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, 2007or¨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, 2007: 616,503,404¨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;
• | 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. |
changes in the regulatory environment in which we operate, or changes in the rules and policies that government regulators apply to our businesses;
increased competition in the local or international telecommunications, Internet access, local VOIP or pay-television (“pay-TV”) markets;
the benefits we expect to receive from our continuing capital expenditure on our Next Generation Network (refer to our Metro Ethernet Network and our newly deployed Gigabit Passive Optical Network (“GPON”));
our ability to maintain growth and successfully introduce new products and services; and
the continued development and stability of the technological infrastructure we use to provide our telecommunications, Internet access, local VOIP and pay-TV using Internet Protocol, which we refer to as IP-TV, services.
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
Consolidated Statement of Operations Data: Hong Kong Financial Reporting Standards (“HKFRSs”) 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) Weighted average number of shares Diluted weighted average number of shares(2) As of and for the year ended August 31, 2003 2004 2005(8) 2006(8) 2007 2007 HK$ HK$ HK$ HK$ HK$ US$ (Amounts in thousands except per share data) 423,107 541,902 629,464 716,600 816,800 104,761 875,802 627,978 532,595 418,276 324,470 41,616 1,298,909 1,169,880 1,162,059 1,134,876 1,141,270 146,377 (76,845 ) (122,476 ) (118,383 ) (125,639 ) (103,795 ) (13,313 ) (245,908 ) (208,932 ) (221,019 ) (174,954 ) (110,796 ) (14,210 ) (322,753 ) (331,408 ) (339,402 ) (300,593 ) (214,591 ) (27,523 ) (704,796 ) (793,212 ) (958,031 ) (919,795 ) (834,104 ) (106,981 ) 271,360 45,260 (135,374 ) (85,512 ) 92,575 11,873 2,562 3,578 (40,884 ) (68,259 ) (64,833 ) (8,315 ) 1,678 2,668 6,037 4,465 3,149 404 (17,857 ) (2,043 ) 6,725 7,244 (2,026 ) (260 ) 257,743 49,463 (163,496 ) (142,062 ) 28,865 3,702 — — — — — — 257,743 49,463 (163,496 ) (142,062 ) 28,865 3,702 46.6 8.1 (26.6 ) (23.1 ) 4.7 0.6 41.9 8.1 (26.6 ) (23.1 ) 4.6 0.6 5.0 9.0 — — 8.0 1.0 552,600 610,095 613,525 614,134 614,840 614,840 615,102 614,365 613,525 614,134 631,319 631,319
As of and for the year ended August 31, | ||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | |||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||
(Amounts in thousands except per share data) | ||||||||||||||||||
U.S. GAAP | ||||||||||||||||||
Total operating revenue | 1,291,119 | 1,169,880 | 1,162,059 | 1,134,876 | 1,141,270 | 146,377 | ||||||||||||
Total operating expenses | (1,015,900 | ) | (1,123,198 | ) | (1,289,014 | ) | (1,220,388 | ) | (1,048,695 | ) | (134,504 | ) | ||||||
Net income/(loss) from continuing operations | 264,151 | 51,565 | (149,148 | ) | (142,062 | ) | 28,865 | 3,702 | ||||||||||
Net income/(loss) from continuing operations per share (cents) | 47.8 | 8.5 | (24.3 | ) | (23.1 | ) | 4.7 | 0.6 | ||||||||||
Net income from discontinued operations | 83 | — | — | — | — | — | ||||||||||||
Loss arising from disposal of discontinued operations | (2,695 | ) | — | — | — | — | — | |||||||||||
Net loss from discontinued operations per share (cents) | (0.5 | ) | — | — | — | — | — | |||||||||||
Diluted net income/(loss) from continuing operations per share (cents)(3) | 42.9 | 8.4 | (24.3 | ) | (23.1 | ) | 4.6 | 0.6 | ||||||||||
Diluted net loss from discontinued operations per share (cents)(4) | (0.4 | ) | — | — | — | — | — | |||||||||||
Dividends declared per share (cents) | 5.0 | 9.0 | — | — | 8.0 | 1.0 | ||||||||||||
Weighted average number of shares | 552,600 | 610,095 | 613,525 | 614,134 | 614,840 | 614,840 | ||||||||||||
Diluted weighted average number of shares(2) | 615,102 | 614,365 | 613,525 | 614,134 | 631,319 | 631,319 |
Consolidated Balance Sheet Data: HKFRSs 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, 2003 2004 2005 2006 2007 2007 HK$ HK$ HK$ HK$ HK$ US$ (Amounts in thousands) 1,548,534 1,683,408 2,347,428 2,124,215 2,161,133 277,182 (18,174 ) (119,170 ) (945,348 ) (948,027 ) (952,593 ) (122,177 ) — — (3,135 ) (2,373 ) (1,210 ) (155 ) (351,185 ) (388,540 ) (378,491 ) (282,161 ) (303,448 ) (38,920 ) (369,359 ) (507,710 ) (1,326,974 ) (1,232,561 ) (1,257,251 ) (161,252 ) 1,179,175 1,175,698 1,020,454 891,654 903,882 115,930 — — — — — — 1,179,175 1,175,698 1,020,454 891,654 903,882 115,930 60,496 61,057 61,412 61,417 61,650 7,907 615,886 617,986 619,408 620,298 622,433 79,832 502,793 496,655 339,634 209,939 219,799 28,191 1,179,175 1,175,698 1,020,454 891,654 903,882 115,930
As of and for the year ended August 31, | ||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | |||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||
(Amounts in thousands) | ||||||||||||||||||
U.S. GAAP | ||||||||||||||||||
Total assets | 1,552,021 | 1,688,640 | 2,385,556 | 2,154,305 | 2,189,086 | 280,767 | ||||||||||||
Total liabilities | (369,359 | ) | (507,710 | ) | (1,352,876 | ) | (1,257,034 | ) | (1,279,587 | ) | (164,117 | ) | ||||||
Total shareholders’ equity | 1,182,662 | 1,180,930 | 1,032,680 | 897,271 | 909,499 | 116,650 |
As of and for the year ended August 31, | ||||||||||||||||||
2003 | 2004 | 2005(8) | 2006(8) | 2007 | 2007 | |||||||||||||
HK$ | HK$ | HK$ | HK$ | HK$ | US$ | |||||||||||||
(Amounts in thousands) | ||||||||||||||||||
Other Financial Data: | ||||||||||||||||||
EBITDA(5) | 449,058 | 244,945 | 108,377 | 195,417 | 353,827 | 45,381 | ||||||||||||
Net cash provided by operating activities | 414,500 | 203,763 | 77,383 | 184,151 | 383,999 | 49,251 | ||||||||||||
Net cash (used in) / generated from investing activities | (309,634 | ) | (406,244 | ) | (557,440 | ) | (492,742 | ) | 114,053 | 14,628 | ||||||||
Net cash provided by (used in) financing activities | (10,274 | ) | 47,221 | 792,216 | (86,432 | ) | (109,504 | ) | (14,045 | ) | ||||||||
Capital expenditures(6) | 250,209 | 410,046 | 419,126 | 322,935 | 132,250 | 16,962 |
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, amortization and exchange difference on senior notes Other borrowing costs Minority interest Gain / loss 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 As of and for the year ended August 31, 2003 2004 2005 2006 2007 2007 HK$ HK$ HK$ HK$ HK$ US$ (Amounts in thousands) 449,058 244,945 108,377 195,417 353,827 45,381 (176,020 ) (197,017 ) (237,714 ) (276,464 ) (258,103 ) (33,104 ) 2,562 3,578 (40,884 ) (68,259 ) (64,833 ) (8,315 ) (17,857 ) (2,043 ) 6,725 7,244 (2,026 ) (260 ) 257,743 49,463 (163,496 ) (142,062 ) 28,865 3,702 176,020 197,017 237,714 276,464 258,103 33,104 — — — 1,131 — — — 1,828 12,927 13,973 15,580 1,998 17,857 2,043 (6,725 ) (7,244 ) 2,026 260 (3,163 ) (3,753 ) (13,578 ) (20,378 ) (22,671 ) (2,908 ) — — 54,065 86,664 89,879 11,528 — — — 1,919 (739 ) (95 ) — — — — — — 427 (34 ) (134 ) 9,621 1,714 220 — 87 6,965 6,823 5,727 735 — — — 125 806 103 — 1,696 (300 ) (668 ) (1,887 ) (242 ) 2,695 — — — — — (19,861 ) (24,819 ) (1,393 ) (2,532 ) (2,171 ) (278 ) — (6,206 ) (6,893 ) 567 5,600 718 (17,218 ) (13,559 ) (41,769 ) (40,252 ) 3,167 406 414,500 203,763 77,383 184,151 383,999 49,251
As of and for the year ended August 31, | ||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | ||||||
Operating Data: | ||||||||||
Fixed Telecommunications Network Services Subscriptions: | ||||||||||
Broadband Internet Access | 172,000 | 197,000 | 229,000 | 220,000 | 247,000 | |||||
Local VOIP | 140,000 | 237,000 | 293,000 | 281,000 | 308,000 | |||||
IP-TV | — | 31,000 | 109,000 | 116,000 | 128,000 | |||||
Total | 312,000 | 465,000 | 631,000 | 617,000 | 683,000 | |||||
Registered International Telecommunications Accounts(7) | 1,589,188 | 1,916,235 | 2,054,036 | 2,201,963 | 2,331,000 | |||||
IDD Outgoing Minutes (in thousands) | 888,000 | 1,007,000 | 947,100 | 788,000 | 659,000 |
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 telecommunications and other services, net | 1,137,356 | 1,162,059 | 1,159,579 | 1,134,876 | ||||||||
Provision for doubtful accounts | (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 |
Average(1) | High | Low | Period-End | |||||
HK$ | HK$ | HK$ | HK$ | |||||
2002 | 7.7996 | 7.8095 | 7.7970 | 7.7988 | ||||
2003 | 7.7864 | 7.8001 | 7.7085 | 7.7640 | ||||
2004 | 7.7891 | 7.8010 | 7.7632 | 7.7723 | ||||
2005 | 7.7775 | 7.7999 | 7.7514 | 7.7718 | ||||
2006 | 7.7681 | 7.7928 | 7.7506 | 7.7767 | ||||
2007 | 7.8019 | 7.8289 | 7.7497 | 7.7975 | ||||
July 2007 | 7.8197 | 7.8264 | 7.8129 | 7.8264 | ||||
August 2007 | 7.8155 | 7.8289 | 7.7968 | 7.7968 | ||||
September 2007 | 7.7816 | 7.7947 | 7.7591 | 7.7689 | ||||
October 2007 | 7.7544 | 7.7694 | 7.7497 | 7.7502 | ||||
November 2007 | 7.7773 | 7.7890 | 7.7573 | 7.7874 | ||||
December 2007 | 7.7983 | 7.8073 | 7.7879 | 7.7984 | ||||
January 2008 (through January 23, 2008) | 7.8043 | 7.8107 | 7.7989 | 7.8075 |
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 |
In fiscal 2007, our
which carries a higher margin than our international telecommunications business. Revenues from our international telecommunications business decreased by 22.4%10.0% in fiscal 2008, primarily due to a decrease in the total number of airtime minutes by 16.4% and12.9%, which reflected a reduction in the intentional drop outoperating scale of low profit margin subscribers. our international telecommunications business.With the drop in averageexpected competitive pressure on tariff rates and a reduced operating scale, we expect profit margins from our international telecommunications services will continuebusiness to be under pressurecontribute a smaller portion of our revenue and less revenue will be generated in future.net profit over time.
5
greater financial, technical, marketing and other resources;
• | greater financial, technical, marketing and other resources; | ||
• | greater existing infrastructure; | ||
• | greater name recognition; and | ||
• | larger customer bases. |
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.
As of January 4, 2008, 253 public non-exclusive telecommunications service licenses, which we refer to as PNETS Licenses, for the provision of external telecommunications services had been issued in Hong Kong. Some of these licenses are held by subsidiaries of major foreign telecommunications providers, which have competitive advantage due to their global presence and size.
On December 31, 2007, TVB and ATV launched digital terrestrial television, which will expand the public’s access to 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. If the number of subscribers to our pay-television service declines, it could adversely affect our results of operations.
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. |
6
We have made significant investments in our network infrastructure
We are exploring the possibility of bidding for Singapore’s Next Generation National Broadband Network project. See “Business Overview—Developments in Fiscal Year 2007”. To participate in this project, weour independent auditors may be required to structure the transactions to comply with certain restrictive covenants under the 8.75% notes that we issued in January 2005. No assurance can be given that we willnot be able to successfully structure the transactions. We may also require financing, which might include the issuance of equity securities and issuance of debt instruments, among other alternatives. Raising additional funds by issuing common stock or other types of equity securities would dilute our existing stockholders.
If we electattest to submit a bid for the project, we cannot assure you that our bid will be accepted or, if accepted, that the awarded contract will generate sufficient revenues to result in profitability. Because the Infocomm Development Authority of Singapore (“IDA”) requires a bid on this project in advance of the completion of the relevant design, we are subject to the risks of unforeseen software development or other technological difficulties and/or cost overruns.
We are in the process of instituting changes to our internal controls and management systems in order to satisfy the requirements of Section 404 of the Sarbanes Oxley Act of 2002. Our failure to timely and successfully institute these changes and to maintain the adequacy of our internal controls could subject us to regulatory actions and may adversely affect our stock price and our ability to raise additional capital.their effectiveness.
2010.
Procedures”.
simultaneously manage implementation of our infrastructure development and marketing plans;
• | 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. |
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.
result in
• | 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. |
jeopardize the security of confidential information stored in the computer system of our customers; and
allow for illegal viewing or download of our content.
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. |
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.
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.
• | 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
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 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.
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 offer local VOIP services through our Next Generation Network. 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 telecommunications network services. The Telecommunications Authority is currently in the process of developing a new Fixed-Mobile Convergence, or FMC, licensing practice which may supersede the existing distinctions between fixed-line and mobile operator licensing. This effectively means that the existing four classes of carrier licenses are proposed to be replaced by a single Unified Carrier License, or UCL. This regulatory change, together with the 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 wireless license, 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.
In addition, themaintained in future.
10
due 2015.
pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;
• | 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. |
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.
The legal and commercial name of the Company is City Telecom (H.K.) Limited.
The Company was incorporated in Hong Kong.
The Company was incorporatedKong on May 19, 1992 under the Hong Kong Companies Ordinance (Chapter 32 of the laws of Hong Kong) (the “Companies Ordinance”).as a limited liability company. Our registered office is located at Level 39, Tower 1, Metroplaza, No. 223 Hing Fong Road, Kwai Chung, New Territories, Hong Kong, telephone (852) 3145-6888. Our agent for U.S. federal securities laws purposes is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.
Important events in the development of our business are as follows:
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 Hong Kong Broadband Network Limited (“HKBN”)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 Next Generation Network.
In January 2008, HKBN launched “Dual Mode High Definition Terrestrial TV Receiver and IPTV Set-Top Box” to all customers in Hong Kong.
• | 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. |
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 July 2007, HKBN was awarded “Integrated Support Team” of the year at the Asia Pacific Customer Service Consortium Customer Relationship Excellence Awards
In June 2007, CTI Group was awarded “Best Retention Strategies” at the Hong Kong HR Awards 2007
In February 2007, HKBN launched bb50 and bb200 symmetric residential broadband service supported by “SDU” personalized customer care service.
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 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 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.11
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.
• | 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. |
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 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 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.
B. Business Overview
high-speed broadband Internet access services that provide our customers with symmetric upstream and downstream access speeds with options for 25 Mbps, 50 Mbps, 100 Mbps, 200 Mbps and 1,000 Mbps;
fixed line local telephony through our voice-over-Internet-Protocol technology;
pay television, where we deliver more than 83 channels including self-produced news, children’s programming, international drama and movies and local interest programming using our IP platform; and
corporate data services, which includes provision of dedicated bandwidth to corporate customers.
As of August 31, 2007, we had a total of approximately 683,000 fixed telecommunications network services subscriptions, consisting of 247,000 broadband Internet access, 308,000 local VOIP and 128,000 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 2.3 million registered accounts. Our international telecommunications business contributed 28.4% to our total revenues in fiscal 2007 as compared to 36.9% in fiscal 2006.
Recent Developments
On February 9, 2007, we signed a Memorandum of Understanding with MobileOne Limited to work together to participate in Singapore’s Next Generation National Broadband Network project (“NGN”).segments. The Project relates to the provision of ultra-high speed national connectivity in Singapore at competitive prices by 2015.
Since then we have submitted our indication of interest in response to an invitation by the IDA to participate in the Pre-Qualification Exercise and Competitve Dialogue for the NGN project.
On December 11, 2007, the IDA released the terms of Request-For-Proposal (“RFP”) for the Network Company. Under this RFP, a company will be selected to design, build and operate the passive infrastructure layer of the project. The deployment of active electronics will be done by an operating company which will also be the entity that offers wholesale broadband access to downstream retail service providers.
Under the terms of the RFP, the Singapore Government is prepared to provide a grant of up to Singapore dollar 750 million for the project and will evaluate proposals based on four key criteria:
It is expect that the IDA will award the winning bid in the third quarter of 2008.
We are now exploring the viability of this project and are in the process of assessing if we will submit the bid. For uncertainties relating to our participation in this project, see “Risks Relating to Our Business and Operations – “Although we have expressed our interest in Singapore’s Next Generation National Broadband Network project, we cannot assure you that we will be capable of participating in the project, and, if we will, that the project will be successful.””
Revenues
A significant 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 | 2005 | 2006 | 2007 | |||
HK$ | HK$ | HK$ | ||||
(Amounts in thousands) | ||||||
Fixed telecommunications network services(1) | 629,464 | 716,600 | 816,800 | |||
International telecommunications services | 532,595 | 418,276 | 324,470 | |||
Total operating revenue | 1,162,059 | 1,134,876 | 1,141,270 | |||
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, pay-TV services and corporate data 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. |
12
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 Christmas holiday and Chinese New Year holiday. We do not believe that seasonality has had a material effect on our business, financial condition or results of operations.
Network infrastructure
Our self-owned network is one of the world’s largest Next Generation Networks and is cited as a global reference case by our two primary vendors, Cisco Systems, Inc. and Nortel Networks Limited. Our Next Generation Network conforms to the industry standards for 10/100/1000 Mbps Internet access speeds, and covers 1.4 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 Next Generation 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.
In November 2007, we have collaborated with one of the largest network solution providers for the deployment of the GPON in Hong Kong to deliver advanced triple play services to our subscribers and enlarge our FTTH network coverage in Hong Kong.
Focus on the Residential Mass and Small-To-Medium Corporate and Enterprise Market Segments.• 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 a majority of Hong Kong’s residential properties have limited space for in-building wiring leading to subscribers’ residences, making it difficult for new entrants to replicate our end-to-end network build.
Leading-Edge Next Generation Network. Ourfixed telecommunications network deploys Ethernet technology provided by Cisco Systems, Inc. We believeservices over 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 while still leaving us with capacity to offer more services in the future. It is also capable of providing up to 1,000 Mbps symmetric broadband Internet access. During fiscal 2007, we launched our “Fiber-To-The-Home” (“FTTH”) residential broadband service providing 100 Mbps, 200Mbps and 1000 Mbps service. Our promotions during fiscal 2006 and 2007 highlighted the bandwidth advantage of our Next Generation Network over xDSL or cable modem services. Ethernet technology is “off-the-shelf” and has long been deployed for large enterprises, but we believe we are one of the first to deploy this technology for the residential market on a mass scale.
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 significant in-building bottlenecks when attempting to complete an end-to-end network. This is because the majority of Hong Kong’s residential properties have limited space for in-building wiring leading to subscribers’ residences, making it difficult for new entrants to replicate our end-to-end network build.
Fixed Telecommunications Network Services
Next Generation Network Infrastructure
Our Next Generation Network is formed by using our own fiber-based backbone, wireless technology or leased wireline-based backbone to connect our in-building Ethernet infrastructures to our IP hub sites and switching centers in Hong Kong. Our Ethernet infrastructure is a system of Category-5e copper wiring that connects our subscribers’ premises to our local area network, or LAN, switches within a residential or commercial building.
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, | ||||||
2005 | 2006 | 2007 | ||||
Fixed Telecommunications Network Services Subscriptions: | ||||||
Broadband Internet Access | 229,000 | 220,000 | 247,000 | |||
Local VOIP | 293,000 | 281,000 | 308,000 | |||
IP-TV | 109,000 | 116,000 | 128,000 | |||
Total | 631,000 | 617,000 | 683,000 | |||
Internet Access
HKBN offers our broadband Internet access services in Hong Kong over our Next Generation Network. 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 maintain on a limited scale for the 56k dial-up Internet access and 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 25 Mbps and 100 Mbps. We currently offer broadband service for bb25, bb50, bb100, bb200 and bb1000 at monthly fees ranging from HK$208 to HK$1,688 for unlimited service. Moreover, we also offer FTTH broadband service for 100 Mbps, 200 Mbps and 1000 Mbps at monthly fees ranging from HK$378 to HK$1,688 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$150 to HK$17,000.
Competition
There have beenunlike many new entrants to the Internet access business, butindustry, we operate an “end-to-end” network that extends from our main competitors are PCCW-HKT (through its current subsidiary PCCW-IMS Limited), i-CableIP network hub sites 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 networkour switching centers in Hong Kong to provide asymmetric Internet access typically at speeds up to 6 Mbps downstream and 640 Kbps upstream.our subscribers’ premises.
Our main competitors have been in operation longer and may have greater market presence, brand recognition and more financial, technical and personnel resources. In addition, they may have greater network coverage in terms of homes passed.
We had approximately 247,000 broadband Internet access subscriptions as of August 31, 2007, which represented a market share of approximately 13% with respect to the total number of broadband Internet access subscribersGPON in Hong Kong.
Local VOIP
We offer As the reach of GPON is considerably more than 100 meters, it can be a more cost effective solution than 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 Next Generation 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 ofsetup for lower density deployments.
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 addeddeliver multiple services, including call waiting, caller displaythe triple play services of voice, broadband and conference call services.
IP-TV.
Competition
PCCW-HKT, the incumbent and largest fixed telecommunications network operator in Hong Kong, announced that it had a market shareinfrastructure of approximately 67% with respectHK$132.3 million in fiscal 2007 and HK$211.7 million in fiscal 2008. In fiscal 2009 to local telephony services asfiscal 2010, we plan to further incur total capital expenditures of June 30, 2007. AsHK$650.0 million to continue increasing the incumbent operator, PCCW-HKT is required to allow interconnection to its fixed telecommunicationscapacity of our existing network to other licensed fixed telecommunications network operators. The remainder ofcoverage and extending 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, 2007, we had 308,000 local VOIP subscriptions. Our market share with respect to local residential telephony services amounts to approximately 14% as of August 31, 2007.
IP-TV
In August 2003 we introduced our IP-TV service that provides DVD quality video delivered via our Next Generation Network to an IP set-top-box connected to the subscriber’s television set. In May 2007, we renamed our IP-TV service as “bbTV”. This monthly subscription-based pay television service offers 83 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 78 employees and produces an average of 70-80 news stories per day for our 24-hour news cycle.
Because of the scalabilityreach of our Next Generation Network infrastructure, the current cost of adding IP-TV services to an existing broadband Internet access or local VOIP subscriber is small. Since the launch of our IP-TV services in August 2003 we have progressively adjusted our content offerings and valued added components of the services. We consider our IP-TV to be an incremental component of our broadband and VOIP service offerings, rather than a large standalone business. As of August 31, 2007, we had 128,000 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.
On December 31, 2007, TVB and ATV launched digital terrestrial television (“DTT”) to bring viewers a wide array of free programme choices, better reception and to open up new creativity platforms for television production. New free channels on standard definition television and high definition television were launched on December 31, 2007. TVB and ATV have pledged to speed up the construction of the six transmission stations to advance the target of providing coverage to 75% of the population of Hong Kong by August 2008. As DTT signals are broadcasted on new frequency channels, building management offices of each building may need to upgrade their communal aerial broadcast distribution systems for reception and distribution of DTT programmes. Viewers are also required to maintain a digital set-top-box, or buy an integrated digital television set with a built-in decoder for receiving DTT programmes. The launch of DTT by TVB and ATV may decrease the demand for pay television service.
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 providers of international direct dial services in Hong Kong. We believe that our ability to deliver a range of calling plans with varying features that cater to different customer needs has been one of the key factors of our success.
The primary international telecommunications services that we currently offer our customers are the following:
| ||
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 users of services are also provided discounts depending on the time of day or day of the week when the call is placed.
In fiscal 2006, we experienced a reduction in total traffic volume of 16.8% to 788 million minutes and in fiscal 2007, a further reduction in total traffic volume of 16.4% to 659 million minutes. The continuing reduction in traffic volume was mainly due to intense competition as some of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offers free PC-to-PC based international calls, is becoming more prevalent. We are proactively migrating our legacy international telecommunications services to our “2b” services, which we believe will enable us to achieve higher margins and access a wider addressable market.
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 2007. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2008. 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, 7 days a week network operation center for real-time service monitoring and maintenance that is supported by about 120 operational and field staff;
• | 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. |
individual self-reporting mechanisms and centralized performance monitoring systems for our switches and equipment;
an emergency self-reporting system that automatically contacts designated personnel; and
back-up systems for our switches, critical software and hardware components.
Once a network fault is detected by our control room, we will either remotely rectify the situationproblem remotely or dispatch field staff to that location should physical interaction be required. After the situationproblem has been resolved, we will continue to monitor network performance as well as track customer service feedback until we are assured of the fault being fully rectified.
We commit considerable resources to our research and development department in order to continuously improve our services and improve our market position.
In February 2007, to further enhance customer experiences, we established a “Special Duty Unit” (“SDU”) customer care system whereby residential broadband customers are assigned a designated personal customer care executive for service account matters.
debts expense represented approximately 3.1%,1.5%1.5%, 0.6% and 0.6%1.1% of our revenue for each of fiscal 2005, 2006, 2007 and 2007,2008, respectively. Bad debts expense for fiscal 2005 was higher compared to fiscal 2006 and 2007 due to the recognition of a provision of HK$19.5 million for mobile interconnection charges in 2005. The lower bad debt expenses in fiscal 2007 was due to the reversal of HK$9.4 million of a previously recognized provision for doubtful accounts as a result of the issuance by the Telecommunications Authority of the Final Determination for theits final determination on mobile interconnection charges. For more information regarding our provision for mobile interconnection charges, see “Our Revenues – Fixed Telecommunications Network Services” above“Factors Affecting our Results of Operations—Our Revenues” below in this annual report.
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Currently, there are four 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
to provide a public fixed telecommunications network service, covering internal services or external services, or both; and
• | 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. |
to establish and maintain a fixed telecommunications network, which may be wireline-based or wireless-based (Wi-Fi spectrum included), or a combination of both.
A FTNS License is valid for a period of 15 years and is renewable for a further period not exceeding 15 years at the Telecommunications Authority’s discretion. The amount of license fee payable by a holder of a FTNS License comprises (i) a fixed annual amount of HK$1.0 million; (ii) a variable amount calculated on the basis of the number of customer connections (which is currently set at HK$700 for each 100 customer connections); and (iii) a variable fee calculated by reference to the radio spectrum assigned and used by the license holder.
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as from July 1, 2008 as well as to set out the issues to be followed up after its withdrawal. After this date, interconnection terms including charges will be determined by commercial negotiation between carriers.
nature, the Telecommunications Authority has indicated that the extent of a licensee’s compliance with the guidelines will be taken into account in assessing if a licensee has complied with the statutory provision mentioned above.
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Operator, with one of its Mobile Network Operators, China Resources Peoples Telephone Company Limited, or Peoples, at a rate of HK$4.8HK4.8 cents per occupancy minute for interconnection from April 1, 2002 to August 31, 2002, HK$4.22HK4.22 cents per occupancy minute for interconnection from September 1, 2002 to August 31, 2003 and HK$2.89HK2.89 cents per occupancy minute for interconnection from September 1, 20042003 to August 31, 2004. However,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.
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| ||
(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, CTI International Limited, BBTV Company Limited, City Telecom (U.S.A.) Inc., City Telecom (Vancouver) Inc. and City Telecom (Toronto) Inc. |
(4) |
|
| The immediate subsidiaries of Hong Kong Broadband Network Limited are Excel Billion Profits Limited, Hong Kong Television Network Limited, Hong Kong Broadband Television Company Limited, |
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. | 100 | |||||||||
City Telecom (Vancouver) Inc. | Canada | 100 | ||||||||
City Telecom Inc. | Canada | 100 | ||||||||
City Telecom International Limited | British Virgin Islands | 100 |
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Percentage of interest | ||||||||||
held by City Telecom | ||||||||||
(%) | ||||||||||
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 Broadband Digital TV Limited | Hong Kong | 100 | ||||||||
Hong Kong Broadband Network Limited | Hong Kong | 100 | ||||||||
Hong Kong Broadband Phone Limited | Hong Kong | 100 | ||||||||
Hong Kong Broadband Television Company Limited | Hong Kong | 100 | ||||||||
Hong Kong Television Network Limited | Hong Kong | 100 | ||||||||
IDD1600 Company Limited | Hong Kong | 100 | ||||||||
SGBN Singapore Broadband Network Pte. Limited | Singapore | 100 | ||||||||
Warwick Gold Enterprises Limited | Hong Kong | 100 |
(1) | The company has only registered its Chinese name. The English name is an unregistered translation. |
August 31, 2008. Mongkok, Kowloon, Hong Kong. 25E.D. Property, Plants and EquipmentHKBN, 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.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 Next 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 Next Generation Network. As of August 31, 20072008, we had a total of approximately 683,000801,000 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 2.3 million registered accounts.Our self-owned network is one of the world’s largest Next Generation Networks and is cited as a global reference case by our primary vendors, Cisco Systems, Inc. and Nortel Networks Limited.has a current coverage of 1.4currently covers 1.5 million residential home passes, which representsrepresenting approximately 60%67% of the population 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.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.
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.
PA issued by the Telecommunications Authority previously.
26
Our total
Substantially all of our international telecommunications revenues are generated by the per minute tariff rate that we charge our IDD customers. For each of our 1666 and 0030 calling plans, these charges vary according to the destination of the call and we also provide certain discounts that depend on the time of day or day of the week at which the call is placed.
2008.
27
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Year ended August 31, | |||||||||
2005 | 2006 | 2007 | |||||||
(Thousands of HK$) | |||||||||
Balance at beginning of the year | 22,959 | 48,316 | 55,745 | ||||||
Additions charged to expense(1)(2) | 35,445 | 17,450 | 15,973 | ||||||
Revesals | — | — | (9,404 | ) | |||||
Write-off(2) | (10,088 | ) | (10,021 | ) | (39,922 | ) | |||
Balance at the end of the year | 48,316 | 55,745 | 22,392 | ||||||
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 |
(2) | Following the TA’s |
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 29HKFRSs,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.HKFRSsHKFRS 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
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 yield 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 assumptions, including the expected stock volatility, and expected dividend yield. As the Company’s share options have characteristics significantly different from those of traded options, the determination of fair value of the options granted is sensitive to certain assumptions used in the valuation model, in particular the expected volatility.
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, 2007, 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 2007, they contributed approximately 1.8% to our revenues.
Year Ended August 31, | ||||||||||||
2005 | 2006 | 2007 | 2007 | |||||||||
HK$ | HK$ | HK$ | US$ | |||||||||
(In thousands) | ||||||||||||
HKFRSs | ||||||||||||
Revenues | ||||||||||||
Fixed telecommunications network services | 629,464 | 716,600 | 816,800 | 104,761 | ||||||||
International telecommunications | 532,595 | 418,276 | 324,470 | 41,616 | ||||||||
1,162,059 | 1,134,876 | 1,141,270 | 146,377 | |||||||||
Operating Expenses: | ||||||||||||
Network costs | (339,402 | ) | (300,593 | ) | (214,591 | ) | (27,523 | ) | ||||
Other operating expenses | ||||||||||||
Salaries and related costs | (259,392 | ) | (256,721 | ) | (221,102 | ) | (28,358 | ) | ||||
Sales and marketing expenses | (267,983 | ) | (204,952 | ) | (219,253 | ) | (28,121 | ) | ||||
Office, general and administrative expenses | (157,497 | ) | (164,208 | ) | (129,077 | ) | (16,555 | ) | ||||
Depreciation and amortization | (237,714 | ) | (276,464 | ) | (258,103 | ) | (33,104 | ) | ||||
Provision for doubtful accounts | (35,445 | ) | (17,450 | ) | (6,569 | ) | (843 | ) | ||||
Total other operating expenses | (958,031 | ) | (919,795 | ) | (834,104 | ) | (106,981 | ) | ||||
Total Operating Expenses | (1,297,433 | ) | (1,220,388 | ) | (1,048,695 | ) | (134,504 | ) | ||||
Income/(loss) from operations | (135,374 | ) | (85,512 | ) | 92,575 | 11,873 | ||||||
Interest income | 13,578 | 20,378 | 22,671 | 2,908 | ||||||||
Interest expense | (54,462 | ) | (88,637 | ) | (87,504 | ) | (11,223 | ) | ||||
Other income, net | 6,037 | 4,465 | 3,149 | 404 | ||||||||
Income/(loss) before taxation | (170,221 | ) | (149,306 | ) | 30,891 | 3,962 | ||||||
Income taxes (expense)/credit | 6,725 | 7,244 | (2,026 | ) | (260 | ) | ||||||
Net income/(loss) | (163,496 | ) | (142,062 | ) | 28,865 | 3,702 | ||||||
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 |
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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 71.6% of total revenues in fiscal 2007, compared to 63.1% and 54.2% in fiscal 2006 and fiscal 2005, respectively. During fiscal 2007, our FTNS subscription base increased 10.7% to 683,000. This return to growth is an indicator that the market has now accepted a premium pricing positioning.
With respect to voice services, our VOIP subscription base rose by 9.6%, to 308,000 subscriptions The decrease was primarily due to improved branding and crossing selling from our broadband customers.
With respect to broadband services, our subscription base rose by 12.3%, to 247,000 subscriptions. During fiscal 2007, we focused on differentiating our services by emphasizing our ultra high Internet access speeds, 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 at higher price. This has significantly increased our revenue from our fixed telecommunications network services.
With respect to IP-TV services, our subscription base increased by 10.3% to 128,000 subscriptions, withlower volumes, the majority of the new subscriptions coming from existing broadband and voice customers.
Our international telecommunications business revenues decreased by 22.4% to HK$324.5 million in fiscal 2007 due to the combined effects of lower volumes and lowerwhich 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 from global VOIPVoIP providers such as Skype, which offer free PC-to-PC based international calls, iswas also becoming more prevalent.
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 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. |
Sales and marketing expenses.Our sales and marketing expenses increased by 6.9% to HK$219.2 million2008 from 8.1% in fiscal 2007 as we increased our sales and marketing efforts2007. The increase in brand building through mass media advertising. We started a strategy of promoting the brand to a wider audience. A series of 1 minute mini programs were shown to educate viewers on the merits of HKBN’s high bandwidth Next Generation Network.
Office, general and administrative expenses. Office, general and administrative expenses decreased by 21.4% to HK$129.1 million in fiscal 2007 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 mainly due to changes in the estimated useful lives of certain assets amounting to HK$15.9 million.
During the second half of fiscal 2007, we reviewed the estimated useful lives of fixed assets based on technology considerations, actual business experience, consultation with external valuation firm and industry benchmark. Based on the review, the estimated useful lives of certain classes of network assets have been extended from 4-15 years to 6-20 years effective from June 1, 2007.
The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. As a result of such change, depreciation expense decreased by HK$15.9 million for the year ended August 31, 2007. Earning per share is also increased by 2.6 cents. This change does not have any effect on the total depreciation charges of those assets during their remaining useful lives.
Provision for doubtful accounts. Overall, our provision for doubtful accounts decreased 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 collectibility of these charges. In fiscal 2007, we have reversed a portion of this provision by HK$9.4 million based on the rates set by the TA in the final determination issued in June 2007. Our provision for other trade receivables recorded in fiscal 2007operating margin 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 “Our Revenues—Fixed Telecommunications Network Services” above in this annual report.
Income from operations. We recorded an income from operations of HK$92.6 million in fiscal 2007, compared to a loss from operations of HK$85.5 million in fiscal 2006. The income from operations isprimarily due to higher revenue contribution from fixed telecommunications network services and the increasebetter margin achieved in margin from our international businesstelecommunications services as a result of the drop offphasing out of lowlower margin customers.
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fiscal 2008 from HK$87.5 million in 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, 2006 Compared to Year Ended August 31, 2005
Our fixed telecommunications network services continued to record significant revenue growth and increased their contribution to our total revenues, accounting for 63.1% of total revenues in fiscal 2006, compared to 54.2% and 46.3% in fiscal 2005 and fiscal 2004, respectively. During fiscal 2006, our FTNS subscription base declined 2.2% to 617,000 as of August 31, 2006 as we placed a priority on revenue yields by increasing revenue per user over subscription growth.
With respect to voice services, our VOIP subscription base fell by 4.1% year-on-year, to 281,000 subscriptions due to intensive competition.
With respect to broadband services, our subscription base fell by 3.9% year-on-year, to 220,000 subscriptions. During fiscal 2006, we focused on differentiating our services by emphasizing our high internet access speeds, which allow us to increase our revenue per user. By providing stable and high speed broadband services and good quality of customer service, we are able to acquire and retain customers with longer subscription period at higher price. This has significantly increased our revenue in fixed telecommunications network services despite a decrease in our subscription base.
With respect to IP-TV services, we grew our subscription base by 6.4% to 116,000 subscriptions, with the majority of the new subscriptions being an upsell to existing broadband and voice customers.
Our international telecommunications business revenues decreased by 21.5% to HK$418.3 million in fiscal 2006 due to the combined effects of lower volumes and lower revenues per minute. Competition during the year was intense as some of our integrated competitors offered international direct dial minutes free or at very low cost as a marketing incentive to gain local fixed line and mobile market share. Further, technology substitution from global VOIP providers such as Skype, which offer free PC-to-PC based international calls, is also becoming more prevalent. As a result, we expect that our international telecommunications business continues to decline in future.
Network costs. Network costs decreased 11.4% to HK$300.6 million in fiscal 2006 mainly due to a reduction in international tariff volume.
Other operating expenses. Our other operating expenses, excluding network costs, decreased by 4.0% to HK$919.8 in fiscal 2006.
Salaries and related costs. Salaries and related costs decreased by 1.0% to HK256.7 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% to HK$205.0 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.
Office, general and administrative expenses. Office, general and administrative expenses increased by 4.3% to HK$164.2 million in fiscal 2006 mainly due to increase in rental expenses as a result of inflationary pressures.
Depreciation and amortization. Depreciation and amortization expenses increased by 16.3% to HK$276.5 million in fiscal 2006 mainly due to expansion of our Next Generation Network.
Provision for doubtful accounts. Overall, our provision for doubtful accounts 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 telecommunications services companies and global VOIP providers and losses from our FTNS business.
Interest income and expense. Our interest income was HK$20.4 million in fiscal 2006 compared to HK$13.6 million in fiscal 2005. The increase in interest income was due to the full year impact of investment return on proceeds from our 8.75% notes issued in January 2005 and a higher overall interest rate environment. We derive interest income from our deposit of surplus capital in interest-bearing accounts at commercial banks. Our interest expense increased to HK$88.6 million in fiscal 2006 compared to HK$54.5 million in fiscal 2005, predominantly due to the full year impact of interest expense of our 8.75% notes issued in January 2005.
Other income, net. Our other income, net consists of the roaming charges we receive from overseas carriers that deliver traffic over our network, exchange gains and losses, small penalties we have received from time to time from contractors that we employ, and management and other fees we receive from other fixed line operators in the ordinary course of our business. Other income, net of expenses was HK$4.5 million in fiscal 2006 compared to HK$6.0 million in fiscal 2005. The other income, net in 2006 mainly includes net exchange gains of HK$1.1 million, net realized and unrealized gains on investment securities and derivative financial instruments of HK$0.6 million and penalty received from contractors of HK$0.3 million.
Income tax( expense)/credit. We recognized income tax credit of HK$7.2 million for fiscal 2006 compared to income tax credit of HK$6.7 million in fiscal 2005. Our income tax credits in fiscal 2006 and fiscal 2005 were mainly related to the recognition of deferred tax assets in respect of the tax losses from our fixed telecommunications network services business offset by the income tax expense associated with the profit generated from our international telecommunications services.
Net loss. For the foregoing reasons, we incurred a net loss of HK$142.1 million in fiscal 2006 compared to a net loss of HK$163.5 million in fiscal 2005.
Year Ended August 31, 2005 Compared to Year Ended August 31, 2004
Revenues. Our total revenues decreased by 0.7% from HK$1,169.9 million in fiscal 2004 to HK$1,162.1 million in fiscal 2005, due to a significant decrease in revenues from our international telecommunications services. The 15.2% decline in our international telecommunications services revenues from HK$628.0 million in fiscal 2004 to HK$532.6 million in fiscal 2005 offset our 16.2% increase in FTNS revenues from HK$541.9 million in fiscal 2004 to HK$629.5 million in fiscal 2005.
Our fixed telecommunications network services continued to record significant revenue growth and increased contribution to our total revenues. Revenue from FTNS accounted for 54.2% of our total revenues in fiscal 2005, compared to 46.3% and 32.6% in fiscal 2004 and fiscal 2003, respectively. Revenues increased from HK$541.9 million in fiscal 2004 to HK$629.5 million in fiscal 2005, representing 16.2% growth. During the year we grew our FTNS subscription base by 166,000, or 35.7% year-on-year, to 631,000 as of August 31, 2005.
With respect to voice services, we grew our VOIP subscription base by 56,000, or 23.6% year-on-year, to 293,000 subscriptions.
With respect to broadband services, we grew our subscription base by 32,000, or 16.2% year-on-year, to 229,000 subscriptions. During fiscal 2005, we focused on differentiating our services by emphasizing our high bandwidth with the commercial launch of our “bb100” and “bb1000” supported by the Liu Xiang advertising campaign. Furthermore, we introduced value-added services such as “bbDrive” (an on-line virtual hard drive with up to 10 Gbps storage), “bbGuard” (an anti-spam and anti-virus package) and “bbWatch” (a full screen IP-TV experience via the PC).
With respect to IP-TV services, we grew our subscription base by 78,000, or 251.6% year-on-year, to 109,000 subscriptions, although the majority of the new subscriptions were from our free trial promotions for periods of six to twelve months.
Our international telecommunications business revenues decreased by 15.2% from HK$628.0 million in fiscal 2004 to HK$532.6 million in fiscal 2005 due to the combined 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 Next Generation Network.
Provision for doubtful accounts. Our provision for doubtful accounts 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$49.5 million in fiscal 2004.
U.S. GAAP Reconciliation
As of and for the Year Ended August 31, | ||||||||||
2005 (restated) | 2006 | 2007 | 2007 | |||||||
HK$ | HK$ | HK$ | US$ | |||||||
(in thousands) | ||||||||||
Net income/(loss) in accordance with: | ||||||||||
HKFRSs | (163,496 | ) | (142,062 | ) | 28,865 | 3,702 | ||||
Net income/(loss) under U.S. GAAP | (149,148 | ) | (142,062 | ) | 28,865 | 3,702 | ||||
Shareholders’ Equity | ||||||||||
HKFRSs | 1,020,454 | 891,654 | 903,882 | 115,930 | ||||||
Total shareholders’ equity under U.S. GAAP | 1,032,680 | 897,271 | 909,499 | 116,650 |
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 |
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Share-based compensation cost;
Goodwill; and
Financial instruments
Disclosure relating to those differences can be found in note 3031 to our consolidated financial statements. In addition, our condensed consolidated statement of operations, changes in shareholders’ equity and comprehensive (loss)/ income have been included in note 2931 to our consolidated financial statements to reflect the impact of the significant differences between HKFRSsHKFRS and U.S. GAAP.
As of August 31, 2007, we had a total cash position of HK$634.5 million and outstanding borrowings of HK$953.8 million. Our long term liability consists mainly of our 8.75% senior notes due 2015, which amounted to HK$952.6 million. Our total cash position of HK$634.5 million consisted of HK$532.9 million in cash and bank balances, HK$87.2 million in pledged bank deposits and HK$14.4 million in long term bank deposits.
As of August 31, 2008, we had cash and bank balance of HK$421.6 million and pledged bank deposit of HK$87.3 million. Our day-to-day operations are also supported by HK$87.3 million banking facilities, of which only HK$29.9 million was utilized.
Year Ended August 31, | ||||||||||||
2005 | 2006 | 2007 | 2007 | |||||||||
HK$ | HK$ | HK$ | US$ | |||||||||
(In thousands) | ||||||||||||
Net cash flow from operating activities | 77,383 | 184,151 | 383,999 | 49,251 | ||||||||
Net cash (used in) / generated from investing activities | (557,440 | ) | (492,742 | ) | 114,053 | 14,628 | ||||||
Net cash (used in) provided by financing activities | 792,216 | (86,432 | ) | (109,504 | ) | (14,045 | ) | |||||
(Decrease)/increase in cash and bank balances | 312,159 | (395,023 | ) | 388,548 | 49,834 | |||||||
Cash and bank balances, at the beginning of year | 228,347 | 539,591 | 144,917 | 18,587 | ||||||||
Effect of foreign exchange rate changes | (915 | ) | 349 | (571 | ) | (73 | ) | |||||
Cash and bank balances, at the end of the year | 539,591 | 144,917 | 532,894 | 68,348 | ||||||||
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.
In fiscal 2006, we generated a
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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.
2006.
Net cash provided by financing activities was
Net cash provided by financing activities was HK$47.2 million in fiscal 2004, which consisted of our draw down of HK$100.0 million on our loan facility with HSBC, offset by our payment of HK$54.9 million in dividends during fiscal 2004.
Indebtedness
Senior Notes
pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;
• | pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments; | ||
• | incur additional indebtedness or issue certain equity interests; | ||
• | merge, consolidate or sell all or substantially all of our assets; | ||
• | issue or sell capital stock of some of our subsidiaries; | ||
• | sell or exchange assets or enter into new businesses; | ||
• | create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets; | ||
• | create liens on assets; | ||
• | enter into certain transactions with affiliates or related persons; and | ||
• | enter into sale and lease back transactions. |
incur additional indebtedness or issue certain equity interests;
merge, consolidate or sell all or substantially all of our assets;
issue or sell capital stock of some of our subsidiaries;
sell or exchange assets or enter into new businesses;
create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;
create liens on assets;
enter into certain transactions with affiliates or related persons; and
enter into sale and lease back transactions.
The net proceeds of the 8.75% senior notes were approximately US$121.0 million after deduction of expenses and commissions. We used the net proceeds, in part, to repay in full an existing bank loan in the outstanding amount of HK$196.7 million. The remaining net proceeds has been and will continue to be used for capital expenditures, including costs incurred in expanding and upgrading our Next Generation Network in Hong Kong, and for additional working capital and general corporate purposes.
35
2007.
During December 2007 and January 2008, we have bought back cumulative principal value of 8.75% notes of US$21.9 million by way of market acquisition. The total consideration (including accrued interest) paid was US$22.1 million. The principal value of 8.75% notes remaining in issue after the buy-back is US$103.2 million. The 8.75% notes bought back have been cancelled subsequently in December 2007 and January 2008.
utilized.
Expenditures
As of August 31, 2007, we had capital commitments contracted but not provided for relating to the purchase of telecommunications, computer and office equipment of HK$54.2 million. In addition, we had commitments under non-cancelable operating leases relating to land, buildings, telecommunications facilities and computer equipment of HK$83.6 million, of which HK$43.6 million is due in fiscal 2008. We also had commitments on program fees of HK$14.0 million, of which HK$10.3 million is due in fiscal 2008. As of August 31, 2007 we utilized HK$1.6 million of the HK$80 million available banking facilities.
Payments due by period | ||||||||||
Contractual Obligations | Total | Within 1 year | More than 1 year but within 3 years | More than within 5 | More than 5 years | |||||
(Thousands of HK$) | ||||||||||
Capital expenditure items | 54,165 | 54,165 | — | — | — | |||||
Operating leases | 83,600 | 43,566 | 13,758 | 9,892 | 16,384 | |||||
Short-term and long-term debt (principal and interest payments) | 1,615,464 | 86,146 | 170,839 | 170,685 | 1,187,794 | |||||
Programming fees (IP-TV) | 13,981 | 10,345 | 3,636 | — | — | |||||
Total | 1,767,210 | 194,222 | 188,233 | 180,577 | 1,204,178 | |||||
2008.
Payments due by period | ||||||||||||||||||||
More than 1 | More than | |||||||||||||||||||
year but | 3 years but | More | ||||||||||||||||||
Within | within 3 | within 5 | than | |||||||||||||||||
Contractual Obligations | Total | 1 year | years | years | 5 years | |||||||||||||||
(Thousands of HK$) | ||||||||||||||||||||
Capital expenditure items | 143,888 | 143,888 | — | — | — | |||||||||||||||
Operating leases | 87,000 | 55,095 | 21,077 | 3,444 | 7,384 | |||||||||||||||
8.75% senior notes | 1,093,852 | 61,012 | 122,024 | 122,024 | 788,792 | |||||||||||||||
Obligation under finance leases | 414 | 142 | 272 | |||||||||||||||||
Other current liabilities | 248,805 | 248,805 | — | — | — | |||||||||||||||
Programming fees (IP-TV) | 6,862 | 6,583 | 219 | 60 | — | |||||||||||||||
Total | 1,580,821 | 515,525 | 143,592 | 125,528 | 796,176 | |||||||||||||||
Our working capital as of August 31, 2007 was HK$563.9 million, which we believe is sufficient for our current requirements. Further, we believe
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 | Age | Position | Date Joined City Telecom | |||
Board of Directors: | ||||||
WONG Wai Kay, Ricky | 46 | Chairman | 1992 | |||
CHEUNG Chi Kin, Paul | 50 | Chief Executive Officer | 1992 | |||
LAI Ni Quiaque | 38 | Chief Financial Officer & Company Secretary | 2004 | |||
CHENG Mo Chi, Moses | 57 | Non-Executive Director | 1997 | |||
CHAN Kin Man | 48 | Independent Non-Executive Director | 1997 | |||
LEE Hon Ying, John | 61 | Independent Non-Executive Director | 1997 | |||
PEH Tun Lu, Jefferson | 48 | Independent Non-Executive Director | 2004 | |||
Senior Management: | ||||||
CHANG Wing Fu, Stephen | 44 | Chief Technology Officer | 2006 | |||
CHONG Kin Chun, John | 45 | Director, Corporate Division | 1996 | |||
LO Sui Lun | 43 | Director, Singapore NGNBN | 1998 | |||
TO Wai Bing | 45 | Managing Director, Business Development | 2007 | |||
YEUNG Chu Kwong, William | 47 | Chief Operating Officer | 2005 |
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 |
Chief Executive Officer.the Vice Chairman of the Company. Currently, heMr. Wong is a member of Commission on Youth, a member of the Zhejiang Committee, Chinese People’s Political Consultative Conference, an independent non-executive director of Bossini International Holdings Limited and a member of the Board of Trustees, United College, The Chinese University of Hong Kong.
On December 4, 2008, Mr. Wong was appointed as chief executive 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.
2009. Mr. Lai has also been appointed as a member of the remuneration committee of the 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.
Dr. CHAN Kin Man, aged 48, is an associate professor in the Department of Sociology of The Chinese University of Hong Kong, specializing in state-society relations in Mainland China and Hong Kong. He received a Bachelor of Social Science degree from The Chinese University of Hong Kong in 1983 and a doctor of philosophy degree from Yale University in the U.S. in 1995. Dr. Chan has been a director of City Telecom since June 1997.
Mr. Lee is also the chairman of the audit committee and remuneration committee of the Company.
Senior Management
Mr. CHANG Wing Fu, Stephen, aged 44, is our Chief Technology Officer. Mr Chang joined the Company in July 2006 as Chief Information Officer andPeh has also been the Company’s Chief Technology Officer since December 2006. He provides advice and assistance to the Company, to ensure that information and communications technologies are acquired and managed inappointed as a manner that is aligned with business strategy, supporting the goals and objectivesmember of the Companyaudit committee and its various business units. Mr Chang graduated from Australia and holds a Masters in Information Systems degree and a Bachelorremuneration committee of Science degree from Monash University. Mr Chang has 19 years of experience in Systems Development, Projectthe Company.
38
U.K.
Mr. YEUNG Chu Kwong, William, aged 47, is our Chief Operating Officer. Mr. Yeung joined City Telecom in October 2005 and is responsible to head our Customer Engagement Department to oversee customer relationship management. Mr. Yeung is also responsible to head Network Development Department. 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. Mr. Yeung has more than 15 years’ experience in the telecom industry. Prior to joining City Telecom, Mr. Yeung was the Director of Customers Division in SmarTone-Vodafone, the General Manager of Personal Communications and Retail Division at Tricom Telecom Limited, and was also an Inspector of Police in the Hong Kong Police Force.
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 2007 was approximately HK$19.4 million. We paid approximately HK$1.4 million as our contribution to the pension schemes of the directors during fiscal 2007. In addition we paid our fiscal non-executive directors fees in the aggregate amount of approximately HK$605,000 during fiscal 2007.
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.
As of January 21, 2008, the Company granted share options to various directors and members of our senior management. For details, please refer to Item 6EShare Ownership herein.
Except as discussed herein, no other payments have been paid or are payable, in respect of fiscal 2007, by us or any of our subsidiaries to our directors and senior management.
For32.5 million for fiscal 2007, 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.
Reviewed the Company’s financial statements for the year ended August 31, |
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 |
Pre-approved the audit and non-audit services provided by KPMG, the Company’s external |
Mr. Lee Hon Ying, John, Mr. Peh Tun Lu, Jefferson and Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu, the non-executive director, Mr. Cheng Mo Chi, Moses, Mr. Lai Ni Quiaque, ourthe executive director, Chief Financial Officer, Company Secretary and Head of Staff Engagement and our director of Talent Management. The Remuneration Committee’s main dutiesremuneration committee’s objectives are set out as follows:-
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” | 2,367 | |||
General administration and others | 304 | |||
| ||||
Total | 3,051 | |||
Employees | ||||
Hong Kong | 1,538 | |||
Guangzhou | 1,489 | |||
Canada | 24 | |||
| ||||
Total | 3,051 | |||
Title of Class | Identity of Person or Group | Number of Shares Beneficially Owned(11) | Percentage of Shares Beneficially Owned (%)(3) | Outstanding Share | ||||||
Ordinary Shares | Wong Wai Kay, Ricky | 318,771,261 | (1) | 50.82 | 14,000,000 | (4) | ||||
Ordinary Shares | Cheung Chi Kin, Paul | 352,792,737 | (2) | 56.25 | 14,000,000 | (5) | ||||
Ordinary Shares | Lai Ni Quiaque | 9,670,000 | 1.54 | 2,000,000 | (6) | |||||
Ordinary Shares | Chang Wing Fu, Stephen | Nil | Nil | 700,000 | (10) | |||||
Ordinary Shares | Chong Kin Chun, John | 1,124,000 | Less than 1.0 | 3,000,000 | (7) | |||||
Ordinary Shares | Lo Sui Lun | 628,000 | Less than 1.0 | 2,000,000 | (8) | |||||
Ordinary Shares | Yeung Chu Kwong, William | 2,000,000 | Less than 1.0 | 2,000,000 | (9) |
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 |
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| 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 offence involving his or her integrity or honesty or, in the case of a grantee-employee and if so determined by the Board, on any other common law, statutory or contractual ground on which an employer would be entitled to terminate such grantee’s employment; |
(viii) | 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. |
9, 2009.
Title of Class | Identity of Person or Group | Beneficially Owned(6) | Percentages of Shares Beneficially Owned | ||||
Ordinary Shares | Wong Wai Kay, Ricky | 318,771,261 | (2) | 50.82 | |||
Ordinary Shares | Cheung Chi Kin, Paul | 352,792,737 | (3) | 56.25 | |||
Ordinary Shares | Top Group International Ltd. | 318,516,999 | 50.78 | ||||
Ordinary Shares | Leung Ka Pak | 318,516,999 | (4) | 50.78 | |||
Ordinary Shares | Yau Ming Yan, Andrew | 318,516,999 | (4) | 50.78 | |||
Ordinary Shares | EK Investment Management Limited | 55,542,000 | (5) | 8.86 |
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 Ltd. 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 respectively. They are two of shareholders of Top Group. Mr. Leung Ka Pak and Mr. Yau Ming Yan, Andrew are the two other shareholders of Top Group.
Mr. Leung Ka Pak was a director and the president of all subsidiaries in Canada other than City Telecom (Canada) Inc.. He resigned as a director and president in October 2005. After Mr. Leung resigned, Mr. Yau Ming Yan, Andrew was a director and the president of all our subsidiaries in Canada other than City Telecom (Canada) Inc.. He resigned as a director and president in July 2006.
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. |
PCCW caseOn December 24, 2007, PCCW IMS
progress.
45
19, 2008. The 2008 Final Dividend will be paid on or about February 25, 2009.
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$) | ||||
2003 | 3.375 | 1.320 | ||
2004 | 2.975 | 1.310 | ||
2005 | 1.530 | 0.550 | ||
2006 | 0.830 | 0.570 | ||
2007 | 3.670 | 0.830 | ||
2006 | ||||
January to March | 0.770 | 0.570 | ||
April to June | 0.820 | 0.600 | ||
July to September | 0.710 | 0.630 | ||
October to December | 0.830 | 0.600 | ||
2007 | ||||
January to March | 1.560 | 0.830 | ||
April to June | 2.200 | 1.250 | ||
July to September | 2.120 | 1.780 | ||
October to December | 3.670 | 1.930 | ||
2007 | ||||
August | 2.000 | 1.780 | ||
September | 2.020 | 1.900 | ||
October | 3.670 | 1.960 | ||
November | 3.140 | 1.930 | ||
December | 2.450 | 2.060 | ||
2008 | ||||
January (through January 21, 2008) | 2.170 | 2.100 |
Price | ||||||||
High | Low | |||||||
(In HK$) | ||||||||
2009 | ||||||||
January (through January 9, 2009) | 1.050 | 0.970 |
Price | ||||
High | Low | |||
(In HK$) | ||||
2003 | 9.550 | 3.100 | ||
2004 | 7.720 | 3.320 | ||
2005 | 3.980 | 1.370 | ||
2006 | 2.009 | 1.380 | ||
2007 | 10.750 | 2.010 | ||
2006 | ||||
January to March | 1.900 | 1.440 | ||
April to June | 1.970 | 1.380 | ||
July to September | 1.760 | 1.540 | ||
October to December | 2.009 | 1.400 | ||
2007 | ||||
January to March | 4.350 | 2.010 | ||
April to June | 5.830 | 3.100 | ||
July to September | 5.600 | 4.050 | ||
October to December | 10.750 | 4.830 | ||
2007 | ||||
August | 5.020 | 4.050 | ||
September | 5.140 | 4.750 | ||
October | 10.750 | 4.830 | ||
November | 7.530 | 4.950 | ||
December | 6.470 | 5.240 | ||
2008 | ||||
January (through January 18, 2008) | 5.580 | 4.690 |
Price | ||||||||
High | Low | |||||||
(In US$) | ||||||||
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.
(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 the Company commences liquidation,members’ winding up, the liquidator may, with the sanction of a special resolution of the Company and any other sanction required by the Companies Ordinance:
(a) | divide among the shareholders the whole or any part of the assets of the Company and set such value as the liquidator deems fair upon any property to be divided and determine how the division shall be carried out between the shareholders; or |
(b) | vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator shall think fit, |
(a) | the declaration and sanctioning of dividends; |
(b) | the consideration and adoption of the accounts, |
(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. |
49
which the next annual general meeting is required by law to be held; or (3) when revoked or varied by an ordinary resolution of the shareholders in a general meeting. IfWhere such shareholders’ approval is given, subject to the Listing Rules and any conditions attached to such approval, our unissued shares shallmay be at the disposal of our board of directors, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the directors may decide.
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, |
Gains
Gains
A
51
an individual who is a citizen or resident of the United States;
• | 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 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.”
American depositary share. Accordingly, no gain or loss will be recognized upon the exchange of an American depositary share for the holders’ proportionate interest in the shares. A U.S. Holder’s tax basis in the withdrawn shares will be the same as the tax basis in the American depositary share surrendered therefore, and the holding period in the withdrawn shares will include the period during which the holder held the surrendered American depositary share.
52
• | 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
the dividends received or gain recognized on the sale of the shares or American depositary shares by such person is treated as effectively connected with the conduct of a trade or business by such person in the United States as determined under United States federal income tax law, and the dividends are attributable to a permanent establishment (or in the case of an individual, a fixed place of business) that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis. In such cases you generally will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. Holder, “effectively connected” dividends may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate, or
in the case of gains recognized on a sale of shares or American depositary shares by an individual, such individual is present in the United States for 183 days or more and certain other conditions are met. The non-U.S. Holder will be subject to United States federal income tax at a rate of 30% on the amount by which the U.S.-source capital gains exceed non-U.S.-source capital losses.
Backup Withholding and Information Reporting
applicable.
applicable.
depositary shares, please refer to the registration statement and to the exhibits and schedules filed with the registration statement. In addition, whenever a reference is made in this annual report to a contract or other document of City Telecom, you should be aware that such reference is not necessarily complete and that you should refer to the exhibits and schedules that are a part of the registration statement for a copy of the contract or other document.
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 the Renminbi, we maintain Renminbi cash balance that approximates three months’ operating cash flow.
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 HKFRS. 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$1.8 million as of August 31, 2006 and HK$1.0 million as of August 31, 2007. Under U.S. GAAP reporting, such interest rate swap instrument is and has been recorded at fair value. As of August 31, 2007, the interest rate swap agreement remains outstanding following the full repayment of our loan facility with HSBC. On January 24, 2008, the interest rate swap agreement has been unwound.
None
We maintain a set of disclosure controls
|
|
|
Procedures
54
With effect from May 13, 2005, PricewaterhouseCoopers, or PwC, tendered its resignation.
For KPMG
Nature of the service | 2006 | 2007 | ||
(HK$ million) | (HK$ million) | |||
Audit fees | 1.8 | 2.2 | ||
Audit-related fees | 0.3 | 0.4 | ||
All other fees | 0.7 | — | ||
Total | 2.8 | 2.6 | ||
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
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 KPMG.None.2007,2008, no shares were purchased under the mandate then in force.F-88F-92 following Item 19. (a) Exhibit 12.1 –— Section 302 Certifications of the Chairman.Chief Executive Officer. (b) Exhibit 12.2 –— Section 302 Certifications of the Chief Financial Officer. (c) Exhibit 13 –— Section 906 Certification of ChairmanChief Executive Officer and Chief Financial Officer.
Audited Consolidated Financial Statements | Pages | |
F-1 | ||
F-2 | ||
F-3, 4 | ||
F-5 | ||
F-6, 7, 8 | ||
F-9 |
City Telecom (H.K.) Limited
F-1
November 22, 2007, except as to note 30 which is as of January 22, 2008
Revenue Operating expenses Network costs Salaries and related costs Sales and marketing expenses General and administrative expenses Provision for doubtful accounts (Loss)/income from operations Interest income Interest expense Other income, net (Loss)/income before taxation Income tax credit/(expense) Net (loss)/income (Loss)/Earnings per share Basic Diluted F-2 Year ended August 31, Note 2005 2006 2007 HK$ HK$ HK$ 1,162,059 1,134,876 1,141,270 3 (339,402 ) (300,593 ) (214,591 ) (259,392 ) (256,721 ) (221,102 ) (267,983 ) (204,952 ) (203,673 ) (395,211 ) (440,672 ) (402,760 ) (35,445 ) (17,450 ) (6,569 ) (135,374 ) (85,512 ) 92,575 13,578 20,378 22,671 4 (54,462 ) (88,637 ) (87,504 ) 4 6,037 4,465 3,149 4 (170,221 ) (149,306 ) 30,891 5 6,725 7,244 (2,026 ) (163,496 ) (142,062 ) 28,865 6 (26.6) cents (23.1) cents 4.7 cents 6 (26.6)cents (23.1)cents 4.6 cents 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
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
August 31, | ||||||
Note | 2006 | 2007 | ||||
HK$ | HK$ | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and bank balances | 19 | 144,917 | 532,894 | |||
Term bank deposits | 19 | 237,496 | — | |||
Pledged bank deposits | 15 | 87,022 | 87,220 | |||
Investment securities | — | 3,779 | ||||
Trade receivables, net | 7(a) | 140,598 | 170,551 | |||
Other receivables, deposits and prepayments | 7(b) | 77,583 | 59,372 | |||
Inventories | 856 | 477 | ||||
Deferred expenditure | 12 | 10,808 | 13,584 | |||
Income tax receivable | 347 | — | ||||
Total current assets | 699,627 | 867,877 | ||||
Goodwill | 8 | 1,066 | 1,066 | |||
Fixed assets, net | 9 | 1,367,234 | 1,237,223 | |||
Investment securities | 16 | 40,274 | 39,213 | |||
Derivative financial instrument | 17 | 1,845 | 1,039 | |||
Long term receivables and prepayment | 12,532 | 6,932 | ||||
Deferred expenditure | 12 | 1,637 | 7,783 | |||
Total assets | 2,124,215 | 2,161,133 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Current liabilities | ||||||
Trade payables | 86,385 | 76,019 | ||||
Deposits received | 16,230 | 16,188 | ||||
Current portion of deferred services income | 33,743 | 64,202 | ||||
Other payables and accrued charges | 10 | 143,486 | 145,267 | |||
Income tax payable | 1,964 | 1,481 | ||||
Current portion of obligations under finance leases | 13 | 1,297 | 835 | |||
Total current liabilities | 283,105 | 303,992 | ||||
Long-term liabilities | ||||||
Deferred taxation | 11 | 353 | 291 | |||
Long-term debt and other liabilities | 13 | 949,103 | 952,968 | |||
Total liabilities | 1,232,561 | 1,257,251 |
Commitments and contingencies Shareholders’ equity Ordinary shares, par value HK$0.10 per share - 2,000,000,000 shares authorised - 614,175,404 and 616,503,404 shares issued and outstanding at August 31, 2006 and 2007, respectively Share premium Retained profits Capital reserve Translation reserve Total shareholders’ equity Total liabilities and shareholders’ equity F-4
Consolidated financial statements for the year ended August 31, 20072008
Consolidated balance sheets (continued) August 31, Note 2006 2007 HK$ HK$ 14 18 61,417 61,650 620,298 622,433 196,289 200,519 12,993 18,109 657 1,171 891,654 903,882 2,124,215 2,161,133 August 31, Note 2007 2008 HK$ HK$ 15 Ordinary shares, par value HK$0.10 per share — 2,000,000,000 shares authorized — 616,503,404 and 650,621,823 shares issued and outstanding at August 31, 2007 and 2008, respectively 19 61,650 65,062 Share premium 622,433 670,717 Retained profits 200,519 275,025 Capital reserve 18,109 19,013 Translation reserve 1,171 2,790 903,882 1,032,607 2,161,133 2,080,416
Year ended August 31, | |||||||||||
Note | 2005 | 2006 | 2007 | ||||||||
HK$ | HK$ | HK$ | |||||||||
Total equity as at beginning of the year | |||||||||||
As previously reported | 1,175,698 | 1,020,454 | 891,654 | ||||||||
Adjustment arising from adoption of HKAS 39 | 18(a) | — | 6,609 | — | |||||||
After opening balance adjustment | 1,175,698 | 1,027,063 | 891,654 | ||||||||
Net (loss)/gain recognized directly in equity: | |||||||||||
Foreign currency translation adjustment | (143 | ) | (183 | ) | 514 | ||||||
(Loss)/profit attributable to shareholders | (163,496 | ) | (142,062 | ) | 28,865 | ||||||
2007 interim dividends declared and paid | — | — | (24,635 | ) | |||||||
Movements in equity arising fromcapital transactions: | |||||||||||
Equity settled share-based compensation | 6,965 | 6,823 | 5,727 | ||||||||
Shares issued upon exercise of options and warrant | 1,430 | 13 | 1,757 | ||||||||
Total equity as at the end of the year | 18 | 1,020,454 | 891,654 | 903,882 | |||||||
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
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
Year ended August 31, | |||||||||||
Note | 2005 | 2006 | 2007 | ||||||||
HK$ | HK$ | HK$ | |||||||||
Cash flows from operating activities | |||||||||||
(Loss)/income before taxation | (170,221 | ) | (149,306 | ) | 30,891 | ||||||
Adjustments to reconcile | |||||||||||
(Loss)/income before taxation to net cash inflow from operating activities: | |||||||||||
-Amortization of goodwill | 1,065 | — | — | ||||||||
-Depreciation of purchased fixed assets | 236,269 | 275,538 | 257,052 | ||||||||
-Depreciation of fixed assets held under finance leases | 380 | 926 | 1,051 | ||||||||
-Impairment loss on investment property | — | 1,131 | — | ||||||||
-Amortization of deferred expenditure | 12,927 | 13,973 | 15,580 | ||||||||
-Interest income | (13,578 | ) | (20,378 | ) | (22,671 | ) | |||||
-Interest expense | 374 | — | — | ||||||||
-Interest element of finance leases | 23 | 54 | 62 | ||||||||
-(Gain)/loss on disposal of fixed assets | (134 | ) | 9,621 | 1,714 | |||||||
-Unrealized loss on investment securities | (300 | ) | (668 | ) | (1,887 | ) | |||||
-Interest, amortisation and exchange difference on senior notes | 54,065 | 86,664 | 89,879 | ||||||||
-Other borrowing costs | — | 1,919 | (739 | ) | |||||||
-Equity settled share-based compensation | 6,965 | 6,823 | 5,727 | ||||||||
-Realized and unrealized loss on derivative financial instruments | — | 125 | 806 | ||||||||
-(Increase)/decrease in long-term receivable and prepayment | (6,893 | ) | 567 | 5,600 |
F-7
Consolidated financial statements for the year ended August 31, 20072008
Consolidated statements of cash flows (continued) Year ended August 31, Note 2006 2007 2008 HK$ HK$ HK$ — (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 46,247 186,737 386,232 382,813 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 ) 184,151 383,999 378,529 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 (492,742 ) 114,053 (147,750 ) (308,591 ) 498,052 230,779
Year ended August 31, | |||||||||||
Note | 2005 | 2006 | 2007 | ||||||||
HK$ | HK$ | HK$ | |||||||||
Cash flows from operating activities(continued) | |||||||||||
Adjustments to reconcile (continued) | |||||||||||
Changes in operating assets and liabilities: | |||||||||||
- Increase in trade receivables, other receivables, deposits and prepayments | (29,890 | ) | (9,413 | ) | (11,742 | ) | |||||
- (Increase)/decrease in inventories | (1,957 | ) | 1,101 | 379 | |||||||
- Increase in deferred expenditure | (12,495 | ) | (5,287 | ) | (24,502 | ) | |||||
- Increase/(decrease) in trade payables, other payables, accrued charges, and deposits received | 5,258 | (23,652 | ) | 8,573 | |||||||
- (Decrease)/increase in deferred service income | (2,685 | ) | (3,001 | ) | 30,459 | ||||||
Net cash inflow generated from operations | 79,173 | 186,737 | 386,232 | ||||||||
Interest paid | (374 | ) | — | — | |||||||
Interest element of finance leases | (23 | ) | (54 | ) | (62 | ) | |||||
Hong Kong profits tax paid | (805 | ) | (961 | ) | (263 | ) | |||||
Overseas tax paid | (588 | ) | (1,571 | ) | (1,908 | ) | |||||
Net cash inflow from operating activities | 77,383 | 184,151 | 383,999 | ||||||||
Investing activities | |||||||||||
(Increase)/decrease in pledged bank deposits | (63,642 | ) | 3,425 | (198 | ) | ||||||
(Increase)/decrease in term bank deposits | (92,850 | ) | (144,646 | ) | 237,496 | ||||||
Purchases of fixed assets | (415,494 | ) | (382,214 | ) | (149,300 | ) | |||||
Interest received | 13,578 | 20,378 | 22,671 | ||||||||
Proceeds from disposal of fixed assets | 968 | 5,676 | 3,384 | ||||||||
Net proceeds from maturity of derivative financial instruments | — | 4,639 | — | ||||||||
Net cash (outflow)/inflow from investing activities | (557,440 | ) | (492,742 | ) | 114,053 | ||||||
Net cash (outflow)/inflow before financing activities | (480,057 | ) | (308,591 | ) | 498,052 | ||||||
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 Repayment of bank loan Repayment of capital element of finance Leases Dividends paid Net cash inflow/(outflow) from financing Activities Increase/(decrease) in cash and bankbalances Cash and bank balances at thebeginning of year Effect of foreign exchange rate changes on cash and bank balances Cash and bank balances at the endof year F-8
Consolidated financial statements for the year ended August 31, 20072008
Consolidated statements of cash flows (continued) Year ended August 31, Note 2005 2006 2007 HK$ HK$ HK$ 1,430 13 1,757 943,655 — — (52,372 ) (85,235 ) (85,313 ) 100,000 — — (200,000 ) — — (497 ) (1,210 ) (1,321 ) — — (24,627 ) 792,216 (86,432 ) (109,504 ) 312,159 (395,023 ) 388,548 228,347 539,591 144,917 (915 ) 349 (571 ) 19 539,591 144,917 532,894 Year ended August 31, Note 2006 2007 2008 HK$ HK$ HK$ 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 ) (86,432 ) (109,504 ) (342,516 ) (395,023 ) 388,548 (111,737 ) 539,591 144,917 532,894 349 (571 ) 453 19 144,917 532,894 421,610
Consolidated financial statements for the year ended August 31, 20072008
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 at August 31, 2007:
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 | Nature of | |||||||||||||
Name | establishment/ operation | Issued capital | Directly | Indirectly |
| |||||||||
963673 Ontario Limited | Canada
| Common Canadian dollar (“CAD”) 502,000 | — | 100 | Investment holding in Canada | |||||||||
Attitude Holdings Limited | British Virgin Islands November 3, 1997 | 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 CAD501,000 | — | 100 | Provision of international telecommunications and dial-up Internet access services in Canada | |||||||||
City Telecom (Canada) Inc. | Canada
| Common CAD100 | — | 100 | Leasing and maintenance of switching equipment and provision of operational services in Canada |
F-9
Consolidated financial statements for the year ended August 31, 20072008
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 September 19, 1991 | Common CAD1,000 | — | 100 | Provision of international telecommunications and dial-up Internet access services in Canada | |||||||||
| ||||||||||||||
City Telecom International Limited | British Virgin Islands
| Ordinary US$5,294 | 100 | — | Investment holding in Hong Kong | |||||||||
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$1 | 100 | — | Investment holding in Hong Kong |
F-10
1 | Description of business and basis of presentation (continued) |
Place and | Percentage | |||||||||||||
date of establishment/ | holding | Nature of | ||||||||||||
Name | operation | Issued capital | Directly | Indirectly | business | |||||||||
Hong Kong Broadband Network Limited | Hong Kong August 23, 1999 | Ordinary HK$ | ||||||||||||
|
| |||||||||||||
|
|
|
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2007
|
|
| ||||||||||||
|
| |||||||||||||
|
| Provision of international telecommunications and fixed telecommunications network services in Hong Kong | ||||||||||||
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 September 17, 1999 | Ordinary HK$10,000 | — | 100 | Inactive | |||||||||
SGBN Singapore Broadband Network Pte. Limited | Singapore
| 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”), 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. |
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 29.F-11
Consolidated financial statements for the year ended August 31, 20072008
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. |
The consolidated financial statements consist of the balance sheets of the Company and all its subsidiaries as of August 31, 2006, and 2007 and the related statements of operations, cash flows and changes in shareholders’ equity for the years ended August 31, 2005, 2006 and 2007.
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) 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 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 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 |
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. |
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
Consolidated financial statements for the year ended August 31, 20072008
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.
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. |
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
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-14
Consolidated financial statements for the year ended August 31, 2007200822 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). 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(t)(vi).(g)Fixed assetsFixed 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:- (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 the leases and their estimated 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 consolidated statement of operations. Major improvements are capitalized and depreciated over the expected useful lives of the related asset.
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.
Consolidated financial statements for the year ended August 31, 2007200822 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. 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 9(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.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)).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. 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
Consolidated financial statements for the year ended August 31, 20072008
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.
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 |
— | 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
F-16 City Telecom (H.K.) Limited
F-18 City Telecom (H.K.) Limited Consolidated financial statements for the year ended August 31, 2008
City Telecom (H.K.) Limited
City Telecom (H.K.) Limited
City Telecom (H.K.) Limited
F-23 City Telecom (H.K.) Limited
F-24
City Telecom (H.K.) Limited
F-26
F-27 (Loss)/income before taxation isarrived at after charging: Goodwill amortization Amortization of deferred expenditure Depreciation of purchased fixed assets Depreciation of fixed assets held under finance leases Impairment loss - investment property Operating lease charges in respect of: - Land and buildings - Computer equipment Research and development costs Retirement benefit costs - defined contribution plans (note 23) Interest expense comprises: Interest element of finance leases Interest on senior notes Interest on bank overdrafts Amortization of debt issuance cost Other borrowing costs Less: Amount capitalized as fixed assets - Interest capitalized Total interest expense Other income net, comprises: Net exchange gain/(loss) Others City Telecom (H.K.) Limited
F-28 City Telecom (H.K.) Limited
F-30 Net (loss)/income Weighted average number of shares in issue Incremental shares from assumed exercise of share options Diluted weighted average number of shares Basic (loss)/earnings per share Diluted (loss)/earnings per share
Trade receivables (note (i)) Less: Provision for doubtful accounts (note (ii))
F-32 Deposits for purchase of fixed assets Deposits for lease of land and building Interest receivable Prepayments USC refund receivable Unbilled revenue Others City Telecom (H.K.) Limited
F-33
F-34 Cost: At September 1, 2005 Exchange adjustments Additions Disposals Transfer to investment property At August 31, 2006 At September 1, 2006 Exchange adjustments Additions Disposals At August 31, 2007 Accumulated depreciation: At September 1, 2005 Exchange adjustments Charge for the year Disposals Transfer to investment property Impairment loss (note (a)) At August 31, 2006 At September 1, 2006 Exchange adjustments Charge for the year Disposals At August 31, 2007 Net book value: At August 31, 2007 At August 31, 2006 City Telecom (H.K.) Limited
F-35
City Telecom (H.K.) Limited
Accrual for staff salaries and bonus Accrual for customer reward program Accrual for carrier fees and charges Accrual for international call forwarding service charges Payable for purchase of fixed assets Payable for advertising and promotional expenses Interest payable on senior notes Others accrual (note) F-37
F-38
F-39
Balance at the beginning of the year Additions during the year Less: Amortization charge for the year (note 4) Balance at the end of the year Current portion F-40
City Telecom (H.K.) Limited
F-42
City Telecom (H.K.) Limited
F-43
Bank guarantees provided to suppliers (note 15(i) and (ii)) Bank guarantee in lieu of payment of utility deposits (note 15(iii)) F-44 City Telecom (H.K.) Limited
F-45
City Telecom (H.K.) Limited
F-46
City Telecom (H.K.) Limited
F-47 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-48 City Telecom (H.K.) Limited
F-52
City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-54 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-55
City Telecom (H.K.) Limited
City Telecom (H.K.) Limited
F-57 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
Both the Black-Scholes Model and Monte Carlo Model, applied for the determination of the estimated
F-58 City Telecom (H.K.) Limited
F-59
F-61 Fixed tele- services 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 City Telecom (H.K.) Limited
F-62
City Telecom (H.K.) Limited
Total assets Capital expenditure Fixed assets, net Hong Kong Canada Unallocated assets
City Telecom (H.K.) Limited
F-67 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-68 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-69 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
F-70 City Telecom (H.K.) Limited Consolidated financial statements for the year August 31, 2008
City Telecom (H.K.) Limited
As reported under HKFRSs U.S. GAAP adjustments: - Share-based compensation under intrinsic Value method - Reversal of retrospective HK GAAP adjustment in respect of share-based compensation - Reversal of amortization of goodwill (acquired after June 30, 2001) - Fair value of interest rate swap - Fair value of foreign forward exchange contracts - Tax effect of U.S. GAAP adjustments Net income/(loss) under U.S. GAAP Basic weighted average common shares issued and outstanding (in 000’s) Incremental shares from assumed exercise of share options (in 000’s) Diluted weighted average common and potential shares issued and outstanding (in 000’s) Earnings/(loss) per share under U.S. GAAP (note) - Basic - Diluted F-74 Total shareholders’ equity As reported under HKFRSs U.S. GAAP adjustments: - Goodwill - Accumulated amortization of goodwill - Reversal of amortization of goodwill - Fair value of interest rate swap - Fair value of forward foreign exchange contracts - Tax effect of U.S. GAAP adjustments Total shareholders’ equity under U.S. GAAP Revenue, net Operating expenses: - Network costs - Sales and marketing expenses - General and administrative expenses - Provision for doubtful accounts Income/(loss) from operations Interest income Interest expense Other income, net Income/(loss) before income taxes Income tax (expense)/credit Net income/(loss) Share premium Cumulative foreign Retained profits Balance at August 31, 2004 Shares issued upon exercise of share options Compensation cost for share options Release of warrant reserve upon warrant expiration Shares issued upon exercise of warrants Net loss Foreign currency translation adjustment Balance at August 31, 2005 Shares issued upon exercise of share options Compensation cost for share options Net loss Foreign currency translation adjustment Balance at August 31, 2006 Shares issued upon exercise of share options Compensation cost for share options Net income 2007 interim dividend declared and paid Foreign currency translation adjustment Balance at August 31, 2007 (Loss)/Net income under U.S. GAAP Foreign currency translation adjustment Comprehensive (loss)/income Net cash provided by operating activities Net cash (used in)/provided by investing activities Net cash provided by/(used in) financing activities Increase/(decrease) in cash and bank balances Cash and bank balances at the beginning of year Effect of foreign exchange rate changes Cash and bank balances at the end of year As F-78 F-79 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 Total gross deferred tax liabilities Net deferred tax liabilities Balance at beginning of the year Addition/(reduction) to income tax expense Valuation allowance written off Balance at end of the year City Telecom (H.K.) Limited Guarantor subsidiaries Non- guarantor subsidiary Eliminating entries Consolidated total Current assets Cash and bank balances Pledged bank deposits Trade receivables, net Other receivables, deposits and prepayments Inventories Investment securities Deferred expenditure Total current assets Fixed assets, net Investments in subsidiaries (note) Investment securities Other long-term assets Total assets Current liabilities Amounts due to subsidiaries/ fellow subsidiaries Trade payables Deposits received Current portion of deferred service income Other payables and accrued charges Income tax payable Current portion of obligation under finance leases Total current liabilities Long-term liabilities Total liabilities City Telecom (H.K.) Limited Guarantor subsidiaries Non- guarantor subsidiary Eliminating entries Consolidated total Commitments andcontingencies 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 Share premium Retained profits/(accumulated losses) Other reserves Total shareholders’ equity Total liabilities and shareholders’ equity F-85 City Telecom (H.K.) Limited Guarantor subsidiaries Non- guarantor subsidiary Eliminating entries Consolidated total Current assets Cash and bank balances Term deposit Pledged bank deposits Trade receivables, net Other receivables, deposits and prepayments Inventories Deferred expenditure Tax recoverable Total current assets Fixed assets, net Investments in subsidiaries (note) Investment securities Other long-term assets Total assets Current liabilities Amounts due to subsidiaries/ fellow subsidiaries Trade payables Deposits received Current portion of deferred service income Other payables and accrued charges Income tax payable Current portion of obligation under finance leases Total current liabilities Long-term liabilities Total liabilities City Telecom (H.K.) Limited Guarantor subsidiaries Non- guarantor subsidiary Eliminating entries Consolidated total Commitments andcontingencies Shareholders’ equity - Ordinary shares, par value HK$0.1 per share - 2,000,000,000 shares authorised - 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 F-87 City Telecom Limited Revenue Network costs Operating expenses: - Salaries and related costs - Sales and marketing expenses - General and administrative expenses - Provision for doubtful accounts Income/(loss) from operations Interest income Interest expense Other income, net Share of net losses from subsidiaries (note) Income before taxation Income tax credit Net income F-88 City Telecom (H.K.) Limited Revenue Network costs Operating expenses: - Salaries and related costs - Sales and marketing expenses - General and administrative expenses - Provision for doubtful accounts (Loss)/income from operations Interest income Interest expense Other income, net Share of net losses from subsidiaries (note) (Loss)/income before taxation Income tax expense/(credit) Net (loss)/income F-89 Revenue Network costs Operating expenses: - Salaries and related costs - Sales and marketing expenses - General and administrative expenses - Provision for doubtful accounts (Loss)/income from operations Interest income Interest expense Other income, net Share of net losses from subsidiaries (note) (Loss)/income before taxation Income tax expense/(credit) Net (loss)/income F-90 City Telecom (H.K.) Limited Net cash provided/(used in) by operating activities Net cash generated from/ (used in) investing activities Net cash (used in)/provided by financing activities Net increase/(decrease) in cash and bank balances Cash and bank balances at beginning of year Effects of foreign exchange rates changes Cash and bank balances at end of year Net cash (used in)/provided by operating activities Net cash used in investing activities Net cash provided by financing activities Net (decrease)/increase in cash and bank balances Cash and bank balances at beginning of year Effects of foreign exchange rates changes Cash and bank balances at end of year Net cash (used in)/provided by operating activities Net cash used in investing activities Net cash provided by financing activities Net increase in cash and bank balances Cash and bank balances at beginning of year Effects of foreign exchange rates changes Cash and bank balances at end of year /s/ Lai Ni Quiaque |