of a grantee whose relationship with us (or the relevant subsidiary, as the case may be) would not have been terminated on any of the grounds specified in (vii) below; |
(iv) | 21 days following the date an effective resolution is passed for our voluntary winding-up; |
(v) | subject to (iv) above, the date of commencement of such winding-up; |
(vi) | the date on which any compromise or arrangement between us and our members or creditors in connection with a scheme for our reconstruction or our amalgamation with any other company or companies becomes effective; |
(vii) | 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 |
(viii) | 14 days following the date a general offer (which has been made to shareholders by way of take-over offer, share repurchase offer or scheme of arrangement or otherwise in like manner) becomes, or is declared unconstitutional; and |
(ix) | the date on which we cancel the options by reason that the grantee in any way sells, transfers, charges, mortgages, encumbers or creates any interest in favor of any third party over or in relation to any of his or her options or attempt to do so. |
Through
9, 2009.
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 | ||||||||||
Beneficially | Beneficially Owned | |||||||||
Title of Class | Identity of Person or Group | Owned(5) | (%)(1) | |||||||
Ordinary Shares | Wong Wai Kay, Ricky | 332,688,495 | (2) | 51.13 | ||||||
Ordinary Shares | Cheung Chi Kin, Paul | 366,983,820 | (3) | 56.40 | ||||||
Ordinary Shares | Top Group International Limited | 331,637,811 | 50.96 | |||||||
Ordinary Shares | Leung Ka Pak | 331,637,811 | (4) | 50.96 | ||||||
Ordinary Shares | Yau Ming Yan, Andrew | 331,637,811 | (4) | 50.96 |
(1) | Percentage ownership is based on |
(2) | Of the |
44
(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.
Except as disclosed above, we are not directly or indirectly owned or controlled by any other person, corporation or foreign government.
We are not aware of any arrangement the operation of which may at a subsequent date result in a change of control of City Telecom.
Except as disclosed above, we are not directly or indirectly owned or controlled by any other person, corporation or foreign government. | ||
We are not aware of any arrangement the operation of which may at a subsequent date result in a change of control of City Telecom. |
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.
progress.
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 of 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 necessary 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.
Dividends
45
No dividends were
the total amounts of HK$11,370,899.92 was paid as cash dividend.
None
Price | ||||||||
High | Low | |||||||
(In HK$) | ||||||||
2003 | 3.375 | 1.320 | ||||||
2004 | 2.975 | 1.310 | ||||||
2005 | 1.530 | 0.550 | ||||||
2006 | 0.830 | 0.570 | ||||||
2007 | 3.670 | 0.830 | ||||||
2006 | ||||||||
January to March | 0.770 | 0.570 | ||||||
April to June | 0.820 | 0.600 | ||||||
July to September | 0.710 | 0.630 | ||||||
October to December | 0.830 | 0.600 | ||||||
2007 | ||||||||
January to March | 1.560 | 0.830 | ||||||
April to June | 2.200 | 1.250 | ||||||
July to September | 2.120 | 1.780 | ||||||
October to December | 3.670 | 1.930 | ||||||
2008 | ||||||||
January to March | 2.170 | 1.620 | ||||||
April to June | 2.090 | 1.670 | ||||||
July to September | 1.950 | 1.340 | ||||||
October to December | 1.360 | 0.750 | ||||||
2008 | ||||||||
August | 1.910 | 1.650 | ||||||
September | 1.750 | 1.340 | ||||||
October | 1.360 | 0.750 | ||||||
November | 1.110 | 0.840 | ||||||
December | 1.160 | 0.950 |
46
Price | ||||
High | Low | |||
(In HK$) | ||||
2001 | 0.890 | 0.420 | ||
2002 | 1.690 | 0.740 | ||
2003 | 3.375 | 1.320 | ||
2004 | 2.975 | 1.310 | ||
2005 | 1.530 | 0.550 | ||
2004 | ||||
January to March | 2.975 | 2.400 | ||
April to June | 2.525 | 1.310 | ||
July to September | 1.930 | 1.390 | ||
October to December | 1.690 | 1.460 |
2005 January to March April to June July to September October to December 2005 July August September October November December 2006 January February March April May June July August September October November December 2007 January (through January 23, 2007) 1.530 1.300 1.280 0.790 0.930 0.780 0.920 0.550 0.930 0.850 0.900 0.820 0.860 0.780 0.920 0.760 0.870 0.640 0.700 0.550 0.670 0.560 0.730 0.590 0.780 0.610 0.830 0.650 0.750 0.580 0.720 0.600 0.730 0.650 0.720 0.670 0.700 0.630 0.680 0.600 0.770 0.590 0.850 0.720 1.650 0.800
Price | ||||||||
High | Low | |||||||
(In HK$) | ||||||||
2009 | ||||||||
January (through January 9, 2009) | 1.050 | 0.970 |
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
Price | ||||||||
High | Low | |||||||
(In US$) | ||||||||
2003 | 9.550 | 3.100 | ||||||
2004 | 7.720 | 3.320 | ||||||
2005 | 3.980 | 1.370 | ||||||
2006 | 2.009 | 1.380 | ||||||
2007 | 10.750 | 2.010 | ||||||
2006 | ||||||||
January to March | 1.900 | 1.440 | ||||||
April to June | 1.970 | 1.380 | ||||||
July to September | 1.760 | 1.540 | ||||||
October to December | 2.009 | 1.400 | ||||||
2007 | ||||||||
January to March | 4.350 | 2.010 | ||||||
April to June | 5.830 | 3.100 | ||||||
July to September | 5.600 | 4.050 | ||||||
October to December | 10.750 | 4.830 | ||||||
2008 | ||||||||
January to March | 5.580 | 4.250 | ||||||
April to June | 5.750 | 4.370 | ||||||
July to September | 4.910 | 2.950 | ||||||
October to December | 3.380 | 1.915 | ||||||
2008 | ||||||||
August | 4.910 | 4.410 | ||||||
September | 4.720 | 2.950 | ||||||
October | 3.380 | 1.930 | ||||||
November | 2.560 | 1.915 | ||||||
December | 2.850 | 2.220 | ||||||
2009 | ||||||||
January (through January 9, 2009) | 2.820 | 2.660 |
applicable.
applicable.
applicable.
47
Not 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.
We were
Director’s
(a) | the giving of any security or indemnity to him or his associates(s) in respect of money lent or obligations incurred or undertaken by him or any of them at the request of or for the benefit of the Company or any of its subsidiaries; |
(b) | the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he or his associate(s) has himself/themselves assumed responsibility in whole or in part and whether alone or jointly under a guarantee or indemnity or by the giving of security; |
(c) | any proposal concerning an offer of shares, debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase in which offer he or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting thereof; |
(d) | any proposal concerning any other company in which he or his associate(s) is/are interested only, whether directly or indirectly, as an officer, executive or shareholder or in which he or his associate(s) is/are beneficially interested in shares of that company, provided that he and any of his associate(s) are not in aggregate beneficially interested in five per |
(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.
48
(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, |
(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. |
Nasdaq’s
practice of its home country.
49
Under the Companies Ordinance, any action to be taken
shareholder of the Company.
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 the Stock Exchange of Hong Kong from time to time, as our board of directors may from time to time require is paid to us in respect of it; |
(c) | the instrument of transfer is in respect of only one class of share; |
(d) | in the case of a transfer of a share |
(e) | the shares concerned are free of any lien in favor of us. |
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. |
A beneficial owner of our shares or American depositary shares that is not a U.S. Holder is referred to herein as a “Non-U.S. Holder.”
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., $50,000 in the case of a taxpayer that is an individual or trust). U.S. Holders are urged to consult their own tax advisors regarding the circumstances in which an investment in shares or American depositary shares may result in a “reportable transaction” that is required to be disclosed.
• | the dividends received or gain recognized on the sale of the shares or American depositary shares by such person is treated as effectively connected with the conduct of a trade or business by such person in the United States as determined under United States federal income tax law, and the dividends are attributable to a permanent establishment (or in the case of an individual, a fixed place of business) that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis. In such cases you generally will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. Holder, “effectively connected” dividends may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate, or | ||
• | in the case of gains recognized on a sale of shares or American depositary shares by an individual, such individual is present in the United States for 183 days or more and certain other conditions are met. The non-U.S. Holder will be subject to United States federal income tax at a rate of 30% on the amount by which the U.S.-source capital gains exceed non-U.S.-source capital losses. |
53
Backup Withholding and Information Reporting
applicable.
applicable.
applicable.
As of August 31, | ||||
(Thousands of HK$) | ||||
Cash and bank balances: | ||||
Denominated in U.S. dollars | 174,397 | |||
| ||||
Denominated in Canadian dollars | 1,311 | |||
| ||||
Denominated in U.S. dollars | ||||
| ||||
|
As of January 9, 2009, an aggregate principal amount of US$89.4 million of the notes were outstanding.
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$1,845,000 as of August 31, 2006. Under U.S. GAAP reporting, such interest rate swap instrument is and has been recorded at fair value. The interest rate swap agreement remains outstanding following the full repayment of our loan facility with HSBC.
None
We maintain a set of disclosure controls
Procedures
54
With effect from May 13, 2005, PricewaterhouseCoopers, or PwC, tendered its resignation.
For KPMG
Nature of the service | 2005 | 2006 | ||
(HK$ 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
| ||
| ||
| ||
| ||
| ||
| ||
years.
Nature of the service | 2007 | 2008 | ||||||
(HK$ million) | (HK$ million) | |||||||
Audit fees | 2.2 | 2.8 | ||||||
Audit-related fees | 0.4 | 0.4 | ||||||
Total | 2.6 | 3.2 | ||||||
55
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.
56 PwC and KPMG and the services provided pursuant to such engagement were approved by our audit committee in accordance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X. The fees for all such services have been pre-approved by our audit committee. Our audit committee has satisfied itself that the provision of the above-stated non-audit services has not impaired the independence of PwC and KPMG.None.2006,2008, no shares were purchased under the mandate then in force.F-59F-92 following Item 19. (a) See pages F-1 to F-59 following this item.Exhibit 12.1 — Section 302 Certifications of the Chief Executive Officer. (b) Exhibit 12 –12.2 — Section 302 Certifications of eachthe Chief Financial Officer.(c) Exhibit 13 — Section 906 Certification of the ChairmanChief Executive Officer and Chief Financial Officer.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements | Pages | |
| ||
F-9 |
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 Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants, the Company changed its accounting polices for goodwill, share-based payment and financial instruments. Consequently certain amounts previously reported for the years ended August 31, 2004 and 2005 have been restated in order to comply with these new HKFRSs. Also, as further described in note 3(e) to the consolidated financial statements, the Company has restated amounts previously reported for net cash flows from operating activities and net cash flows from investing activities for the year ended August 31, 2005 to present cash outflows for term bank deposits as investing activities instead of operating activities.
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 City Telecom (H.K.) Limited and its subsidiaries (hereafter collectively referred to as the “Company”) for the year ended August 31, 2004, all expressed in Hong Kong Dollars. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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 Standards.
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 30note 31 to the consolidated financial statements.
F-1
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
2004 (restated) 2005 (restated) Revenue from provision of telecommunication and related services Operating expenses Network costs Salaries and related costs Sales and marketing expenses General and administrative expenses Provision for doubtful accounts receivable Income/(loss) from operations Interest income Interest expense Other income, net Income/(loss) before taxation Income tax credit/(expense) Net income/(loss) Earnings/(loss) per share Basic Diluted Limited F-2CITY TELECOMLIMITED AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS Year ended August 31, Note 2006 HK$ HK$ HK$ (Amounts in thousands except per share data) 1,169,880 1,162,059 1,134,876 4 (331,408 ) (339,402 ) (300,593 ) (226,737 ) (259,392 ) (256,721 ) (228,169 ) (267,983 ) (204,952 ) (326,804 ) (395,211 ) (440,672 ) (11,502 ) (35,445 ) (17,450 ) 45,260 (135,374 ) (85,512 ) 3,753 13,578 20,378 (175 ) (54,462 ) (88,637 ) 2,668 6,037 4,465 5 51,506 (170,221 ) (149,306 ) 6 (2,043 ) 6,725 7,244 49,463 (163,496 ) (142,062 ) 7 8.1 cents (26.6) cents (23.1) cents 7 8.1 cents (26.6) cents (23.1) cents
Consolidated financial statements for the year ended August 31, 2008 Year ended August 31, Note 2006 2007 2008 HK$ HK$ HK$ 1,134,876 1,141,270 1,302,981 Network costs, net 4 (300,593 ) (214,591 ) (178,367 ) Salaries and related costs (256,721 ) (221,102 ) (247,460 ) Sales and marketing expenses (204,952 ) (203,673 ) (307,743 ) General and administrative expenses (440,672 ) (402,760 ) (396,598 ) Provision for doubtful accounts (17,450 ) (6,569 ) (14,293 ) (85,512 ) 92,575 158,520 Interest income 20,378 22,671 15,596 Interest expense 5 (88,637 ) (87,504 ) (75,137 ) Other income, net 5 4,465 3,149 9,393 5 (149,306 ) 30,891 108,372 Income tax credit/(expense) 6 7,244 (2,026 ) 16,818 (142,062 ) 28,865 125,190 Basic 7 (23.1) cents 4.7 cents 19.7 cents Diluted 7 (23.1) cents 4.6 cents 19.0 cents accompanyingaccompany notes are an integral part of these consolidated financial statements.
CITY TELECOM
August 31, | ||||||||||
Note | 2007 | 2008 | ||||||||
HK$ | HK$ | |||||||||
ASSETS | ||||||||||
Current assets | ||||||||||
Cash and bank balances | 20 | 532,894 | 421,610 | |||||||
Pledged bank deposits | 16 | 87,220 | 87,319 | |||||||
Investment securities | 17 | 3,779 | 27,997 | |||||||
Trade receivables, net | 8(a) | 170,551 | 140,283 | |||||||
Other receivables, deposits and prepayments | 8(d) | 59,372 | 82,726 | |||||||
Inventories | 477 | — | ||||||||
Deferred expenditure | 13 | 13,584 | 40,704 | |||||||
Total current assets | 867,877 | 800,639 | ||||||||
Goodwill | 9 | 1,066 | 1,066 | |||||||
Fixed assets, net | 10 | 1,237,223 | 1,231,399 | |||||||
Investment securities | 17 | 39,213 | — | |||||||
Derivative financial instrument | 18 | 1,039 | — | |||||||
Long term receivables and prepayment | 6,932 | 5,586 | ||||||||
Deferred expenditure | 13 | 7,783 | 15,391 | |||||||
Deferred taxation | 12 | — | 26,335 | |||||||
Total assets | 2,161,133 | 2,080,416 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
Current liabilities | ||||||||||
Trade payables | 76,019 | 52,324 | ||||||||
Deposits received | 16,188 | 16,264 | ||||||||
Deferred services income | 64,202 | 110,449 | ||||||||
Other payables and accrued charges | 11 | 145,267 | 178,114 | |||||||
Income tax payable | 1,481 | 2,103 | ||||||||
Current portion of obligations under finance leases | 14 | 835 | 121 | |||||||
Total current liabilities | 303,992 | 359,375 | ||||||||
Long-term liabilities | ||||||||||
Deferred taxation | 12 | 291 | 4,937 | |||||||
Long-term debt and obligations under finance leases, excluding current portion | 14 | 952,968 | 683,497 | |||||||
Total liabilities | 1,257,251 | 1,047,809 |
F-3
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 $0.10 per share — 2,000,000,000 shares authorized — 614,125,404 shares issued and outstanding at August 31, 2005, 614,175,404 shares issued and outstanding at August 31, 2006 | 19 | 61,412 | 61,417 | |||
Share premium | 619,408 | 620,298 | ||||
Retained profits | 331,742 | 196,289 | ||||
Capital reserve | 7,052 | 12,993 | ||||
Translation reserve | 840 | 657 | ||||
Total shareholders’ equity | 1,020,454 | 891,654 | ||||
Total liabilities and shareholders’ equity | 2,347,428 | 2,124,215 | ||||
August 31, | ||||||||||
Note | 2007 | 2008 | ||||||||
HK$ | HK$ | |||||||||
Commitments and contingencies | 15 | |||||||||
Shareholders’ equity | ||||||||||
Ordinary shares, par value HK$0.10 per share | ||||||||||
— 2,000,000,000 shares authorized | ||||||||||
— 616,503,404 and 650,621,823 shares issued and outstanding at August 31, 2007 and 2008, respectively | 19 | 61,650 | 65,062 | |||||||
Share premium | 622,433 | 670,717 | ||||||||
Retained profits | 200,519 | 275,025 | ||||||||
Capital reserve | 18,109 | 19,013 | ||||||||
Translation reserve | 1,171 | 2,790 | ||||||||
Total shareholders’ equity | 903,882 | 1,032,607 | ||||||||
Total liabilities and shareholders’ equity | 2,161,133 | 2,080,416 | ||||||||
F-4
CITY TELECOM
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Year ended August 31, | ||||||||
Note | 2004 (restated) | 2005 (restated) | 2006 | |||||
HK$ | 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
Consolidated financial statements for the year ended August 31, 2008
Year ended August 31, | ||||||||||||||||
Note | 2006 | 2007 | 2008 | |||||||||||||
HK$ | HK$ | HK$ | ||||||||||||||
Total equity as of beginning of the year | ||||||||||||||||
As previously reported | 1,020,454 | 891,654 | 903,882 | |||||||||||||
Adjustment arising from adoption of HKAS 39 | 6,609 | — | — | |||||||||||||
After opening balance adjustment | 1,027,063 | 891,654 | 903,882 | |||||||||||||
Net (loss)/gain recognized directly in equity: | ||||||||||||||||
Foreign currency translation adjustment | (183 | ) | 514 | 1,619 | ||||||||||||
(Loss)/profit attributable to shareholders | (142,062 | ) | 28,865 | 125,190 | ||||||||||||
Dividend paid in respect of the current year | — | (24,635 | ) | (11,371 | ) | |||||||||||
Dividend paid in respect of the previous year | — | — | (5,915 | ) | ||||||||||||
Movements in equity arising from capital transactions: | ||||||||||||||||
Equity settled share-based compensation | 6,823 | 5,727 | 4,204 | |||||||||||||
Shares issued upon exercise of options | 13 | 1,757 | 14,998 | |||||||||||||
Total equity as of the end of the year | 19 | 891,654 | 903,882 | 1,032,607 | ||||||||||||
F-5
CITY TELECOM
Year ended August 31, | ||||||||||||||||
Note | 2006 | 2007 | 2008 | |||||||||||||
HK$ | HK$ | HK$ | ||||||||||||||
Cash flows from operating activities | ||||||||||||||||
(Loss)/income before taxation | (149,306 | ) | 30,891 | 108,372 | ||||||||||||
Adjustments to reconcile | ||||||||||||||||
(Loss)/income before taxation to net cash inflow from operating activities: | ||||||||||||||||
—Depreciation of purchased fixed assets | 275,538 | 257,052 | 209,464 | |||||||||||||
—Depreciation of fixed assets held under finance leases | 926 | 1,051 | 587 | |||||||||||||
—Impairment loss on investment property | 1,131 | — | — | |||||||||||||
—Amortization of deferred expenditure | 13,973 | 15,580 | 33,777 | |||||||||||||
—Interest income | (20,378 | ) | (22,671 | ) | (15,596 | ) | ||||||||||
—Interest element of finance leases | 54 | 62 | 34 | |||||||||||||
—Loss on disposal of fixed assets | 9,621 | 1,714 | 1,431 | |||||||||||||
—Realized and unrealized gain on investment securities | (668 | ) | (1,887 | ) | (3,284 | ) | ||||||||||
—Interest, amortization and exchange difference on senior notes | 86,664 | 89,879 | 72,640 | |||||||||||||
—Other borrowing costs | 1,919 | (739 | ) | (1,185 | ) | |||||||||||
—Equity settled share-based compensation | 6,823 | 5,727 | 4,204 | |||||||||||||
—Realized and unrealized loss on derivative financial instruments | 125 | 806 | 1,039 | |||||||||||||
—Gain on extinguishment of 10-year senior notes | — | — | (2,582 | ) | ||||||||||||
—Decrease in long-term receivable and prepayment | 567 | 5,600 | 1,346 |
F-6
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 | ) | |||
(Continued)
Year ended August 31, | ||||||||||||||||
Note | 2006 | 2007 | 2008 | |||||||||||||
HK$ | HK$ | HK$ | ||||||||||||||
Cash flows from operating activities (continued) | ||||||||||||||||
Adjustments to reconcile (continued) | ||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
— (Increase)/decrease in trade receivables, other receivables, deposits and prepayments | (9,413 | ) | (11,742 | ) | 6,914 | |||||||||||
— Decrease in inventories | 1,101 | 379 | 477 | |||||||||||||
— Increase in deferred expenditure | (5,287 | ) | (24,502 | ) | (68,505 | ) | ||||||||||
— (Decrease)/increase in trade payables, other payables, accrued charges, and deposits received | (23,652 | ) | 8,573 | (12,567 | ) | |||||||||||
— (Decrease)/increase in deferred service income | (3,001 | ) | 30,459 | 46,247 | ||||||||||||
Net cash inflow generated from operations | 186,737 | 386,232 | 382,813 | |||||||||||||
Interest element of finance leases | (54 | ) | (62 | ) | (34 | ) | ||||||||||
Hong Kong profits tax (paid)/recovered | (961 | ) | (263 | ) | 42 | |||||||||||
Overseas tax paid | (1,571 | ) | (1,908 | ) | (4,292 | ) | ||||||||||
Net cash inflow from operating activities | 184,151 | 383,999 | 378,529 | |||||||||||||
Investing activities | ||||||||||||||||
Decrease/(Increase) in pledged bank deposits | 3,425 | (198 | ) | — | ||||||||||||
(Increase)/decrease in term bank deposits | (144,646 | ) | 237,496 | — | ||||||||||||
Purchases of fixed assets | (382,214 | ) | (149,300 | ) | (189,903 | ) | ||||||||||
Interest received | 20,378 | 22,671 | 15,596 | |||||||||||||
Proceeds from disposal of fixed assets | 5,676 | 3,384 | 7,057 | |||||||||||||
Net proceeds from maturity of derivative financial instruments | 4,639 | — | 3,900 | |||||||||||||
Net proceeds from redemption of long-term bank deposit | — | — | 15,600 | |||||||||||||
Net cash (outflow)/inflow from investing activities | (492,742 | ) | 114,053 | (147,750 | ) | |||||||||||
Net cash (outflow)/inflow before financing activities | (308,591 | ) | 498,052 | 230,779 | ||||||||||||
F-7
Year ended August 31, | ||||||||||||||||
Note | 2006 | 2007 | 2008 | |||||||||||||
HK$ | HK$ | HK$ | ||||||||||||||
Financing activities | ||||||||||||||||
Proceeds from exercise of share options | 13 | 1,757 | 14,998 | |||||||||||||
Interest paid on senior notes | (85,235 | ) | (85,313 | ) | (70,010 | ) | ||||||||||
Repayment of capital element of finance leases | (1,210 | ) | (1,321 | ) | (834 | ) | ||||||||||
Repurchase of senior notes | — | — | (269,399 | ) | ||||||||||||
Dividends paid | — | (24,627 | ) | (17,271 | ) | |||||||||||
Net cash outflow from financing activities | (86,432 | ) | (109,504 | ) | (342,516 | ) | ||||||||||
(Decrease)/increase in cash and bank balances | (395,023 | ) | 388,548 | (111,737 | ) | |||||||||||
Cash and bank balances at the beginning of year | 539,591 | 144,917 | 532,894 | |||||||||||||
Effect of foreign exchange rate changes on cash and bank balances | 349 | (571 | ) | 453 | ||||||||||||
Cash and bank balances at the end of year | 19 | 144,917 | 532,894 | 421,610 | ||||||||||||
F-8
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
As ofyear ended August 31, 2006 the Company had the following principal direct and indirect subsidiaries:
1 | Description of business and basis of presentation |
City Telecom (H.K.) Limited (the “Company”) was incorporated in Hong Kong on May 19, 1992 under the Hong Kong Companies Ordinance. City Telecom (H.K.) Limited and its subsidiaries (collectively referred to as the “Group”) are engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada. | ||
The following is a list of principal subsidiaries which principally affect the results, assets or liabilities of the Group as of August 31, 2008: |
Percentage | ||||||||||||||
| holding | |||||||||||||
Place and date of
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| Nature of | ||||||||||||
Name | establishment/ operation | Issued capital | Directly | Indirectly | Business | |||||||||
963673 Ontario Limited | Canada | Common dollar (“CAD”) 502,000 | — | 100 | Investment holding in Canada | |||||||||
Attitude Holdings Limited | British Virgin Islands | Ordinary US$1 | — | 100 | Inactive | |||||||||
Automedia Holdings Limited | British Virgin Islands | Ordinary US$1 | 100 | — | Investment holding in Hong Kong | |||||||||
City Telecom (B.C.) Inc. | Canada | Common | — | 100 | Provision of international telecommunications and dial-up | |||||||||
City Telecom (Canada) Inc. | Canada | Common | — | 100 | Leasing and maintenance of switching equipment and provision of operational services in Canada |
F-9
1 | Description of business and basis of presentation (continued) |
Place and | Percentage | |||||||||||||
date of establishment/ | holding | Nature of | ||||||||||||
Name | operation | Issued capital | Directly | Indirectly | business | |||||||||
City Telecom Inc. | Canada | Common | — | 100 | Provision of international telecommunications and dial-up | |||||||||
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International Limited |
May 8, 1997 |
US$5,294 |
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City Telecom (U.S.A.) Inc. | USA May 5, 1997 | Common US$1 | — | 100 | Inactive | ||||||||||
Credibility Holdings Limited | British Virgin Islands December 18, 1998 | Ordinary US$1 | 100 | — | Investment holding in Hong Kong | ||||||||||
CTI Guangzhou Customer Service Co. Ltd (translated from the registered name in Chinese) | The People’s Republic of China (“the PRC”) April 29, 2002 | Paid in capital of HK$8,000,000 | 100 | — | Provision of administrative support services in the PRC | ||||||||||
CTI International Limited | Hong Kong August 23, 1999 | Ordinary HK$10,000,000 | — | 100 | Inactive | ||||||||||
CTI Marketing Company Limited | Hong Kong August 23, 1999 | Ordinary HK$10,000 | — | 100 | Provision of media marketing services in Hong Kong | ||||||||||
Golden Trinity Holdings Limited | British Virgin Islands June 11, 1997 | Ordinary US$1 | 100 | — | Investment holding in Hong Kong |
F-10
1 | Description of business and basis of presentation (continued) |
Place and | Percentage | |||||||||||||
date of establishment/ | holding | Nature of | ||||||||||||
Name | operation | Issued capital | Directly | Indirectly | business | |||||||||
Hong Kong Broadband Network Limited | Hong Kong August 23, 1999 | Ordinary HK$383,049 | — | 100 | Provision of international telecommunications and fixed telecommunications network services in Hong Kong | |||||||||
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IDD 1600 Company Limited | Hong Kong November 4, 1998 | Ordinary | — | 100 | Provision of international telecommunications services in Hong Kong | |||||||||
Global Courier Company Limited (formerly known as iStore.com Limited) | Hong Kong | Ordinary | — | 100 | Inactive | |||||||||
SGBN Singapore Broadband Network Pte. Limited | Singapore March 29, 2007 | Ordinary Singapore dollar 1 | 100 | — | Inactive |
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:
| 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”), as well as accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. HKFRSs 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 31. |
F-11
2 | Basis of preparation and principal accounting policies (continued) |
(b) | Basis of preparation | |
The consolidated financial statements consist of the balance sheets of the Company and all its subsidiaries as of August 31, 2007, and 2008 and the related statements of operations, cash flows and changes in shareholders’ equity for the years ended August 31, 2006, 2007 and 2008. | ||
The measurement basis used in the preparation of the consolidated financial statements is the historical cost basis except that certain financial assets are stated at their fair value or amortized cost as explained in the accounting policies set out below (see notes 2(j), 2(k) and 2(s)). | ||
The preparation of financial statements in conformity with HKFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. | ||
All 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 |
Subsidiaries are entities controlled by the Company. Control exists when the Company 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 exercisable are taken into account. |
F-12
2 | Basis of preparation and principal accounting policies (continued) |
(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 transactions are dealt with in the consolidated statement of operations. | ||
For consolidation purposes, the balance sheets of subsidiaries with functional currencies other than Hong Kong Dollars are translated at the rate of exchange ruling at the balance sheet date. Revenues and expenses are translated at the average rate prevailing during the year. The resulting exchange differences are dealt with in the consolidated 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 Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate of a jointly controlled entity is recognized immediately in the consolidated statement of operations. | ||
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-13
2 | Basis of preparation and principal accounting policies (continued) |
(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 consolidated 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: |
— | Buildings and investment property situated on leasehold land | over the shorter of the unexpired term of useful lives of 50 years | ||||
— | Furniture, fixtures and fittings | 4 years | ||||
— | Telecommunications, computer and office equipment | 4 - 20 years | ||||
— | Motor vehicles | 4 years | ||||
— | Leasehold improvements | over the shorter of the unexpired term of the leases and their estimated useful lives |
Where the parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.
Major costs incurred in restoring fixed assets to their normal working condition are charged to the 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. | ||
Major costs incurred in restoring fixed assets to their normal working condition are charged to the consolidated statement of operations. Major improvements are capitalized and depreciated over the expected useful lives of the related asset. |
F-14
2 | Basis of preparation and principal accounting policies (continued) |
(g) | Fixed assets (continued) | |
The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognized in the consolidated statement of operations on the date of disposal. | ||
During the year ended August 31, 2007, the Group changed the estimated useful lives of certain telecommunications equipment. The effect of such change is set out in note 10(d). | ||
Under certain circumstances, the Group may have obligation to dismantle part of its network upon request by concerned parties. Owing to the absence of such history, no reliable estimate can be reasonably made in respect of such potential obligation. |
(h) | Assets held under leases |
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease. | ||
(i) | Classification of leased assets | |
Assets held 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 which its fair value cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease (see note 2(h)(iii)). | ||
(ii) | Finance leases | |
Where the Group acquired the use of assets under finance leases, the amounts representing the lower of the fair value of the leased asset, or 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 the consolidated statement of operations over the period of the leases so as to produce an approximate constant periodic rate of charge on the remaining balance of the obligations. |
F-15
2 | Basis of preparation and principal accounting policies (continued) | |
(h) | Assets held under leases (continued) | |
(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, are credited/ charged to the consolidated statement of operations on a straight-line basis over the lease periods. | ||
(i) | Impairment of assets | |
(i) | Impairment of investment securities and other receivables | |
Investments in debt and equity securities and other current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events: |
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-16
2 | Basis of preparation and principal accounting policies (continued) | |
(i) | Impairment of assets (continued) | |
(i) | Impairment of investment securities and other receivables (continued) |
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the consolidated statement of operations. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years. | |||
For available-for-sale securities, the cumulative loss that has been recognized directly in equity is removed from equity and is recognized in consolidated statement of operations. The amount of the cumulative loss that is recognized in consolidated statement of operations is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in consolidated statement of operations. | |||
Impairment losses recognized in consolidated statement of operations in respect of available-for-sale equity securities are not reversed through consolidated statement of operations. Any subsequent increase in the fair value of such assets is recognized directly in equity. | |||
Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognised. Reversals of impairment losses in such circumstances are recognised in profit or loss. | |||
Impairment losses are written off against the corresponding assets directly, except for impairment losses recognised in respect of trade debtors, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors 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 recognised in profit or loss. |
(ii) | Impairment of other assets |
— | fixed assets; | ||
— | investment property; and | ||
— | goodwill. |
F-17
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
2 | Basis of preparation and principal accounting policies (continued) | |
(ii) | Impairment of other assets (continued) | |
If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment. |
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.
Except in the case of goodwill, an impairment loss is reversed if there has been favorable change in the estimates
— | Calculation of recoverable amount | ||
The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). | |||
— | Recognition of impairment losses | ||
An impairment loss is recognized in consolidated statement of operations whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable. | |||
— | Reversals of impairment losses | ||
Except in the case of goodwill, an impairment loss is reversed if there has been a favorable change in the estimate used to determine the recoverable amount. An impairment
| |||
A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to consolidated statement of operations in the year in which the reversals are recognized. |
F-18
(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:
(j) | Investment securities | |
The Group’s accounting policy for investments securities is as follows: | ||
Financial assets at fair value through profit or loss comprise of financial assets held for trading and those designated as of fair value through profit or loss at inception. They are initially stated at fair value and are classified as current assets, if they are expected to be realized within 12 months. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized in the consolidated statement of operations. The net gain or loss recognized in the consolidated statement of operations does not include any interest earned on these investments as these are recognized in accordance with the policies set out in notes 2(u)(v). | ||
Held-to-maturity securities are dated debt securities that the Group has the positive ability and intention to hold to maturity. They are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, they are stated in the balance sheet at amortized cost less impairment losses (see note 2(i)(i)). | ||
Investment securities that are not classified as held for trading, financial assets at fair value through profit or loss, or held-to-maturity securities, are classified as available-for-sale securities. Available-for sale securities are initially recognized at fair value plus transaction costs. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized directly in equity, except for impairment losses (see note 2(i)(i)) and, in the case of monetary items such as debt securities, foreign exchange gains and losses that are recognized directly in the consolidated statement of operations. Where these investments are interest-bearing, interest calculated using the effective interest method is recognized in the consolidated statement of operations. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in the consolidated statement of operations. | ||
Investments are recognized on the date the Group commits to purchase the investments. Investments are derecognized when: |
(i) | the contractual rights to the cash flows from the investment securities expire; or |
(ii) | the |
(k) | Derivative financial instruments | |
Derivative financial instruments that are not designated as hedge are recognized initially at fair value. At each balance sheet date the fair value is remeasured. The gain or loss on remeasurement to fair value is charged immediately to the consolidated statement of operations. | ||
(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. |
(k) DerivativeF-19
Derivative financial instruments are recognized initially at fair value. At each balance sheet datestatements for 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 yearsyear ended August 31, 2004, 2005 and 2006, there was no write-down or provision made against2008
2 | Basis of preparation and principal accounting policies (continued) | |
(m) | Accounts receivables | |
Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for 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 bad and doubtful debts. | ||
(n) | Inventories | |
Inventories are carried at the lower of cost or net realizable value. | ||
Cost is determined using the first in, first out method and comprises all costs of purchase. | ||
Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. | ||
When inventories are sold, the carrying amount of the inventory is recognized in the consolidated statement of operations as cost of inventories sold in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value is recognized as an expense in the period the write-down occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction of network costs in the period in which the reversal occurs. | ||
For the years ended August 31, 2006, 2007 and 2008, there was no write-down of inventories. | ||
(o) | Cash, bank balances and pledged bank deposits | |
Cash and bank balances consist of cash on hand, cash in bank accounts and interest-bearing savings accounts. Cash that is restricted for use or pledged as security is disclosed separately on the face of the consolidated balance sheet, and is not included in the cash and bank balances total in the consolidated statements of cash flows. The pledged bank deposits represent cash maintained at a bank as security for bank facility and bank guarantees issued by the bank to third party suppliers and utility vendors (see note 16). |
F-20
(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
(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 year ended August 31, 2008
2 | Basis of preparation and principal accounting policies (continued) |
(p) | 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. |
(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 services are rendered by employees. 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. |
F-21
(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 notesended August 31, 2008
2 | Basis of preparation and principal accounting policies (continued) |
(q) | Employee benefits (continued) | |
(iii) | Retirement benefit costs | |
The Group contributes to defined contribution retirement schemes which are available to certain employees. Contributions to the schemes by the Group are calculated as a percentage of employees’ basic salaries and charged to the consolidated statement of operations. The Group’s contributions are reduced by contributions forfeited by those employees who leave the scheme prior to being fully vested in the Group’s contributions. | ||
The assets of the scheme are held in an independently administered fund that is separated from the Group’s assets. | ||
(iv) | Share-based payments | |
The fair value of share options granted to 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 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 the consolidated statement of operations in the year of the review, unless the original employee cost qualified 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 relating to share options expense is recorded 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. |
F-22
(u) Revenue recognition
2 | Basis of preparation and principal accounting policies (continued) |
(s) | Senior notes | |
Senior notes are recognized initially at fair value less direct and incremental issuance costs. Subsequent to initial recognition, the senior notes are stated at amortized cost. The difference between the original issuance price and redemption price of the notes is recognized in the consolidated statement of operations over the period of the notes using the effective interest method. |
(t) | Trade and other payables |
Trade and other payables are initially recognized at fair value and are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost. | ||
As at August 31, 2007 and 2008, the Group’s trade and other payables are stated at cost as the effect of discounting is immaterial. |
(u) | 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 |
(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 services |
(iv) | Revenue from the sales of products is recognized upon the transfer of risks and rewards of ownership to the customer, which generally coincides with the time when the goods are delivered to |
F-23
2 | Basis of preparation and principal accounting policies (continued) |
(u) | Revenue recognition (continued) | |
(v) | Interest income is recognized |
(vi) | Rental income receivable under operating leases is recognized in the consolidated statement of operations in equal installments over the periods covered by the lease term. Lease incentives granted are recognized in the consolidated statement of operations as an integral part of the aggregate net lease payments receivable. |
(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.
(v) | Borrowing costs |
Borrowing costs are expensed in the consolidated statement of operations in the period which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset. | ||
The capitalization of
| ||
No borrowing cost was capitalized for the years ended August 31, 2006, 2007 and 2008, respectively. |
(w) | Segment reporting |
In accordance with the Group’s internal financial reporting, the Group 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. |
F-24
(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
2008
2 | Basis of preparation and principal accounting policies (continued) |
(x) | 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 consideration received or receivable adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services provided, adjusted by the amount of any cash or cash equivalents transferred. |
(y) | 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. |
F-25
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.2008
3 | Changes in accounting policies |
The HKICPA has issued a number of new and revised HKFRSs and Interpretations that are effective or available for early adoption for the current accounting period of the Group. | ||
There have been no significant changes to the accounting policies applied in these financial statements for the years presented as a result of adoption of these new standards. However, as a result of the adoption of HKFRS 7, Financial instruments: Disclosures and the amendment to HKAS 1, Presentation of financial statements: Capital disclosures, there have been some additional disclosures provided as follows: | ||
As a result of the adoption of HKFRS 7 and as compared with the information previously required to be disclosed by HKAS 32, Financial instruments: Disclosure and presentation, the financial statements include expanded disclosure about the significance of the Group’s financial instruments and the nature and extent of risks arising from those instruments. These disclosures are provided throughout these financial statements, in particular in note 27. | ||
The amendment to HKAS 1 introduces additional disclosure requirements to provide information about the level of capital and the Group’s objectives, policies and processes for managing capital. These new disclosures are set out in note 19. | ||
Both HKFRS 7 and the amendment to HKAS 1 do not have any material impact on the classification, recognition and measurement of the amounts recognized in the financial instruments. | ||
The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 30). |
4 | Network costs |
Network costs mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, production costs for the pay-TV using Internet Protocol service and costs of inventories sold, and exclude depreciation charge which is included in general and administration expenses. | ||
Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a Fixed Telecommunications Network Services (“FTNS”) licensee, is obligated to contribute Universal Services Contributions (“USC”) as compensation to PCCW-HKT Telephone Limited (“PCCW-HKT”) for the cost of network development in remote areas in Hong Kong. | ||
The Group estimates the USC payable to PCCW-HKT based on the provisional rates announced by the Telecommunications Authority (“TA”). The TA periodically reviews the actual costs incurred by PCCW-HKT in the network development and revises the amounts owed to, or be refunded by, PCCW-HKT to the respective USC contributing parties, including the HKBN (“the Rate Revisions”). Accordingly, the estimate made by the HKBN’s management is subject to change based on the Rate Revisions identified during a financial year and up to the date prior to the release of the financial statements of the Group. The Group adjusts such differences as an addition or reduction of the corresponding costs of services in that particular reporting period. | ||
Any sum received in advance from PCCW-HKT as an estimated refund of the USC on a provisional basis, which is subject to the final confirmation and determination of TA, is recorded in other payables and accrued expenses in the Group’s consolidated balance sheet. | ||
On November 13, 2006, TA issued a statement (the “2006 TA”) on the USC and confirmed the actual contribution level for calendar year 2004. In aggregate, an amount of HK$1,365,088 was recorded as a reduction against the network costs of the Group for the year ended August 31, 2006. | ||
As of the date of issuance of the Group’s financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes, the actual contribution level for calendar year 2005, 2006 and 2007 had not yet been confirmed by the TA. For the year ended August 31, 2007, the Group recorded USC charges based on the provisional rates set out in the 2006 TA. On December 28, 2007, TA issued a statement (the “2007 TA”) on the USC and confirmed that the actual contribution level for the period from January 1, 2005 to June 30, 2007. Based on the 2007 TA, an amount of HK$7,617,000 was recovered as a reduction against the network cost of the Group for the year ended August 31, 2008. | ||
The actual contribution level for the period subsequent to June 30, 2007 has not yet been confirmed by the TA. Therefore, for the year ended August 31, 2008, the Group recorded USC charges based on the provisional rates set out in the 2007 TA. |
F-26
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$87,000
5 | (Loss)/income before taxation |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
(Loss)/income before taxation is arrived at after charging: | ||||||||||||
Amortization of deferred expenditure | 13,973 | 15,580 | 33,777 | |||||||||
Depreciation of purchased fixed assets | 275,538 | 257,052 | 209,464 | |||||||||
Depreciation of fixed assets held under finance leases | 926 | 1,051 | 587 | |||||||||
Impairment loss — investment property | 1,131 | — | — | |||||||||
Operating lease charges in respect of: | ||||||||||||
— Land and buildings | 17,556 | 13,879 | 13,296 | |||||||||
— Computer equipment | 840 | 32 | 50 | |||||||||
Research and development costs | 9,605 | 4,977 | 9,593 | |||||||||
Retirement benefit costs — defined contribution plans (note 24) | 27,956 | 23,933 | 29,738 | |||||||||
Interest expense comprises: | ||||||||||||
Interest element of finance leases | 54 | 62 | 34 | |||||||||
Interest on senior notes | 85,235 | 85,313 | 70,010 | |||||||||
Amortization of debt issuance cost | 1,429 | 2,129 | 1,665 | |||||||||
Other borrowing costs | 1,919 | — | 3,428 | |||||||||
Total interest expense | 88,637 | 87,504 | 75,137 | |||||||||
Other income net, comprises: | ||||||||||||
Net exchange gain/(loss) | 1,044 | (114 | ) | 1,923 | ||||||||
Gain on extinguishment of 10-year senior notes | — | — | 2,582 | |||||||||
Others | 3,421 | 3,263 | 4,888 | |||||||||
4,465 | 3,149 | 9,393 | ||||||||||
F-27
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:
6 | Income tax credit/(expense) | ||
(Loss)/income before taxation by geographical location is as follows: |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Hong Kong (loss)/income | (150,624 | ) | 24,574 | 100,514 | ||||||||
Overseas income | 1,318 | 6,317 | 7,858 | |||||||||
(Loss)/income before taxation | (149,306 | ) | 30,891 | 108,372 | ||||||||
| |||
| |||
Income tax credit/(expense) consist of the following: |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Hong Kong income tax | ||||||||||||
— current (note (a)) | (24 | ) | (121 | ) | (391 | ) | ||||||
— under-provision of current tax in prior years | (552 | ) | — | — | ||||||||
— deferred (note 12) | 10,046 | 47 | 21,757 | |||||||||
Overseas taxation | ||||||||||||
— current (note (b)) | (2,367 | ) | (1,964 | ) | (1,929 | ) | ||||||
— under-provision of current tax in prior years | — | — | (2,552 | ) | ||||||||
— deferred (note 12) | 141 | 12 | (67 | ) | ||||||||
7,244 | (2,026 | ) | 16,818 | |||||||||
| |||||
| |||||
| |||||
| |||||
4 Network costs
Network costs mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, production costs for 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 | ||||||
The Company |
(b) | Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the |
The income taxes attributable to incomeF-28
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 and2008
6 | Income tax credit/(expense) (continued) | |
The income tax credit/ (expense) for the years ended August 31, 2006, 2007 and 2008 differs from the amounts determined by applying the applicable statutory rate in Hong Kong of 17.5% (2008:16.5%) to income/ (loss) before taxation as a result of the following differences: |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Computed “expected” income tax credit/(expense) | 26,129 | (5,406 | ) | (17,881 | ) | |||||||
Difference in statutory tax rates of foreign subsidiaries | (459 | ) | (1,006 | ) | (1,046 | ) | ||||||
Effect of expenses not deductible for income taxes | (883 | ) | (772 | ) | (6,243 | ) | ||||||
Recognition of prior year unrecognized tax losses | — | — | 26,335 | |||||||||
Effect of bank interest income not subject to income taxes | 2,944 | 3,533 | 2,370 | |||||||||
Effect of other income not subject to income taxes | 548 | 686 | 1,508 | |||||||||
Under-provision for Hong Kong current income tax in prior years | (552 | ) | — | — | ||||||||
Under provision for overseas current income tax in prior years | — | — | (2,552 | ) | ||||||||
Adjustment for changes in new tax laws on share based payment | — | — | 2,324 | |||||||||
Effect of prior year tax losses utilized | 2,416 | 6,678 | 12,013 | |||||||||
Effect of tax loss not recognized | (20,597 | ) | (4,539 | ) | (74 | ) | ||||||
Effect of share based payment not recognized | (2,305 | ) | (1,125 | ) | (110 | ) | ||||||
Others | 3 | (75 | ) | 174 | ||||||||
Income tax credit/(expense) | 7,244 | (2,026 | ) | 16,818 | ||||||||
F-29
7 | (Loss)/earnings per share |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Net (loss)/income | (142,062 | ) | 28,865 | 125,190 | ||||||||
Number of shares in thousands | ||||||||||||
Weighted average number of shares in issue | 614,134 | 614,840 | 634,015 | |||||||||
Incremental shares from assumed exercise of share options | — | 16,479 | 23,982 | |||||||||
Diluted weighted average number of shares | 614,134 | 631,319 | 657,997 | |||||||||
Basic (loss)/earnings per share | HK(23.1) cents | HK4.7 cents | HK19.7 cents | |||||||||
Diluted (loss)/earnings per share | HK(23.1) cents | HK4.6 cents | HK19.0 cents | |||||||||
Basic (loss)/earnings per share is calculated based on the weighted average number of issued ordinary shares and the related (loss)/income amount. Diluted (loss)/earnings per share is calculated based on the weighted average number of issued ordinary shares and the number of incremental shares from assumed exercise of share options has been determined using the treasury stock method and the related (loss)/income amount. | ||
For the years ended August 31, 2006, the number of shares used in the calculation of diluted loss per share was equal to the number of shares used to calculate basic loss per share as the incremental effect of share options was anti-dilutive in a loss-making year. |
F-30
8 | Receivables |
(a) | Trade receivables, net |
August 31, | ||||||||
2007 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Trade receivables | 192,943 | 152,227 | ||||||
Less: Allowance for doubtful debts | (22,392 | ) | (11,944 | ) | ||||
170,551 | 140,283 | |||||||
The aging analysis of accounts receivable is as follows: |
August 31, | ||||||||
2007 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Current - 30 days | 50,282 | 45,462 | ||||||
31 - 60 days | 15,619 | 17,507 | ||||||
61 - 90 days | 8,876 | 7,249 | ||||||
Over 90 days | 118,166 | 82,009 | ||||||
192,943 | 152,227 | |||||||
The majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted. |
(b) | Impairment of trade receivables |
Impairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly. | ||
The movement in the allowance for doubtful debts during the year, including both specific and collective loss components is as follows: |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Balance at beginning of the year | 48,316 | 55,745 | 22,392 | |||||||||
Additions | 17,450 | 15,973 | 14,293 | |||||||||
Reversals | — | (9,404 | ) | — | ||||||||
Write-off | (10,021 | ) | (39,922 | ) | (24,741 | ) | ||||||
Balance at the end of the year | 55,745 | 22,392 | 11,944 | |||||||||
Allowance for doubtful debts as of August 31, 2006 includes allowance for mobile interconnection charges receivables of HK$20,809,000. Following TA’s 2004 Determination issued in June 2007 (note 26(c)), the Group has reversed HK$9,404,000 of the allowance for mobile interconnection charges to the consolidated statement of operations (note 26(c)) and has written off the remaining balance of the allowance of HK$11,405,000 against the related accounts receivable. |
F-31
8 Receivables
(a) Trade receivables, netyear ended August 31, 2008
August 31, | ||||||
2005 | 2006 | |||||
HK$’000 | HK$’000 | |||||
Trade receivables (note (a)) | 178,326 | 196,343 | ||||
Less: provision for doubtful debts (note (b)) | (48,316 | ) | (55,745 | ) | ||
130,010 | 140,598 | |||||
Note
Receivables (continued) | ||
(c) | Trade receivables that are not impaired | |
The aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows: |
August 31, | ||||||||
2007 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Neither past due nor impaired | 50,282 | 45,462 | ||||||
0-30 past due | 15,619 | 17,507 | ||||||
31-60 past due | 8,876 | 7,249 | ||||||
Over 60 past due | 95,774 | 70,065 | ||||||
170,551 | 140,283 | |||||||
Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default. | ||
Trade receivables over 60 days past due for the Group include receivable relating to mobile interconnection charges of HK$ | ||
Other accounts receivable that were past due but not impaired relate to a number of |
Other receivables, |
August 31, | ||||||||
2007 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Deposits for purchase of fixed assets | 6,007 | 9,094 | ||||||
Deposits for lease of land and building | 7,256 | 10,528 | ||||||
Interest receivable | 1,344 | 757 | ||||||
Prepayments | 19,895 | 30,635 | ||||||
Unbilled revenue | 15,572 | 23,293 | ||||||
Others | 9,298 | 8,419 | ||||||
59,372 | 82,726 | |||||||
F-32
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$’000 | ||||
Cost | |||||
At the beginning of the year | 5,326 | 5,326 | |||
Opening balance adjustment to eliminate accumulated amortization | — | (4,260 | ) | ||
At the end of the year | 5,326 | 1,066 | |||
Accumulated amortization | |||||
At the beginning of the year | 3,195 | 4,260 | |||
Charge for the year | 1,065 | — | |||
Eliminated against cost at the beginning of the year | — | (4,260 | ) | ||
At the end of the year | 4,260 | — | |||
Net book value | |||||
At the end of the year | 1,066 | 1,066 | |||
For the year ended August 31, 2005 goodwill was amortized on a straight-line basis over five years. The amortization of goodwill
As described in note 3(b), with effect from September 1, 2005 goodwill is no longer amortized in accordance with the transitional provisions set out in HKFRS 3 but tested for impairment on an annual basis as follows.
Goodwill has been allocated to the Company’s fixed telecommunications network services segment or cash-generating unit (GCU) for purposes of goodwill impairment test.
2008
9 | Goodwill |
August 31, | ||||||||
2007 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Cost and carrying amount: | ||||||||
Beginning of the year/at the end of the year | 1,066 | 1,066 | ||||||
Goodwill has been allocated to the Group’s fixed telecommunications network services cash-generating unit (“CGU”) for purposes of the goodwill impairment test. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Based on
F-33 City Telecom (H.K.) Limited Consolidated financial statements for the year ended August 31, 2008
F-34
City Telecom (H.K.) Limited Consolidated financial statements for the year ended August 31, 2008
F-35 City Telecom (H.K.) Limited Consolidated financial statements for the year ended August 31, 2008
F-36 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-37 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-38 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-39
City Telecom (H.K.) Limited Consolidated financial statements for
F-40 City Telecom (H.K.) Limited Consolidated financial statements for the
City Telecom (H.K.) Limited Consolidated financial statements for the year August 31,
F-42 City Telecom (H.K.) Limited Consolidated financial statements for the
F-43 City Telecom (H.K.) Limited Consolidated financial statements for the
F-44 City Telecom (H.K.) Limited Consolidated financial statements for the
As of August 31, 2007, the Group has an outstanding |
At the beginning of the year Exercise of share options (note (a)) Exercise of warrants (note (b)) At the end of the year
F-45 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-46 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-47 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-48 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-49 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-50 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
City Telecom (H.K.) Limited Consolidated financial statements for the
F-52
City Telecom (H.K.) Limited Consolidated financial statements
F-53
City Telecom (H.K.) Consolidated financial statements for
2008
F-54 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-55
City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
In determining the value of the share options granted during the year ended August 31, 2008, the Black-Scholes option pricing model (the “Black-Scholes Model”) has been used except for the share options granted on February 11, 2008 which adopts the Monte Carlo model. Both models are the most generally accepted methodologies used to calculate the value of options. The variables of the models include expected life of the options, risk-free interest rate, expected volatility and expected dividend yield of the shares of the Company. | |
F-56
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 | % |
25 | Equity settled share-based transactions (continued) |
2002 Share Option Scheme (continued) |
Notes: (continued) | ||
(t) | Fair value of share options and assumptions: (continued) | |
In determining the value of the share options granted during the year, the following variables have been applied to the models: |
June 3, | October 21, | January 5, | October 3, | May 22, | July 3, | August 3, | November 22, | May 23, | December 12, | February 6, | February 11, | February 15, | March 11, | May 2, | ||||||||||||||||||||||||||||||||||||||||||||||
Measurement date | 2004 | 2004 | 2005 | 2005 | 2006 | 2006 | 2006 | 2006 | 2007 | 2007 | 2008 | 2008 | 2008 | 2008 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||
Variables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
— Expected life (i) | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | Average 4 years | 3 years | 5 years | 5 years | |||||||||||||||||||||||||||||||||||||||||||||
— Risk-free rate (ii) | 3.78 | % | 2.65 | % | 2.75 | % | 4.41 | % | 4.63 | % | 4.45 | % | 4.06 | % | 3.76 | % | 4.45 | % | 3.10 | % | 2.16 | % | 2.16 | % | 2.16 | % | 2.04 | % | 2.88 | % | ||||||||||||||||||||||||||||||
— Expected volatility (iii) | 59.04 | % | 72.06 | % | 69.37 | % | 58.29 | % | 55.04 | % | 53.56 | % | 52.71 | % | 51.02 | % | 56.01 | % | 61.86 | % | 63.22 | % | 63.32 | % | 63.22 | % | 63.35 | % | 63.56 | % | ||||||||||||||||||||||||||||||
— Expected dividend yield (iv) | 1 | % | 1 | % | 1 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 2 | % | 2 | % | 2 | % | 2 | % | 2 | % | 2 | % |
The | above variables were determined as follows: |
(i) | The expected life is estimated to be 3 to 5 years from the date of grant (the “Measurement Date”). |
(ii) | The risk-free rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as |
(iii) | The expected volatility represents the |
(iv) | The expected dividend yield |
UsingF-57
25 | Equity settled share-based transactions (continued) |
2002 Share Option Scheme (continued) |
Notes: (continued) | ||
(t) | Fair value of share options and assumptions: (continued) | |
The fair value of the options granted during the year is estimated as below: |
June 3, | October 21, | January 5, | October 3, | May 22, | July 3, | August 3 | November 22, | May 23, | December 12, | February 6, | February 11, | February 15, | March 11, | May 2, | ||||||||||||||||||||||||||||||||||||||||||||||
Date of grant | 2004 | 2004 | 2005 | 2005 | 2006 | 2006 | 2006 | 2006 | 2007 | 2007 | 2008 | 2008 | 2008 | 2008 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | HK$ | ||||||||||||||||||||||||||||||||||||||||||||||
Fair value per share option | 0.70 | 0.84 | 0.80 | 0.44 | 0.33 | 0.35 | 0.36 | 0.35 | 1.13 | 1.13 | 0.90 | 0.41 | 0.72 | 0.87 | 0.83 |
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-Scholesand Monte Carlo Model, applied for the 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 requiresrequire input of highly subjective assumptions, including the expected stock volatility. As the Company’s share options have characteristics significantly different from those of traded options, changes in subjective inputs may materially affect the estimated fair value of the options granted.
F-58
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
Year ended August 31, | ||||||
2004 | 2005 | 2006 | ||||
HK$’000 | HK$’000 | HK$’000 | ||||
Revenue | ||||||
International telecommunications services | 627,978 | 532,595 | 418,276 | |||
Fixed telecommunications network services (note (c)) | 541,902 | 629,464 | 716,600 | |||
1,169,880 | 1,162,059 | 1,134,876 | ||||
Other income | ||||||
Interest income | 3,753 | 13,578 | 20,378 | |||
Other income | 2,668 | 6,037 | 4,465 | |||
6,421 | 19,615 | 24,843 | ||||
(a) Primary reporting format — business segments
The Company is organized on a worldwide basis into two business segments:
26 | Revenues and segmental information |
Revenue recognized during the year is as follows: |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Revenue | ||||||||||||
International telecommunications services | 418,276 | 324,470 | 291,943 | |||||||||
Fixed telecommunications network services (note (c)) | 716,600 | 816,800 | 1,011,038 | |||||||||
1,134,876 | 1,141,270 | 1,302,981 | ||||||||||
Other income | ||||||||||||
Interest income | 20,378 | 22,671 | 15,596 | |||||||||
Other income | 4,465 | 3,149 | 9,393 | |||||||||
24,843 | 25,820 | 24,989 | ||||||||||
(a) | Primary reporting format — business segments |
The Group is organized on a worldwide basis into two business segments: |
— | International telecommunications — provision of international long distance calls services. | ||
— | Fixed telecommunications network — provision of dial up and broadband Internet access services, local voice-over-IP services and IP-TV services. |
The Group’s reportable segments are strategic business units that offer different type of telecommunications services. Each of these business units are operated and managed separately. | ||
The Group’s inter-segment transactions mainly consist of provision of leased lines services. |
F-59
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
26 | Revenues and segmental information (continued) | |
(a) | Primary reporting format — business segments (continued) | |
Segment results are income/(loss) from operations excluding interest expense and interest income, but includes other income, net. All segment measures are based on accounting policies that are consistent with those used in the preparation of the consolidated financial statements. |
Year ended August 31, 2006 | ||||||||||||||||
International | Fixed tele- | |||||||||||||||
tele- | communications | |||||||||||||||
communications | network | |||||||||||||||
services | services | Elimination | Group | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Revenue (note (c)) | ||||||||||||||||
— External sales | 418,276 | 716,600 | — | 1,134,876 | ||||||||||||
— Inter-segment sales | 5,670 | 31,275 | (36,945 | ) | — | |||||||||||
423,946 | 747,875 | (36,945 | ) | 1,134,876 | ||||||||||||
Segment results | 22,095 | (107,607 | ) | (85,512 | ) | |||||||||||
Interest income | 17,728 | 2,650 | — | 20,378 | ||||||||||||
Interest expense | (88,637 | ) | ||||||||||||||
Other income | 4,465 | |||||||||||||||
Loss before taxation | (149,306 | ) | ||||||||||||||
Segment assets | 626,480 | 1,497,388 | — | 2,123,868 | ||||||||||||
Unallocated assets | — | — | — | 347 | ||||||||||||
Total assets | 2,124,215 | |||||||||||||||
Segment liabilities | 114,847 | 167,370 | — | 282,217 | ||||||||||||
Unallocated liabilities | 950,344 | |||||||||||||||
Total liabilities | 1,232,561 | |||||||||||||||
Capital expenditure | 13,838 | 309,097 | — | 322,935 | ||||||||||||
Depreciation | 23,598 | 252,866 | — | 276,464 |
F-60
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 ofLimited
Consolidated financial statements for the year end.
For the years ended August 31, 2004 and 2005, the Company recognized revenue2008
26 | Revenues and segmental information (continued) |
(a) | Primary reporting format — business segments (continued) |
Year ended August 31, 2007 | ||||||||||||||||
International | Fixed tele- | |||||||||||||||
tele- | communications | |||||||||||||||
communications | network | |||||||||||||||
services | services | Elimination | Group | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Revenue (note (c)) | ||||||||||||||||
— External sales | 324,470 | 816,800 | — | 1,141,270 | ||||||||||||
— Inter-segment sales | 5,699 | 27,633 | (33,332 | ) | — | |||||||||||
330,169 | 844,433 | (33,332 | ) | 1,141,270 | ||||||||||||
Segment results | 49,702 | 42,873 | 92,575 | |||||||||||||
Interest income | 15,032 | 7,639 | — | 22,671 | ||||||||||||
Interest expense | (87,504 | ) | ||||||||||||||
Other income | 3,149 | |||||||||||||||
Profit before taxation | 30,891 | |||||||||||||||
Segment assets | 541,502 | 1,619,631 | — | 2,161,133 | ||||||||||||
Unallocated assets | — | |||||||||||||||
Total assets | 2,161,133 | |||||||||||||||
Segment liabilities | 101,148 | 201,738 | — | 302,886 | ||||||||||||
Unallocated liabilities | 954,365 | |||||||||||||||
Total liabilities | 1,257,251 | |||||||||||||||
Capital expenditure | 4,060 | 128,190 | — | 132,250 | ||||||||||||
Depreciation | 21,707 | 236,396 | — | 258,103 |
F-61
26 | Revenues and segmental information (continued) |
(a) | Primary reporting format — business segments (continued) |
Year ended August 31, 2008 | ||||||||||||||||
International | Fixed tele- | |||||||||||||||
tele- | communications | |||||||||||||||
communications | network | |||||||||||||||
services | services | Elimination | Group | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Revenue (note (c)) | ||||||||||||||||
— External sales | 291,943 | 1,011,038 | — | 1,302,981 | ||||||||||||
— Inter-segment sales | 5,692 | 22,680 | (28,372 | ) | — | |||||||||||
297,635 | 1,033,718 | (28,372 | ) | 1,302,981 | ||||||||||||
Segment results | 63,225 | 95,295 | 158,520 | |||||||||||||
Interest income | 8,590 | 7,006 | — | 15,596 | ||||||||||||
Interest expense | (75,137 | ) | ||||||||||||||
Other income | 9,393 | |||||||||||||||
Profit before taxation | 108,372 | |||||||||||||||
Segment assets | 426,781 | 1,627,300 | — | 2,054,081 | ||||||||||||
Unallocated assets | 26,335 | |||||||||||||||
Total assets | 2,080,416 | |||||||||||||||
Segment liabilities | 80,756 | 276,771 | — | 357,527 | ||||||||||||
Unallocated liabilities | 690,282 | |||||||||||||||
Total liabilities | 1,047,809 | |||||||||||||||
Capital expenditure | 4,293 | 207,391 | — | 211,684 | ||||||||||||
Depreciation | 19,587 | 190,464 | — | 210,051 |
F-62
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
(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. Exceptstatements for the year August 31, 2008
26 | Revenues and segmental information (continued) |
(b) | Geographical segments | |
Although the Group’s two business segments are managed on a worldwide basis, they operate in two main geographical areas: |
— | Hong Kong | ||
— | Canada |
In disclosing information on the basis of geographical segments, revenue and segment results are disclosed based on the geographical location of customers. Total assets and capital expenditure are disclosed based on the geographical location of the assets. | ||
There were no sales between the geographical segments. |
August 31, 2006 | ||||||||||||||||
Total | Capital | Fixed | ||||||||||||||
Revenue | assets | expenditure | assets, net | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Hong Kong | 1,114,452 | 2,114,018 | 321,708 | 1,362,359 | ||||||||||||
Canada | 20,424 | 9,850 | 1,227 | 4,875 | ||||||||||||
1,134,876 | 2,123,868 | 322,935 | 1,367,234 | |||||||||||||
Unallocated assets | 347 | |||||||||||||||
2,124,215 | ||||||||||||||||
August 31, 2007 | ||||||||||||||||
Total | Capital | Fixed | ||||||||||||||
Revenue | assets | expenditure | assets, net | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Hong Kong | 1,120,538 | 2,149,728 | 132,031 | 1,233,100 | ||||||||||||
Canada | 20,732 | 11,405 | 219 | 4,123 | ||||||||||||
1,141,270 | 2,161,133 | 132,250 | 1,237,223 | |||||||||||||
�� | ||||||||||||||||
Unallocated assets | — | |||||||||||||||
2,161,133 | ||||||||||||||||
F-63
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 responsiblestatements 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$1.00 since 1983, management does not expect significant foreign exchange gains or losses between the Hong Kong dollar and the United States dollar.
The Company is also exposed to a certain amount of foreign exchange risk in relation to fluctuations between the Hong Kong dollars and the Renminbi arising from its operations in the PRC. In order to limit this foreign currency risk exposure, the Company maintains Renminbi cash balance that approximates six months’ operating cash flows.
e) Fair values
Trade receivables less impairment provision and account payables approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments. The carrying value and the fair value of the Company’s investment securities, derivative financial instruments and the 8.75% senior notes as atyear August 31, 2006 and 2005 are as follows:
2005 Carrying amount 2006 Carrying amount Long-term bank deposit (a) Debt securities (b) Interest rate swap (c) Foreign currency forward contract (d) 8.75% senior notes (b) Fair Value Fair Value HK$’000 HK$’000 HK$’000 HK$’000 15,540 15,193 13,641 13,459 25,901 25,901 26.633 26,633 — 2,570 1,845 1,845 — 4,039 — — (945,348 ) (888,694 ) (948,027 ) 722,081
26 | Revenues and segmental information (continued) |
(b) | Geographical segments (continued) |
August 31, 2008 | ||||||||||||||||
Total | Capital | Fixed | ||||||||||||||
Revenue | assets | expenditure | assets, net | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Hong Kong | 1,281,069 | 2,040,496 | 211,482 | 1,227,907 | ||||||||||||
Canada | 21,912 | 13,585 | 202 | 3,492 | ||||||||||||
1,302,981 | 2,054,081 | 211,684 | 1,231,399 | |||||||||||||
Unallocated assets | 26,335 | |||||||||||||||
2,080,416 | ||||||||||||||||
(c) | Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a FTNS licensee, provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the TA and interconnection services have been provided, HKBN has been billing mobile operators for the interconnection services provided to them and recognizing revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts it expected to collect. In prior years, majority of the mobile operators, however, rejected HKBN’s demand for payment. As a result of non-payment by certain mobile operators, in 2004, the Group asked TA to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile operators to HKBN; and the effective date of the determined mobile interconnection charges. | |
In March 2006, TA issued a preliminary analysis (the “2006 PA”) on the 2004 Determination with respect to the rates of mobile interconnection charges payable by the mobile operator under dispute. However, as of August 31, 2006, the final level of mobile interconnection charges was still subject to the 2004 Determination to be issued by TA. | ||
For the year ended August 31, 2006, the Group recognized mobile interconnection charges of HK$22,037,000 based on the 2006 PA. |
F-64
26 | Revenues and segmental information (continued) |
(c) | (continued) | |
In March 2007, TA issued a revised preliminary analysis (the “2007 PA”) which superseded the 2006 PA. The 2007 PA set out the rates of mobile interconnection charges, which are different from those rates stated in the 2006 PA. | ||
In June 2007, TA issued the 2004 Determination which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from April 1, 2002 to August 31, 2004, which superseded the rates stated in both the 2006 PA and 2007 PA issued by TA previously. | ||
For the year ended August 31, 2007, the Group recognized revenue related to mobile interconnection charges of HK$40,877,000 based on the 2004 Determination which included charges for the year ended August 31, 2007 and additional charges for the years ended August 31, 2005 and 2006 previously measured based on the 2006 PA. The Group has also written back bad debt provision for mobile interconnection charges receivables of HK$9,404,000 to the consolidated statement of operations based on the amount it expected to collect for billings outstanding through that date. | ||
During the year ended August 31, 2008, HKBN entered into contractual agreements with additional mobile operators which agreed to pay mobile interconnection charges based on the 2004 determination for period from April 1, 2002 to August 31, 2004 and for the subsequent period at an interim rate stated in the agreements which will be adjusted based on further determination to be issued by TA. | ||
In February 2008, HKBN requested TA to make a new determination with four mobile operators (the “2008 Determination”) on the rate of mobile interconnection charge and interest thereon. In September 2008, TA indicated that it accepted HKBN’s request for determination, which covers the mobile interconnection charges payable by the mobile operators under the determination, for the period from April 1, 2002 to April 26, 2009 (for those mobile operators who have not reached the relevant contractual agreements with HKBN) or for the period from September 1, 2004 to April 26, 2009 (for those mobile operators who have reached the relevant contractual agreements with HKBN), and the interest rate thereon. | ||
For the year ended August 31, 2008, the Group recognized revenue related to mobile interconnection charges of HK$29,568,000 representing the amount of mobile interconnection charges management expects to collect. |
F-65
27 | 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 trade 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 trade and other receivables, credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer locates. These receivables are due within 30 days from the date of billing. Subscribers with receivables that are more than 3 months overdue are requested to settle all outstanding balances before any further credit is granted. The Group generally does not obtain collateral from customers. | ||
The Group’s exposure to credit risk is influenced mainly by individual characteristics of each customer. The default risk of the country in which customer locates also has an influence on credit risk but to a lesser extent. Concentrations of credit risk with respect to accounts receivable are limited due to the Group’s customer base being large and unrelated. As such, management does not expect any significant losses of accounts receivable that have not been provided for by way of allowances as disclosed in note 8. | ||
The maximum exposure to credit risk is represented by the carrying amount of each financial asset after deducting any impairment allowance, in the balance sheet. Except for the financial guarantee given by the Group as disclosed in note 15(d), the Group does not provide any other guarantees which expose the Group to credit risk. The maximum exposure to credit risk in respect of these financial guarantees at the balance sheet date is disclosed in note 15 (d). | ||
Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from accounts receivable are set out in note 8. |
F-66
27 | Financial instruments (continued) |
(b) | Liquidity risk | |
The Group has a cash management policy, which includes the short term investment of cash surpluses and the raising of loans and other borrowings to cover expected cash demands. The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient cash and readily realizable marketable securities and adequate amount of committed credit facilities from major financial institutions to meet its liquidity requirements in the short and long term. Due to the dynamic nature of the underlying business, the Group aims to maintain flexibility in funding by maintaining committed credit lines available. |
F-67
27 | Financial instruments (continued) |
(b) | Liquidity risk (continued) | |
The following table details the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on undiscounted cash flows (including interest) and the earliest date the Group are required to pay. |
2007 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||||
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$’000 | |||||||||||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Accounts payable | 76,019 | 76,019 | 76,019 | — | — | — | 52,324 | 52,324 | 52,324 | — | — | — | ||||||||||||||||||||||||||||||||||||
Other payables and accrued charges | 145,267 | 145,267 | 145,267 | — | — | — | 178,114 | 178,114 | 178,114 | — | — | — | ||||||||||||||||||||||||||||||||||||
Deposits received | 16,188 | 16,188 | 16,188 | — | — | — | 16,264 | 16,264 | 16,264 | — | — | — | ||||||||||||||||||||||||||||||||||||
Obligations under finance leases | 835 | 869 | 869 | — | — | — | 121 | 142 | 142 | — | — | — | ||||||||||||||||||||||||||||||||||||
Tax payable | 1,481 | 1,481 | 1,481 | — | — | — | 2,103 | 2,103 | 2,103 | — | — | — | ||||||||||||||||||||||||||||||||||||
Non current liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
8.75% senior notes | 952,593 | 1,614,184 | 85,278 | 85,278 | 255,834 | 1,187,794 | 683,242 | 1,093,852 | 61,012 | 61,012 | 183,036 | 788,792 | ||||||||||||||||||||||||||||||||||||
Obligation under finance leases | 375 | 414 | — | 142 | 272 | — | 255 | 272 | — | 142 | 130 | — | ||||||||||||||||||||||||||||||||||||
1,192,758 | 1,854,422 | 325,102 | 85,420 | 256,106 | 1,187,794 | 932,423 | 1,343,071 | 309,959 | 61,154 | 183,166 | 788,792 | |||||||||||||||||||||||||||||||||||||
F-68
27 | Financial instruments (continued) |
(c) | Interest rate risk | |
The Group’s interest-rate risk arises mainly from its 10-year 8.75% senior notes which bear interest at the fixed rate of 8.75% per annum. Borrowings issued at fixed rate expose the Group to fair value interest-rate risk. |
(i) | Interest rate profile | ||
The following table details the interest rate profile of the Group’s net borrowings at the balance sheet date. |
August 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Effective | Effective | |||||||||||||||
interest rate | interest rate | |||||||||||||||
% | HK$’000 | % | HK$’000 | |||||||||||||
Fixed rate borrowings: | ||||||||||||||||
8.75% senior notes | 9.2 | 952,593 | 9.2 | 683,242 | ||||||||||||
Obligation under finance lease | 6.8 | 1,210 | 6.8 | 376 | ||||||||||||
953,803 | 683,618 | |||||||||||||||
(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 |
(i) | Exposure to currency risk | ||
The following table details the Group’s exposure at the balance sheet date to currency risk arising from recognized assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate. |
August 31, | ||||||||||||||||||||||||
2007 | 2008 | |||||||||||||||||||||||
United | United | |||||||||||||||||||||||
States | Japanese | Canadian | States | Japanese | Canadian | |||||||||||||||||||
Dollars | Yen | Dollars | Dollars | Yen | Dollars | |||||||||||||||||||
’000 | ’000 | ’000 | ’000 | ’000 | ’000 | |||||||||||||||||||
Cash at bank and in hand and pledged bank deposits | 21,172 | 2,218 | 111 | 22,330 | 1,099 | 176 | ||||||||||||||||||
Accounts payable | (4,781 | ) | — | — | (2,500 | ) | — | — | ||||||||||||||||
Other payables and accrued charges | (1,563 | ) | — | — | (3,390 | ) | — | — | ||||||||||||||||
8.75% senior notes | (122,127 | ) | — | — | (87,483 | ) | — | — | ||||||||||||||||
Overall net exposure | (107,299 | ) | 2,218 | 111 | (71,043 | ) | 1,099 | 176 | ||||||||||||||||
F-69
27 | Financial instruments (continued) |
(d) | Foreign currency risk (continued) |
(ii) | Sensitivity analysis | ||
Management determines that the Group’s exposure of foreign currency risk was not significant and hence no sensitivity analysis is prepared. |
(e) | Fair values | |
Except for the following instruments, all financial instruments are carried at amounts not materially different from their fair values as of August 31, 2007 and 2008: |
August 31, | ||||||||||||||||
2007 | 2008 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
amount | Fair value | amount | Fair value | |||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||
Long-term bank deposit | 14,415 | 14,277 | — | — | ||||||||||||
8.75% senior notes | (952,593 | ) | (970,125 | ) | (683,242 | ) | (672,236 | ) | ||||||||
F-70
27 | Financial instruments (continued) |
(e) | Fair values (continued) | |
Fair value of financial instruments is estimated as follows: |
(i) | The fair value of |
(ii) | The fair value of | ||
(iii) | Trade receivables less impairment provision and account |
28 | Barter transaction |
28 Barter transaction
During the year ended August 31, 2004, Hong Kong Broadband Network |
A second agreement (“Second Agreement”) was entered into on the same date by both parties whereby HKBN agree to provide certain telecommunication
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 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 theF-71
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:
30 |
(a) | HKFRSs | |
| Effective for | |||||
accounting periods | ||||||
| beginning on or after | |||||
HK(IFRIC) Interpretation 13 | Customer loyalty programmes | July 1, 2008 | ||||
HKAS 1 (Revised) | Presentation of financial statements | January 1, | ||||
| ||||||
HKAS 23 (Revised) | Borrowing costs | January 1, | ||||
| ||||||
HKFRS 8 | Operating segments | January 1, |
F-72
(b) | ||
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosure required for fair value measurement. SFAS 157 applies to other accounting pronouncements that require fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and is effective for the Group on September 1, 2008. However, FASB Staff Position FAS 157-2 delayed the adoption date until January 1, |
In February 2007, the FASB issued SFAS 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains or losses on items for which the fair value option has been elected be reported in earnings. Early adoption of SFAS 159 is permitted provided that the entity also adopts SFAS No. 157. Effective from September 1, 2008, management has elected not to adopt the fair value option for all the financial assets and financial liabilities held at September 1, 2008. |
In addition, the Hong Kong Companies (Amendment) Ordinance 2005 came into effect on December 1, 2005 that would apply to the Company’sF-73
The Company is in the process 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 endingyear 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)2008
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 | ||||||||
31 | Summary of significant differences between HKFRSs and U.S. GAAP |
The Group’s consolidated financial statements are prepared in accordance with HKFRSs, which differ in certain significant respects from U.S. GAAP. The following are significant differences between HKFRSs and U.S. GAAP which pertain to the Group: |
Net income/(loss) |
Year ended 31 August, | ||||||||||||||
Note | 2006 | 2007 | 2008 | |||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||||
As reported under HKFRSs and U.S. GAAP | (142,062 | ) | 28,865 | 125,190 | ||||||||||
Basic weighted average common shares issued and outstanding (in 000’s) | 614,134 | 614,840 | 634,015 | |||||||||||
Incremental shares from assumed exercise of share options (in 000’s) | — | 16,479 | 23,982 | |||||||||||
Diluted weighted average common and potential shares issued and outstanding (in 000’s) | 614,134 | 631,319 | 657,997 | |||||||||||
Earnings/(loss) per share under U.S. GAAP (note) | ||||||||||||||
— Basic | (23.1) cents | 4.7 cents | 19.7 cents | |||||||||||
— Diluted | (23.1) cents | 4.6 cents | 19.0 cents | |||||||||||
Note: | The number of incremental shares from assumed exercise of stock options |
Total shareholders’ equity |
Year ended August 31, | ||||||||||||||
Note | 2006 | 2007 | 2008 | |||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||||
Total shareholders’ equity | ||||||||||||||
As reported under HKFRSs | 891,654 | 903,882 | 1,032,607 | |||||||||||
U.S. GAAP adjustments: | ||||||||||||||
— Goodwill | (a) | 5,092 | 5,092 | 5,092 | ||||||||||
— Accumulated amortization of goodwill | (a) | (3,735 | ) | (3,735 | ) | (3,735 | ) | |||||||
— Reversal of amortization of goodwill | (a) | 4,260 | 4,260 | 4,260 | ||||||||||
Total shareholders’ equity under U.S. GAAP | 897,271 | 909,499 | 1,038,224 | |||||||||||
F-74
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 | ) | ||||
Balance at August 31, 2003 Shares issued upon exercise of share options Compensation cost for share options Shares issued upon exercise of warrants 2003 final dividend declared and paid (note 21) 2004 interim dividend declared and paid (note 21) Net income Foreign currency translation adjustments Balance at August 31, 2004 Shares issued upon exercise of share options Compensation cost for outstanding share options Realization of outstanding warrant reserve upon warrant expiration Shares issued upon exercise of warrants Net loss Foreign currency translation adjustments Balance at August 31, 2005 Shares issued upon exercise of share options Compensation cost for outstanding share options Net loss Foreign currency translation adjustments Balance at August 31,2006 Net income/ (loss) under U.S. GAAP Foreign currency translation adjustments Comprehensive income/ (loss) Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at the end of year As reported Less: total share-based compensation expense determined under intrinsic value method for all awards Less: total share-based compensation expense determined under fair value method for all awards, net of tax Basic earnings/(loss) per share As reported Pro forma Diluted earnings/(loss) per share As reported Pro forma Weighted average Risk-free interest rates Dividend yield Volatility factor of the expected market price of the Company’s shares Expected life of the options Deferred tax assets: Tax losses Share-based payment Total gross deferred tax assets Valuation allowance Net deferred tax assets Deferred tax liabilities Accelerated depreciation allowance Others Total gross deferred tax liabilities Net deferred tax liabilities Balance at beginning of the year (Reduction)/additions to income tax expense Balance at end of the year F-75Statement 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$’000 604,959,787 60,496 615,886 858 1,231 28,474 475,717 1,182,662 640,000 64 115 — — — — 179 — — — — — (270 ) — (270 ) 4,973,574 497 1,985 (493 ) — — — 1,989 — — — — — — (45,789 ) (45,789 ) — — — — — — (9,158 ) (9,158 ) — — — — — — 51,565 51,565 — — — — (248 ) — — (248 ) 610,573,361 61,057 617,986 365 983 28,204 472,335 1,180,930 52,000 5 25 — — — — 30 — — — — — (389 ) — (389 ) — — — (18 ) — — 18 — 3,500,043 350 1,397 (347 ) — — — 1,400 — — — — — — (149,148 ) (149,148 ) — — — — (143 ) — — (143 ) 614,125,404 61,412 619,408 — 840 27,815 323,205 1,032,680 50,000 5 8 — — — — 13 — — 251 — — 6,572 — 6,823 — — — — — — (142,062 ) (142,062 ) — — — — (183 ) — — (183 ) 614,175,404 61,417 619,667 — 657 34,387 181,143 897,271 Comprehensive (loss)/incomeThe comprehensive income/(loss) of the Company, determined in accordance with SFAS No. 130 “Reporting Comprehensive Income”, is set out as follows: Year ended August 31, 2004 2005 2006 HK$’000 HK$’000 HK$’000 51,565 (149,148 ) (142,062 ) (248 ) (143 ) (183 ) 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 flowsUnder 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$’000 207,516 90,984 204,583 (409,997 ) (571,018 ) (513,120 ) 48,217 773,023 (86,486 ) (154,264 ) 292,989 (395,023 ) 402,034 247,517 539,591 (253 ) (915 ) 349 247,517 539,591 144,917 (a) Share-based compensationUnder 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 theunderlying 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) 51,565 (149,148 ) (270 ) (389 ) (1,904 ) (20,547 ) 49,391 (170,084 ) HK8.5 cents HK(24.3) cents HK8.1 cents HK(27.7) cents HK8.4 cents HK(24.3) cents 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, 2004 2005 3.78 % 2.7 % 1.02 % 1.01 % 59.04 % 70.66 % 5 years 5 years (b) GoodwillUnder 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 InstrumentsUnder 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 taxesUnder 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$’000 177,827 204,300 — 2,429 177,827 206,729 (29,804 ) (52,404 ) 148,023 154,325 (158,477 ) (154,678 ) (85 ) — (158,562 ) (154,678 ) (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 15,171 7,633 29,804 (7,538 ) 22,171 22,600 7,633 29,804 52,404 (e) Investment securitiesThe 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 buildingUnder 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 costsUnder 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$24,473,000, respectively.31 Supplemental Guarantors Consolidated Financial InformationThe senior notes mentioned above in note 14(b) are irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).The condensed consolidated financial information is presented below and should be read in connection with the consolidated
Consolidated financial statements for the year August 31, 200831 Summary of significant differences between HKFRSs and U.S. GAAP (continued) Condensed consolidated statements of operations under US GAAP Under HKFRS, depreciation charges of network assets are included in general and administrative expenses. Under US GAAP, however, depreciation charges of networks assets which are directly related to the generation of revenue are included in network costs. As a result, under US GAAP, the consolidated statements of operations would be reported as follows: Year ended August 31, 2006 2007 2008 HK$’000 HK$’000 HK$’000 Revenue, net 1,134,876 1,141,270 1,302,981 Operating expenses: — Network costs, net (554,136 ) (451,080 ) (368,278 ) — Salaries and related costs (256,721 ) (221,102 ) (247,460 ) — Sales and marketing expenses (204,952 ) (203,673 ) (307,743 ) — General and administrative expenses (187,129 ) (166,271 ) (206,687 ) — Provision for doubtful accounts (17,450 ) (6,569 ) (14,293 ) (Loss)/ income from operations (85,512 ) 92,575 158,520 Interest income 20,378 22,671 15,596 Interest expense (88,637 ) (87,504 ) (75,137 ) Other income, net 4,465 3,149 9,393 (Loss)/ income before income taxes (149,306 ) 30,891 108,372 Income tax credit/ (expense) 7,244 (2,026 ) 16,818 Net (loss)/ income (142,062 ) 28,865 125,190
31 | Summary of significant differences between HKFRSs and U.S. GAAP (continued) |
Statement of changes in shareholders’ equity under US GAAP |
Ordinary shares | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Number of | Additional | other | Total | |||||||||||||||||||||||||
shares | Amount | paid-in | comprehensive | Capital | Retained | shareholders’ | ||||||||||||||||||||||
outstanding | outstanding | capital | income | reserve | profits | equity | ||||||||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | |||||||||||||||||||||||
Balance at August 31, 2005 | 614,125,404 | 61,412 | 619,408 | 840 | 27,815 | 323,205 | 1,032,680 | |||||||||||||||||||||
Shares issued upon exercise of share options | 50,000 | 5 | 8 | — | — | — | 13 | |||||||||||||||||||||
Compensation cost for share options | — | — | 251 | — | 6,572 | — | 6,823 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (142,062 | ) | (142,062 | ) | |||||||||||||||||||
Foreign currency translation adjustment | — | — | — | (183 | ) | — | — | (183 | ) | |||||||||||||||||||
Balance at August 31, 2006 | 614,175,404 | 61,417 | 619,667 | 657 | 34,387 | 181,143 | 897,271 | |||||||||||||||||||||
Shares issued upon exercise of share options | 2,328,000 | 233 | 2,135 | — | (611 | ) | — | 1,757 | ||||||||||||||||||||
Compensation cost for share options | — | — | — | — | 5,727 | — | 5,727 | |||||||||||||||||||||
Net income | — | — | — | — | — | 28,865 | 28,865 | |||||||||||||||||||||
Dividend paid in respect of previous year | — | — | — | — | — | (24,635 | ) | (24,635 | ) | |||||||||||||||||||
Foreign currency translation adjustment | — | �� | — | — | 514 | — | — | 514 | ||||||||||||||||||||
Balance at August 31, 2007 | 616,503,404 | 61,650 | 621,802 | 1,171 | 39,503 | 185,373 | 909,499 | |||||||||||||||||||||
Shares issued upon exercise of share options | 14,052,268 | 1,405 | 16,893 | — | (3,300 | ) | — | 14,998 | ||||||||||||||||||||
Compensation cost for share options | — | — | — | — | 4,204 | — | 4,204 | |||||||||||||||||||||
Net income | — | — | — | — | — | 125,190 | 125,190 | |||||||||||||||||||||
Dividend paid in respect of previous year | — | — | — | — | — | (5,915 | ) | (5,915 | ) | |||||||||||||||||||
Shares issued in respect of scrip dividend of previous year | 11,227,213 | 1,123 | 18,044 | — | — | (19,167 | ) | — | ||||||||||||||||||||
Dividend paid in respect of current year | — | — | — | — | — | (11,371 | ) | (11,371 | ) | |||||||||||||||||||
Shares issued in respect of scrip dividend of current year | 8,838,938 | 884 | 13,347 | — | — | (14,231 | ) | — | ||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 1,619 | — | — | 1,619 | |||||||||||||||||||||
650,621,823 | 65,062 | 670,086 | 2,790 | 40,407 | 259,879 | 1,038,224 | ||||||||||||||||||||||
F-76
The following condensed consolidated
Consolidated financial information presentsstatements for the condensed consolidated balance sheets as ofyear 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) 2008
31 | Summary of significant differences between HKFRSs and U.S. GAAP (continued) |
Comprehensive (loss)/income under US GAAP | ||
The comprehensive (loss)/income of the Group, determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130 “Reporting Comprehensive Income”, is set out as follows: |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
(Loss)/Net income under U.S. GAAP | (142,062 | ) | 28,865 | 125,190 | ||||||||
Foreign currency translation adjustment (net of nil tax) | (183 | ) | 514 | 1,619 | ||||||||
Comprehensive (loss)/income | (142,245 | ) | 29,379 | 126,809 | ||||||||
Condensed consolidated statement of cash flows |
Under HKFRSs, in adopting HKAS 7, three categories of activities are reported: operating activities; investing activities and financing activities, which is similar to U.S. GAAP. However, under HKFRSs, the difference is that cash flows from interest income would be included in investing activities whereas under U.S. GAAP it would be included in operating activities. | ||
Summary cash flow information under U.S. GAAP is as follows: |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Net cash provided by operating activities | 204,583 | 406,732 | 394,159 | |||||||||
Net cash (used in)/provided by investing activities | (513,120 | ) | 91,382 | (163,346 | ) | |||||||
Net cash used in financing activities | (86,486 | ) | (109,566 | ) | (342,550 | ) | ||||||
Increase/(decrease) in cash and bank balances | (395,023 | ) | 388,548 | (111,737 | ) | |||||||
Cash and bank balances at the beginning of year | 539,591 | 144,917 | 532,894 | |||||||||
Effect of foreign currency exchange rate changes on cash | 349 | (571 | ) | 453 | ||||||||
Cash and bank balances at the end of year | 144,917 | 532,894 | 421,610 | |||||||||
F-77
Condensed Consolidated Balance Sheet as ofyear 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
31 | Summary of differences between HKFRSs and U.S. GAAP (continued) |
(a) | Goodwill | |
Prior to September 1, 2001, goodwill arising from a business combination was charged against available reserves. In January 2001, HKICPA issued Statement of Standard Accounting Practice (“SSAP”) No. 30 “Business Combinations” which applied to business combinations for which the agreement date is on or after September 1, 2001. As a result of the adoption of this SSAP in the fiscal year ended August 31, 2002 and up to September 1, 2005, goodwill on acquisitions occurring on or after September 1, 2001 was shown separately on the consolidated balance sheet and amortized using the straight-line method over its estimated useful life. | ||
On September 1, 2005, the Group adopted HKFRS 3 “Business Combinations”. Under HKFRS 3, goodwill is recorded at cost less any accumulated impairment losses and is no longer amortized. Goodwill is subject to an annual impairment test and when there is an indication of impairment. An impairment loss is recognized when the carrying amount of the cash generating unit to which the goodwill has been allocated exceeds its recoverable amounts. In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken directly to reserves (i.e. goodwill which arose before September 1, 2001) is not recognized in the consolidated statement of operations on disposal or impairment of the acquired business, or under any other circumstances. The adoption of HKFRS 3 did not result in any restatement in the consolidated financial statements of prior years and therefore had no impact on U.S. GAAP adjustments of prior years. | ||
Under U.S. GAAP, goodwill arising from a business combination is not amortized and is required to be tested annually for impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. | ||
As a result of the adoption of HKFRS 3, there were no U.S. GAAP adjustments to the net loss/ income pertaining to goodwill for the years ended August 31, 2006 ,2007 and 2008. |
F-78
31 | Summary of differences between HKFRSs and U.S. GAAP (continued) |
(b) | Deferred taxes | |
Under HKFRSs, deferred taxes are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. | ||
Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. | ||
Under U.S. GAAP, the Group is required to recognize deferred tax assets and liabilities for the expected future tax consequences of all events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future tax benefits in respect of tax loss carry forwards are also required to be recognized in full. A valuation allowance is required to be established for such assets if it is more likely than not that the Group will not be able to realize such benefits in the future. | ||
Under HKFRS, deferred tax assets and liabilities shall be classified as noncurrent assets or noncurrent liabilities. Under U.S. GAAP, deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax asset related to tax loss carryforwards, are classified according to the expected reversal date of the temporary difference. The valuation allowance for a particular tax jurisdiction shall be allocated between current and non-current deferred tax assets for that tax jurisdiction on a pro rata basis. | ||
Except for the presentation differences, there were no differences in the amount of deferred tax assets recognized under HKFRSs and U.S. GAAP. For the years ended August 31, 2006, 2007 and 2008, no adjustment was made for tax effects of U.S. GAAP adjustments because the U.S. GAAP adjustments in those years had no tax consequences under Hong Kong tax laws. | ||
The following additional financial statements disclosures are required under U.S. GAAP and are presented on a U.S. GAAP basis. |
August 31, | ||||||||
2007 | 2008 | |||||||
HK$’000 | HK$’000 | |||||||
Deferred tax assets: | ||||||||
Tax loss carryforwards | 182,739 | 150,234 | ||||||
Total gross deferred tax assets | 182,739 | 150,234 | ||||||
Valuation allowance | (48,120 | ) | (2,389 | ) | ||||
Net deferred tax assets | 134,619 | 147,845 | ||||||
Deferred tax liabilities: | ||||||||
Accelerated depreciation allowance | (134,910 | ) | (126,447 | ) | ||||
Total gross deferred tax liabilities | (134,910 | ) | (126,447 | ) | ||||
Net deferred tax asset /(liability) | (291 | ) | 21,398 | |||||
Net current deferred tax assets | — | 11,399 | ||||||
Net non-current deferred tax assets | — | 16,630 | ||||||
Net non-current deferred tax liabilities | (291 | ) | (6,631 | ) | ||||
Net deferred tax asset /(liability) | (291 | ) | 21,398 | |||||
F-79
31 | Summary of differences between HKFRSs and U.S. GAAP (continued) |
(b) | Deferred taxes (continued) | |
The valuation allowance for deferred tax assets as August 31, 2006, 2007 and 2008 was HK$52,404,000, HK$48,120,000 and HK$2,389,000 respectively. The valuation allowance as at August 31, 2006, 2007 and 2008 was primarily related to tax loss carryforwards that, in the judgement of management, are not more likely than not to be realized. | ||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary difference are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryforward periods) and projected taxable income in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax rules. Based on the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences, net of existing valuation allowance at August 31, 2008. The amount of the deferred tax asset considered realizable; however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. | ||
Changes in the valuation allowance consist of: |
Year ended August 31, | ||||||||||||
2006 | 2007 | 2008 | ||||||||||
HK$’000 | HK$’000 | HK$’000 | ||||||||||
Balance at beginning of the year | 29,804 | 52,404 | 48,120 | |||||||||
Addition/(reduction) to income tax expense | 22,600 | (1,979 | ) | (37,834 | ) | |||||||
Valuation allowance written off | — | (2,305 | ) | (7,897 | ) | |||||||
Balance at end of the year | 52,404 | 48,120 | 2,389 | |||||||||
The net change in the total valuation allowance for the year ended August 31, 2008 was a decrease of HK$45,731,000 which primarily relates to the release of the valuation allowance of HK$12,013,000 due to the utilization of tax loss carryforwards during the year ended August 31, 2008 and the release of valuation allowance of HK$26,335,000 due to the changes in estimate of future taxable income of the Company’s major operating subsidiary. As at August 31, 2008, considering the operating results of this major operating subsidiary during the year ended August 31, 2008 and the previous years as well as the Company’s forecast for future years, management reassessed that it is more likely than not that this subsidiary will be able to generate sufficient future taxable income to realize the tax benefit of its tax loss carryforwards, which resulted in the release of the valuation allowance of HK$26,335,000. In addition, the write-off of the valuation allowance in the amount of HK$7,897,000 during the fiscal year ended August 31, 2008 was offset by a corresponding reduction in the gross deferred tax asset relating to tax loss carryforwards since management assessed that certain tax positions are not more likely than not sustainable upon examination by the relevant tax authority. |
F-80
31 | Summary of differences between HKFRSs and U.S. GAAP (continued) |
(b) | Deferred taxes (continued) | |
Effective September 1, 2007, the Group adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. The Interpretation prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return. For each tax position, the enterprise must determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is then measured to determine the amount of benefit to recognize within the financial statements. No benefits may be recognized for tax positions that do not meet the more likely than not threshold. The benefit to be recognized is the largest amount that is more likely than not to be realized upon settlement. | ||
The adoption of FIN 48 did not result in a change to the Group’s retained earnings. The aggregate changes in the balance of the Company’s gross unrecognized tax benefits were as follows: |
HK$’000 | ||||
Balance at September 1, 2007 | 7,897 | |||
Additions based on tax positions related to the current year | 1,797 | |||
Balance at August 31, 2008 | 9,694 | |||
All of these unrecognized tax benefits, if recognized, would affect the Group’s effective tax rate. As of August 31, 2008, the Group did not have any accrued interest and penalties related to the unrecognized tax benefits. The Company will recognize interest and penalties, if any, related to unrecognized tax benefits in financial expense and other operating expense, respectively. | ||
The Group files income tax returns in Hong Kong, PRC, Canada and USA. The open tax years for the Company and its subsidiaries range between fiscal 2002 and fiscal 2008. The provisions made as a result of these open tax years are subject to the final agreement with the tax authorities. However, management does not believe there will be any material changes in the unrecognized tax benefits within the next 12 months. |
F-81
31 | Summary of differences between HKFRSs and U.S. GAAP (continued) |
(c) | Investment securities | |
The Group’s investment securities consist of equity-indexed mutual fund securities and long-term bank deposits. | ||
Under HKFRSs, the equity-linked mutual fund securities have been designated as financial asset at fair value through profit or loss as permitted under HKAS 39 “Financial Instruments: Recognition and Measurement”. | ||
Under U.S. GAAP, the Group follows SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” which requires the embedded derivative in the equity-linked mutual fund securities to be separated and accounted for as a derivative instrument, and the host contract to be accounted for based on generally accepted accounting principles applicable to the instruments of that type that do not contain derivative instruments. Accordingly, the host contracts of the equity-linked mutual fund securities are classified as held-to-maturity securities under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” and measured at amortized cost while the embedded derivatives are accounted for in accordance with SFAS No. 133 and measured at fair value. | ||
For the periods presented, there were no differences between i) the fair value of the equity-indexed debt securities; and ii) the aggregate of the amortized cost of the host contracts and the fair value of the embedded derivative instruments. |
(d) | Deposits for purchase of fixed assets and lease of land and building | |
Under HKFRSs, deposits for purchase of fixed assets and lease of land and buildings are classified as current assets if the amounts are expected to be realized within twelve months after the balance sheet date. Under U.S. GAAP, such deposits are classified as non-current assets. As of August 31, 2007 and 2008, deposits for purchase of fixed assets and lease of land and building were HK$13,263,000 and HK$19,622,000, respectively. |
(e) | Debt issue costs | |
Under HKFRSs, debt issue costs are reported as a reduction against the related debt proceeds and amortized over the life of the related debt using effective interest method. Under U.S. GAAP, such costs are disclosed separately as non-current asset and are similarly amortized. As of August 31, 2007 and 2008, the unamortized debt issue costs were HK$22,336,000 and HK$14,605,000, respectively. |
F-82
32 | Supplemental guarantors consolidated financial information | |
The senior notes described in note 13 are fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”). | ||
The condensed consolidated financial information is presented below and should be read in connection with the consolidated financial statements of City Telecom (H.K.) Limited prepared under HKFRSs. Separate financial statements of the Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries are wholly-owned and have fully and unconditionally guaranteed the Notes on a joint and several basis. Reconciliations to U.S. GAAP are not presented because the majority of the reconciling items relate to City Telecom (H.K.) Limited and Guarantor Subsidiaries are already disclosed and explained in Note 29. | ||
The following condensed consolidated financial information presents the condensed consolidated balance sheets as of August 31, 2007 and 2008 and the related condensed consolidated statements of operations and statements of cash flows for the years ended August 31, 2006, 2007 and 2008 of (a) City Telecom (H.K.) Limited, the parent; (b) the Guarantor Subsidiaries on a combined basis; (c) the Non-guarantor Subsidiary; (d) eliminating entries; and (e) the total consolidated amounts. |
F-83
32 | Supplemental guarantors consolidated financial information (continued) | |
Condensed consolidated balance sheet as of August 31, 2008 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and bank balances | 90,386 | 263,386 | 67,838 | — | 421,610 | |||||||||||||||
Pledged bank deposits | 87,319 | — | — | 87,319 | ||||||||||||||||
Trade receivables, net | 11,418 | 128,865 | — | 140,283 | ||||||||||||||||
Other receivables, deposits and prepayments | 3,378 | 80,293 | 2,759 | (3,704 | ) | 82,726 | ||||||||||||||
Investment securities | 27,997 | — | — | 27,997 | ||||||||||||||||
Deferred expenditure | — | 40,704 | — | 40,704 | ||||||||||||||||
Total current assets | 220,498 | 513,248 | 70,597 | 800,639 | ||||||||||||||||
Fixed assets, net | 87,483 | 1,135,394 | 8,522 | 1,231,399 | ||||||||||||||||
Investments in subsidiaries (note) | 1,499,437 | 260,399 | — | (1,759,836 | ) | — | ||||||||||||||
Other long-term assets | — | 61,499 | — | (13,121 | ) | 48,378 | ||||||||||||||
Total assets | 1,807,418 | 1,970,540 | 79,119 | 2,080,416 | ||||||||||||||||
Current liabilities | ||||||||||||||||||||
Amounts due to subsidiaries/ fellow subsidiaries | 10,830 | 1,316,410 | 51,059 | (1,378,299 | ) | — | ||||||||||||||
Trade payables | 26,440 | 25,884 | — | 52,324 | ||||||||||||||||
Deposits received | 7,943 | 8,321 | — | 16,264 | ||||||||||||||||
Current portion of deferred service income | 11,172 | 102,678 | — | (3,401 | ) | 110,449 | ||||||||||||||
Other payables and accrued charges | 17,831 | 149,548 | 10,735 | 178,114 | ||||||||||||||||
Income tax payable | 356 | 496 | 1,251 | 2,103 | ||||||||||||||||
Current portion of obligation under finance leases | 112 | 9 | — | 121 | ||||||||||||||||
Total current liabilities | 74,684 | 1,603,346 | 63,045 | 359,375 | ||||||||||||||||
Long-term liabilities | 702,917 | 17 | — | (14,500 | ) | 688,434 | ||||||||||||||
Total liabilities | 777,601 | 1,603,363 | 63,045 | 1,047,809 | ||||||||||||||||
F-84
32 | Supplemental guarantors consolidated financial information (continued) | |
Condensed consolidated balance sheet as of August 31, 2008(continued) |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Commitments and contingencies | ||||||||||||||||||||
Shareholders’ equity | ||||||||||||||||||||
— Ordinary shares, par value | ||||||||||||||||||||
HK$0.1 per share | ||||||||||||||||||||
— 2,000,000,000 shares authorized | ||||||||||||||||||||
— 650,621,823 shares issued and outstanding at August 31, 2008 | 65,062 | 15,485 | 8,131 | (23,616 | ) | 65,062 | ||||||||||||||
Share premium | 670,717 | 470,836 | — | (470,836 | ) | 670,717 | ||||||||||||||
Retained profits/(accumulated losses) | 275,025 | (118,907 | ) | 5,006 | 113,901 | 275,025 | ||||||||||||||
Other reserves | 19,013 | (237 | ) | 2,937 | 90 | 21,803 | ||||||||||||||
Total shareholders’ equity | 1,029,817 | 367,177 | 16,074 | 1,032,607 | ||||||||||||||||
Total liabilities and shareholders’ equity | 1,807,418 | 1,970,540 | 79,119 | 2,080,416 | ||||||||||||||||
Note: | The amounts of investment in subsidiaries at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting. |
F-85
Condensed
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | ||||||||
HK$’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 $0.1 per share | ||||||||||||
— 2,000,000,000 shares authorized at August 31, 2005 | ||||||||||||
— 614,125,404 shares issued and outstanding at August 31, 2005 | 61,412 | 15,485 | 8,131 | (23,616 | ) | 61,412 | ||||||
Share premium | 619,408 | 470,836 | — | (470,836 | ) | 619,408 | ||||||
Retained profits/(accumulated losses) | 331,742 | (153,183 | ) | 226 | 152,957 | 331,742 | ||||||
Other reserves | 7,052 | 100 | 97 | 643 | 7,892 | |||||||
Total shareholders’ equity | 1,019,614 | 333,238 | 8,454 | 1,020,454 | ||||||||
Total liabilities and shareholders’ equity | 2,113,665 | 1,741,879 | 47,422 | 2,347,428 | ||||||||
32 | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated balance sheet as of August 31, 2007 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and bank balances | 220,531 | 303,227 | 9,136 | 532,894 | ||||||||||||||||
Pledged bank deposits | 87,220 | — | — | 87,220 | ||||||||||||||||
Trade receivables, net | 12,105 | 158,446 | — | 170,551 | ||||||||||||||||
Other receivables, deposits and prepayments | 4,579 | 56,290 | 2,207 | (3,704 | ) | 59,372 | ||||||||||||||
Inventories | 477 | — | — | 477 | ||||||||||||||||
Investment securities | — | 3,779 | — | 3,779 | ||||||||||||||||
Deferred expenditure | — | 13,584 | — | 13,584 | ||||||||||||||||
Total current assets | 324,912 | 535,326 | 11,343 | 867,877 | ||||||||||||||||
Fixed assets, net | 100,201 | 1,126,870 | 10,152 | 1,237,223 | ||||||||||||||||
Investments in subsidiaries (note) | 1,495,935 | 274,449 | — | (1,770,384 | ) | — | ||||||||||||||
Investment securities | 39,213 | — | — | 39,213 | ||||||||||||||||
Other long-term assets | — | 33,645 | — | (16,825 | ) | 16,820 | ||||||||||||||
Total assets | 1,960,261 | 1,970,290 | 21,495 | 2,161,133 | ||||||||||||||||
Current liabilities | ||||||||||||||||||||
Amounts due to subsidiaries/ fellow subsidiaries | 10,830 | 1,490,567 | (4,771 | ) | (1,496,626 | ) | — | |||||||||||||
Trade payables | 37,477 | 38,542 | — | 76,019 | ||||||||||||||||
Deposits received | 7,876 | 8,312 | — | 16,188 | ||||||||||||||||
Current portion of deferred service income | 11,380 | 56,532 | — | (3,710 | ) | 64,202 | ||||||||||||||
Other payables and accrued charges | 18,694 | 119,642 | 6,931 | 145,267 | ||||||||||||||||
Income tax payable | 356 | 62 | 1,063 | 1,481 | ||||||||||||||||
Current portion of obligation under finance leases | 104 | 731 | — | 835 | ||||||||||||||||
�� | ||||||||||||||||||||
Total current liabilities | 86,717 | 1,714,388 | 3,223 | 303,992 | ||||||||||||||||
Long-term liabilities | 970,833 | 386 | (70 | ) | (17,890 | ) | 953,259 | |||||||||||||
Total liabilities | 1,057,550 | 1,714,774 | 3,153 | 1,257,251 | ||||||||||||||||
F-86
32 | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated balance sheet as of August 31, 2007(continued) |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Commitments and contingencies | ||||||||||||||||||||
Shareholders’ equity | ||||||||||||||||||||
— Ordinary shares, par value | ||||||||||||||||||||
HK$0.1 per share | ||||||||||||||||||||
— 2,000,000,000 shares authorized | ||||||||||||||||||||
— 616,503,404 shares issued and outstanding at August 31, 2007 | 61,650 | 15,485 | 8,131 | (23,616 | ) | 61,650 | ||||||||||||||
Share premium | 622,433 | 470,836 | — | (470,836 | ) | 622,433 | ||||||||||||||
Retained profits/(accumulated losses) | 200,519 | (230,666 | ) | 9,033 | 221,633 | 200,519 | ||||||||||||||
Other reserves | 18,109 | (139 | ) | 1,178 | 132 | 19,280 | ||||||||||||||
Total shareholders’ equity | 902,711 | 255,516 | 18,342 | 903,882 | ||||||||||||||||
Total liabilities and shareholders’ equity | 1,960,261 | 1,970,290 | 21,495 | 2,161,133 | ||||||||||||||||
Note: | The amounts of investment in subsidiaries at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting. |
F-87
Condensed
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | |||||||||||
HK$’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 | ) | ||||||||
32 | Supplemental guarantors consolidated financial information (continued) |
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$’000 | |||||||||||
(restated) | (restated) | (restated) | |||||||||||||
Revenue from provision of telecommunication and related services, net | 227,045 | 1,104,389 | 122,054 | (291,429 | ) | 1,162,059 | |||||||||
Network costs | (111,836 | ) | (271,203 | ) | — | 43,637 | (339,402 | ) | |||||||
Operating expenses: | |||||||||||||||
Salaries and related costs | (50,705 | ) | (224,799 | ) | (94,120 | ) | 110,232 | (259,392 | ) | ||||||
Sales and marketing expenses | (25,506 | ) | (416,728 | ) | — | 174,251 | (267,983 | ) | |||||||
General and administrative expenses | (65,552 | ) | (316,284 | ) | (26,132 | ) | 12,757 | (395,211 | ) | ||||||
Provision for doubtful accounts receivable | (1,814 | ) | (33,631 | ) | (35,445 | ) | |||||||||
(Loss)/income from operations | (28,368 | ) | (158,256 | ) | 1,802 | (135,374 | ) | ||||||||
Interest income | 13,061 | 403 | 114 | 13,578 | |||||||||||
Interest expenses | (54,167 | ) | (17,354 | ) | — | 17,059 | (54,462 | ) | |||||||
Other income, net | 25,617 | 43,515 | 99 | (63,194 | ) | 6,037 | |||||||||
Share of net losses from subsidiaries(2) | (128,156 | ) | — | 128,156 | — | ||||||||||
(Loss)/income before taxation | (172,013 | ) | (131,692 | ) | 2,015 | (170,221 | ) | ||||||||
Income tax expense/(credit) | 8,517 | (854 | ) | (938 | ) | 6,725 | |||||||||
Net (loss)/income | (163,496 | ) | (132,546 | ) | 1,077 | (163,496 | ) | ||||||||
Condensed consolidated statement of operations for the |
Condensed Consolidated Statements of operations for the year ended August 31, 2004
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | |||||||||||
HK$’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 | |||||||||||
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | Total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Revenue | 116,130 | 1,283,296 | 135,374 | (231,819 | ) | 1,302,981 | ||||||||||||||
Network costs | (28,398 | ) | (184,851 | ) | — | 34,882 | (178,367 | ) | ||||||||||||
Operating expenses: | ||||||||||||||||||||
— Salaries and related costs | (35,057 | ) | (231,196 | ) | (102,067 | ) | 120,860 | (247,460 | ) | |||||||||||
— Sales and marketing expenses | (5,743 | ) | (403,425 | ) | — | 101,425 | (307,743 | ) | ||||||||||||
— General and administrative expenses | (45,797 | ) | (331,030 | ) | (28,414 | ) | 8,643 | (396,598 | ) | |||||||||||
— Provision for doubtful accounts | (954 | ) | (13,339 | ) | — | (14,293 | ) | |||||||||||||
Income from operations | 181 | 119,455 | 4,893 | 158,520 | ||||||||||||||||
Interest income | 6,817 | 7,518 | 1,261 | 15,596 | ||||||||||||||||
Interest expense | (71,702 | ) | (71,753 | ) | — | 68,318 | (75,137 | ) | ||||||||||||
Other income, net | 86,677 | 30,234 | 75 | (107,593 | ) | 9,393 | ||||||||||||||
Share of net income from subsidiaries (note) | 108,154 | — | — | (108,154 | ) | — | ||||||||||||||
Income before taxation | 130,127 | 85,454 | 6,229 | 108,372 | ||||||||||||||||
Income tax (expense)/credit | (4,937 | ) | 26,306 | (4,551 | ) | 16,818 | ||||||||||||||
Net income | 125,190 | 111,760 | 1,678 | 125,190 | ||||||||||||||||
Note: | The net income amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses) of its subsidiaries using the equity method of accounting. |
Condensed F-88
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminating Entries | Consolidated Total | |||||||||||
HK$’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$’000 | |||||||||||
(restated) | (restated) | (restated) | |||||||||||||
Net cash (used in)/provided by operating activities(3) | (75,334 | ) | 135,503 | 23,094 | (5,880 | ) | 77,383 | ||||||||
Net cash used in investing activities(3) | (536,911 | ) | (497,143 | ) | (5,786 | ) | 482,400 | (557,440 | ) | ||||||
Net cash provided by financing activities | 892,713 | 381,903 | — | (482,400 | ) | 792,216 | |||||||||
Net increase in cash and bank balances | 280,468 | 20,263 | 17,308 | 312,159 | |||||||||||
Cash and bank balances at beginning of year | 180,473 | 41,691 | 6,183 | 228,347 | |||||||||||
Effects of foreign exchange rates changes | 60 | (405 | ) | (210 | ) | (360 | ) | (915 | ) | ||||||
Cash and cash equivalents at end of years | 461,001 | 61,549 | 23,281 | 539,591 | |||||||||||
32 | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated statement of operations for the year ended August 31, |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | Total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Revenue | 124,017 | 1,186,356 | 108,692 | (277,795 | ) | 1,141,270 | ||||||||||||||
Network costs | (50,522 | ) | (203,506 | ) | — | 39,437 | (214,591 | ) | ||||||||||||
Operating expenses: | ||||||||||||||||||||
— Salaries and related costs | (30,475 | ) | (209,065 | ) | (77,594 | ) | 96,032 | (221,102 | ) | |||||||||||
— Sales and marketing expenses | (12,601 | ) | (362,975 | ) | — | 171,903 | (203,673 | ) | ||||||||||||
— General and administrative expenses | (43,149 | ) | (344,162 | ) | (26,050 | ) | 10,601 | (402,760 | ) | |||||||||||
— Provision for doubtful accounts | (796 | ) | (5,773 | ) | — | (6,569 | ) | |||||||||||||
Income/(loss) from operations | (13,526 | ) | 60,875 | 5,048 | 92,575 | |||||||||||||||
Interest income | 13,390 | 8,606 | 675 | 22,671 | ||||||||||||||||
Interest expense | (87,474 | ) | (68,161 | ) | — | 68,131 | (87,504 | ) | ||||||||||||
Other income, net | 50,031 | 59,200 | 43 | (106,125 | ) | 3,149 | ||||||||||||||
Share of net losses from subsidiaries (note) | 66,444 | — | — | (66,444 | ) | — | ||||||||||||||
Income before taxation | 28,865 | 60,520 | 5,766 | 30,891 | ||||||||||||||||
Income tax credit | — | (75 | ) | (1,951 | ) | (2,026 | ) | |||||||||||||
Net income | 28,865 | 60,445 | 3,815 | 28,865 | ||||||||||||||||
Note: | The net income amounts at City Telecom (H.K.) Limited level have |
F-89
32 | Supplemental guarantors consolidated financial |
Condensed consolidated statement of operations for the year ended August 31, 2006 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Revenue | 174,113 | 1,110,256 | 116,355 | (265,848 | ) | 1,134,876 | ||||||||||||||
Network costs | (87,849 | ) | (254,740 | ) | — | 41,996 | (300,593 | ) | ||||||||||||
Operating expenses: | ||||||||||||||||||||
— Salaries and related costs | (44,254 | ) | (233,105 | ) | (81,887 | ) | 102,525 | (256,721 | ) | |||||||||||
— Sales and marketing expenses | (20,567 | ) | (336,985 | ) | — | 152,600 | (204,952 | ) | ||||||||||||
— General and administrative expenses | (56,366 | ) | (366,635 | ) | (30,353 | ) | 12,682 | (440,672 | ) | |||||||||||
— Provision for doubtful accounts | (1,090 | ) | (16,360 | ) | — | (17,450 | ) | |||||||||||||
(Loss)/income from operations | (36,013 | ) | (97,569 | ) | 4,115 | (85,512 | ) | |||||||||||||
Interest income | 16,594 | 2,946 | 838 | 20,378 | ||||||||||||||||
Interest expense | (88,584 | ) | (60,454 | ) | — | 60,401 | (88,637 | ) | ||||||||||||
Other income, net | 67,672 | 39,201 | 2,245 | (104,653 | ) | 4,465 | ||||||||||||||
Share of net losses from subsidiaries (note) | (111,171 | ) | — | — | 111,171 | — | ||||||||||||||
(Loss)/income before taxation | (151,502 | ) | (115,876 | ) | 7,198 | (149,306 | ) | |||||||||||||
Income tax expense/(credit) | 9,440 | 11 | (2,207 | ) | 7,244 | |||||||||||||||
Net (loss)/income | (142,062 | ) | (115,865 | ) | 4,991 | (142,062 | ) | |||||||||||||
Note: | The net loss amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses) of its subsidiaries using the equity method of accounting. |
F-90
Condensed
32 | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated statement of cash flows for the year ended August 31, 2008 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Net cash provided by operating activities | 193,001 | 125,504 | 59,866 | 158 | 378,529 | |||||||||||||||
Net cash generated from/ (used in) investing activities | 18,775 | (164,222 | ) | (2,303 | ) | (147,750 | ) | |||||||||||||
Net cash used in financing activities | (341,786 | ) | (730 | ) | — | (342,516 | ) | |||||||||||||
Net (decrease)/increase in cash and bank balances | (130,010 | ) | (39,448 | ) | 57,563 | (111,737 | ) | |||||||||||||
Cash and bank balances at beginning of year | 220,531 | 303,227 | 9,136 | 532,894 | ||||||||||||||||
Effects of foreign exchange rates changes | (135 | ) | (393 | ) | 1,139 | (158 | ) | 453 | ||||||||||||
Cash and bank balances at end of year | 90,386 | 263,386 | 67,838 | 421,610 | ||||||||||||||||
Condensed consolidated statement of cash flows for the year ended August 31, 2007 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Net cash provided/(used in) by operating activities | 110,190 | 342,627 | (69,035 | ) | 217 | 383,999 | ||||||||||||||
Net cash generated from/ (used in) investing activities | 132,039 | (69,197 | ) | 51,211 | 114,053 | |||||||||||||||
Net cash used in financing activities | (108,277 | ) | (1,227 | ) | — | (109,504 | ) | |||||||||||||
Net increase/(decrease) in cash and bank balances | 133,952 | 272,203 | (17,824 | ) | 388,548 | |||||||||||||||
Cash and bank balances at beginning of year | 86,670 | 31,349 | 26,898 | 144,917 | ||||||||||||||||
Effects of foreign exchange rates changes | (91 | ) | (325 | ) | 62 | (217 | ) | (571 | ) | |||||||||||
Cash and bank balances at end of year | 220,531 | 303,227 | 9,136 | 532,894 | ||||||||||||||||
F-91
City Telecom (H.K.) Limited | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminating Entries | Consolidated Total | |||||||||||
HK$’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 | |||||||||||
SIGNATURE
32 | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated statement of cash flows for the year ended August 31, 2006 |
City | ||||||||||||||||||||
Telecom | Non- | |||||||||||||||||||
(H.K.) | Guarantor | guarantor | Eliminating | Consolidated | ||||||||||||||||
Limited | subsidiaries | subsidiary | entries | total | ||||||||||||||||
HK$’000 | HK$’000 | HK$’000 | HK$’000 | HK$’000 | ||||||||||||||||
Net cash (used in)/provided by operating activities | (278,174 | ) | 403,086 | 58,994 | 245 | 184,151 | ||||||||||||||
Net cash used in investing activities | (12,087 | ) | (425,348 | ) | (55,307 | ) | (492,742 | ) | ||||||||||||
Net cash provided by financing activities | (85,238 | ) | (1,248 | ) | — | 54 | (86,432 | ) | ||||||||||||
Net (decrease)/increase in cash and bank balances | (375,499 | ) | (23,510 | ) | 3,687 | (395,023 | ) | |||||||||||||
Cash and bank balances at beginning of year | 461,001 | 55,309 | 23,281 | 539,591 | ||||||||||||||||
Effects of foreign exchange rates changes | 1,168 | (450 | ) | (70 | ) | (299 | ) | 349 | ||||||||||||
Cash and bank balances at end of year | 86,670 | 31,349 | 26,898 | 144,917 | ||||||||||||||||
F-92
CITY TELECOM (H.K.) LIMITED | ||||
By: | /s/ Lai Ni Quiaque | |||
Name: | Lai Ni Quiaque | |||
Title: | Chief Financial Officer |