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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 Commission File number: 333-11014
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i-CABLE COMMUNICATIONS LIMITED
(Exact name of Registrant as specified in its charter)
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N/A
(Translation of Registrant's name into English)
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HONG KONG
(Jurisdiction of incorporation or organization)
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Cable TV Tower
9 Hoi Shing Road
Tsuen Wan, Hong Kong
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of
the Act.
Title of each class Name of quotation system on which registered
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American Depositary Shares, each representing 20 Ordinary Shares, par Nasdaq - National Market System
value HK$1.00 per share
Ordinary Shares, par value HK$1.00 per share Nasdaq - National Market System*
Securities registered or to be registered pursuant to Section 12(g) of
the Act.
None
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
Ordinary Shares..................................... 2,019,234,400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /x/ No / /
- -
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 / / Item 18 /x/
- -
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* Not for trading purposes, but only in connection with the registration of
American Depositary Shares pursuant to the requirements of the Securities
and Exchange Commission.
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TABLE OF CONTENTS
Certain Defined Terms............................................................................................................1
Forward-Looking Statements.......................................................................................................1
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................................................................2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................................................................2
ITEM 3. KEY INFORMATION......................................................................................................2
A. Selected Financial Data......................................................................................2
B. Capitalization and Indebtedness..............................................................................6
C. Reasons for the Offer and Use of Proceeds....................................................................6
D. Risk Factors.................................................................................................7
ITEM 4. INFORMATION ON THE COMPANY..........................................................................................14
A. History and Development.....................................................................................14
B. Business Overview...........................................................................................14
C. Organizational Structure....................................................................................24
D. Property, Plant and Equipment...............................................................................25
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................................................................25
A. Operating Results...........................................................................................25
B. Liquidity and Capital Resources.............................................................................32
C. Research and Development, Patents and Licenses, etc.........................................................35
D. Trend Information...........................................................................................35
E. Off-balance Sheet Arrangements..............................................................................35
F. Tabular Disclosure of Contractual Obligations...............................................................35
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................................................................35
A. Directors and Senior Management.............................................................................35
B. Compensation ...............................................................................................38
C. Board Practices.............................................................................................39
D. Employees...................................................................................................40
E. Share Ownership.............................................................................................40
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...................................................................41
A. Major Shareholders..........................................................................................41
B. Related Party Transactions..................................................................................42
C. Interests of Experts and Counsel............................................................................44
ITEM 8. FINANCIAL INFORMATION...............................................................................................44
A. Consolidated Statements and Other Financial Information.....................................................44
B. Significant Changes.........................................................................................44
ITEM 9. THE OFFER AND LISTING...............................................................................................44
A. Offer and Listing Details...................................................................................44
B. Plan of Distribution........................................................................................45
C. Markets.....................................................................................................45
D. Selling Shareholders........................................................................................45
E. Dilution....................................................................................................45
F. Expense of the Issue........................................................................................45
ITEM 10. ADDITIONAL INFORMATION..............................................................................................45
A. Share Capital...............................................................................................45
B. Memorandum and Articles of Association......................................................................45
C. Material Contracts..........................................................................................49
D. Exchange Controls...........................................................................................50
E. Taxation....................................................................................................50
F. Dividends and Paying Agents.................................................................................53
G. Statement by Experts........................................................................................53
H. Documents on Display........................................................................................53
TABLE OF CONTENTS
I. Subsidiary Information......................................................................................53
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................................54
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..............................................................54
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.....................................................................55
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS........................................55
ITEM 15. CONTROLS AND PROCEDURES.............................................................................................55
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT....................................................................................55
ITEM 16B. CODE OF ETHICS......................................................................................................55
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................................................................56
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES..........................................................56
PART III
ITEM 17. FINANCIAL STATEMENTS................................................................................................57
ITEM 18. FINANCIAL STATEMENTS................................................................................................57
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS...................................................................................57
CERTAIN DEFINED TERMS
References to "China" or "PRC" herein are references to the People's
Republic of China, references to "Hong Kong" are references to The Hong Kong
Special Administrative Region of the PRC and references to "Taiwan" are to the
island of Taiwan and other areas under the effective control of the Republic
of China. References to "United States" or "U.S." are to the United States of
America. All references to the "Government" herein are references to the
government of Hong Kong.
All references herein to "we," "us," "our," "i-CABLE" and the "Company"
are references to i-CABLE Communications Limited and, unless the context
otherwise requires, all such references include our subsidiaries.
References in this annual report to "HK dollars" and "HK$" are to Hong
Kong dollars, the lawful currency of Hong Kong; and references to "U.S.
dollars," "$" and "US$" are to United States dollars, the lawful currency of
the United States. Certain figures (including percentages) have been rounded
for convenience, and therefore indicated and actual sums, quotients,
percentages and ratios may differ. Unless otherwise indicated, our financial
information has been presented in Hong Kong dollars in accordance with Hong
Kong GAAP, and is presented on a consolidated basis.
Solely for the convenience of the reader, certain Hong Kong dollar amounts
have been translated into U.S. dollars at specified rates. Unless otherwise
indicated, any amounts translated from Hong Kong dollars to U.S. dollars in
this annual report have been translated at the rate of US$1.00 = HK$7.764, the
noon buying rate in The City of New York for cable transfers of Hong Kong
dollars per US$1.00 as certified for customs purposes by the Federal Reserve
Bank of New York ("Hong Kong Dollar Noon Buying Rate") at December 31, 2003.
As of June 22, 2004, the Hong Kong Dollar Noon Buying Rate was US$1.00 =
HK$7.7994. Based on an agreement between the Hong Kong SAR Government and Hong
Kong banknote issuing banks, the Hong Kong dollar to U.S. dollar exchange rate
is stabilized at approximately US$1.00 = HK$7.80. No representation is made
that the Hong Kong dollar or U.S. dollar amounts shown herein could have been
or could be converted into U.S. dollars or Hong Kong dollars, as the case may
be, at any particular rate or at all. See "Item 3--Key Information--Exchange
Rate Information" for further information regarding rates of exchange between
Hong Kong dollars and U.S. dollars.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 20-F, including those statements
contained under the captions "Item 4--Information on the Company" and "Item
5--Operating and Financial Review and Prospects" that are not statements of
historical fact, are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements can be generally identified by the use of terms such
as "believes," "expects," "may," "will," "would," "could," "plans," "projects"
or "anticipates," the negatives of such terms, or comparable terms. In
addition to the statements contained in this Form 20-F, we (or our directors
or executive officers authorized to speak on our behalf) from time to time may
make forward-looking statements, orally or in writing, regarding i-CABLE
(including its subsidiaries) and its business, including in press releases,
oral presentations, filings under the Securities Act, the Exchange Act or
securities laws of other countries, and filings with Nasdaq, The Stock
Exchange of Hong Kong Limited (the "HKSE") or other stock exchanges.
Such forward-looking statements represent our judgment or expectations
regarding the future, and are subject to risks and uncertainties that may
cause actual events and our future results to be materially different than
expected by us or indicated by such statements. Such risks and uncertainties
include in particular (but are not limited to) the risks and uncertainties
related to: economic and political circumstances in Hong Kong; international
net settlement rates; the regulatory structure in Hong Kong, including without
limitation Government policies with respect to exclusivity, competition,
interconnection and tariffs and license fees; the development and
implementation of new technologies; the availability of suitable programming
content; and competition affecting our services and products. No assurance can
be given that the results anticipated by us, or indicated by any such
forward-looking statements, will be achieved.
- 1 -
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
We provide you with selected financial and operating data of i-CABLE in
the tables below.
The following table contains selected historical consolidated financial
data as of and for the years ended December 31, 1999, 2000, 2001, 2002 and
2003. The statement of operations data for the years ended December 31, 2001,
2002 and 2003 and balance sheet data as of December 31, 2002 and 2003 have
been derived from our historical consolidated financial statements audited by
KPMG, and are included in this annual report. The statement of operations data
for the year ended December 31, 1999 and 2000, and balance sheet data as of
December 31, 1999, 2000 and 2001 have been derived from our historical
consolidated financial statements audited by KPMG, but are not included in the
annual report contained in Part III.
Our consolidated financial statements have been prepared in accordance
with Hong Kong generally accepted accounting principles ("Hong Kong GAAP").
For a detailed discussion of the significant differences between Hong Kong
GAAP and United States generally accepted accounting principles ("U.S. GAAP")
as they relate to i-CABLE, see note 33 to our consolidated financial
statements included in this annual report.
When you read the selected historical consolidated financial data, it is
important that you read along with it the historical consolidated financial
statements and related notes, as well as "Item 5--Operating and Financial
Review and Prospects" also included in this annual report.
Solely for the convenience of the reader, the December 31, 2003 figures
have been translated into U.S. dollars at the rate of exchange of US$1 =
HK$7.764, the Hong Kong Dollar Noon Buying Rate at December 31, 2003.
- 2 -
STATEMENT OF OPERATIONS DATA
Year ended December 31,
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1999 2000 2001 2002 2003 2003
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HK$ HK$ HK$ HK$ HK$ US$
(in millions except for per share and per ADS data)
Statement of Operations Data:
Hong Kong GAAP
Operating revenues................................... 1,346 1,649 1,931 2,161 2,143 276
Operating expenses (excluding network rental
expense)............................................. (1,590) (1,656) (1,751) (1,935) (1,892) (244)
Network rental income(1)............................. 208 - - - - -
Network rental expense(1)............................ (117) - - - - -
------- ------- ------- ------- ------- -----
Profit/(loss) from operations........................ (153) (7) 180 226 251 32
Interest income...................................... 11 101 58 26 8 1
Finance costs........................................ (90) (72) (72) (62) (16) (2)
Non-operating income/(expense)....................... (6) (2) 1 (0) (10) (1)
Impairment loss on investments - - - (73) - -
Provision for income tax............................. 1 - - - (13) (2)
------- ------- ------- ------- ------- -----
Net profit/(loss).................................... (237) 20 167 117 220 28
======= ======= ======= ======= ======= =====
Basic and diluted earnings/(loss) per share ......... (0.14) 0.01 0.08 0.06 0.11 0.01
Basic and diluted earnings/(loss) per ADS ........... (2.88) 0.20 1.66 1.16 2.18 0.28
Dividend per share (cents)........................... - - 2.50 3.00 5.50 0.71
U.S. GAAP
Net profit/(loss).................................... (417) (110) (6) 100 128 16
Basic and diluted earnings/(loss) per share.......... (0.25) (0.05) (0.003) 0.05 0.063 0.008
Basic and diluted earnings/(loss) per ADS ........... (5.07) (1.10) (0.057) 0.99 1.27 0.16
Dividend per share (cents)........................... - - 2.50 3.00 5.50 0.71
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(1) Prior to our reorganization, we leased our fiber network to Wharf T&T
Limited ("Wharf T&T"), which in turn sub-leased a part of the fiber network
back to us for the operation of our pay-TV services. As a result, we derived
network rental income and incurred network rental expenses during such time.
As part of our reorganization, we transferred to Wharf T&T the part of the
network that Wharf T&T requires for its operations and terminated our network
lease and sublease agreements at the end of September 1999. Consequently, from
October 1999 onwards, we did not receive these rental revenues or incur the
related expenses. Instead, we began receiving revenues from the maintenance
and repair of ducts, cables and ancillary equipment shared with Wharf T&T and
from project management services provided to Wharf T&T.
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FINANCIAL DATA
As of December 31,
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1999 2000 2001 2002 2003 2003
---- ---- ---- ---- ---- ----
HK$ HK$ HK$ HK$ HK$ US$
(in millions)
Balance Sheet Data:
Hong Kong GAAP
Cash and cash equivalents(1)(4)...................... 1,600 1,541 1,212 7 29 4
Property, plant and equipment, net................... 2,033 2,072 2,257 2,302 2,170 279
Total assets(4) (5) (1999-2002: Restated)............ 4,119 4,208 4,358 3,224 2,681 345
Amounts due to immediate holding company............. 8 36 1 1 - -
Total liabilities(4) (5)............................. 2,836 2,905 2,902 1,699 996 128
Total shareholders' equity (1999-2002: Restated)..... 1,283 1,303 1,456 1,525 1,685 217
U.S. GAAP
Cash and cash equivalents............................ 1,600 1,541 1,212 7 29 4
Total assets......................................... 5,418 5,312 5,246 4,031 2,834 365
Shareholders' equity................................. 1,805 1,694 1,705 1,754 1,824 235
Other Financial Data:
Hong Kong GAAP
Adjusted EBITDA(2)................................... 225 442 615 730 789 102
Depreciation......................................... 469 449 435 504 539 69
Capital expenditures(3).............................. 383 507 641 608 363 47
Cash flows from operating activities................. 399 680 734 863 719 93
Cash flows from investing activities................. (482) (736) (1,063) (884) 50 6
Cash flows from financing activities................. 1,663 (8) - (1,177) (747) (96)
U.S. GAAP
Cash flows from operating activities................. 399 680 734 863 719 93
Cash flows from investing activities................. (422) (669) (990) (802) 50 6
Cash flows from financing activities................. 1,603 (73) (73) (1,266) (747) (96)
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(1) Under Hong Kong GAAP, cash and cash equivalents in the balance sheet are
defined as:
o Cash--Cash at bank and on hand and deposits with any bank or other
financial institution. Cash includes cash on hand and deposits
denominated in foreign currencies.
o Cash equivalents--Short-term, highly liquid investments that are
readily convertible into known amounts of cash and which are
subject to an insignificant risk of changes in value, having been
within three months of maturity at acquisition. For the purposes
of the cash flow statement, cash equivalents would also include
bank overdrafts that are repayable on demand and form an integral
part of our cash management.
(2) We have defined adjusted EBITDA to mean earnings before interest income,
finance costs, non-operating income/expenses, provision for income tax,
depreciation of property, plant and equipment (excluding network rental
income and expense) but after amortization of programming rights as
computed under Hong Kong GAAP. Adjusted EBITDA is not a standard measure
under either Hong Kong GAAP or U.S. GAAP. You should not consider our
definition of adjusted EBITDA in isolation or as an indicator of
operating performance, liquidity or any other standard measure under
either Hong Kong GAAP or U.S. GAAP. We believe net income provided by
operating activities is the most directly comparable financial measure
for adjusted EBITDA as an indicator of our operating performance. For
our management's explanation of how we define EBITDA and why we use it,
see "Item 5--Operating and Financial Review and Prospects--Operating
Results--Non-GAAP Financial Measures."
(3) Capital expenditures relate to acquisitions of property, plant and
equipment only.
(4) Under Hong Kong GAAP, prior to 2003, certain bank deposits and bank
loans were offset against each other and were not included above, as
described in note 33(h) of our consolidated financial statements. Such
bank deposits and bank loans matured or were repaid during 2003.
(5) The results for each of the four years ended December 31, 1999, 2000,
2001 and 2002 and the assets and liabilities as at December 31, 1999,
2000, 2001 and 2002 have been restated to reflect the effect of the
adoption of SSAP 12 (revised) "Income taxes" issued by the Hong Kong
Society of Accountants as explained in Note 10 of our consolidated
financial statements.
- 4 -
SELECTED OPERATING DATA
In the following table, we provide you with our selected operating data as
of and for the years ended December 31, 1999, 2000, 2001, 2002 and 2003.
Year Ended December 31,
---------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
Operating Data (end of period,
except average):
Homes passed(1)............................. 1,692,000 1,790,000 1,903,000 1,959,000 2,010,000
Fiber homes passed(2)....................... 957,000 1,302,000 1,769,000 1,892,000 1,942,000
Total pay-TV subscribers(3)................. 453,000 522,000 561,000 606,000 656,000
Pay-TV subscriber penetration............... 27% 29% 29% 31% 33%
Average monthly revenue per
pay-TV subscriber(4)..................... HK$239 HK$250 HK$232 HK$233 HK$220
Broadband-ready homes passed(5)............. - 912,000 1,634,000 1,844,000 1,900,000
Broadband subscribers(6).................... - 53,000 160,000 226,000 258,000
Broadband subscriber penetration............ - 6% 10% 12% 14%
Average monthly revenues per broadband
subscriber(7)............................ - HK$227 HK$224 HK$180 HK$129
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(1) One residential household ready for pay-TV connection represents one
home passed. For hotels and service apartments, each serviceable unit
counts as one home passed. For commercial and institutional accounts,
each account counts as one home passed.
(2) Fiber homes passed represents the number of homes passed that are
connected to the fiber coaxial cable network. (3) One pay-TV billing
account represents one pay-TV subscriber, except for hotels, service
apartments and communal service
accounts, for which one serviceable unit represents one subscriber. In
the case of commercial and institutional customers, such as hospitals
and schools, one account represents one subscriber, regardless of the
number of television outlets.
(4) Average monthly revenues per pay-TV subscriber ("pay-TV ARPU") equals
the monthly average pay-TV revenues for the year divided by the average
number of pay-TV subscribers for the year. The average number of pay-TV
subscribers is calculated using the number of pay-TV subscribers at the
beginning of the year and the number of pay-TV subscribers at the end of
each month. Pay-TV revenues include monthly subscription fees and other
television-related income.
(5) Broadband-ready homes passed represent the number of residential homes
passed that are able to subscribe to our broadband service. For hotels,
service apartments and commercial and institutional accounts, one signal
point counts as one home passed.
(6) One broadband service billing account represents one broadband
subscriber, except for hotels and service apartments, for which one
personal computer port represents one subscriber. In the case of a
commercial customer, one billing account represents one subscriber,
regardless of the number of personal computer ports.
(7) Average monthly revenue per broadband subscriber ("broadband ARPU")
equals the monthly average broadband revenue for the year divided by the
average number of broadband subscribers for the year. The average number
of broadband subscribers is calculated using the number of broadband
subscribers at the beginning of the year and the number of broadband
subscribers at the end of each month. Broadband revenues include monthly
subscription fees, cable modem rental/sales income and other broadband
service related income.
- 5 -
EXCHANGE RATES
The Hong Kong Dollar is freely convertible into other currencies
(including the U.S. Dollar). Since October 17, 1983, the Hong Kong Dollar has
been linked to the U.S. dollar at the rate of HK$7.80 per US$1.00. The central
element in the arrangements which give effect to the link is an agreement
between the Hong Kong government and the three Hong Kong banknote issuing
banks: The Hongkong and Shanghai Banking Corporation Limited, Standard
Chartered Bank and the Bank of China. Under this agreement, the Hong Kong
Government Exchange Fund issues certificates of its indebtedness to the
banknote issuing banks to cover the issuances of banknotes. When the banknotes
are withdrawn from circulation, the banknote issuing banks surrender the
certificates of indebtedness to the Hong Kong Government Exchange Fund and are
paid the equivalent U.S. Dollars at the fixed rate.
Under the 1984 Joint Declaration between The People's Republic of China,
or PRC, and the United Kingdom, the Hong Kong Dollar would continue to
circulate and remain freely convertible after July 1, 1997, when Hong Kong
became a Special Administrative Region of the PRC. However, no assurance can
be given that the Hong Kong government, or any successor SAR government will
maintain the link of HK$7.80 per US$1.00, if at all.
The following table sets forth the Hong Kong Dollar Noon Buying Rate as at
and for the periods indicated.
Noon buying rate
------------------------------------------------------
Period End Average(1) High Low
- ------ --- ---------- ---- ---
(HK$ per US$1.00)
1999...................................................... 7.7740 7.7599 7.7755 7.7457
2000...................................................... 7.7999 7.7924 7.8008 7.7765
2001...................................................... 7.7980 7.7996 7.8004 7.7970
2002...................................................... 7.7988 7.7996 7.8095 7.7970
2003...................................................... 7.7640 7.7864 7.8001 7.7085
December 2003............................................. 7.7640 7.7645 7.7670 7.7628
January 2004.............................................. 7.7775 7.7669 7.7775 7.7632
February 2004............................................. 7.7845 7.7748 7.7845 7.7686
March 2004................................................ 7.7930 7.7930 7.7980 7.7842
April 2004................................................ 7.7998 7.7970 7.8000 7.7870
May 2004.................................................. 7.7941 7.7971 7.8010 7.7895
June 2004 (through June 22, 2004)......................... 7.7994 7.7975 7.7998 7.7947
- ----------
(1) Determined by averaging the Hong Kong Dollar Noon Buying Rates on the
last business day of each month during the respective period.
As of June 22, 2004, the Hong Kong Dollar Noon Buying rate was US$1.00 =
HK$7.7994.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
- 6 -
D. Risk Factors
i-CABLE is subject to various changing regulatory, competitive, economic,
political and social risks and conditions, which are described below:
Investment in our ordinary shares or ADSs involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this annual report, before
you decide whether to buy our ordinary shares or ADSs.
Any significant change in our ability to pay dividends or our dividend
policy may adversely affect the market price of our ordinary shares and ADSs.
Although we have declared and paid dividends in respect of the years ended
December 31, 2001, 2002 and 2003, there can be no assurance that we will
declare and pay dividends in the future or that we will maintain our current
dividend policy. Any significant change in our ability to pay a dividend or
our dividend policy may adversely affect the market price of our ordinary
shares and ADSs.
We reported net losses in previous years and we may incur net losses in
the future.
Although we have recorded net profits for each year since 2000, we
reported net losses from the beginning of our pay-TV operation in 1993 until
1999. As of December 31, 2003, our consolidated accumulated losses were
HK$5,173 million (US$666 million). Our ability to maintain profitability will
depend on the growth of our existing business and the success of our new
products and services, as well as general market conditions. If we do not
remain profitable or our accumulated losses are not offset by future profits,
our financing needs may increase, we may not be able to pay dividends in the
future and the market price of our ordinary shares and/or ADSs may be
adversely affected.
We may not be able to fund the capital expenditures necessary to keep pace
with technological developments or our customers' demand for new products and
services. This could limit our ability to compete effectively.
The markets for pay-TV, Internet access services and related services are
characterized by rapidly changing technology, industry standards, subscriber
needs and new products and services. The emerging nature of these products and
services and their rapid evolution will require us to continually improve the
performance, features and reliability of our network, Internet content and
consumer services, especially in response to competitive offerings.
We may not be successful in responding quickly, cost effectively or
sufficiently to these developments. In addition, services or technologies
developed by competitors may render our services or technologies undesirable
or obsolete. Furthermore, changing our services in response to market demand
may require the adoption of new technologies that could render many of our
assets less competitive or obsolete. Even if we respond successfully to
technological advances and emerging industry standards, the integration of new
technology may require substantial capital expenditures. We may not be
successful in modifying our network infrastructure in a timely and
cost-effective manner. In addition, our new products and services may contain
design flaws or other defects that could have a material adverse effect on our
business, operating results and financial condition. We do not intend to
conduct our own research and development of new technologies.
Illegal viewing activities may affect our pay-TV subscriber growth and
subscription revenue.
Our pay-TV business is dependent upon subscription revenue. We are aware
that some viewers in Hong Kong use unauthorized pay-TV decoders to receive our
pay-TV service illegally. Such illegal viewing became increasingly more
widespread in 2001. Although we have been migrating our transmissions from
analog to digital platforms in order to better control and limit illegal
viewing activities (our digital conversion program was over two-thirds
complete by December 2003), illegal activities have continued and we are aware
that pirated digital set-top-boxes are available in the market. We have
substantially completed the digital migration program as of the date of this
Form 20-F. However, even after the migration, we expect manufacturers or
vendors of unauthorized pay-TV decoders to attempt to overcome our digital
encryption methods. If we fail to deploy appropriate and timely
countermeasures in response to such activities, illegal
- 7 -
viewing activities may grow. Such illegal viewing activities will adversely
affect the growth of our pay-TV subscriber base and our subscription revenue.
The loss of key employees, including senior management, and our failure to
recruit qualified personnel as needed could weaken our strategic,
technological and operational expertise, delay the introduction of new
products and services and lower the quality of our services.
We may not be able to attract and retain key employees, including our
senior management. Our key employees may be recruited by our competitors. This
could hinder the introduction of our new products and services as planned. Our
operations could suffer with the loss of any member of our senior management
team or any key employee. Our success also depends on our ability to attract
and retain qualified personnel for strategic planning, programming and
enhanced services, including Internet, marketing and network operations. The
competition for qualified personnel in the Internet services and pay-TV
industry may increase in the future, making it difficult for us to attract and
retain qualified personnel in the Internet services and pay-TV industry.
Our programming costs are substantial and may increase, which could reduce
our margins if we are unable to pass on any such increase to our subscribers.
The growth and revenues for our pay-TV services depend on our ability to
produce or purchase programming that is affordable to our subscribers. The
cost of some of our acquired programming has increased in the past and may
increase substantially in the future if competition in the pay-TV and
television services markets intensifies. If we are not able to pass on
programming cost increases to our subscribers, our revenues, cash flow and
operating margins may be reduced.
We recently acquired the exclusive right to televise the English Premier
League in Hong Kong for the three-year period ending May, 2007. This
arrangement will replace our previous coverage of the English Premier League
via ESPN and Star Sports and will enable us to generate advertising revenues
from our EPL broadcasts. However, the cost of the English Premier League
rights increased significantly from previous periods and we may be unable to
offset the increased programming costs with advertising revenues and increased
subscriber revenues.
We are in the process of migrating our pay-TV subscribers to digital from
analog services. This migration may disrupt our pay-TV services and reduce our
revenues. High digital pay-TV set-top-box costs may adversely affect our
profitability and financial position.
Due in part to the rampancy of illegal viewing, we commenced the
migration of our analog television service subscribers to the more secure
digital system during December 2001. We completed digital migration for our
microwave service in March 2002 and have begun replacing analog decoders with
digital set-top-boxes for subscribers served by our hybrid fiber coaxial
network. Analog service delivered to our subscribers will be turned off as we
complete the replacement of the decoders for each building. As of December 31,
2003, our digital conversion program was over two-thirds complete. We have
committed to completing the digital migration and shutdown of our analog
transmission by May 31, 2005, and we have substantially completed the
migration program as of the date of this Form 20-F. Prior to completion,
pay-TV services to some of our pay-TV subscribers may be disrupted. Any
continuing disruption of our pay-TV service could harm our reputation, result
in a loss of subscribers and have a material adverse effect on our business,
operating results and financial condition.
Although the unit cost of our set-top-boxes declined in 2003, there is no
assurance that our digital set-top-box unit cost will not rise in the future.
In the future, we may consider the acquisition of digital set-top-boxes which
can deliver additional features, such as video-on-demand and interactivity.
The costs of the digital set-top-boxes may be significantly higher than the
cost of our existing analog decoders or digital set-top-boxes. If we are not
able to pass the costs onto our subscribers, our profitability and financial
position may be adversely affected.
- 8 -
New digital pay-TV channels may add to our programming costs and may
adversely affect our profitability.
Digital broadcasting allows the compression of pay-TV signals, which
increases our effective channel capacity. We intend to utilize this additional
capacity by increasing the number of pay-TV channels offered on our digital
platform. During 2003, a total of 23 new channels, including 6 sports events
that were offered on a pay-per-event basis, were added to our digital
platform. The channels were either included in the basic service or marketed
as tier packages to derive additional revenues from existing as well as new
subscribers. We may not be able to limit the total costs of production or the
acquisition of content for these new channels. If such programming costs are
significant and we are unable to pass on these costs to our pay-TV
subscribers, our profitability may be adversely affected.
Demand for our broadband Internet access service may not continue to grow.
The success of our broadband Internet access service (also known as
"broadband" service) will require continued growth in the use of the Internet
and the demand for broadband services in Hong Kong. Although our broadband
Internet subscriber base has been growing since the launch of the service in
March 2000, this growth trend may not continue. In 2002, we pre-empted
competition with an aggressive pricing strategy which has also resulted in
significant ARPU erosion. Critical issues concerning the increased use of the
Internet, including security, reliability, cost, ease of access and quality of
service are likely to affect future demand for our broadband service. The
competitive pressures to provide low-cost broadband access may impact our
ability to charge subscription fees at favorable rates. The demand for our
broadband access service may decline or it may not command the fees necessary
to permit us to maintain or increase the profitability of our broadband
business.
The competition we face from other television broadcasters and Internet
service providers may cause us to lose market share.
The markets for television services, Internet access and related services
in Hong Kong are becoming more competitive. This heightened level of
competition may result in a loss of subscribers to our competitors and may
reduce our revenues or significantly increase our programming costs, resulting
in a decrease in our cash flow and operating margin. We face strong
competition in the television services market from Hong Kong's free-to-air
networks, Asia Television Limited and Television Broadcasts Limited, commonly
known as ATV and TVB. In addition, two new pay-TV services were launched
during the third quarter of 2003. They are operated by the incumbent
telecommunications service provider, PCCW, and another telecommunications
service provider, Hong Kong Broadband Network. In February 2004, Galaxy
Satellite Broadcasting Limited, or Galaxy, a company that is 49%-owned by TVB,
the dominant free television operator in Hong Kong, launched its pay-TV
service under the brand name exTV. These new pay-TV service providers may
cause us to lose market share and encounter pricing pressure in the future.
Our pay-TV program offerings include content that we acquire from third
parties. The new pay-TV service providers may compete with us to acquire the
rights for certain TV content. Such competition may raise the cost of
purchasing these rights, and significantly raise our programming costs.
In 2002, we launched an aggressive pricing strategy in the residential
broadband market in order to maintain our market share. The strategy resulted
in significant ARPU erosion. Although revenues from our broadband services
began to recover during 2003, our competitors may in the future become more
aggressive in pricing their broadband services. This may lead us to further
lower our prices for broadband services, causing our broadband revenue to
decline.
The opening up of our network to other service providers may negatively
affect our revenues and profitability.
Under our fixed telecommunication network license, we are required to open
up our network to other telecommunications and television service providers
through interconnection arrangements. The opening up of our network may lead
to increased competition which may negatively affect our subscriber base,
revenues and operating profit. Although we expect to derive revenues from the
service providers to whom we open up our network, we may not be able to charge
these service providers fees high enough to compensate for the loss in
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revenues and operating profit due to increased competition. If this is the
case, the revenues from, and operating profit of, our broadcasting and
broadband business may be negatively affected.
Pay-TV competition may increase due to the Hong Kong government's
deregulation of the television broadcasting and telecommunications sectors.
Any increase in competition may cause us to lose subscribers and encounter
pricing pressure.
We were initially able to operate our pay-TV business as the sole pay-TV
provider in Hong Kong. In March 1998, a subsidiary of Cable & Wireless HKT
(now known as PCCW Limited) launched a video-on-demand service which offered
instantaneous viewing of movies and other programs. In July 2002, PCCW Limited
applied to the Hong Kong government for termination of its video-on-demand
service. To further liberalize the pay-TV market, the Hong Kong government
awarded five new pay-TV licenses in late 2000. Four operators have since opted
out from the Hong Kong market and returned their licenses to the Government.
In the third quarter of 2003, two new pay-TV services were launched. They were
operated by the incumbent telecommunications service provider, PCCW, and
another telecommunications service provider, Hong Kong Broadband Network. In
February 2004, Galaxy Satellite Broadcasting Limited, or Galaxy, a company
that is 49%-owned by TVB, the dominant free television operator in Hong Kong,
launched its pay-TV service under the brand name exTV. These new pay-TV
service providers may cause us to lose market share and encounter pricing
pressure in the future.
The failure to renew our subscription television broadcasting license, or
the renewal of such license with terms less favorable than the current terms,
may adversely affect the profitability of our pay-TV business.
Our subscription television broadcasting license will expire on May 31,
2005. We applied to the Hong Kong government to renew the license in June
2003. The government has approved the renewal of the license for a period of
12 years and has produced a draft new license for our review. In line with the
government's deregulation philosophy, new pro-competition conditions may be
imposed on us to continue our service. If the license is renewed with terms
less favorable than then current terms, the profitability of our pay-TV
business may be adversely affected. In the extreme case, if we fail to renew
our license, we will cease to operate our pay-TV business, which could
adversely affect our results.
We may encounter pricing pressure and experience an adverse impact on our
subscriber base for broadband Internet access service as a result of
competition from alternative Internet access platforms.
The Hong Kong government is creating a regulatory regime that will
accelerate the introduction of new broadband and wireless platforms in Hong
Kong. The development of these alternative Internet access platforms, such as
third-generation mobile phones, satellite interactive services, and local
wireless fixed network services may intensify competition. As a result, we may
encounter pricing pressure and experience an adverse impact on our subscriber
base for our broadband Internet access service.
We may not be able to acquire or retain the right to broadcast certain TV
content.
Our pay-TV service includes broadcasting of TV content that we acquire
from third parties. In the event we do not acquire or retain the right to
broadcast certain TV content, we may acquire rights to broadcast alternative
TV content in substitution. Such alternative TV content may not be available
on the same terms, or at all, and any loss of TV content or inability to
obtain the rights to provide suitable alternative TV content could adversely
affect the quality of our pay-TV service. In the event that we retain certain
TV content on terms and conditions significantly different from prior
agreements, our programming costs and/or pay-TV subscription revenues may be
adversely affected.
Our network system may fail or shut down, which may adversely affect the
quality of our Internet services.
Any failure to maintain a consistent level of high-quality service could
harm our reputation and have a material effect on our business, operating
results and financial condition. Our network is vulnerable to damage
- 10 -
or cessation of operations from fire, earthquakes, severe storms, power loss,
telecommunications failures, network software flaws, transmission cable cuts
and other catastrophic events. We may experience failures or shutdowns
relating to individual points of presence or even catastrophic failure of our
entire network. Our insurance coverage may not cover such losses or, even if
such losses are covered by our insurance, may not be sufficient to cover all
losses arising from such events. Any 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 addition, our network is potentially vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our subscribers or other
Internet users. Computer viruses, break-ins or other problems could lead to
the following problems:
o interruption, delay or cessation in service to our subscribers;
o compromised security of confidential information stored in the
computer systems of our subscribers; and
o costly litigation.
The success of our broadband Internet access service depends on our
ability to maintain high-quality data transmission with minimal service
disruptions or interference. This will be critical to our ability to attract
and retain Internet service subscribers.
We recently launched a satellite channel targeted at Mainland China. The
channel is expected to incur losses in its initial years of operations and it
may never be profitable.
We launched a satellite channel targeted primarily at Mainland China in
October 2003. The channel is available in hotels that are rated at or above
three stars, foreign compounds, and other select areas in Mainland China. In
May 2004, our subsidiary, Hong Kong Cable Television Limited, entered into an
agreement for the channel to be carried by Shenzhen Television Station. As a
result, the channel is available to the pay-TV subscribers of Shenzhen
Television Station. The relevant television market in Mainland China is highly
competitive. The channel is expected to incur losses in its initial years of
operation and there is no assurance that the channel will become profitable.
In addition, any adverse development in the economic, political or legal
environment in Mainland China could have a negative effect on the operations
and financial condition of this channel.
We are finalizing our plans to launch voice-over-Internet-protocol, or
VoIP, services. The operation of such services may increase our capital
expenditure and, furthermore, such services may not be profitable.
We are finalizing our plans to launch voice-over-Internet-protocol, or
VoIP, services. The services will enable subscribers to make and receive calls
using traditional telephone handsets connected to a cable modem. The launching
of such services may incur additional capital expenditures and adversely
affect our financial position. There is no assurance that VoIP services will
be profitable, and such services may adversely affect our future consolidated
earnings.
The Hong Kong Inland Revenue Department may not accept the Group's
compromise settlement for an ongoing discussion regarding a finance lease
arrangement.
We are currently in discussion with the Hong Kong Inland Revenue
Department regarding the deductibility of certain interest payments claimed in
the previous year tax computations of the lessors in a finance lease
arrangement. As part of the settlement proposal, we have offered to cause
certain interest expenses previously deducted by the lessees to be rendered
disallowable, therefore reducing their unused tax losses brought forward by
the equivalent amount. The outcome of the discussion is uncertain. The Inland
Revenue Department may decide that our settlement proposal will not
sufficiently counteract the tax benefits that we have gained and seek to
enforce various protective assessments already issued, in which case, we may
be liable to pay additional taxes.
- 11 -
The political and economic environment in Hong Kong is uncertain and may
adversely affect our business and financial condition.
All of our facilities and operations are located in Hong Kong. Hong Kong
is a Special Administrative Region of the PRC, with its own government and
legislature. The Joint Declaration between the Chinese and British governments
and the Basic Law, the mini-constitution for Hong Kong, provide that Hong Kong
will have a high degree of legislative, judicial and economic autonomy. Since
the PRC's resumption of sovereignty over Hong Kong on July 1, 1997, Hong Kong
has enjoyed a high degree of autonomy. However, our business and financial
condition may be adversely affected as a result of future developments in the
political and economic environment in Hong Kong or in the PRC. Moreover, the
economic environment in Hong Kong is susceptible to the instability in global
economic conditions. The continued military involvement in Iraq has aggravated
global economic conditions, which have been weakened by recent events
including, but not limited to, terrorism-related activities and corporate
governance issues in the United States. Any worsening in the economic
condition of Hong Kong as a result of the current turmoil may adversely affect
our business and financial condition.
In the first half of 2003, China, Hong Kong, Taiwan, Singapore, Vietnam
and certain other countries encountered an outbreak of severe acute
respiratory syndrome, or SARS, which is a highly contagious form of atypical
pneumonia. Such SARS outbreak had an adverse effect on our results of
operations for the first half of 2003.
We cannot assure you that SARS or SARS-like outbreaks will not occur again
and that any future SARS or SARS-like outbreaks, or the measures taken by Hong
Kong and other countries against SARS or SARS-like outbreaks, will not
seriously interrupt our operations, which may have a material adverse effect
on our financial condition and results of operations.
We may be liable for information disseminated over our Internet services
network, which could increase our costs or cause us to discontinue certain
services or content offerings.
We may be required to spend substantial resources or discontinue certain
services or content offerings as a result of liability under the Hong Kong law
for dissemination of information, which could have a material adverse effect
on our business, operating results and financial condition. Hong Kong law
relating to liability of Internet service providers for information carried on
or disseminated through their networks is new and untested. The imposition of
potential liability upon Internet service providers, such as liability for
defamatory speech or copyright infringement, for materials carried on or
disseminated over a network may cause us to adopt measures that may reduce our
exposure to such liability. We do not carry errors and omissions insurance
which, under certain circumstances, could mitigate any damages incurred by us.
Rights of shareholders under Hong Kong law may not provide expected levels
of protection for shareholders.
Our corporate affairs are governed by our constitutive documents and by
the laws of Hong Kong. The rights of our shareholders and the fiduciary
responsibilities of our directors under Hong Kong law are not as clearly
established as under statutes or judicial precedent in existence in certain
jurisdictions in the United States. Therefore, our public shareholders may
have more difficulty in protecting their interests in the face of actions by
our management, directors or our controlling shareholders than would
shareholders of a corporation incorporated in some jurisdictions in the United
States.
Certain judgments obtained against us by our shareholders may not be
enforceable in Hong Kong.
We are a Hong Kong company and most of our assets are located outside the
United States. Substantially all of our current operations are conducted in
Hong Kong. In addition, most of our directors and officers are nationals and
residents of countries other than the United States. All or a substantial
portion of the assets of these persons are located outside the United States.
As a result, it may be difficult for you to effect service of process within
the United States upon these persons. In addition, there is uncertainty as to
whether the courts of Hong Kong would recognize or enforce judgments of United
States courts obtained against us or such persons predicated upon the civil
liability provisions of the securities laws of the United States or any state.
In addition, there is uncertainty as to whether such Hong Kong courts would be
competent to hear original
- 12 -
actions brought in Hong Kong against us or such persons predicated upon the
securities laws of the United States or any state.
Forward-looking statements reflect current expectations and may not be
correct.
This document contains various forward-looking statements, including
statements regarding our expectations and projections for future operating
performance and business prospects. The words "believe," "expect,"
"anticipate," "estimate," "project" and similar words identify forward-looking
statements. In addition, all statements other than statements of historical
facts included herein are forward-looking statements. These statements are
forward-looking and reflect our current expectations. Although we believe that
the expectations reflected in the forward-looking statements are reasonable,
we can give no assurance that such expectations will prove to be correct. They
are subject to a number of risks and uncertainties, including changes in the
economic and political environments in Hong Kong. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the reference to these
risks.
- 13 -
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
i-CABLE was incorporated under the laws of Hong Kong on May 21, 1999 with
limited liability under the Companies Ordinance. We changed our name to
i-CABLE Communications Limited with effect from August 27, 1999. Our principal
place of business is located at Cable TV Tower, 9 Hoi Shing Road, Tsuen Wan,
Hong Kong. Our telephone number is (852) 2112-6868. Our registered office is
located at 16th Floor, Ocean Centre, Harbour City, Canton Road, Kowloon, Hong
Kong. The telephone number for our registered office is (852) 2118-8118.
Our agent in the United States is CT Corporation System, which is
currently located at 111 Eighth Avenue, 13th Floor, New York, New York 10011.
Our capital expenditures for purchases of property, plant and equipment in
2001, 2002 and 2003 amounted to HK$641.5 million, HK$608.7 million and
HK$362.8 million, respectively. The major items of our capital expenditures
included investments on digital set-top-boxes, cable modems and related
equipment, and further network upgrade and expansion expenditures. These items
are expected to be the major areas of our capital expenditures in 2004.
B. Business Overview
We believe that we are the leading pay-TV programming operator and service
provider in Hong Kong and that we are also Hong Kong's second largest
residential broadband Internet access service provider.
We launched our pay-TV service in October 1993. As of December 31, 2003,
we had 656,000 pay-TV subscribers, representing an 8.1% increase over the
previous year.
We launched our broadband service in March 2000. As of December 31, 2003,
we had 258,000 broadband subscribers, representing a 14.0% increase over the
previous year. As of December 31, 2003, our in-building coaxial network passed
over 2,010,000 homes. Within this total, 1,942,000 homes were connected to our
fiber optic cable network, out of which 1,900,000 households were
"broadband-ready" (i.e., these households were able to subscribe to our
broadband service).
Business Strategy
Our goal is to become Hong Kong's leading provider of integrated
multimedia communications services, encompassing video, data and voice
services. We are also looking for opportunities to expand into other markets
outside of Hong Kong, in the Greater China region. Our strategy is to:
o Expand our pay-TV subscriber base through programming differentiation
We will continue to provide locally-targeted, innovative television
programming to maintain our market leadership in news, sports and movies.
Our investment in Chinese-language programming has been instrumental to
our success to date since most of Hong Kong's population speaks Cantonese
as their primary language. To complement our local programming, we will
continue to broadcast sport events, movies and major international
channels such as CNN International, HBO Asia and Discovery. As of December
31, 2003, we carried 74 program channels on our digital platform. Some of
the channels were included in our basic package while others were marketed
as tier packages to derive additional revenues from existing or new
subscribers. We will continue to invest in programming content to maintain
service differentiation. We will continue to evaluate new genres and
programs so that we can offer more programming packages to existing and
new subscribers. We also plan to continue to increase the number of our
subscribers by marketing through direct sales, promotions and advertising.
We believe there is an opportunity to further increase our number of
subscribers in a market such as Hong Kong as the market for pay-TV
services continues to develop.
- 14 -
o Continuous rollout of our fiber coaxial cable network
We will continue to rollout our fiber coaxial cable network so we can
utilize the network's ability to provide video, data and other services.
As of December 31, 2003, 1,942,000 of our homes passed were connected to
our fiber coaxial cable network.
o Pursue penetration of our broadband Internet access service
We launched our broadband Internet access service based on cable modem
technology in March 2000. There are inherent technological advantages
broadband Internet access has over dial-up Internet access. These
advantages include faster data transmission speeds, permanent or "always
on" connections and no need for subscribers to keep a separate telephone
line for Internet access. During 2003, our broadband subscribers grew by
14.0% to 258,000 and we maintained our position as the second largest
residential broadband access service provider in Hong Kong. In 2002, we
preempted competition with an aggressive pricing strategy that resulted in
broadband ARPU erosion. Price competition in the residential broadband
market appeared to stabilize in 2003, and our broadband ARPU began to
recover during 2003.
Products and Services
Pay-TV Services
We offer the following pay-TV services:
Basic Package. As of December 31, 2003, our basic package included access
to 25 channels for our analog subscribers and 39 channels for our digital
subscribers. We have since added two channels to our basic package for digital
subscribers. We also offer various other packages, typically consisting of a
limited number of channels offered in our basic package at a lower
subscription fee to enhance our pay-TV penetration.
Pay-Per-View and Premium Services. We currently offer pay-per-view
channels and were the first pay-per-view provider in Asia. Pay-per-view
channels offer viewing of adult entertainment and live sports events at
additional fees. As of December 31, 2003, our premium channels included HBO
Asia, Cinemax, STAR Movies and Channel A. HBO Asia, Cinemax, and STAR Movies
offer Hollywood movies and other programs. Channel A features some of the more
popular programs we offer from among all our local channels. In addition to
three premium packages launched in 2002, we launched a premium Entertainment
Package that is comprised of Asia Plus and Jet TV from Taiwan, Fashion TV,
Soundtrack Channel and our Channel A; and a premium Discovery Package that
includes Discovery Channel, Animal Planet, Discovery Travel and Adventure,
Discovery Health, Discovery Science and Discovery H&L during 2003. Discovery
Channel, Animal Planet, and Discovery Travel and Adventure are also included
in our basic package. To cater to our subscribers who are sports fans, we also
added a World Cricket Live Channel and a popular sports channel, Ten Sports.
As of December 31, 2003, we also provided access and maintenance services
to approximately 239,000 satellite television systems households in Hong Kong.
Satellite television systems allow customers to view free-to-air channels
distributed via satellite.
Internet and Multimedia Services
In January 1999, we formed a new business unit to develop advanced
applications for our fiber coaxial cable network and to capitalize on the
rapidly growing number of Internet users in Hong Kong. Our existing products
and Internet services are:
Broadband Internet Access. We introduced our broadband Internet access
service utilizing cable modem technology under the i-CABLE brandname in March
2000. As of December 31, 2003, we were Hong Kong's second largest residential
broadband service provider. A cable modem is a peripheral device attached to a
personal computer that allows the user to send and receive data over a cable
television system. The technology allows for a permanent connection to the
Internet and eliminates the typical connection delays associated with
accessing the Internet using dial-up procedures. We charge our broadband
Internet access subscribers flat fees with no usage charges. We typically
market our broadband Internet access service at discounts to our standard
monthly subscription fee for new subscribers.
- 15 -
Dial-Up Internet Access. We also offer dial-up Internet services to our
subscribers. Our dial-up subscribers can access the Internet over their
telephone lines with data transmission speeds of up to 56 kilobits per second.
Programming
Pay-TV Services
Our strategy has been to achieve pay-TV subscriber penetration through
local content production and packaging, consisting primarily of news, movies
and live and exclusive sports programming. As there are limited Cantonese
language programming alternatives, we produce our own programming and
repackage licensed programming to suit local preferences. We are one of the
largest producers of television programming in Hong Kong. We originate and
repackage 16 channels in our basic package.
News, movies and sports have been our most important programming genres
and we will continue to invest in such programming.
News. We produce three 24-hour Cantonese news channels. News 1 broadcasts
local news and public affairs, financial and comprehensive breaking news. News
2 broadcasts non-stop news with half-hourly updates. Top News broadcasts
non-stop news with updates every eight to ten minutes. We believe subscribers
are attracted to the convenience and quality of our 24-hour news programming.
Our digital news production center commenced operations in early 2002. As the
first fully digitized news production center in Hong Kong, it deploys the
latest digital shooting, editing and broadcasting technologies to reduce
production time and enhance efficiency. It will also facilitate multimedia
content development and generate new revenue opportunities. We have also
acquired broadcasting rights to international news channels such as CNN
International, BBC World and CNBC Asia.
Movies. Through our own three basic movie channels and three premium
channels, we offer popular Hollywood titles, local blockbusters and special
packages catering to our subscribers. Our pay-per-view service features movies
and adult entertainment programs. We also carry TCM, Cartoon Network and AXN
in our basic service and HBO Asia, Cinemax and STAR Movies as premium
channels.
Sports. We produce two sports channels and carry ESPN and STAR Sports,
World Cricket Live, and Ten Sports. Exclusive and live coverage of sports
events has played an important role in attracting new subscribers. Soccer is
more popular than any other sports in Hong Kong. Following our successful
acquisition of broadcast rights to the Spanish Soccer League last summer, we
launched a 24-hour soccer channel to accommodate the wide array of soccer
matches and programs on our platform. We have also secured the exclusive
rights to broadcast the English Premier League for three seasons from August
this year as well as the 2006 FIFA World Cup. We also carry major
international sports events, such as major tennis tournaments including the
Australian Open and French Open and major golf and snooker events.
Additionally, our Channel 18 provides comprehensive live coverage of all horse
races of the Hong Kong Jockey Club.
Our Channels
We offer a variety of channels with our own originated or packaged
channels, primarily in Cantonese, as well as licensed satellite channels. As
of December 31, 2003, we offered 74 channels on our network, consisting of 39
basic channels, 30 premium channels, including the channels that are included
in our premium packages, and five pay-per-view channels. Our analog
subscribers received 25 channels for the basic package plus one premium
channel as of December 31, 2003.
News, sports and movies remained the mainstay of our programming platform.
We also carried a number of acclaimed documentary channels such as Discovery
and the National Geographic channels. Our entertainment platform consists of a
mix of international, regional and self-produced channels. In the summer of
2003, we launched a 24-hour Entertainment News Channel, the first of its kind
in Hong Kong, which provides round-the-clock reporting and news magazine
programs featuring the world of show business as well
- 16 -
as lifestyle and trends in Hong Kong, the region and the world. We also
carried five premium packages, for a total of 24 channels, catering to ethnic
minority groups, sports fans and viewers with particular interests
Internet and Multimedia Services
Leveraging on our content library production and output, we have enhanced
our Chinese language Internet portal to further showcase the multimedia
capabilities of our broadband Internet access service. To differentiate
ourselves from other Internet services providers, we offer our television
program content on our websites as well as develop new content and
applications with content providers to offer a rich multimedia experience to
our subscribers.
During 2002, we launched several fee-charging portals, including portals
on horse racing and stocks. We have also begun charging subscription fees for
access to contents in our "walled garden" portals, which include news, sports,
movies, fortune, and games. In 2003, following the Hong Kong government's
legalization of betting on soccer matches, we launched a soccer website that
provides information to soccer punters.
Segment Information
The following table shows the breakdown of our total consolidated
operating revenues for each of the periods indicated and the percentage
contribution of each revenue component to our total operating revenues:
- -------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31,
----------------------------------------------------------------------------------
2001 2002 2003
-------------------------- -------------------------- --------------------------
HK$ in HK$ in HK$ in
million % million % million %
------------- ----------- -------------- ---------- -------------- ----------
Pay television 1,595 82.6 1,711 79.2 1,734 80.9
Internet and multimedia 336 17.4 450 20.8 409 19.1
------------- ----------- -------------- ---------- -------------- ----------
Total operating revenues 1,931 100.0 2,161 100.0 2,143 100.0
------------- ----------- -------------- ---------- -------------- ----------
Our business activities are conducted primarily in Hong Kong. For the
years ended 2001, 2002 and 2003, less than 10% of our revenues were derived
from activities conducted outside Hong Kong.
Sales and Marketing
Pay-TV Services
We use a variety of marketing methods to attract and retain subscribers.
Direct sales marketing is our most effective sales method, particularly due to
Hong Kong's high population density. Our marketing strategy is to:
o achieve high brand awareness;
o feature live and exclusive sports, popular movies and convenient
quality news programming;
o develop and retain a team of well-trained direct sales
representatives;
o integrate our direct sales, advertising, inbound and
outbound-telemarketing and other sales channels to optimize subscriber
acquisition opportunities;
o offer short-term promotions and incentives for subscribers to sign up
quickly for longer-term commitments;
o promote customer loyalty by offering subscriber benefit programs;
o promote customer loyalty through the sale of set-top-boxes to
subscribers; and
o expand into niche markets by offering different programming packages
which target subscribers with different price sensitivities.
- 17 -
Internet Access Services
We launched our dial-up Internet access service under the i-CABLE
brandname in March 1999, applying many of the same sales and marketing
strategies we have used successfully for our pay-TV services. We launched our
broadband Internet access service using cable modems in March 2000. The
marketing strategy for our broadband Internet access service is to:
o achieve high brand awareness;
o develop and retain a team of well-trained direct sales
representatives;
o integrate our direct sales, advertising, inbound, and
outbound-telemarketing and other sales channels to optimize subscriber
acquisition opportunities;
o offer short-term promotions and incentives for subscribers to sign up
quickly for longer-term commitments; and
o promote customer loyalty by offering subscriber benefit programs
By leveraging on our brandname, marketing and sales experience, and
customer fulfillment capabilities, we believe we have established ourselves as
Hong Kong's second largest residential broadband Internet access service
provider at the end of 2003.
Network Architecture
Overview
Cable television consists of a broadband network transmitting multiple
channels of videos, images, sound and data between a central facility and a
subscriber's television over fiber optic and coaxial cable.
Our cable television system consists of three major parts: a head-end, a
distribution network, and a home terminal. At the head-end, signals from live
studios, video cassette playback machines and servers, and satellites are
received, processed, amplified and then sent through a distribution network,
which consists of trunk lines, feeder cables and drop cables. Drop cables
carry signals into a subscriber's premises and, ultimately, to television
receivers in the home terminal.
The significant advantages of fiber optic technology have led to the
increased use of the fiber optic cable as part of the distribution network's
trunk lines, or backbone. The portion of our network employing fiber optic
trunk lines generally requires less maintenance, resulting in lower operating
costs. The increased capacity and reliability of fiber optic cable can be
utilized to expand the number and quality of services delivered to the
subscribers' premises.
Our Distribution Network
Our distribution network can be divided into two sections: trunk
transmission and in-building coaxial networks. We have substantially completed
the trunk transmission sections from a microwave system to fiber optic cable
to connect to the in-building coaxial networks to form a HFC cable network.
The concentration of high-rise buildings in Hong Kong has been a significant
factor in shaping communications networks in the region. The resulting concept
of these buildings as "vertical streets" highlights the importance of access
to in-building coaxial networks and bandwidth allocation within such
in-building coaxial networks.
Most of our subscribers live in high-rise apartment buildings which have
been wired with in-building coaxial networks. We have been allocated 35
frequency channels by the Telecommunications Authority for television services
and two additional frequency channels for broadband services. The total number
of frequency channels for television services allocated to us will be reduced
to 20 following completion of our digital migration. However, with compression
technology, the 20 frequency channels will enable us to carry over 100 program
channels.
We built our existing backbone network first by using a microwave system.
The microwave system carries scrambled television signals which travel through
fiber optic cables from the cable television headend to
- 18 -
transmission sites on hilltops. From the transmission sites, signals are
broadcast to the signal processing center located on the rooftops of our
anchor buildings. Each signal processing center converts the microwave signals
into radio frequency signals. These signals are then distributed by coaxial
cable to households in the same building or adjoining buildings. The coaxial
network transmits signals through amplifiers to a multi-port two-way tap which
connects to the subscriber's drop. The subscriber's drop connects to a set-top
box which descrambles the television signals in the subscriber's home.
To complete our HFC cable network, we have converted the majority of the
trunk transmission from microwave to fiber optic cable, which enables two-way
active capability. A portion of our network trunks are laid along the
infrastructure of the Mass Transit Railway Corporation, the Hong Kong subway
system. The subway underground infrastructure provides a stable and protective
network environment and facilitates the maintenance of our fiber optic trunk
transmission. The in-building coaxial networks, known as last mile access to
the subscribers, remain unchanged except for the installation of the return
path modules to existing amplifiers.
The completed fiber coaxial cable network is two-way capable. It will also
have the capacity to support additional advanced services by placing
telecommunications and data-communications equipment at network nodes to
interface with facilities of various Internet service providers, value-added
service providers, content providers, network carriers and broadcasters.
We returned the 12 GHz and 2 GHz microwave frequencies to the Hong Kong
government during 2001. The Telecommunications Authority has allowed us to use
alternative frequencies at 18 GHz to broadcast our pay-TV services to certain
homes in remote locations. Since December 2001, we have begun to migrate our
television service to digital broadcasting to combat illegal viewing and to
expand our channel capacity. In March 2002, we shut down the more vulnerable
analog service on our microwave network to protect our signal integrity. We
have also begun to convert our HFC subscribers to digital by replacing their
set top boxes in phases. We have undertaken to the Government to complete the
migration by May 31, 2005. By the end of December 2002, we had converted more
than one-third of our subscribers to digital service. At the end of 2003, our
digital conversion program was over two-thirds complete. We have substantially
completed the digital migration program as of the date of this Form 20-F.
To ensure a smooth migration to digital broadcasting, the Hong Kong
government has allocated an additional four in-building network frequencies on
top of the original 31 frequencies allocated to us in order to maintain the
integrity of our analog service. We will return 15 frequencies to the Hong
Kong government when we have completed our migration and maintain a 20
frequency digital platform, which will enable us to offer over 100 program
channels with digital compression technology.
Broadband Internet Access System
We use our hybrid fiber coaxial cable network to provide broadband
Internet access service. In order to provide such services, we need to install
cable modem head-ends to route the Internet data traffic through our digital
transport network.
Internet access is the first non pay-TV application deployed over our
hybrid fiber coaxial cable network. In the future, we may introduce other
applications, such as voice services, over the cable modem infrastructure with
incremental investment.
Customer Service and Technical Support
We believe providing a high level of customer service and technical
support to our subscribers is integral to our customers' satisfaction. In
order to achieve this, we operate a 24-hour customer service hotline. We
continually seek to staff our customer service department with qualified
personnel to provide solutions to potential customer questions or related
matters. We also continue to invest in equipment and technology to enhance
operational efficiency. Most of the customer service representatives have
in-depth knowledge of our pay-TV and Internet and Multimedia services.
- 19 -
Subscribers can pay through a direct-debit service that automatically
deducts the monthly payment from a subscriber's designated bank account or
credit card account, by telephone, at payment points such as local banks or
automated teller machines, or by mail.
We provide our subscribers with complete technical support, including
installation, maintenance and service calls and disconnection of our services.
We monitor key statistics, such as average time for completion of
installation, in order to identify any potential areas for improvement.
Research and Development
We do not conduct any research and development activities for new
technologies.
Intellectual Property
We have registered certain trademarks, including our brandname, logo, and
certain advertising features, as well as trademarks in connection with our
pay-TV services with the Hong Kong Trade Marks Registry, the independent
authority responsible for registration of trademarks in Hong Kong. In
addition, we have registered some of our trademarks in the PRC, Taiwan and
Macau.
Insurance
We have insurance with reputable insurance providers to cover risks
incurred in the ordinary course of business, including general liability,
property coverage and workers' compensation insurance in amounts typical of
similar operators in the cable industry. We believe our insurance coverage is
adequate and there have not been any significant insurance claims during the
past three years.
Regulations
Regulations on Television Broadcasting
Overview
We conduct our pay-TV business through our subsidiary, Hong Kong Cable
Television Limited ("HKC"). HKC is a licensed subscription television
broadcaster and is subject to the provisions of the Television Ordinance
(repealed in July 2000), the Broadcasting Ordinance, the Broadcasting
Authority Ordinance, the Telecommunications Ordinance and its license and
related regulations, codes of practice, guidelines and directions by the
Broadcasting Authority. The provisions are administered by the Broadcasting
Authority, a statutory body established under the Broadcasting Authority
Ordinance and the Telecommunications Authority. The Broadcasting Authority
prescribes rules concerning the content and scope of television programming,
supervises all services provided by television broadcasters and makes
recommendations to the Chief Executive-in-Council on applications for
broadcasting licenses, as well as on the renewal, suspension and revocation of
licenses. The Chief Executive-in-Council issues domestic pay television
program service licenses (formerly subscription television broadcasting
licenses under the regime of the now repealed Television Ordinance) which
grants the right to provide domestic pay television program services. HKC's
domestic pay television program service license sets forth the terms and
conditions for providing its pay-TV service, including the length, network
milestone requirements, and the scope of its programming.
License
HKC provides its pay-TV services under its subscription television
broadcasting license (the "Subscription TV License") which has been deemed to
be a domestic pay television program service license issued under the
Broadcasting Ordinance. The Subscription TV License came into effect on June
1, 1993 and is valid for a period of 12 years until May 31, 2005. The
Subscription TV License provides that it is subject to a mid-term review and
the Chief Executive-in-Council, on recommendation of the Broadcasting
Authority, gave his approval on the review on January 25, 2000. The
Subscription TV License was thereby renewed on March 24, 2000.
- 20 -
Under the renewed Subscription TV License, new annual network milestones
were imposed requiring HKC to increase the number of homes passed by its
hybrid fiber coaxial cable network to not less than 1,737,093 by 2005. We have
met all of these annual milestones by the required target as set out in the
license.
Our subscription television broadcasting license will expire on May 31,
2005. We applied to the Government to renew our license in June 2003. The
Government has approved the renewal of the license for a period of 12 years
and has produced a draft new license for our review. Separately, we have
commenced discussions with the Telecommunications Authority to include the
transmission of our television service into our fixed line license under the
current regulatory regime, which requires the transmission part of our license
to be subject to the Telecommunications Ordinance.
We also hold a non-domestic television service license for the uplink of a
satellite channel, which has been granted limited landing right for reception
in hotels and selected compounds in Mainland China.
HKC has undertaken to the Hong Kong government to complete the migration
of our television broadcasting service to digital transmission by May 31,
2005. HKC started the migration in the fourth quarter of 2001, and our digital
conversion program was over two-thirds complete as of December 31, 2003. We
have substantially completed the digital migration program as of the date of
this Form 20-F.
Additionally, the Broadcasting Authority may require HKC to refrain from
broadcasting all or part of certain programs, advertisements or other material
where this would result in material breaches of the terms and conditions of
the license or violations of applicable law, regulations or public policy.
Restrictions on Ownership and Control
The Broadcasting Ordinance provides that the majority of directors and
majority of principal officers of television broadcasters such as HKC must be
persons who are ordinarily resident in Hong Kong. Persons are considered
resident in Hong Kong if they reside in Hong Kong for at least 180 days in any
calendar year and at least 300 days in any two consecutive calendar years, and
have been so resident for at least one continuous period of seven years. The
broadcaster must also be incorporated in Hong Kong. Directors ordinarily
resident in Hong Kong must also form the majority of the quorum at its board
meetings. Following the enactment of the Broadcasting Ordinance, there are no
foreign ownership controls over HKC. In other words, HKC's shareholders may be
non-residents of Hong Kong or foreign corporations.
The Broadcasting Ordinance restricts cross-media ownership by barring the
following entities from holding a domestic pay or free television program
service license or exercising control of such licensees unless approval from
the Chief Executive-in-Council is obtained:
o advertising agents;
o companies which are themselves licensees under the Broadcasting
Ordinance;
o sound broadcasting licensees under the Telecommunications Ordinance;
o publishers of Hong Kong newspapers; and
o directors, principal officers, shareholders holding more than a 15%
beneficial interest and any associates of the foregoing.
The Broadcasting Authority is also empowered to obtain information as to
HKC's past and present shareholders.
HKC is prohibited from transferring its Subscription TV License to another
company except with the approval of the Chief Executive-in-Council.
Programming
HKC is required to broadcast announcements of public interest and
publicity material relating to the Broadcasting Authority but is not otherwise
obligated to broadcast a minimum number of channels. The
- 21 -
maximum number of channels is set by frequency availability. Each channel,
except any pay-per-view channels, must be broadcast for not less than 5 hours
per day. We believe we have satisfied these programming requirements.
New Regulatory Developments
The Hong Kong government has adopted the policy of liberalizing the
television broadcasting market, including the pay-TV market, with the aim of
increasing competition. In December 1998, the Hong Kong government adopted a
number of policies designed to liberalize the market and increase competition.
These policies aim to increase competition by requiring HKC to open its
networks, abolishing subscription and advertising royalties, allowing HKC to
deliver telecommunications services using its subscription television network,
lifting the moratorium on pay television and video-on-demand program services,
and opening the market for digital terrestrial television services. The
restrictions on ownership and control were also modified. Some of the policy
decisions have been implemented through the enactment of the Broadcasting
Ordinance in the second half of 2000. The Hong Kong government also awarded
five new pay-TV licenses in late 2000. Four operators have since opted out
from the Hong Kong market and returned their licenses to the Government.
Nonetheless, two new pay-TV services were launched during the third quarter of
2003. They were operated by the incumbent telecommunications service provider,
PCCW, and another telecommunications service provider, Hong Kong Broadband
Network. Galaxy, in which Hong Kong's dominant free TV operator TVB holds 49%,
launched its pay-TV service under the brand name exTV in February 2004.
Regulations on Telecommunications
Overview
The Telecommunications Ordinance regulates the operation of
telecommunications in Hong Kong. The Telecommunications Authority is the
statutory body responsible for regulating and administering the
Telecommunications Ordinance. The Office of the Telecommunications Authority
assists the Telecommunications Authority in administering and enforcing the
provisions of the Telecommunications Ordinance, regulating and licensing
telecommunications, and ensuring the effective operation and successful
development of Hong Kong's telecommunications industry. The Telecommunications
Authority is empowered to issue licenses of the types set out in the
Telecommunications Regulations. The Telecommunications Authority is also
empowered to require a licensee to comply with the conditions of its license
and the Telecommunications Ordinance. The Telecommunications Authority may
suspend or revoke licenses for non-compliance and the Chief Executive in
Council may cancel or suspend a license at any time if he considers that the
public interest so requires.
The Telecommunications Ordinance was amended when the Telecommunications
(Amendment) Ordinance 2000, or the Amended Ordinance, came into effect on June
16, 2000. The general effect of the Amended Ordinance is to enhance
competition safeguards, improve interconnection and access arrangements to
telecommunications services, streamline licensing procedures and provide the
Telecommunications Authority with powers over certain technical areas such as
radio spectrum management. The competitive safeguards, which include
provisions to deal with anti-competitive practices, the abuse of a dominant
position, misleading and deceptive conduct, and discrimination, are to be
administered and enforced by the Telecommunications Authority and represent
the first occasion on which competition law principles have been included in
legislation in Hong Kong. The Amended Ordinance also significantly increases
penalties for breach of license conditions. In addition, under the
Telecommunication (Amendment) (No. 2) Regulations 1999, the scope of services
received and distributed by satellite master antenna television systems
("SMATV") has been extended to cover subscription satellite television
services licensed in Hong Kong and, from January 1, 2000, telecommunications
messages intended for users of the satellite system. In addition, the
Telecommunications Authority issued five wireless fixed telecommunication
network services ("FTNS") licenses in 2000.
Licenses
In general, under the Telecommunications Ordinance, a person who
establishes and maintains a means of telecommunications in Hong Kong, will
require a license to do so.
- 22 -
In order to provide Internet access and services, a public non-exclusive
telecommunications services ("PNETS") license is required to be obtained from
the Telecommunications Authority. i-CABLE WebServe Limited is a wholly owned
subsidiary of the Company and holds a PNETS license to operate our Internet
business. The Telecommunications Authority may cancel or suspend the PNETS
license at any time for up to 12 months for contravention of any provision of
the Telecommunications Ordinance or any condition of the PNETS license.
The FTNS license authorizes HKC to provide local fixed telecommunication
network services utilizing the hybrid fiber coaxial part of its subscription
television network.
The Telecommunications Authority assigned one pair of frequency channels
on the in-building coaxial network (one upstream channel and one downstream
channel) for the operation of its cable modem broadband Internet service.
New Regulatory Developments
In January 2002, the Telecommunications Authority announced its policy on
the implementation of the full liberalization of the local FTNS market in Hong
Kong from January 1, 2003 which follows the liberalization policy announced in
May 1999 to license the operation of additional wireline based fixed networks
when the moratorium on issuing new local FTNS licenses ends on December 31,
2002. Since January 1, 2003, the local and external FTNS market is fully
liberalized and there is no pre-set limit for number of licenses for the
operation of local wireline-based fixed networks. In January 2003, three new
local wireline-based FTNS were granted, including two of which granted to
local wireless FTNS licensees by modifying their licenses to include the
operation of local wireline-based FTNS. As of May 3, 2004, there were 9 local
wireline-based FTNS licensees.
- 23 -
C. Organizational Structure
The chart below represents i-CABLE's organizational structure as of
December 31, 2003. All the companies have been established under the laws of
Hong Kong, except for Apex Victory Limited, i-CABLE China Limited, i-CABLE
Ventures Limited, Kreuger Assets Limited, Moscan Assets Limited and Wisdom
Global Holdings Limited, which were established under the laws of the British
Virgin Islands; and Guangzhou Kuan Xun Customer Services Limited (English
translation/transliteration of Chinese name), which was established under the
laws of China. All the companies are direct or indirect wholly-owned
subsidiaries of i-CABLE.
------------------------------------
| i-CABLE Communications Limited |
------------------------------------
|
---------------------------------------------------------------------------------
| | |
- ----------------------------------------- ------------------------- ------------------------------
| Cable Network Communications Limited | | Apex Victory Limited | | i-CABLE Ventures Limited |
- ----------------------------------------- ------------------------- ------------------------------
| |
| | ---------------------------
| -------------| i-CABLE China Limited |
| | ---------------------------
| |
| | ------------------------------------------
| -------------| i-CABLE Satellite Television Limited |
| ------------------------------------------
| ----------------------------------------
|------------------------| Hong Kong Cable Television Limited |
| ----------------------------------------
|
| ----------------------------------------
|------ | Hong Kong Cable Enterprises Limited |
| ---------------------------------------
| -----------------------------
|-------- | i-CABLE Cineplex Limited |
| -----------------------------
|
| --------------------------------
-----------------------| i-CABLE Network Limited |
| --------------------------------
|
| --------------------------------
-----------------------| i-CABLE WebServe Limited |
| --------------------------------
|
| ------------------------------------
-----------------------| Kreuger Assets Limited |
| ------------------------------------
|
| --------------------------------------------------
-----------------------| Maspon Company Limited |----------
| -------------------------------------------------- |
| |
| | 99.9975%
| 0.0025% -------------------------------------
|---------------------------------------------------------------| The Network Leasing Partnership |
| -------------------------------------
|
| -------------------------------------------------
-----------------------| Moscan Assets Limited |
| -------------------------------------------------
|
| ----------------------------------------------------
-----------------------| New Television and Film International Limited |
| ----------------------------------------------------
|
| -------------------------------------------------
-----------------------| Rediffusion Satellite Services Limited |
| -------------------------------------------------
|
| -------------------------------------------------
-----------------------| Rediffusion (Hong Kong) Limited |
| -------------------------------------------------
|
| -------------------------------------------------
-----------------------| Rediffusion Engineering Limited |
| -------------------------------------------------
|
| ------------------------------------------------
------------------------| Riddlewood Company Limited |----------
| ------------------------------------------------ |
| |
| | 99.9975%
| 0.0025% ---------------------------------
|-------------------------------------------------------------------| The Cable Leasing Partnership |
| ---------------------------------
| ------------------------------------
|--------------| Wisdom Global Holdings Limited |
| ------------------------------------
| -----------------------------------------------
|--------------------------------------------------------| Guangzhou Kuan Xun Customer Services |
| Limited (English translation/transliteration |
| of Chinese Name) |
| -----------------------------------------------
- 24 -
All of the subsidiaries are 100% owned unless otherwise specified and
are consolidated in our financial statements.
D. Property, Plant and Equipment
We own most of our cable systems distribution networks and lease some
fiber links for our microwave network. We have obtained licenses to use the
signal reception sites that house our antenna towers and head-ends and
microwave complexes. We have entered into an agreement with Wharf T&T for the
shared use and maintenance of some of the ducts that house our network. We
lease office space from The Wharf (Holdings) Limited in Tsuen Wan, Hong Kong,
for our principal executive offices and programming production studios. The
physical components of our network require maintenance and periodic rebuilding
to keep pace with technological advances. We believe that our properties, both
owned and leased, are in good condition and are legally and physically
suitable and adequate for our business operations as presently conducted and
as proposed to be conducted.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
You should read the following discussion and analysis in conjunction with
the Consolidated Financial Statements included elsewhere in this annual
report. Unless otherwise indicated, all financial information in this annual
report is presented in Hong Kong Dollars as of December 31, 2003. The U.S.
dollar translations provided in this annual report are, unless otherwise
indicated, calculated at the Hong Kong Dollar Noon Buying Rate at December 31,
2003, which was HK$7.764 per US$1.00. Sums may not add due to rounding.
Overview
i-CABLE was incorporated under the laws of Hong Kong in May 1999. The
following discussion reflects our financial condition and results of
operations. Our reorganization was accounted for as a reorganization of
businesses under common control. Accordingly, our consolidated financial
statements were prepared on the basis of historical costs and as if the
consolidated companies had been part of i-CABLE throughout the periods
presented.
This discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements and Notes thereto presented
in this annual report. The information presented below has been extracted from
the accounts of the Company and its subsidiaries as prepared in accordance
with Hong Kong GAAP. A reconciliation of our net profit/loss and shareholders'
equity as prepared in accordance with U.S. GAAP is also separately provided in
note 33 to our consolidated financial statements.
HKC, our subsidiary, launched its pay-TV service in Hong Kong in October
1993 and is Hong Kong's leading pay-TV system operator. As of December 31,
2003, our network passed over 2,010,000 homes, of which 1,942,000 have been
connected to our fiber network. As of December 31, 2003, we had 656,000 pay-TV
subscribers.
Through our HFC network we began to offer broadband Internet access
service in March 2000. As of December 31, 2003, we had 258,000 broadband
Internet subscribers. Since the end of 2000, we have conducted field trials to
distribute voice service using Voice over Internet Protocol technology over
our network.
The provision of television broadcasting services in Hong Kong is
regulated by the Broadcasting Authority, a statutory body of the Hong Kong
government. HKC is a licensed television broadcaster and is subject to the
provisions of Hong Kong's Broadcasting Ordinance and other applicable laws,
conditions and codes of practice. In order to provide telecommunications
services, including broadband Internet access service over our fiber coaxial
cable network, we obtained a Fixed Telecommunications Network Services license
from Hong Kong's Telecommunications Authority in January 2000.
We generated approximately 80.9% of our revenues from our pay-TV segment,
with the balance derived from our Internet and Multimedia segment.
- 25 -
Subscription fees charged to our pay-TV customers for basic, premium and
pay-per-view services, and for provision of installation and other support
services accounted for the majority of our pay-TV revenue. We derive
additional revenues from advertising income, program-guide sales, satellite
television systems services, multimedia dial-up and broadband access services.
We have increased our pay-TV revenues in each of the past three fiscal years
primarily by attracting more subscribers.
In 2003, broadband revenues constituted over 93.3% of our Internet and
Multimedia revenue, with additional revenues coming from our dial-up Internet
access, portal subscriptions and advertisement fees.
Our operating expenses consist primarily of:
o programming costs;
o network and other operating expenses;
o selling, general and administrative expenses; and
o depreciation
Programming costs, representing the largest component of our operating
costs, are costs incurred for the acquisition, production and broadcasting of
programming, and the amortization of programming rights. Programming-related
personnel costs accounted for approximately 45.1% of total programming costs
in 2003.
Network and other operating expenses include our network maintenance and
operating costs for the expanding network, telecommunication expenses for
Internet services, other technical support costs as well as our customer
service and billing costs.
Selling, general and administrative expenses include expenses incurred for
marketing, sales and administration, information systems support and other
corporate support services.
Depreciation includes the depreciation of property, plant and equipment.
Early Redemption of Convertible Bonds
On November 24, 1999, we issued 4% fixed rate convertible bonds in an
aggregate principal amount of HK$1,800 million. These convertible bonds are
due for redemption at face value on November 23, 2003 and are held by Wharf
Communications Limited (formerly known as Wharf Communications Investments
Limited) ("Wharf Communications"), a wholly-owned subsidiary of our
controlling shareholder, The Wharf (Holdings) Limited. The convertible bonds
are convertible into our ordinary shares.
On September 17, 2002, we entered into a deed with Wharf Communications to
early redeem HK$1,500 million of these convertible bonds at the face value
redemption price of HK$1,500 million plus accrued interest from July 1, 2002
up to but excluding the completion date. On October 22, 2002, our independent
shareholders approved the early redemption and the transaction was completed
in late October 2002.
Prior to the early redemption, we had surplus funds of approximately
HK$1,500 million, which earned a yield of less than 2% per annum pending the
redemption of the convertible bonds, and which was applied towards the early
redemption. The early redemption resulted in a reduction of our net financing
costs. The balance of the outstanding convertible bonds amounting to HK$300
million was fully redeemed upon maturity in November, 2003.
See also "Item 7--Major Shareholders and Related Party
Transactions--Related Transactions."
Non-GAAP Financial Measures
We use a financial measure that we defined as adjusted EBITDA to provide
additional information about our operating performance. Adjusted EBITDA refers
to our earnings before the following items:
- 26 -
o interest income;
o finance costs;
o non-operating income/expenses;
o provision for income tax;
o depreciation of property, plant and equipment (excluding network
rental income and expense), but after amortization of programming
rights; and
o impairment loss on investments.
Adjusted EBITDA is not a standard measure under either Hong Kong GAAP or
U.S. GAAP. However, we believe the investor community commonly uses this type
of financial measure to assess the operating performance of companies in our
market sector.
As a measure of our operating performance, we believe that the most
directly comparable Hong Kong GAAP and U.S. GAAP measure to adjusted EBITDA is
net income. We operate in a capital intensive industry. We use adjusted EBITDA
in addition to net income because net income includes many accounting items
associated with capital expenditures, such as depreciation of property, plant
and equipment. These accounting items may vary between companies depending on
the method of accounting adopted by a company. By minimizing differences in
capital expenditures and the associated depreciation expenses as well as
reported tax positions, adjusted EBITDA provides further information about our
operating performance and an additional measure for comparing our operating
performance with other companies' results.
The following table reconciles our net income under Hong Kong GAAP to our
definition of adjusted EBITDA for the periods indicated:
As of December 31,
----------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
HK$ HK$ HK$ HK$ HK$
(in millions)
Adjusted EBITDA 225 442 615 730 789
Adjustments:
Network rental income........................ 208 - - - -
Network rental expense....................... (117) - - - -
Interest income.............................. 11 101 58 26 9
Finance costs................................ (90) (72) (72) (62) (16)
Non-operating income/(expenses).............. (6) (2) 1 - (10)
Provision for income tax..................... 1 - - - (13)
Impairment loss on investments............... - - - (73) -
Depreciation................................. (469) (449) (435) (504) (539)
Net profit/(loss)............................ (237) 20 167 117 220
You should not consider our definition of adjusted EBITDA in isolation or
construe it as an alternative to net income or as an indicator of operating
performance or any other standard measure under Hong Kong GAAP or U.S. GAAP.
Our definition of adjusted EBITDA does not account for taxes and other
non-operating cash expenses. Our adjusted EBITDA measures may not be
comparable to similarly titled measures used by other companies.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with Hong Kong GAAP.
The preparation of these financial statements requires our management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses as well as the disclosure of contingent
assets and liabilities. Our management evaluates their estimates and
assumptions including those related to revenue recognition, useful lives of
property, plant and equipment and impairment of long lived assets at each
balance sheet date. Actual results may differ from these estimates under
different assumptions or conditions.
- 27 -
We believe that the following critical accounting policies have a more
significant impact on our financial statements, either because of the
significance of the financial statement elements to which they relate, or
because they require judgment and estimations.
Revenue recognition. Revenues from rendering of services is recognized
only when the outcome of a transaction can be estimated reliably with the
amount recognized by reference to the stage of completion of the transaction
at the balance sheet date. The outcome of a transaction can be estimated
reliably when all of the following conditions are satisfied: (a) the amount of
revenues can be measured reliably; (b) it is probable that the economic
benefits associated with the transaction will flow to us; (c) the stage of
completion of the transaction at the balance sheet date can be measured
reliably; and (d) the costs incurred for the transaction and the costs to
complete the transaction can be measured reliably. In certain circumstances,
it is necessary to apply the recognition criteria to the separately
identifiable components of a single multiple-element transaction in order to
reflect the substance of the transaction. Please see note 2(h) to our
consolidated financial statements for further details of our revenue
recognition policies.
Useful lives of property, plant and equipment. The useful lives of
property, plant and equipment are estimated in order to determine the amount
of depreciation expense to be recorded during any reporting period. The useful
lives are estimated at the time the assets are acquired and are based on
historical experience with similar assets, also taking into account the
anticipated technological or industrial changes. If these changes were to
occur more rapidly than anticipated or in a different form than anticipated,
the useful lives assigned to these assets may need to be shortened, resulting
in the recognition of increased depreciation expense in future periods.
Estimation of useful lives involves judgment and assumptions. Our policies
regarding accounting for these assets are included in note 2(d) to our
consolidated financial statements.
Impairment of long lived assets. Long lived assets including property,
plant and equipment, programming library and goodwill (including those
initially taken to reserves) are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. If any such indication exists, the asset's recoverable amount is
estimated. An impairment loss is recognized whenever the carrying amount of an
asset exceeds its recoverable amount. The recoverable amount of an asset is
the greater of its net selling price and value in use. In assessing value in
use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of time
value of money and the risks specific to the asset. Our accounting policies on
impairment of assets are further detailed in note 2(t) to our consolidated
financial statements.
Results of Operations
The following table summarizes our results of operations under Hong Kong
GAAP for the years ended December 31, 2001, 2002 and 2003:
Year ended December 31,
----------------------------------------------
2001 2002 2003
---------- ---------- ----------
(HK$ in millions)
Service revenues 1,931 2,161 2,143
---------- ---------- ----------
Programming costs................................................. 602 732 649
Network and other operating expenses.............................. 364 351 361
Selling, general and administrative expenses...................... 350 348 343
---------- ---------- ----------
1,316 1,431 1,353
Depreciation...................................................... 435 504 539
---------- ---------- ----------
Total operating expenses.......................................... 1,751 1,935 1,892
Profit from operations............................................ 180 226 251
Non-operating income/(expenses)................................... 1 (0) (10)
Interest income................................................... 58 26 8
Impairment loss on investments.................................... - (73) -
- 28 -
Finance costs..................................................... (72) (62) (16)
---------- ---------- ----------
Profit before taxation............................................ 167 117 233
Provision for income tax.......................................... - - (13)
---------- ---------- ----------
Net profit........................................................ 167 117 220
========== ========== ==========
2003 Compared to 2002
Service Revenues
Our service revenues in 2003 decreased slightly by HK$18 million (US$2
million), or 0.8%, to HK$2,143 million (US$276 million) from HK$2,161 million
in 2002. Service revenues from our pay-TV business in 2003 grew by HK$23
million (US$3 million), or 1.4%, to HK$1,734 million (US$223 million) from
HK$1,711 million in 2002 due to a growth in subscription which more than
offset the decline in airtime sales revenues attributable to the absence of
the 2002 World Cup. During the same period, service revenues from our
Internet-related services decreased by HK$41 million (US$5 million), or 9.2%,
to HK$409 million (US$53 million) from HK$450 million during the previous year
as the growth in the number of broadband subscribers was more than offset by a
fall in broadband ARPU. However, both ARPU and revenue began to recover in the
second half of 2003. Service revenues attributable to our Internet-related
services accounted for 19.1% of our total service revenues in 2003,
representing a 1.7% decrease as compared to 20.8% during the previous year.
Operating Expenses
Our operating expenses including depreciation decreased by HK$42 million
(US$5 million), or 2.2%, to HK$1,892 million (US$244 million) in 2003 from
HK$1,934 million in 2002, with the following breakdown:
Programming Costs. Programming costs decreased by 11.3% to HK$650 million
(US$84 million) in 2003 from HK$732 million in 2002, primarily due to the
absence of the costs associated with our carriage of the 2002 FIFA World Cup
and stringent cost control related to our ongoing price negotiation with
content providers, which more than offset the additional costs associated with
the launch of new channels.
Network and Other Operating Expenses. Network and other operating
expenses increased 2.8% to HK$361 million (US$46 million) in 2003 from HK$351
million in 2002, primarily due to an increase in network costs, repair and
maintenance costs and the incremental customer service costs, as partially
offset by lower international bandwidth costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased slightly by 1% to HK$343 million (US$44
million) in 2003 from HK$347 million in 2002 due mainly to lower marketing
costs as a result of the absence of major marketing campaigns such as the 2002
World Cup acquisition promotion, despite an expansion of the sales force.
Depreciation. Depreciation expenses increased by 6.8% to HK$539 million
(US$69 million) in 2003 from HK$504 million in 2002 due mainly to capital
investments in digital set-top boxes, cable modems and related network
equipment to cater for subscriber growth.
Operating Profit
We recognized an operating profit of HK$251 million (US$32 million) in
2003, representing a HK$24 million (US$3 million), or 10.7%, increase compared
to HK$226 million in 2002.
Interest Income and Finance Costs
Interest income dropped by HK$18 million (US$2 million), or 68%, to HK$8
million (US$1 million) in 2003 from HK$26 million in 2002 due to the low
interest rate environment and a significant reduction in surplus funds after
the early redemption of our fixed rate convertible bonds in October 2002.
Finance costs also decreased by HK$47 million (US$6 million), or 75%, to HK$16
million (US$2 million) in 2003 from
- 29 -
HK$62 million in 2002 due to the partial redemption in October 2002 and full
redemption in November 2003 of our fixed rate convertible bonds.
Impairment Loss
We did not make any provision for impairment loss in 2003 as compared to a
HK$73 million (US$9 million) provision in 2002 for the diminution in value of
our venture investments in the technology sector.
Net Profit
We recorded a net profit after taxation of HK$220 million (US$28 million)
in 2003, representing an increase of HK$103 million (US$13 million), or 88.0%,
from HK$117 million in 2002. Basic and diluted earnings per share for 2003
were 10.9 cents as compared to basic and diluted earnings per share of 5.8
cents in 2002.
2002 Compared to 2001
Service Revenues
Our service revenues in 2002 increased by HK$230 million (US$29 million),
or 12%, to HK$2,161 million (US$277 million) from HK$1,931 million in 2001.
Service revenues from our pay-TV business in 2002 grew by HK$115 million
(US$15 million), or 7%, to HK$1,711 million (US$219 million) from HK$1,595
million in 2001 due to increases in both subscription and airtime sales
revenues. During the same period, service revenues from our Internet related
services rose by HK$114 million (US$15 million), or 34%, to HK$450 million
(US$58 million) from HK$336 million during the previous year as the growth in
the number of broadband subscribers was partially offset by a fall in
broadband ARPU. Service revenues attributable to our Internet related services
accounted for 21% of our total service revenues in 2002, representing an
increase as compared to 17% during the previous year.
Operating Expenses
Our operating expenses including depreciation increased by HK$183 million
(US$23 million), or 10%, to HK$1,935 million (US$248 million) in 2002 from
HK$1,751 million in 2001, with the following breakdown:
Programming Costs. Programming costs increased by 22% to HK$732
million (US$94 million) in 2002 from HK$602 million in 2001, primarily due
to costs related to our carriage of the 2002 FIFA World Cup in Hong Kong.
Network and Other Operating Expenses. Network and other operating
expenses decreased 4% to HK$351 million (US$45 million) in 2002 from
HK$364 million in 2001, primarily due to lower international bandwidth
costs, which were partially offset by higher customer service costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 1% to HK$348 million (US$44 million)
in 2002 from HK$350 million in 2001 due mainly to lower marketing and
overhead costs.
Depreciation. Depreciation expenses increased by 16% to HK$504 million
(US$65 million) in 2002 from HK$435 million in 2001 due mainly to capital
investments in digital set-top boxes, our Digital News Centre, cable
modems and related network equipment.
Operating Profit
We recognized an operating profit of HK$226 million (US$29 million) in
2002, representing a HK$46 million (US$6 million), or 26%, improvement
compared to HK$180 million in 2001. This was primarily due to our high
operating gearing with relatively low marginal costs of servicing each
additional pay-TV or broadband subscriber.
- 30 -
Interest Income and Finance Costs
Interest income dropped by HK$32 million (US$4 million), or 55%, to HK$26
million (US$3 million) in 2002 from HK$58 million in 2001 due to the low
interest rate environment and a significant reduction in surplus funds after
the early redemption of our fixed rate convertible bonds in October 2002.
Finance costs
also decreased by HK$10 million (US$1 million), or 13%, to HK$62 million (US$8
million) in 2002 from HK$72 million in 2001 due to the early redemption of our
fixed rate convertible bonds.
Impairment Loss
We made a provision of HK$73 million (US$9 million) for the diminution in
value of our venture investments in the technology sector out of a total
investment cost of over HK$93 million (US$12 million). Following this
provision, the net amount representing venture investments in our balance
sheet as at December 31, 2002 was HK$21 million (US$3 million).
Net Profit
We recorded a net profit after taxation of HK$117 million (US$15 million)
in 2002, representing a decrease of HK$50 million (US$6 million), or 30%, from
HK$167 million in 2001. This decrease was primarily due to the impairment
provision for our venture investments of HK$73 million (US$9 million). Basic
and diluted earnings per share for 2002 were 5.8 cents as compared to basic
and diluted earnings per share of 8.3 cents in 2001.
U.S. GAAP Reconciliation
Our consolidated financial statements are prepared in accordance with Hong
Kong GAAP which differs in certain significant respects from U.S. GAAP.
The description of the significant differences between Hong Kong GAAP and
U.S. GAAP as they relate to i-CABLE, including deferred pre-maturity and
franchise costs, the offset of goodwill against reserves and related goodwill
amortization, the reversal of impairment writedown, provision for deferred
taxes liabilities and recognition of deferred tax assets, installation fees,
costs and subscription fees, investment write down to earnings and share
option compensation expense, is provided in note 33 to our consolidated
financial statements. A reconciliation of net profit/(loss) for the three
years ended December 31, 2001, 2002 and 2003 and shareholders' equity as of
December 31, 2002 and 2003 under Hong Kong GAAP to the comparable amounts
determined under U.S. GAAP is also provided in note 33 to our consolidated
financial statements.
- 31 -
Net profit/(loss) and shareholders' equity under Hong Kong GAAP as
compared to the amounts determined under U.S. GAAP is set forth below:
As of and for the year ended December 31,
----------------------------------------------------------
2001 2002 2003
---- ---- ----
(HK$ in millions)
Net profit/(loss):
Hong Kong GAAP........................................ 167 117 220
U.S. GAAP............................................. (6) 100 128
Shareholders' equity:
Hong Kong GAAP (2001 and 2002: Restated).............. 1,456 1,525 1,685
U.S. GAAP............................................. 1,705 1,754 1,824
B. Liquidity and Capital Resources
Liquidity
Since the commencement of our business, we have financed our operations
and capital expenditure requirements primarily through shareholder's loan from
Wharf Communications and cash flows from operations, and the initial public
offering in 1999. In October 2002, we early redeemed HK$1,500 million out of
HK$1,800 million outstanding of our fixed rate convertible bonds. The balance
of the convertible bonds amounting to HK$300 million was fully redeemed upon
maturity in November 2003. These fixed rate convertible bonds were held by a
subsidiary of The Wharf (Holdings) Limited. See "Item 5 - Operating and
Financial Review and Prospects - Operating Results - Early Redemption of
Convertible Bonds" and "Item 7 - Major Shareholders and Related Party
Transactions - Related Transactions." We repaid our bank borrowings during
2003 and as of December 31, 2003, we were debt-free with a surplus cash of
HK$28.9 million. As of December 31, 2003, we had current assets of HK$246.6
million and current liabilities of HK$883.6 million. Our current ratio was
27.9%.
The surplus cash of HK$28.9 million, together with expected cash flow from
operations are expected to be sufficient to fund our current operational and
capital expenditure plans.
During 2003, net cash generated from operating activities amounted to
HK$719.5 million (US$92.7 million), a decrease of HK$143.8 (US$18.5 million)
or 16.7% from HK$863.4 million in 2002. Cash generated from investing
activities in 2003 totaled HK$49.5 million (US$6.4 million), compared to cash
outflow from investing activities of HK$883.7 (US$113.8 million) in 2002,
mainly due to the redemption of deposits placed with financial institutions in
2003. We believe that cash generated from our operations and funds available
from external sources are sufficient to cover our operating and capital
expenditures.
- 32 -
The following table sets forth a summary of our statements of cash flows
under Hong Kong GAAP for the years ended December 31, 2001, 2002 and 2003:
Year ended December 31,
-------------------------------------------------
2001 2002 2003
----------- ------------ -----------
(HK$ in millions)
Net cash inflow from operating activities.......................... 734.1 863.4 719.6
Net cash inflow/(outflow) from investing activities................ (1,063.2) (883.7) 49.5
Net cash outflow from financing activities......................... - (1,177.1) (746.9)
----------- ------------ -----------
Net increase/(decrease) in cash and cash equivalents............... (329.1) (1,197.4) 22.2
=========== ============ ===========
If the primary sources of funding are inadequate to meet our liquidity
requirements and borrowing commitments, or if we pursue new projects, we may
need to raise capital in the future. Depending on our capital requirements,
market conditions and other factors, we may raise additional funds through
debt or equity offerings or through the sale of assets. We have arranged short
term bank credit facilities of approximately HK$560 million to meet any future
cash outflow. In the event that such financing cannot be obtained, we may have
to scale back our business expansion plans.
Capital Resources
Our cash outflow from capital expenditures decreased by HK$245.9 million
(US$31.7 million) or 40.4% to HK$362.9 million (US$46.7 million) in 2003 from
HK$608.7 million in 2002. The capital expenditures were incurred primarily
from the rollout of our broadband service, the construction of fiber trunk and
in-building coaxial networks, and the digitization of our news broadcasting
facilities.
Our cash outflow from the purchase of our programming library for the year
ended December 31, 2003 decreased by HK$16.9 million (US$2.2 million) or 15.7%
to HK$90.7 million (US$11.7 million) from HK$107.7 million in 2002.
Contractual Obligations and Commitments
The following table summarizes our material contractual obligations and
commitments at December 31, 2003:
2005- 2008 and
2004 2007 thereafter Total
-------------- ------------ ---------------- ---------------
(HK$ in millions)
Operating leases.......................................... 32.0 43.5 2.7 78.2
Capital commitments
Authorized and contracted for:
Plant and equipment ...................................... 77.0 1.2 - 78.2
Programming rights ....................................... 28.3 30.4 - 58.7
----------------------------------------------------------------
105.3 31.6 - 136.9
Capital commitments
Authorized and contracted for:
Plant and equipment................................... 154.5 - - 154.5
Programming rights.................................... 21.1 4.6 - 25.7
-------------- --------------- -------------- ---------------
175.6 4.7 - 180.2
============== =============== ============== ===============
We have operating leases for our premises and certain office equipment,
some of which have future minimum lease payments and do not allow for early
termination by us without cause. As of December 31, 2003, our minimum lease
payment commitments under such operating leases totaled HK$78.2 million
(US$10.05 million).
- 33 -
As of December 31, 2003, our capital commitments in respect of plant,
equipment, leasehold improvements and programming rights amounted to HK$136.9
million (US$17.63 million). We expect to meet these commitments from our
current cash on hand and additional cash to be generated from future
operations.
Prospects
Pay-TV
We plan to increase our pay-TV subscriber base by marketing through direct
sales, promotions, and advertising. In addition, we will continue to explore
the opportunities for launching new services, by offering more tiered packages
and by expanding the line-up of pay-per-view channels made possible by the
expanded effective network capacity following digitization. Four premium
packages have been introduced since 2002. We will continue to introduce new
packages and programs, making full use of the expanded network capacity
following digitization to derive additional income. At the same time, to
broaden our appeal to viewers, we have launched a 24-hour entertainment news
channel to provide round-the-clock local updates on happenings in the local
and global entertainment world. Packaged with an innovative concept combining
fast-paced news reports and lifestyle magazine variety programs, we believe
the channel has received wide recognition in Hong Kong.
Illegal viewing activities have been a major threat to our pay-TV
business since 2001. Although we have been migrating our transmission from
analog to digital platforms in order to better control and limit illegal
viewing activities (with our digital conversion program was over two-thirds
complete by December 2003), illegal activities have continued and we are aware
that pirated digital set-top-boxes are available in the market. We have
substantially completed the digital migration program as of the date of this
Form 20-F. However, even after the migration, we expect manufacturers or
vendors of unauthorized pay-TV decoders to attempt to overcome our digital
encryption methods. If we fail to deploy appropriate and timely
countermeasures in response to such activities, illegal viewing activities may
grow. Such illegal viewing activities will adversely affect the growth of our
pay-TV subscriber base and our subscription revenue. See "Item 3 - Key
Information - Risk Factors - Illegal viewing activities may affect our pay-TV
subscriber growth."
Internet and Multimedia
We intend to increase our broadband subscriber base by marketing through
direct sales, promotions, advertising, and offering competitive prices. The
growth of our broadband subscriber base may require continued growth in the
demand for broadband services in Hong Kong, although critical issues
concerning the increased use of the Internet may adversely affect future
demand for our broadband Internet access service. See "Item 3--Key
Information--Risk Factors--Demand for our broadband Internet access service
may not continue to grow."
The markets for Internet access and related services in Hong Kong are
highly competitive. This high level of competition may reduce our broadband
revenue, resulting in a decrease in our cash flow and operating margin. In
2002, we offered an aggressive marketing initiative for our broadband service
to maintain subscription growth momentum. After the initial focus on capturing
market share, service operators in the broadband segment began to relax price
competition toward the end of 2003, while revenues began to recover. However,
we believe broadband services have become a commodity product that is highly
sensitive to price. Competition in the segment will continue to exert pressure
on our income and market share. We will continue to enhance our service
quality and introduce more value-added services to expand our market share in
the broadband segment. See "Item 3--Key Information--Risks Factors--The
competition we face from other television broadcasters and Internet service
providers may cause us to lose market share."
New Services
We continue to look for ways to offer new services by leveraging our fiber
coaxial cable network, local content production expertise, as well as our
brandname, marketing and customer service infrastructure to launch new and
enhanced Internet and telecommunications services. With our capacity to offer
live digital content as well as our abundance of digital content in library,
we have begun offering content to other service operators, such as new 3G
mobile service operators.
- 34 -
Satellite Television Service in Mainland China
We launched a satellite channel targeted mainly at Mainland China in
October 2003. The satellite channel has been granted approval to broadcast to
hotels rated at or above three stars, foreign compounds and other
select areas in Mainland China. The channel features live and updated
reporting of events in the entertainment world. Since its launch, the channel
has received encouraging feedback from Mainland television stations. The
relevant television market in China is highly competitive. The channel is
expected to incur losses in its initial years of operation and there is no
assurance that the channel will become profitable. See "Item 3--Key
Information--Risk Factors--We recently launched a satellite channel targeted
at Mainland China. The channel is expected to incur losses in its initial
years of operations and it may never be profitable."
C. Research and Development, Patents and Licenses, etc.
We did not engage in research and development activities during the years
ended December 31, 2003, 2002 and 2001.
D. Trend Information
The significant trends that are expected to have a material effect on our
financial performance and operating results for the current year are set out
below:
Since the launch of our pay-TV service in October 1993, our total pay-TV
subscribers have increased annually. During 2003, our total pay-TV subscribers
have increased by 8.1% to 656,000.
In the third quarter of 2003, two new pay-TV services were launched in the
market. They were operated by the incumbent telecommunications service
provider, PCCW, and another telecommunications service provider, Hong Kong
Broadband Network. In February 2004, Galaxy Satellite Broadcast Limited, or
Galaxy, a company that is 49%-owned by TVB, the dominant free television
operator in Hong Kong, launched its pay-TV service under the brand name exTV.
Notwithstanding the competition from these new pay-TV operators in the
market, our total pay-TV subscribers have continued to grow so far in 2004 at
the average rate not materially worse than the average rate experienced during
the same period of 2003. Although our total pay-TV subscribers have continued
to grow so far in 2004, the new pay-TV operators may cause us to lose
subscribers in future. See "Item 3 - Key information - Risk Factors - Pay-TV
competition may increase due to the Hong Kong government's deregulation of the
television broadcasting and telecommunications sectors. Any increase in
competition may cause us to lose subscribers and encounter pricing pressure."
E. Off-balance Sheet Arrangements
None.
F. Tabular Disclosure of Contractual Obligations
See "Item 5--Operating and Financial Review and Prospects--Liquidity and
Capital Resources--Capital Resources--Contractual Obligations and
Commitments."
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Our directors and senior management are as follows:
Age as of
Name December 31, 2003 Positions
----------------------------------------------- -------------------- ---------------------------------------------------
Mr. Stephen T. H. Ng........................... 51 Chairman, President and Chief Executive Officer
- 35 -
Dr. David K. D. Hsu(2)......................... 61 Director
Mr. Fa-Kuang Hu, GBS, CBE, JP.................. 80 Director
Mr. Quinn Y.K. Law(3).......................... 51 Director
Mr. Victor C. W. Lo, GBS, JP................... 53 Director
Dr. Dennis T. L. Sun, BBS, JP.................. 53 Director
Mr. Samuel S. F. Wong(3)....................... 42 Director and Chief Financial Officer
Sir Gordon Y.S. Wu, KCMG, FICE................. 68 Director
Mr. Vincent T. Y. Lam.......................... 53 Executive Director - Technology and Network
Services, HKC(1)
Mr. Eric Lo.................................... 53 Executive Director - Cable Subscription
Services, HKC(1)
Mr. Benjamin W. S. Tong........................ 54 Executive Director - Multimedia Services, HKC(1)
Mr. Siuming Y.M. Tsui.......................... 50 Executive Director - Programming Services,
HKC(1)
Mr. Garmen K. Y. Chan......................... 50 Vice President - External Affairs
Mr. Ronald Y.C. Chiu........................... 51 Vice President- News and Sports, HKC
Mr. Paul K. S. Lo.............................. 48 Vice President - Human Resources and
Administration
Mr. Simon K. K. Yu............................. 50 Vice President - Procurement
Mr. Samuel C. C. Tsang......................... 47 Chief Operating Officer - Hong Kong Cable
Enterprises Limited
- ---------------------------------------
1. HKC - Hong Kong Cable Television Limited.
2. Dr. David K.D. Hsu retired after our Company's Annual General Meeting
on May 29, 2003.
3. Mr. Quinn Y.K. Law and Mr. Samuel S.F. Wong were appointed Directors
of the Company on April 1, 2003.
Directors
Stephen T. H. Ng. Mr. Ng became Chairman of our Company in August 2001. He
has been a Director, President and Chief Executive Officer since 1999 and
formerly was the Deputy Chairman of the Company. He is also the deputy
chairman and managing director of The Wharf (Holdings) Limited, deputy
chairman of Wheelock and Company Limited ("Wheelock"), a director of Joyce
Boutique Holdings Limited, and chairman, president and chief executive officer
of Wharf T&T. He serves as a member of the General Committee of the Hong Kong
Chamber of Commerce.
David K. D. Hsu. Dr. Hsu has been a Director of the Company since 2000. He
retired after our Annual General Meeting on May 29, 2003. Dr. Hsu is also the
chairman of Multi-Fineline Electronix, Inc., a circuit manufacturer in the
U.S., a director of MedicineNet, Inc., Webzter, Inc., California
Gastroenterology Network, and the former chairman of First Internet Franchise
Corporation. Furthermore, he is a member of Orange County Medical Association,
American Society of Gastrointestinal Endoscopy and an associate clinical
professor of medicine, University of California, Irvine.
Fa-Kuang Hu, GBS, CBE, JP. Mr. Hu has been a Director of the Company since
1999. He is also the chairman of Ryoden Development Limited and is a director
of Hysan Development Company Limited.
Quinn Y.K. Law. Mr. Law has been a Director of the Company since April
2003. He is also a director of The Wharf (Holdings) Limited, Modern Terminals
Limited and Wharf T&T.
- 36 -
Victor C. W. Lo, GBS, JP. Mr. Lo has been a Director of the Company since
2000. He is also the chairman and chief executive of publicly-listed Gold Peak
Industries (Holdings) Limited. He is currently chairman of Hong Kong Science
and Technology Parks Corporation, council chairmen of The Hong Kong
Polytechnic University and chairman of the Board of Governors, Hong Kong
Design Centre. He is also a member of the Steering Committee on Innovation and
Technology, the Greater Pearl River Delta Business Council, the Exchange Fund
Advisor Committee and a council member of the Hong Kong Trade Development
Council. He was awarded the Gold Bauhinia Star by the Government of the HKSAR
in July 2001.
Dennis T. L. Sun, BBS, JP. Dr. Sun has been a Director of the Company
since December 2001. He is the chairman and managing director of
publicly-listed China Hong Kong Photo Products Holdings Limited. Furthermore,
he is the chairman of the Board of Governors of the Hong Kong Arts Centre,
deputy chairman of the Hong Kong Management Association and a council member
of The City University of Hong Kong. He has also been the vice patron of the
Community Chest of Hong Kong from 1999 to 2004. He is the honorary chairman of
the Hong Kong Photo Marketing Association, the life honorary advisor of the
Photographic Society of Hong Kong and the founding member of the China Charity
Foundation. He was awarded the Bronze Bauhinia Star in 1999 and appointed a
Justice of the Peace in 2002.
Samuel S. F. Wong. Mr. Wong has been a Director of the Company since April
2003. He joined HKC in 1993 and was appointed as the Chief Financial Officer
of the Company and HKC in February 2002. He is currently responsible for
finance, corporate development, accounting, planning, treasury, management
information systems, investor relations, investment projects, and commercial
dealings with acquired channels. Mr. Wong previously worked in Toronto, Canada
with the investment and corporate banking group of the Bank of Nova Scotia and
as a chartered accountant with Price Waterhouse.
Gordon Y. S. Wu, KCMG, FICE. Sir Gordon Wu has been a Director of the
Company since October 2001. He is the chairman as well as the founder of
publicly-listed Hopewell Holdings Limited. He is active in civic and community
services, and has received many awards and honors which include, inter alia,
chairmanship of The City University of Hong Kong since 2004, membership in the
Chinese People's Political Consultative Conference, the People's Republic of
China since 1983, and membership in the Greater Pearl River Delta Business
Council since 2004. He is also a stalwart supporter of his alma mater
Princeton University, USA where he earned his Bachelor of Science in
Engineering degree in 1958.
Senior Management
Stephen T. H. Ng. See "Directors" above.
Samuel S. F. Wong. See "Directors" above.
Vincent T. Y. Lam. Mr. Lam joined Wharf Communications in 1992 as Vice
President - Planning, to lead its investment in pay-TV and telecommunications.
In 1995, Mr. Lam was appointed chief operating officer of i-CABLE Network
Limited responsible for the rollout and deployment of cable network
infrastructure in Hong Kong. In 1999, Mr. Lam became Strategic Planning
Director of HKC, responsible for legal, regulatory and long-term planning. He
was appointed as executive director, Technology and Network Services of HKC in
February 2002. Mr. Lam has over 20 years of experience in the
telecommunications industry in the United States and Asia. Prior to joining
Wharf Communications, Mr. Lam was general manager of business development in
Asia for US West International.
Eric Lo. Mr. Lo joined HKC in 1993 as Marketing and Sales Director to
create and manage HKC's marketing and sales organization. He was appointed
Cable Operations Director in 1995 and became executive director, Cable
Subscription Services of HKC in February 2002. Mr. Lo has an extensive
background in consumer marketing. Prior to joining HKC, Mr. Lo was associated
with American Express, Sears Roebuck and The Bank of Montreal.
Benjamin W. S. Tong. Mr. Tong joined HKC in 1995 to manage the Marketing
and Sales Department in the Cable Operations Division. He was appointed Cable
Multimedia Services Director in August 1999 to lead the development of our
broadband Internet access service. He became an executive director, Multimedia
Services of HKC in February 2002. Mr. Tong has over 20 years of marketing and
sales experience in Hong
- 37 -
Kong, Mainland China and Taiwan. Prior to joining HKC, Mr. Tong was marketing
and sales director in Taiwan for American Express.
Siuming Y. M. Tsui. Mr. Tsui joined HKC in July 2001 as Chief Operating
Officer of our subsidiary, i-CABLE Satellite Television Limited, to develop
satellite television business and program production in Mainland China. Mr.
Tsui was appointed Executive Director, Programming Services of HKC in August
2002. Mr. Tsui was principally responsible for program development, production
and transmission of channels other than the Sports and News platform. Mr. Tsui
has extensive managerial experience in the media industry. Prior to joining
HKC, he was previously chief executive officer of Sun TV Cyberworks Holdings
Ltd., senior vice president for Asia Television Limited (ATV) and chief
executive officer of Emperor Movie Group Limited.
Garmen K. Y. Chan. Mr. Chan joined HKC in 1995 as its external affairs
director. He is responsible for formulating and implementing regulatory and
external affairs strategies and action plans for the Company and our
subsidiaries. Mr. Chan came from a diverse media background in Hong Kong,
having held key positions in English newspapers and local television stations.
Mr. Chan was a media consultant prior to joining HKC.
Ronald Y. C. Chiu. Mr. Chiu joined HKC in 1991 as a member of the
pre-license consultant team. When HKC was awarded the license in June 1993,
Mr. Chiu was appointed Assistant News Controller and was instrumental in the
launch of the first 24-hour Cantonese language News Channel in the world. Mr.
Chiu was promoted to News Controller in 1994 and appointed as Vice President,
News & Sports in 2002, a portfolio giving him also overall responsibility for
the planning and production of HKC's sports programs. Prior to joining HKC,
Mr. Chiu held various senior news positions in the television industry. His
experience spans from reporting, editing, news anchoring, to planning and
execution of news coverage as well as management of news operation.
Paul K. S. Lo. Mr. Lo joined HKC in 2000 as Vice President - Human
Resources. He has over 20 years of experience in human resources management in
a variety of industries, including electronics manufacturing and multinational
trading conglomerates. Prior to joining HKC, Mr. Lo was general manager -
group human resources & communications of Dah Chong Hong Ltd.
Simon K. K. Yu. Mr. Yu joined the Wharf Group in 1987 and has held various
administration and audit positions in the Wharf Group. He was appointed
corporate controller-operations of Wharf Communications in 1992, responsible
for operations, accounting, finance, control, administration and personnel. In
1996, Mr. Yu was appointed Administration and Audit Director of HKC and he
became Vice President - Procurement, of HKC in 2003.
Samuel C. C. Tsang. Mr. Tsang joined Wharf Communications in 1992 as
marketing consultant to bid for the first cable television license in Hong
Kong. In 1995, he was appointed Enterprises Director to take charge of
international program licensing and advertising sales for the station. He
became chief operating officer of Hong Kong Cable Enterprises Limited when it
was set up in 2000 to take over advertising sales of HKC. Mr. Tsang has
extensive experience in media and marketing, specializing in new business
establishment in the Mainland China and Hong Kong.
B. Compensation
During 2003, an aggregate amount of HK$33.0 million in compensation was
paid to our directors and current officers as a group by us and by the Wharf
Group on our behalf. We also provide fringe benefits and other compensation
arrangements to a number of our directors and officers.
Retirement Scheme and Mandatory Provident Fund
The principal retirement scheme operated by us is a defined contribution
retirement scheme for our employees, established under a trust deed. Some of
our fellow subsidiaries also participate in the scheme.
The scheme is funded by contributions from employees and employers. The
employees and employers contribute respectively to the scheme sums which
represent percentages of the employees' salaries as defined under the trust
deed. Forfeited contributions may be utilized by the employers to reduce
contributions.
- 38 -
Our principal retirement scheme is closed to employees who joined after
October 1, 2000, while existing members of the scheme can continue to accrue
future benefits.
Employees who joined on or after October 1, 2000 participate in the
Mandatory Provident Fund ("MPF") with terms as stipulated by the MPF Authority
in Hong Kong. We also provide voluntary top-up benefits to employees receiving
a monthly basic salary exceeding HK$20,000, which is the relevant income cap
as stipulated by the MPF Ordinance.
Our total retirement scheme costs charged to the statement of operations
during the year ended December 31, 2003 amounted to HK$31 million (HK$41
million in 2002), which were incurred after utilization of forfeitures of HK$2
million (HK$3 million in 2002) to reduce our contributions.
C. Board Practices
Our directors during the financial year were Mr. Stephen T. H. Ng, Dr.
David K. D. Hsu (retired on May 29, 2003), Mr. F. K. Hu, Mr. Quinn Y. K. Law
(appointed on April 1, 2003), Mr. Victor C. W. Lo, Dr. Dennis T. L. Sun, Mr.
Paul Y. C. Tsui (resigned on April 1, 2003), Mr. Samuel S. F. Wong (appointed
on April 1, 2003) and Sir Gordon Y. S. Wu.
Dr. Dennis Sun and Sir Gordon Wu retired from the Board by rotation in
accordance with Article 82 of the Company's Articles of Association at the
Annual General Meeting held on May 12, 2004. Being eligible, they offered
themselves for re-election and were duly re-elected. None of the retiring
Directors proposed for re-election at the Annual General Meeting has a service
contract with the Company which is not determinable by the employer within one
year without payment of compensation (other than statutory compensation).
Under the provisions of the Company's Articles of Association, the
Chairman of the Company is not subject to retirement from the Board by
rotation. The other six Directors (five of them not holding any executive
title of the Company), will have their respective terms of office coming to an
end by reason of retirement by rotation at the Annual General Meeting of the
Company in 2005, 2006 or 2007 in accordance with Article 82 of the Company's
Articles of Association.
There is no relationship between any of our directors or senior managers
and any other director or senior manager. None of our directors has a service
contract with us or any of our subsidiaries which is not determinable by the
employer within one year without payment of compensation.
Audit Committee
As of December 31, 2003, our audit committee was composed of Mr. Fa-Kuang
Hu (Chairman), Dr. Dennis T. L. Sun (Deputy Chairman) and Mr. Quinn Y. K. Law.
Our audit committee meets at least twice a year and must have at least two
members. A majority of the members must be independent from us. The audit
committee's responsibilities include the appointment of our external auditors
and a review of our accounting policies and practices.
Compensation Committee
As of December 31, 2003, our compensation committee was composed of Mr.
Fa-Kuang Hu (Chairman), Dr. Dennis Sun (Deputy Chairman) and Mr. Quinn Law.
Our compensation committee must have at least two members, who are appointed
by our board of directors among our non-executive directors. The chairman and
a majority of the members of the committee must be independent from us. The
quorum for a compensation committee meeting is two members. Decisions are made
by a majority of votes of the members present, and in the case of an equality
of votes, the chairman of the committee shall have a second or casting vote. A
resolution in writing signed by all of the committee members is treated as if
it had been passed at a meeting of the committee. The committee has the
authority to obtain advice and assistance from the Company and its management
or any outside legal expert or other advisor. The compensation committee's
responsibilities include the following:
o approve compensation and benefits for directors and senior executives;
o decide the terms of the Employee Share Option Scheme; and
- 39 -
o review compensation-related or other issues as requested by our board
of directors.
D. Employees
As of December 31, 2003 we had 2,847 full-time employees, classified by
function as follows:
Television operations.......................................... 997
Network and technical operations............................... 639
Sales and marketing............................................ 603
Customer service and support operations........................ 392
Internet access and content operations......................... 64
Administration, finance and others............................. 152
-----------------
Total................................................... 2,847
=================
We believe our relations with our employees are good.
E. Share ownership
At December 31, 2003, Mr. Stephen T. H. Ng and Mr. Samuel S. F. Wong, our
directors, owned 1,065,005 and 3,000 of our ordinary shares, respectively.
Except as disclosed in the previous sentence, none of our directors serving as
of December 31, 2003 owned any of our ordinary shares at December 31, 2003.
Employee Share Option Scheme
We operate an employee share option scheme pursuant to which our board of
directors may, at their discretion, award any full time employee of any member
of us, including directors of any of our subsidiaries, to take up options to
subscribe for ordinary shares up to a maximum aggregate number of ordinary
shares equal to 10% of our total issued share capital. The price for an
ordinary share payable by a participant upon the exercise of an option will be
determined by our board of directors in their discretion from time to time,
except that with effect from September 1, 2001, the minimum exercise price
must be at least the higher of :
o the closing price of the shares as stated in the Hong Kong Stock
Exchange's daily quotations sheet at the date of grant which must be a
business day; and
o the average closing price of the shares as stated in Hong Kong Stock
Exchange's daily quotations sheets for the 5 business days immediately
preceding the date of grant.
The period during which an option may be exercised will be determined by
the Directors at their discretion, except that no option may be exercised
later than 10 years after it has been granted. The employee share option
scheme commenced on November 2, 1999 and will remain in force for a period of
ten years from such date.
Under our employee share option scheme, certain options to subscribe for a
total of 50,034,000 and 380,000 of our ordinary shares were granted during
2001 and 2002, respectively, to 1,802 and one executives/employees of us or
our subsidiaries, respectively at subscription prices of HK$10.49 and HK$3.30
per share, respectively.
The above-mentioned options to subscribe for 22,910,000 ordinary shares
granted in 2000 include the options granted to two of our Directors, Mr.
Stephen T. H. Ng and Mr. Samuel S.F. Wong, to subscribe for 1,500,000 and
700,000 ordinary shares respectively. The consideration for the granting of
such options to them was HK$10 per option. The option rights are exercisable
during the period from April 1, 2001 to December 31, 2009 at a subscription
price of HK$10.49 per share.
The above-mentioned options to subscribe for 50,034,000 ordinary shares
granted in 2001 include the options granted to Mr. Stephen T. H. Ng and Mr.
Samuel S.F. Wong to subscribe for 1,100,000 and 476,000 of our ordinary shares
respectively. The consideration for the granting of such options to them was
HK$10 per option. The option rights of 150,000 shares in respect of Mr. Ng and
65,500 shares in respect of Mr. Wong are exercisable from April 1, 2003 to
December 31, 2003 and the remaining 700,000 shares in respect of Mr. Ng and
241,500 shares in respect of Mr. Wong are exercisable from July 1, 2003 to
December 31, 2005.
- 40 -
The total number of employee share options which were granted, exercised
and lapsed during the year ended December 31, 2003 and the details of our
employee share options which remained outstanding at December 31, 2003 are set
out in note 33(g) to our consolidated financial statements.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table contains information with respect to the ownership of
our ordinary shares, as of June 22, 2004, by each person known to us to own,
directly or indirectly, more than 5% of our ordinary shares. We are not aware
of any arrangement which may at a subsequent date result in a change of
control of our company. There are no differences in the voting rights among
any of the major shareholders.
Ordinary shares owned(2)
---------------------
Name(1) Number Percent
- ---- ------ -------
(i) Wharf Communications Limited............................................. 1,355,261,583 67.12%
(ii) The Wharf (Holdings) Limited............................................. 1,356,031,238 67.16%
(iii) Diplock Holdings Limited................................................. 1,463,654,999 72.49%
(iv) WF Investment Partners Limited........................................... 1,463,822,799 72.49%
(v) Wheelock and Company Limited............................................. 1,481,442,626 73.37%
(vi) Bermuda Trust (Guernsey) Limited......................................... 1,481,442,626 73.37%
(vii) Marathon Asset Management Limited........................................ 102,212,000 5.06%
- ---------------------------
(1) For the avoidance of doubt and double counting, it should be noted that
duplication occurs in respect of all of the above-stated shareholdings
to the extent that the shareholdings stated against parties (i) and
(ii) above represent the same block of shares; such shareholdings are
entirely duplicated or included in the shareholdings stated against
party (iii) above, with the same duplication of the shareholdings in
respect of (iii) in (iv), (iv) in (v) and (v) in (vi).
(2) All the interests stated above represented long positions and as at
December 31, 2003, there were no short positions recorded in the said
register.
- 41 -
B. Related Party Transactions
We are a party to certain agreements and engage in transactions with a
number of entities that are related to us. A significant part of these
transactions are transactions with Wharf (Holdings) Limited ("Wharf") and its
subsidiaries (together, the "Wharf Group"). We are a 67.12% owned subsidiary
of Wharf. We paid interests for the convertible bonds held by Wharf
Communications, a wholly-owned subsidiary of Wharf, totalling HK$72.0 million,
HK$60.6 million and HK$10.8 million in 2001, 2002 and 2003, respectively. We
lease various properties from the Wharf Group and paid rentals and related
management fees in the amount of HK$40.7 million, HK$40.6 million, and HK$38.4
million for the years 2001, 2002 and 2003, respectively. The Wharf Group
provides telecommunication services to us relating to dataline leasing, public
non-exclusive telecommunication services and international bandwidth access.
Expenses for such telecommunication services amounted to HK$20.9 million,
HK$23.8 million and HK$24.5 million in 2001, 2002 and 2003, respectively. The
Wharf Group also offers computer maintenance and consulting services to us.
Such computer services fees amounted to HK$9.1 million, HK$12.2 million and
HK$14.2 million in 2001, 2002 and 2003, respectively. On the other hand, we
offer the Wharf Group operation and maintenance services in relation to ducts,
cables and ancillary equipment, generating income of HK$16.3 million, HK$20.6
million and HK$21.3 million in 2001, 2002 and 2003, respectively. In addition,
certain management services costs incurred by the Wharf Group on our behalf
are recharged to us. Fees recharged for this purpose in 2001, 2002 and 2003
were HK$12.8 million, HK$13.4 million and HK$11.6 million, respectively.
In 2002, we redeemed at face value a portion of the convertible bonds held
by Wharf Communications in the principal amount of HK$1,500 million in 2002.
The early redemption was duly approved by our independent shareholders at an
extraordinary general meeting held on October 22, 2002. On November 23, 2003,
the remaining portion of the convertible bonds of HK$300 million were redeemed
at their principal amount upon maturity. See also "Item 5--Operating and
Financial Review and Prospects--Operating Results--Early Redemption of
Convertible Bonds."
The following table sets forth information relating to connected
transactions between the Company and the Wharf Group for the years ended
December 31, 2003, 2002 and 2001:
Amount paid (received)
Description of the Connected Transactions For the year ended December 31,
2003 2002 2001
-------------- -------------- --------------
HK$ million HK$ million HK$ million
I. Property
1. Headquarters leased from the Wharf Group
Factory 3 on G/F, 4/F to 12/F (inclusive), portions of 1/F and 2/F,
units 1-7 on 40/F, units 1, 2 and 4 on G/F, storeroom 3 on the roof top,
and various car-parking and lorry-parking spaces of Cable TV Tower, 9
Hoi Shing Road, Tsuen Wan, New Territories ("Cable TV Tower").................... 28.5 30.7 30.6
2. Licenses granted to the Wharf Group to occupy premises
(a) Northern portion of 12/F of Cable TV Tower................................... 1.2 1.2 1.7
(b) 9/F and 12/F of Cable TV Tower............................................... 2.5 2.5 3.3
3. Licenses granted by the Wharf Group to occupy premises
(a) Workshop No. E13, 11/F, Block E of Tsing Yi Industrial Centre Phase II,
Nos. 1-33 Cheung Tat Road, Tsing Yi, New Territories......................... 0.1 0.1 0.1
(b) Unit D (2001 and 2002: Units C & D) 6/F of Kowloon Godown, 1-3 Kai Hing
Road, Kowloon Bay, Kowloon................................................... 1.0 1.4 1.4
4. Car-parking spaces rented from the Wharf Group
Car-parking spaces at Chai Wan Kok Street, Tsuen Wan, New Territories............. 2.4 2.1 2.0
- 42 -
II. Computer services
1. Information technology services provided by the Wharf Group....................... 8.4 7.6 2.8
2. Billing services provided by the Wharf Group...................................... 6.5 6.2 6.0
III. Network
1. Maintenance and sharing of ducts, cables and ancillary equipment provided to
the Wharf Group................................................................... 21.1 20.4 16.2
2. Telecommunications services provided by the Wharf Group........................... 24.5 23.8 20.9
3. Project management services provided to the Wharf Group........................... 7.1 7.6 7.7
4. Multi-party arrangements for the construction, sharing and maintenance of
ducts for telecommunications cables and equipment in Hong Kong:
(a) Payment to the Wharf Group................................................... 1.2 1.5 0.4
(b) Payment from the Wharf Group................................................. 1.6 1.2 1.5
IV.
1. Advertising services provided by the Wharf Group.................................. 1.5 1.2 1.5
2. Advertising services provided to the Wharf Group.................................. - 0.7 0.9
V. Management services provided by the Wharf Group................................... 11.6 13.4 12.8
VI. Video link service provided by the Wharf Group.................................... 2.3 2.7 2.2
As all of the connected transactions described above are and will continue
to be conducted on an ongoing basis, it is considered that strict compliance
with the relevant requirements (the "Requirements") relating to the connected
transactions under Chapter 14 of the applicable Rules (i.e. the relevant Rules
which were in force during the financial year ended December 31, 2003) (the
"Listing Rules") Governing the Listing of Securities on The Stock Exchange of
Hong Kong Limited (the "Hong Kong Stock Exchange") would be impractical. On
our application, the Hong Kong Stock Exchange granted us conditional waivers
from strict compliance with the Requirements in respect of the connected
transactions.
Our directors, including our independent non-executive directors, have
reviewed the connected transactions and confirmed that:
1. the connected transactions were:
(a) entered into by us and/or our subsidiaries in the ordinary and
usual course of business;
(b) conducted either (A) on normal commercial terms (which expression
will be applied by reference to connected transactions of a similar nature and
to be made by similar entities) or (B) (where there is no available
comparison) on terms that are fair and reasonable so far as our shareholders
are concerned; and
(c) entered into either (A) in accordance with the terms of the
agreements governing such connected transactions or (B) (where there are no
such agreements) on terms no less favorable than those available to or from
independent third parties;
2. in respect of each of the connected transactions mentioned above in
paragraphs numbered I.1, I.2(a), I.3(a), I.4, II.1, II.2, III.1, III.2, III.3,
III.4(a), III.4(b),and V, the aggregate amount of connected transactions
within each such category for the financial year ended December 31, 2003 of
the Company did not exceed the relevant cap amount prescribed by the Hong Kong
Stock Exchange (as set out in the relevant conditional waiver granted to the
Company in January 2002), i.e. 3% of the Company and our subsidiaries'
consolidated net tangible assets as disclosed in our audited consolidated
financial statements for the year ended December 31, 2002;
3. in respect of each of the Connected Transactions mentioned above in
paragraphs numbered I.2(b), I.3(b) and IV.1, the annual fees paid for the
financial year ended December 31, 2003 in respect of each of such
- 43 -
category did not exceed the relevant cap amount of HK$10 million prescribed by
the Hong Kong Stock Exchange as set out in the relevant conditional waiver
granted to the Company in October 2001; and
4. in respect of the Connected Transaction mentioned above in paragraph
numbered (VI), the annual amount did not exceed the relevant cap amount (as
prescribed by the Hong Kong Stock Exchange and as set out in the relevant
conditional waiver granted to the Company in October 2000) of 1% of the
Group's turnover for the immediately preceding year.
In addition to the transactions disclosed in the table above, on September
17, 2002, we entered into an agreement to early redeem a portion of our 4%
fixed rate convertible bonds held by Wharf Communications, a wholly-owned
subsidiary of Wharf. An independent committee comprised of our independent
non-executive directors was appointed to consider the terms of the agreement
and to advise our shareholders as to whether the transaction and the terms
thereof were fair and reasonable. An independent financial adviser was also
appointed to advise the independent committee in relation to the terms of the
agreement. The transaction was duly approved by our independent shareholders
at an extraordinary general meeting held on October 22, 2002. On November 23,
2003, the remaining portion of the convertible bonds of HK$300 million were
redeemed at their principal amount upon maturity. See also "Item 5--Operating
and Financial Review and Prospects--Operating Results--Early Redemption of
Convertible Bonds."
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Financial Statements
See Item 19(a) for a list of financial statements filed under Item 18.
B. Significant Changes
Not applicable.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
On June 22, 2004, the last reported sale price of our ADSs on the Nasdaq
National Market was US$7.51. As of March 31, 2004, there were 29 registered
holders of ADSs on our record.
The principal trading market for our ordinary shares is the Stock Exchange
of Hong Kong Limited, or the HKSE. Our ADSs have been quoted on The Nasdaq
National Market under the symbol "ICAB" since November 24, 1999. Each ADS
represents 20 ordinary shares.
The table below sets forth, for the periods indicated, the highest and
lowest closing price for our ordinary shares on the HKSE and our ADSs on the
Nasdaq National Market. The closing price for the ordinary shares on the HKSE
and the ADSs on The Nasdaq National Market on December 31, 2003 was HK$1.99
per ordinary share and US$4.83 per ADS, respectively. The table is based on
information made available by commercial financial information services and is
believed to be reliable.
Ordinary Shares ADSs
-------------------------------------- ------------------------------------
High Low High Low
(HK$) (US$)
Fiscal Year:
1999(1)................................. 16.700 8.950 25.8125 24.75
2000.................................... 11.150 2.400 27.50 6.00
2001.................................... 5.100 3.150 13.40 7.80
- 44 -
2002.................................... 6.200 2.575 15.50 6.52
2003.................................... 2.875 1.660 7.25 4.20
Fiscal 2002:
First Quarter........................... 5.400 4.400 13.75 11.33
Second Quarter.......................... 6.200 4.675 15.50 11.50
Third Quarter........................... 4.750 2.750 12.05 7.15
Fourth Quarter.......................... 3.450 2.575 8.68 6.52
Fiscal 2003:
First Quarter........................... 2.875 1.660 7.25 4.21
Second Quarter.......................... 2.200 1.680 5.82 4.20
Third Quarter........................... 2.400 1.810 6.25 4.81
Fourth Quarter.......................... 2.025 1.820 5.20 4.55
Fiscal 2004:
First Quarter........................... 3.175 1.970 7.92 4.80
Previous Six Months:
December 2003........................... 2.000 1.860 5.01 4.58
January 2004............................ 2.450 1.970 6.24 4.80
February 2004........................... 3.175 2.300 7.92 5.76
March 2004.............................. 2.975 2.600 7.77 6.37
April 2004.............................. 3.050 2.800 7.71 6.91
May 2004................................ 3.075 2.550 7.71 6.39
June 2004 (As of June 22, 2004)........ 3.100 2.950 7.90 7.26
- ---------------
(1) Trading in our ordinary shares and ADSs commenced November 24, 1999.
B. Plan of Distribution
Not applicable.
C. Markets
The ADSs are listed on the Nasdaq National Market and the ordinary shares
are listed on the HKSE.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expense of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are a Hong Kong company and our affairs are governed by our memorandum
and articles of association and Hong Kong law. The following are summaries of
material provisions of our memorandum and articles of association and Hong
Kong law as they relate to the material terms of our ordinary shares.
Certificates representing the ordinary shares are issued in registered
form. Under the laws of Hong Kong, shareholders who are not residents of Hong
Kong may hold, vote and transfer their ordinary shares in the same manner as
Hong Kong residents. There are no conversion or redemption rights of the
ordinary shares.
- 45 -
Voting Rights
We are required to hold an annual general meeting of shareholders within
15 months from the date of our last annual general meeting. We may also hold
other general meetings of shareholders, which are called extraordinary general
meetings, from time to time. Our board of directors may convene an
extraordinary general meeting at will or, under section 113 of the Companies
Ordinance of Hong Kong, upon request of our shareholders and in default, an
extraordinary general meeting may be convened by the requesting shareholders.
Our annual general meeting and any general meeting of i-CABLE called for the
passing of a special resolution requires at least 21 days' notice, and any
other meeting of i-CABLE requires at least 14 days' notice. The notice must
specify the place, the day and the hour of the meeting and, in the case of
special business, the general nature of that business. The quorum for a
general meeting is two shareholders present in person or by proxy. A
corporation that is a shareholder will be deemed to be present in person by
its duly authorized representative or by proxy. If within five minutes from
the time appointed for the meeting a quorum is not present, the meeting, if
convened upon request of shareholders, will be dissolved. In any other case,
the meeting will stand adjourned to such other day not being less than 14 nor
more than 28 days thereafter and at such time and place as may be decided by
the chairman of the meeting. At an adjourned meeting, one shareholder present
in person or by proxy will be a quorum.
Subject to any special rights, privileges or restrictions as to voting for
the time being attached to any class or classes of shares, at any general
meeting every shareholder who is present in person has one vote on a show of
hands, and on a poll every shareholder present in person or by proxy has one
vote for every ordinary share held by such shareholder.
If at any time our capital is divided into different classes of shares,
all or any of the special rights attached to any class may, subject to the
provisions of the Companies Ordinance, be varied or abrogated either with the
consent in writing by at least three-fourths of the holders of the issued
shares of that class or with the sanction of a special resolution passed at a
separate general meeting of the holders of the shares of that class. At such
separate general meetings, the provisions of our articles of association
relating to general meetings apply with an additional requirement that the
necessary quorum be not less than one-third of the issued shares of that
class, and at an adjourned meeting, and that any holder of shares of the class
present may demand a poll.
As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and the content of proxy statements.
Dividends
No dividend is payable except out of our profits or other distributable
reserves.
Subject to the rights of persons, if any, entitled to shares with special
rights as to dividends, all dividends are declared and paid according to the
amounts paid up on the shares in respect whereof the dividend is paid, but no
amount paid up on a share in advance of calls is for this purpose treated as
paid up on the share. All dividends will be apportioned and paid equally
according to the amounts paid up on the shares during any portion or portions
of the period in respect of which the dividends are paid. Our board of
directors may deduct from any dividend or other monies payable to our
shareholders all sums of money, if any, presently payable to us by such
shareholder on account of calls, installments or otherwise.
In respect of any dividend that our board of directors or our shareholders
in general meeting have resolved be paid or declared, our board of directors
may further propose either:
o that such dividend be satisfied wholly or in part in the form of an
allotment of shares credited as fully paid provided that the
shareholders are at the same time accorded the right to elect to
receive such dividend, or part thereof, as the case may be, in cash in
lieu of such allotment, or
o that the shareholder entitled to such dividend be entitled to elect to
receive an allotment of shares credited as fully paid in lieu of the
whole or such part of the dividend as the Board may think fit.
Any dividend unclaimed after a period of six years from the date of
declaration of such dividend will be forfeited and will revert to us.
- 46 -
Liquidation
If we are to be liquidated, the liquidator may, with the approval of our
shareholders and any other approval required by the Companies Ordinance,
divide among our shareholders in cash or in kind the whole or any part of our
assets and may vest the whole or any part of such assets in trustees upon such
trusts for the benefit of the shareholders as the liquidator, with the
approval of the shareholders, thinks fit, provided, that a shareholder will
not be compelled to accept any shares or other assets that would subject such
shareholder to liability.
Registration and Transfers
Any shareholder may transfer all or any of his fully paid shares by an
instrument of transfer in the usual common form or in any other form that the
board of directors may approve, subject to such of the requirements of our
memorandum and articles of association as may be applicable. Such requirements
may include:
o lodging the instrument of transfer 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 transferor to make the transfer; and
o limiting the number of joint holders to whom the share is to be
transferred to four, in the case of a transfer to joint holders.
The instrument of transfer of a share will be signed by or on behalf of
the transferor and, in the case of partly paid shares, the transferee, and the
transferor will be deemed to remain the holder of the share until the name of
the transferee is entered in the register. All instruments of transfer, when
registered, may be retained by us.
We may charge a fee not exceeding HK$2, or such higher amount as the Hong
Kong Stock Exchange may approve for the time being, for registering any
transfer or other document relating to or affecting the title to any of our
shares, or for otherwise making any entry in the register of members relating
to any of our shares.
Our board of directors will cause to be kept a register of shareholders on
which various particulars required by the Companies Ordinance are entered. We
are entitled, by giving notice in an advertisement in a newspaper circulating
generally in Hong Kong, to close our register of shareholders for a period not
exceeding 30 days in each year. The period of 30 days may be extended up to 60
days in a year by an ordinary resolution at a general meeting of our
shareholders.
Changes in Share Capital
Our shareholders may from time to time by ordinary resolution increase our
capital by such sum to be divided into shares of such amounts as the
resolution will prescribe.
Subject to the Companies Ordinance, our shareholders may, by resolution,
increase the capital, direct that the new shares or any of them will be
offered in the first instance to all the holders for the time being of shares
of any class or classes in proportion to their shareholdings or may make any
other provisions as to the issue of the new shares. The new shares will be
subject to all the provisions of our memorandum and articles of association
with reference to lien, the payment of calls, forfeiture, transfer,
transmission and otherwise.
Our shareholders may from time to time by ordinary resolution:
o consolidate and divide all or any of our share capital into shares of
a larger amount than our existing shares;
o sub-divide all or part of our shares into shares of smaller amount
than is fixed by our articles of association;
o cancel any shares that at the date of the passing of the resolution
have not been taken or agreed to be taken by any person and diminish
the amount of its authorized share capital by the amount of the shares
so cancelled; and
- 47 -
o subject to any condition prescribed by law, reduce our issued share
capital or any capital redemption reserve fund or any share premium
account or other undistributable reserve in any manner.
Where any difficulty arises in regard to any such consolidation and
division, our board of directors may issue fractional certificates or arrange
for the sale of the fractional shares and distribution of the net proceeds
equally among the shareholders. For this purpose, our board of directors may
authorize the transfer of fractional shares to or in accordance with the
directions of the purchaser.
Pre-emptive Rights
The Companies Ordinance provides that our directors may not, without prior
shareholder approval, allot shares to existing shareholders other than in
proportion to their respective shareholding. Each year we obtain a general
mandate from shareholders authorizing our directors to allot and issue and
otherwise dispose of ordinary shares up to the level permitted by the listing
rules of the Hong Kong Stock Exchange without requiring such specific
approval.
Purchase of Own Shares
Subject to the provisions of the Companies Ordinance and other applicable
laws or regulations and to any special rights conferred on the holder of any
class of our shares, we may purchase our shares of any class. On purchase,
such shares will be cancelled. Under the listing rules of the Hong Kong Stock
Exchange, restrictions are imposed on companies listed in Hong Kong, which
accordingly apply to us, on the purchase by such a company of its own shares,
including (i) a requirement for prior approval, either by way of a general
mandate or by specific approval in relation to a particular transaction, by
the shareholders in general meeting, (ii) limitations on purchases in the
market over a particular period, and (iii) reporting requirements.
Miscellaneous
Share certificates registered in the names of two or more persons are
deliverable to any one of them named in our share register, and if two or more
such persons tender a vote, the vote of the person whose name first appears in
the share register will be accepted to the exclusion of any other. In the case
of joint holders, dividends that are declared will be paid to whichever of
such persons is named first in the share register, and notices will be given
to any one of them named in the share register.
Certain Rights of Our Shareholders
In the event that a duty owed by our directors may have been breached,
shareholders holding in excess of 10% of our share capital may request our
directors to convene a general meeting. At such general meeting, shareholders
present may pass an ordinary resolution to remove a director or directors and
to elect replacement directors. Our shareholders may petition the courts for
an appropriate order of the courts on the grounds of conduct by the directors
that is oppressive or prejudicial to some part of the shareholders, including
the shareholder bringing the action. Hong Kong law allows a derivative action
to be brought by our shareholders where it is alleged that our directors have
committed a fraudulent action on our minority shareholders.
- 48 -
Certain Powers of Our Directors
Our Articles of Association give our board of directors the power to
borrow and raise funds, including issuing securities. Our board of directors
may also mortgage or charge all or any part of the Company's undertaking,
property and assets and uncalled capital.
Our Articles of Association limit a director's power to vote on
transactions in which he or she is materially interested. Subject to
exceptions described below, a director of the Company shall not vote on any
contract, arrangement or proposal in which the director knows he/she or any of
his or her associates is materially interested. For this purpose, material
interest is presumed if a company, in which the director and his or her
associates in aggregate own five percent or more of its shares or voting
rights, is materially interested in the transaction. A director of the Company
may, however, vote on the following matters:
o any contract, arrangement or proposal to give security or indemnity to
the director or his or her associates for money lent or obligations
undertaken by such director or his or her associates at the request of
or for the benefit of the Company or its subsidiaries;
o any contract, arrangement or proposal to give security or indemnity to
the director or his or her associates for debts of the Company or its
subsidiaries for which such director or his or her associates assumed
responsibility by giving security or indemnity;
o any contract, arrangement or proposal concerning offering of
securities by the Company (or any company which the Company may
promote or be interested in purchasing) for which the director or his
or her associates participate in the underwriting;
o any contract, arrangement or proposal in which the director or his or
her associates are interested only by virtue of their interest in the
securities of the Company;
o any contract, arrangement or proposal concerning any other company in
which the director or his or her associates own less than five percent
of such company's shares or voting rights;
o any contract, arrangement or proposal concerning employee benefits
that do not provide privileges to directors of the Company or their
associates, including employee share schemes and retirement, death or
disability benefits schemes.
Indemnification
Our directors and officers are indemnified by i-CABLE against all
liabilities incurred by such directors and officers in defending any
proceedings, whether civil or criminal, in which judgment is given in their
favor, or in which they are acquitted, or in connection with any application
under the Companies Ordinance in which relief from liability is granted to
them by the court.
Inspection of Books and Records
Except when the register of members is closed, the register and the index
of names of our shareholders are open to any shareholder for inspection
without charge during business hours. However, no shareholder, other than our
officers, has any right to inspect any of our accounting records except as
conferred by law or authorized by our directors.
Transfer Agent
We have appointed Tengis Limited as the transfer agent and registrar for
our ordinary shares.
C. Material Contracts
See Exhibits 10.1-10.10, which are incorporated by reference to our
Registration Statement on Form F-1 (File No. 333-11014) filed with the
Commission on November 1, 1999.
- 49 -
D. Exchange Controls
Under existing Hong Kong law, (i) there are no foreign exchange controls
or other laws, decrees or regulations that affect the remittance of dividends
or other payments on the Company's outstanding ordinary shares to U.S.
residents and (ii) there are no limitations on the rights of non-resident or
foreign owners to hold the Company's ordinary shares.
E. Taxation
This summary is based on the Inland Revenue Ordinance, Stamp Duty
Ordinance and Estate Duty Ordinance, their subsidiary legislation, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof and all of which are subject to change, possible retroactively.
Tax on Dividends
No tax is payable in Hong Kong by way of withholding or otherwise in
respect of dividends on the ordinary shares.
Profits Tax
No tax is imposed in Hong Kong in respect of capital gains from the sale
of the ordinary shares and ADSs as long as they are held as capital assets.
Trading gains from the sale of assets by persons carrying on a trade,
profession or business in Hong Kong where such gains are derived from or arise
in Hong Kong from such trade, profession or business will be chargeable to
Hong Kong profits tax which is currently imposed at the rate of 17.5% on
corporations and at the rate of 15.5% on unincorporated businesses or
individuals. The latter rate was increased to 16% with effect from April 1,
2004. Gains or losses from sales of shares listed on the HKSE will be
considered to be derived from or arise in Hong Kong.
Gains or losses from sales of ADSs may be considered to be derived from or
arise in Hong Kong where either the contracts of purchase and sale are
effected in Hong Kong. In determining whether a contract is effected in Hong
Kong, the Hong Kong Inland Revenue Department considers all steps leading up
to and including the signing and execution of the purchase and sales
contracts. Liability for Hong Kong profits tax would thus arise in respect of
trading gains from sales of ordinary shares realized by persons carrying on a
business of trading or dealing in securities in Hong Kong. Liability for Hong
Kong profits tax would also arise in respect of trading gains from sales of
ADSs realized by persons carrying on a business of trading or dealing in
securities in Hong Kong where the contracts of purchase and sale were effected
in Hong Kong.
Stamp Duty
Hong Kong stamp duty, currently charged at the rate of HK$1.00 per
HK$1,000 or part thereof on the higher of the consideration for or the value
of the ordinary shares, will be payable by the purchaser on every purchase and
by the seller on every sale of ordinary shares. For example, a total of
HK$2.00 per HK$1,000 or part thereof is currently payable on a typical sale
and purchase transaction involving shares. In addition, a fixed duty of HK$5
is currently payable on any instrument of transfer of shares. The withdrawal
of ordinary shares upon the surrender of ADSs, and the issuance of ADSs upon
the deposit of ordinary shares, will also attract stamp duty at the rate
described above for sale and purchase transactions unless the withdrawal or
deposit of ADSs does not result in a change in the beneficial interest of the
ordinary shares under Hong Kong law. The issuance of ADSs by the depositary
upon the deposit of ordinary shares issued directly by i-CABLE to the
depositary or for the account of the depositary does not attract stamp duty.
No Hong Kong stamp duty is payable upon the transfer of ADSs outside Hong Kong
where the transfer does not result in a requirement to register such transfer
of ADSs in Hong Kong or a change in the beneficial interest of the ordinary
shares under Hong Kong law.
If stamp duty is not paid on or before the due date, a penalty of up to 10
times the duty payable may be imposed.
- 50 -
Estate Duty
The ordinary shares are Hong Kong property under Hong Kong law, and
accordingly such ordinary shares may be subject to estate duty on the death of
the beneficial owner of such ordinary shares, regardless of the place of the
owner's residence, citizenship or domicile. The Hong Kong Inland Revenue
Department may treat the ADSs as Hong Kong property that may be subject to
estate duty on the death of the beneficial owner of the ADS even if the ADSs
are located outside Hong Kong at the date of such death. Hong Kong estate duty
is imposed on a progressive scale from 5% to 15%. The rate of and the
threshold for estate duty has, in the past, been adjusted on a fairly regular
basis. No estate duty is payable when the aggregate value of the dutiable
estate does not exceed HK$7.5 million, and the maximum rate of duty of 15%
applies when the aggregate value of the dutiable estate exceeds HK$10.5
million.
Where a person has transferred ordinary shares to a controlled company
(which is defined in the Estate Duty Ordinance to mean a company controlled by
not more than 5 persons) during a period of 3 years ending on the person's
death, the controlled company may be liable to estate duty if during that
period the deceased has received benefits from it. This may also apply to a
transfer by the deceased of ADSs to the company if the ADSs were to be treated
as Hong Kong property by the Inland Revenue Department.
No double tax treaty exists between the United States and Hong Kong apart
from a treaty to avoid double taxation on shipping income.
United States
Federal Income Tax Considerations
The following is a summary of United States federal income tax
considerations that are anticipated to be material for U.S. Holders, as
defined below. This summary is based upon existing United States federal
income tax law, which is subject to change, possibly with retroactive effect.
This summary does not discuss all aspects of United States federal income
taxation which may be important to particular investors in light of their
individual investment circumstances, such as investors subject to special tax
rules including: partnerships, financial institutions, insurance companies,
broker-dealers, tax-exempt organizations, and, except as described below,
non-U.S. Holders, or to persons that will hold our shares or ADSs as part of a
straddle, hedge, conversion, or constructive sale transaction for United
States federal income tax purposes or that have a functional currency other
than the United States dollar, all of whom may be subject to tax rules that
differ significantly from those summarized below. In addition, this summary
does not discuss any foreign, state, or local tax considerations. This summary
assumes that investors will hold our shares or ADSs as "capital assets"
(generally, property held for investment) under the United States Internal
Revenue Code. Each prospective investor is urged to consult its tax advisor
regarding the United States federal, state, local, and foreign income and
other tax considerations of the purchase, ownership, and disposition of our
shares or ADSs.
For purposes of this summary, an U.S. Holder is a beneficial owner of
shares or ADSs that is for United States federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o 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;
o an estate the income of which is includible in gross income for United
States federal income tax purposes regardless of its source;
o 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
o 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.
- 51 -
A beneficial owner of our shares or ADSs that is not a U.S. Holder is
referred to herein as a "Non-U.S. Holder."
A foreign corporation will be treated as a "passive foreign investment
company" or "PFIC", for United States federal income tax purposes, if 75% or
more of its gross income consists of certain types of "passive" income or 50%
or more of its assets are passive. Based on our current and projected income,
assets, and activities, we presently believe that we are not a PFIC and do not
anticipate becoming a PFIC. This is, however, a factual determination made on
an annual basis. Because the classification of certain of our interests for
United States federal income tax purposes is uncertain and the PFIC rules are
subject to administrative interpretation, however, no assurance can be given
that we are not or will not be treated as a PFIC. The discussion below under
"U.S. Holders-Dividends" and "U.S. Holders-Sale or Other Disposition of Shares
or ADSs," assumes that we will not be subject to treatment as a PFIC for
United States federal income tax purposes.
U.S. Holders
For United States federal income tax purposes, a U.S. Holder of an ADS
will be treated as the owner of the proportionate interest of the shares held
by the depositary that is represented by an ADS and evidenced by such ADS.
Accordingly, no gain or loss will be recognized upon the exchange of an ADS
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 ADS
surrendered therefore, and the holding period in the withdrawn shares will
include the period during which the holder held the surrendered ADS.
Dividends. Any cash distributions paid by us out of our earnings and
profits, as determined under United States federal income tax principles, will
be subject to tax as ordinary dividend income and will be includible in the
gross income of a U.S. Holder upon receipt. Cash distributions paid by us in
excess of our earnings and profits will be treated as a tax-free return of
capital to the extent of the U.S. Holder's adjusted tax basis in our shares or
ADSs, and after that as gain from the sale or exchange of a capital asset.
Dividends paid in Hong Kong dollars will be includible in income in a United
States dollar amount based on the United States dollar to Hong Kong dollar
exchange rate prevailing at the time of receipt of such dividends by the
depositary, in the case of ADSs, or by the U.S. Holder, in the case of shares
held directly by such U.S. Holder. U.S. Holders should consult their tax
advisors regarding the United States federal income tax treatment of any
foreign currency gain or loss recognized on the subsequent conversion of Hong
Kong dollars received as dividends to United States dollars. Dividends
received on shares or ADSs will not be eligible for the dividends received
deduction allowed to corporations.
Under current law, "qualified dividend income" received by an individual
after December 31, 2002 and before January 1, 2009 is subject to United States
federal income tax rates lower than those applicable to ordinary income. The
top federal income tax rate on such qualifying dividends received by an
individual is 15%, or 5% for those individuals whose incomes fall in the 10-
or 15 percent brackets. Based upon our existing and anticipated future
operations and current assets, we believe that we are a "qualified foreign
corporation" and that our dividends paid to U.S. Holders who are individuals
will be eligible to be treated as "qualified dividend income" provided that
such Holders satisfy applicable holding period requirements with respect to
the ADSs and other application requirements. Dividends paid by foreign
corporations that are classified as PFICs are not "qualified dividend income".
See "PFIC Considerations" below.
Dividends received on shares or ADSs will be treated, for United States
federal income tax purposes, as foreign source income. A U.S. Holder may be
eligible, subject to a number of complex limitations, to claim a foreign tax
credit in respect of any foreign withholding taxes imposed on dividends
received on shares or ADSs. U.S. Holders who do not elect to claim a foreign
tax credit for federal income tax withheld may instead claim a deduction, for
United States federal income tax purposes, in respect of such withholdings,
but only for a year in which the U.S. Holder elects to do so for all
creditable foreign income taxes.
In addition, the United States Treasury has expressed concerns that
parties to whom depositary shares are pre-released may be taking actions that
are inconsistent with the claiming of foreign tax credits by the
- 52 -
holders of ADSs. Accordingly, the analysis of the creditability of foreign
withholding taxes could be affected by future actions that may be taken by the
United States Treasury.
Sale or Other Disposition of Shares or ADSs. A U.S. Holder will recognize
capital gain or loss upon the sale or other disposition of shares or ADSs in
an amount equal to the difference between the amount realized upon the
disposition and the U.S. Holder's adjusted tax basis in such shares or ADSs,
as each is determined in U.S. dollars. Any such capital gain or loss will be
long-term if the shares or ADSs have been held for more than one year and will
generally be United States source gain or loss. The claim of a deduction in
respect of a capital loss, for United States federal income tax purposes, may
be subject to limitations. If a U.S. Holder receives Hong Kong dollars for any
such disposition, such U.S. Holder should consult its tax advisor regarding
the United States federal income tax treatment of any foreign currency gain or
loss recognized on the subsequent conversion of the Hong Kong dollars to
United States dollars.
PFIC Considerations
If we were to be classified as a PFIC in any taxable year, a U.S. Holder
would be subject to special rules generally intended to reduce or eliminate
any benefits from the deferral of United States federal income tax that a U.S.
Holder could derive from investing in a foreign company that does not
distribute all of its earnings on a current basis. In such event, a U.S.
Holder of the shares or ADSs may be subject to tax at ordinary income tax
rates on (i) any gain recognized on the sales of the shares or ADSs and (ii)
any "excess distribution" paid on the shares or ADSs (generally, a
distribution in excess of 125% of the average annual distributions paid by us
in the three preceding taxable years). In addition, a U.S. Holder may be
subject to an interest charge on such gain or excess distribution. Prospective
investors are urged to consult their tax advisors regarding the potential tax
consequences to them if we are or do become a PFIC, as well as certain
elections that may be available to them to mitigate such consequences.
Non-U.S. Holders
An investment in shares or ADSs by a Non-U.S. Holder will not give rise to
any United States federal income tax consequences unless:
o the dividends received or gain recognized on the sale of the shares or
ADSs 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, or
o in the case of gains recognized on a sale of shares or ADSs by an
individual, such individual is present in the United States for 183 days
or more and certain other conditions are met.
In order to avoid back-up withholding on dividend payments made in the United
States, a Non-U.S. Holder of the shares or ADSs may be required to complete,
and provide the payer with, an Internal Revenue Service Form W-8BEN, or other
documentary evidence, certifying that such holder is an exempt foreign person.
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
We file annual reports with and furnish other information to the SEC as
may be applicable from time to time. You may read and copy any documents filed
or furnished by i-CABLE at the SEC's public reference room in Washington, D.C.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room.
I. Subsidiary Information
- 53 -
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to foreign exchange and interest-rate risk primarily
associated with underlying assets and/or liabilities. During 2003, the Group
entered into a forward foreign exchange contract with a financial institution
to hedge certain firmly committed, non-Hong Kong dollar commercial
transactions in 2004. The Group had, as at December 31, 2003, an outstanding
forward contract to buy foreign currency with a notional principal value of
HK$5.8 million equivalent.
Foreign Currency Risk
The functional currency for our operations is the HK dollar. We have
incurred and expect to continue to incur expenses and liabilities in U.S.
dollars, primarily because our licensed programming costs are in U.S. dollars.
There have been no material operating trends or effects on our liquidity as a
result of fluctuations in currency exchange rates. To date, the Hong Kong
government has continued to support a linkage of the value of the HK dollar to
the U.S. dollar at approximately HK$7.80 to US$1.00, and the PRC has not
devalued the Renminbi since January 1, 1994.
Interest Rate Risk
As of December 31, 2003, we had cash and cash equivalents of HK$28.9
million (US$3.7 million). The interest income derived from these cash and cash
equivalents is determined with reference to market interest rates.
Deflation
For the years 2001, 2002 and 2003, Hong Kong experienced an annual
deflation rate of 1.6%, 3.0% and 2.6%, respectively, based on its Composite
Consumer Price Index. Deflation in Hong Kong has not had a material impact on
our operations.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
- 54 -
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) We carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rules 13a - 14(c) of the
Securities Exchange Act of 1934, as amended) as of December 31, 2003. Based
upon our evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in all
material respects to ensure that information required to be disclosed in the
reports we file and submit under the Exchange Act is made known to them by
others within the i-CABLE Group and is recorded, processed, summarized and
reported as and when required.
(b) There were no significant changes in our internal control over
financial reporting or in other factors that could significantly affect
internal controls subsequent to the date of our evaluation.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that we do not currently have an
audit committee financial expert serving on our audit committee. While every
audit committee member has extensive management and/or finance experience,
none of them qualifies as an audit committee financial expert as defined in
Section 407 of the Sarbanes-Oxley Act of 2002. Our board is in the process of
considering appointing an additional member with relevant qualification and
experience to the audit committee.
ITEM 16B. CODE OF ETHICS
We have adopted a Code of Ethics that applies to our Chief Executive
Officer and senior financial officers. We have filed this Code of Ethics as an
exhibit hereto.
- 55 -
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees to the Independent Auditor
The Board of Directors engaged KPMG ("KPMG") to perform an annual audit of
the Company's financial statements. The following table presents fees for
professional audit services rendered by KPMG for the audit of the Company's
annual financial statements for 2002 and 2003, and fees billed for other
services rendered by KPMG in each of those years.
2003 2002
HK$'000 HK$'000
-------------------------------------------------------------
Audit fees.......................................... 2,527 2,409
Audit-related fees (1).............................. 16 16
Tax fees (2)........................................ 387 570
All other fees (3).................................. - -
-------------------------------------------------------------
Total Fees.......................................... 2,930 2,995
=============================================================
- ------------
(1) Audit related fees consist of fees for issuance of agreed upon procedures
reports not required by statute or regulation.
(2) Tax fees consist of fees for tax compliance, tax advice, and tax planning
services.
(3) Fees for all other services rendered by KPMG other than those separately
defined above.
Pre-Approval of Services Provided by KPMG
The Audit Committee has adopted policies and procedures for pre-approving
all non-audit work performed by KPMG after January 1, 2003. Specifically, the
policies and procedures prohibit KPMG from performing any services for the
Company or its subsidiaries without the prior approval of the Audit Committee.
All of the services provided by KPMG in 2003 were approved by the Audit
Committee pursuant to the approval policies described above, and none of such
services were approved pursuant to the procedures described in Rule
2-01(c)(7)(i)(C) of Regulation S-X, which waives the general requirement for
pre-approval in certain circumstances.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
- 56 -
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
See Item 19(a) for a list of financial statements filed under Item 18.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
Page
----
(a) List of Financial Statements
Report of Independent Registered Public Accounting Firm...................................................................F-1
Consolidated Statements of Operations for the three years ended December 31, 2001, 2002 and 2003 ..........................F-2
Consolidated Balance Sheets as of December 31, 2002 and 2003...............................................................F-3
Consolidated Statements of Changes in Equity for the three years ended December 31, 2001,
2002 and 2003..............................................................................................................F-4
Consolidated Statements of Cash Flows for the three years ended December 31, 2001, 2002 and 2003...........................F-5
Notes to Consolidated Financial Statements.................................................................................F-7
(b) List of Exhibits
See Item 19(a) and Exhibits, which are incorporated by reference to the
Registrant's Registration Statement on Form F-1 (File No. 333-11014) filed
with the Commission on November 1, 1999, except for Exhibit 3.2--Articles of
Association of i-CABLE, which was amended on each of June 6, 2002 and May 29,
2003 and is filed together with this annual report on Form 20-F as Exhibit 1.1
Exhibit 1.1 Articles of Association of i-CABLE Communications Limited
Exhibit 8.1 List of Subsidiaries.
Exhibit 11.1 Code of Ethics
Exhibit 12.1 Certification by the Chief Executive Officer in
accordance with Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 12.2 Certification by the Chief Financial Officer in
accordance with Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 13.1 Certification by the Chief Executive Officer and Chief
Financial Officer required by 18 U.S.C.ss.1350.
- 57 -
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
i-CABLE Communications Limited
By: /s/ Samuel S.F. Wong
-------------------------------
Name: Samuel S. F. Wong
Title: Chief Financial Officer
Date: June 30, 2004
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[GRAPHIC OMITTED]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
i-CABLE Communications Limited:
We have audited the accompanying consolidated balance sheets of i-CABLE
Communications Limited and its subsidiaries (the "Group") as of December 31,
2002 and 2003 and the related consolidated statements of operations, changes
in equity and cash flows for each of the years in the three-year period ended
December 31, 2003, all expressed in Hong Kong dollars. These consolidated
financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and auditing standards
generally accepted in Hong Kong. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of i-CABLE
Communications Limited and its subsidiaries as of December 31, 2002 and 2003,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in Hong Kong.
As discussed in Note 10 to the consolidated financial statements, the
Group adopted Hong Kong Statement of Standard Accounting Practice ("SSAP") 12
(Revised) "Income taxes" in 2003.
Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of
such differences is presented in Note 33 to the consolidated financial
statements.
The accompanying consolidated financial statements as of and for the
year ended December 31, 2003 have been translated into United States dollars
solely for the convenience of the reader. We have audited the translation, and
in our opinion, the consolidated financial statements expressed in Hong Kong
dollars have been translated into United States dollars on the basis set forth
in Note 1 to the consolidated financial statements.
/s/ KPMG
Hong Kong
March 11, 2004
F-1
i-CABLE Communications Limited
Consolidated Statements of Operations
For the year ended December 31
Note 2001 2002 2003 2003
---- ---- ---- ----
HK$ HK$ HK$ US$
(in thousands, except for per share and per ADS data)
Service revenues 3,4 1,930,999 2,160,788 2,142,813 275,993
---------------- ---------------- ---------------- ----------------
Programming costs (601,731) (732,205) (649,523) (83,658)
Network and other operating expenses (364,100) (351,148) (360,983) (46,494)
Selling, general and administrative expenses (350,680) (346,742) (343,098) (44,191)
Depreciation (434,659) (504,258) (538,599) (69,371)
---------------- ---------------- ---------------- ----------------
Profit from operations 179,829 226,435 250,610 32,279
Interest income 5 58,649 26,355 8,485 1,093
Finance costs 5 (72,013) (62,463) (15,610) (2,011)
Non-operating income/(expenses) 6 1,027 (198) (9,885) (1,273)
Impairment loss on investments 5 - (72,870) - -
---------------- ---------------- ---------------- ----------------
Profit before taxation 5 167,492 117,259 233,600 30,088
---------------- ---------------- ---------------- ----------------
Provision for income tax 7(a)
- current income tax charge (8,825) (10,823) (139,938) (18,024)
- deferred income tax credit 8,825 10,823 126,796 16,331
---------------- ---------------- ---------------- ----------------
- - (13,142) (1,693)
================ ================ ================ ================
Net profit 167,492 117,259 220,458 28,395
================ ================ ================ ================
Earnings per share 9
Basic HK$0.08 HK$0.06 HK$0.11 US$0.01
================ ================ ================ ================
Diluted HK$0.08 HK$0.06 HK$0.11 US$0.01
================ ================ ================ ================
Weighted-average shares outstanding for
earnings per share (thousands)
Basic 2,014,000 2,016,284 2,019,234 2,019,234
================ ================ ================ ================
Diluted 2,022,502 2,026,931 2,019,234 2,019,234
================ ================ ================ ================
Earnings per ADS 9
Basic HK$1.66 HK$1.16 HK$2.18 US$0.28
================ ================ ================ ================
Diluted HK$1.66 HK$1.16 HK$2.18 US$0.28
================ ================ ================ ================
ADS outstanding for earnings per ADS
(thousands)
Basic 100,700 100,814 100,962 100,962
================ ================ ================ ================
Diluted 101,125 101,347 100,962 100,962
================ ================ ================ ================
Dividends attributable to the year 8
Interim dividend declared during the year - 30,289 30,289 3,901
Final dividend proposed after the balance
sheet date 50,350 30,289 80,769 10,403
---------------- ---------------- ---------------- ----------------
50,350 60,578 111,058 14,304
================ ================ ================ ================
See accompanying notes to the consolidated financial statements which are an
integral part of these statements.
F-2
i-CABLE Communications Limited
Consolidated Balance Sheets
As of December 31
Note 2002 2003 2003
---- ---- ----
HK$'000 HK$'000 US$'000
(restated)
ASSETS
Current assets
Inventories 11 24,477 17,511 2,255
Accounts receivable from trade debtors, net 12 89,480 112,054 14,433
Deposits, prepayments and other receivables 32,312 84,693 10,908
Amounts due from fellow subsidiaries 13 8,197 3,453 445
Deposits with financial institutions 14 468,000 - -
Investments in debt securities 15 15,746 - -
Cash and cash equivalents 6,696 28,915 3,724
--------------- ---------------- ----------------
Total current assets 644,908 246,626 31,765
Property, plant and equipment 16 2,302,189 2,169,729 279,460
Programming library 17 148,851 142,171 18,312
Deferred tax assets 24(b) 107,198 112,600 14,503
Non-current investments 18 20,957 9,725 1,253
--------------- ---------------- ----------------
TOTAL ASSETS 3,224,103 2,680,851 345,293
=============== ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Amounts due to trade creditors 20 53,448 48,520 6,249
Accrued expenses and other payables 322,547 441,369 56,848
Receipts in advance and customers' deposits 383,751 241,753 31,138
Interest-bearing borrowings 19 686,299 - -
Taxation 24(a) 2,007 131,055 16,880
Amounts due to fellow subsidiaries 21 16,758 20,606 2,654
Amount due to immediate holding company 22 531 300 39
--------------- ---------------- ----------------
Total current liabilities 1,465,341 883,603 113,808
Deferred tax liabilities 24(b) 233,994 112,600 14,503
--------------- ---------------- ----------------
TOTAL LIABILITIES 1,699,335 996,203 128,311
--------------- ---------------- ----------------
Shareholders' equity
Share capital 25 2,019,234 2,019,234 260,077
Reserves (494,466) (334,586) (43,095)
--------------- ---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 1,524,768 1,684,648 216,982
=============== ================ ================
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 3,224,103 2,680,851 345,293
=============== ================ ================
See accompanying notes to the consolidated financial statements which are an
integral part of these statements.
F-3
i-CABLE Communications Limited
Consolidated Statements of Changes in Equity
Investment
Share revaluation Revenue
Share capital premium reserve reserve Total
------- ------- ------- ------- -----
Note HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
Group
Balance at January 1, 2001*
As previously reported 2,014,000 4,826,326 - (5,549,943) 1,290,383
Prior year adjustment arising
from a change in accounting
policy for income taxes 10 - - - 13,000 13,000
--------------- --------------- ---------------- --------------- ---------------
As restated 2,014,000 4,826,326 - (5,536,943) 1,303,383
Transfer from the statement of
operations - - - 167,492 167,492
Deficit on revaluation of
investments and net loss not
recognised in the statement of
operations - - (14,500) - (14,500)
--------------- --------------- ---------------- --------------- ---------------
Balance at December 31, 2001* 2,014,000 4,826,326 (14,500) (5,369,451) 1,456,375
Transfer from the statement of
operations - - - 117,259 117,259
Dividend approved in respect of the
previous year - - - (50,350) (50,350)
Dividend declared in respect of the
current year - - - (30,289) (30,289)
Deficit on revaluation of
investments and net loss not
recognised in the statement of
operations - - (58,156) - (58,156)
Transfer to the statement of
operations on impairment of
investments - - 72,870 - 72,870
Transfer to the statement of
operations on disposal of debt
securities - - (214) - (214)
Shares issued under share option
scheme 5,234 12,039 - - 17,273
--------------- --------------- ---------------- --------------- ---------------
Balance at December 31, 2002* 2,019,234 4,838,365 - (5,332,831) 1,524,768
Transfer from the statement of
operations - - - 220,458 220,458
Dividend approved in respect of the
previous year - - - (30,289) (30,289)
Dividend declared in respect of the
current year - - - (30,289) (30,289)
--------------- --------------- ---------------- --------------- ---------------
Balance at December 31, 2003* 2,019,234 4,838,365 - (5,172,951) 1,684,648
=============== =============== ================ =============== ===============
The application of the share premium account is governed by Section 48B of the
Hong Kong Companies Ordinance.
* Included in the Group's revenue reserve is positive goodwill written off
against reserves in prior years amounting to HK$197,785,000.
See accompanying notes to the consolidated financial statements which are an
integral part of these statements.
F-4
i-CABLE Communications Limited
Consolidated Statements of Cash Flows
Year ended December 31
------------------------------------------------------------------------
2001 2002 2003 2003
---- ---- ---- ----
HK$'000 HK$'000 HK$'000 US$'000
Operating activities
Profit before taxation 167,492 117,259 233,600 30,088
Adjustments for:
Finance costs 72,013 62,463 15,610 2,011
Interest income (58,649) (26,355) (8,485) (1,093)
Depreciation 434,659 504,258 538,599 69,371
Amortization of programming library 103,253 152,861 95,152 12,256
Impairment loss on investments - 72,870 - -
Gain on disposal of listed investments - (469) (99) (13)
Impairment loss of property, plant and equipment - 1,671 5,734 738
(Gain)/loss on disposal of property, plant and
equipment (1,027) 198 7,593 978
---------------- ---------------- --------------- ---------------
Operating profit before changes in working capital 717,741 884,756 887,704 114,336
(Increase)/decrease in inventories (2,812) 16,020 5,772 743
(Increase)/decrease in accounts receivable from trade
debtors (4,737) 8,543 (22,574) (2,907)
(Increase)/decrease in deposits, prepayments and other
receivables 1,697 10,989 (54,780) (7,056)
(Increase)/decrease in amounts due from fellow
subsidiaries 12,551 (440) 4,744 611
Increase/(decrease) in amounts due to trade creditors 2,143 17,541 (2,721) (350)
Increase/(decrease) in accrued expenses and other
payables (15,546) (23,603) 54,489 7,018
Increase/(decrease) in receipts in advance and
customers' deposits 75,792 (6,529) (140,821) (18,138)
Increase in amounts due to fellow subsidiaries 5,176 3,927 3,848 496
Increase/(decrease) in amount due to immediate holding
company 335 31 (232) (30)
---------------- ---------------- --------------- ---------------
Cash generated from operations 792,340 911,235 735,429 94,723
Interest received 58,773 25,448 10,704 1,379
Interest paid (108,013) (62,382) (15,690) (2,021)
Hong Kong taxation paid (8,952) (10,904) (10,890) (1,403)
---------------- ---------------- --------------- ---------------
Net cash from operating activities 734,148 863,397 719,553 92,678
---------------- ---------------- --------------- ---------------
F-5
Consolidated Statements of Cash Flows (continued)
Year ended December 31
------------------------------------------------------------------------
2001 2002 2003 2003
---- ---- ---- ----
HK$'000 HK$'000 HK$'000 US$'000
Investing activities
Purchase of property, plant and equipment (641,466) (608,689) (362,788) (46,727)
Additions to programming library (113,495) (107,652) (90,729) (11,686)
Proceeds from sales of property, plant and equipment 3,756 4,333 7,982 1,028
(Placement)/redemption of deposits with financial
institutions (312,000) (156,000) 468,000 60,278
Purchase of investments - (46,861) - -
Proceeds from disposal of investments - 31,182 27,078 3,488
---------------- ---------------- --------------- ---------------
Net cash generated from/(used in) investing activities (1,063,205) (883,687) 49,543 6,381
---------------- ---------------- --------------- ---------------
Financing activities
Proceeds from/(repayment of) bank loans - 386,299 (386,299) (49,755)
Proceeds from shares issued under share option scheme - 17,273 - -
Dividends paid - (80,639) (60,578) (7,802)
Redemption of convertible bonds - (1,500,000) (300,000) (38,640)
---------------- ---------------- --------------- ---------------
Net cash used in financing activities - (1,177,067) (746,877) (96,197)
================ ================ =============== ===============
Net increase/(decrease) in cash and cash equivalents (329,057) (1,197,357) 22,219 2,862
Cash and cash equivalents
at January 1 1,533,110 1,204,053 6,696 862
---------------- ---------------- --------------- ---------------
Cash and cash equivalents
at December 31 1,204,053 6,696 28,915 3,724
================ ================ =============== ===============
See accompanying notes to the consolidated financial statements which are an
integral part of these statements.
F-6
i-CABLE Communications Limited
Notes to Consolidated Financial Statements
For the year ended December 31, 2003
1. Basis of presentation
The consolidated financial statements have been prepared in
accordance with all applicable Hong Kong Financial Reporting Standards (which
include all applicable Statements of Standard Accounting Practice and
Interpretations) issued by the Hong Kong Society of Accountants ("HKSA") ("HK
GAAP"). Information relating to the nature and effect of differences between
HK GAAP and accounting principles generally accepted in the United States ("US
GAAP") are set out in Note 33.
The consolidated financial statements are expressed in Hong Kong
dollars. Solely for the convenience of the reader, the December 31, 2003
consolidated financial statements have been translated into United States
dollars at the rate of exchange US$1=HK$7.7640, the noon buying rate for cable
transfers for buying Hong Kong dollars at December 31, 2003 as certified for
customs purposes by the Federal Reserve Bank of New York. No representation is
made that Hong Kong dollar amounts could have been, or could be, converted
into United States dollars at that rate or at any other particular rate at
December 31, 2003 or any other date.
2. Significant accounting policies
(a) Statement of compliance
These financial statements have been prepared in accordance with HK
GAAP. A summary of the significant accounting policies adopted by the Group is
set out below.
(b) Basis of preparation of the financial statements
The measurement basis used in the preparation of the financial
statements is historical cost except for certain investments in securities
which are recorded at fair value as explained in the accounting policies set
out below.
(c) Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and all its subsidiaries made up to December 31 each
year.
(i) Subsidiaries and controlled enterprises
A subsidiary, in accordance with the Hong Kong Companies
Ordinance, is a company in which the Group, directly or
indirectly, holds more than half of the issued share
capital, or controls more than half of the voting power,
or controls the composition of the board of directors.
Subsidiaries are considered to be controlled if the
Company has the power, directly or indirectly, to govern
their financial and operating policies, so as to obtain
benefits from their activities.
An investment in a controlled subsidiary is consolidated
into the consolidated financial statements, unless it is
acquired and held exclusively with a view to subsequent
disposal in the near future or operates under severe
long-term restrictions which significantly impair its
ability to transfer funds to the Group, in which case,
it is stated in the consolidated balance sheet at fair
value with changes in fair value recognized in the same
way as other investments in securities as set out in
Note 2(s) below.
All material intra-Group transactions and balances are
eliminated on consolidation.
F-7
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
(c) Basis of consolidation (continued)
(ii) Goodwill
Positive goodwill arising on consolidation represents
the excess of the cost of the acquisition over the
Group's share of the fair value of the identifiable
assets and liabilities acquired.
For acquisitions before January 1, 2001, positive
goodwill is eliminated against reserves and is reduced
by impairment losses recognized in the statement of
operations (see Note 2(t) below).
For acquisitions on or after January 1, 2001, positive
goodwill is amortized to the consolidated statement of
operations on a straight-line basis over its estimated
useful life. Positive goodwill is stated in the
consolidated balance sheet at cost less any accumulated
amortization and any impairment losses (see Note 2(t)
below).
On disposal of a controlled subsidiary during the year,
any attributable amount of purchased goodwill not
previously amortized through the consolidated statement
of operations or which has previously been dealt with as
a movement on Group reserves is included in the
calculation of the profit or loss on disposal.
(d) Property, plant and equipment and depreciation
Property, plant and equipment are stated in the balance sheet at
cost, less accumulated depreciation and any accumulated impairment losses (see
Note 2(t) below). Cost includes materials, labour and an appropriate
proportion of overhead and borrowing costs directly attributable to
acquisition, construction or production of such property, plant and equipment
that necessarily take a substantial period of time to get ready for their
intended use. Estimated cost of dismantling and removing the property, plant
and equipment and restoring the site, to the extent that it is recognized as a
provision under Statement of Standard Accounting Practice ("SSAP") 28
"Provisions, contingent liabilities and contingent assets" issued by the HKSA,
is also included.
Depreciation is provided on a straight-line basis on the cost of
the equipment required to support a fully operating network and cable
television system at rates determined by the estimated useful lives of the
assets ranging from five to 20 years, adjusted by the appropriate pre-maturity
fraction during the pre-maturity period, which began with the first earned
subscriber revenue on October 31, 1993 and was to continue until the earlier
of the attainment of a predetermined subscriber level and December 31, 1996.
The pre-maturity period ended on November 30, 1996, when the predetermined
subscriber level was attained. Depreciation is provided on a straight-line
basis on the cost of other assets at rates determined by the estimated useful
lives of the assets of two to 40 years.
The principal annual depreciation rates used are as follows:
Network, decoders, cable modems and
television production systems 5% to 50%
Furniture, fixtures, other equipment
and motor vehicles 10% to 33.33%
Leasehold land Shorter of 40 years and unexpired term
of land leases
Buildings 2.5%
Leasehold improvements 8.33%
F-8
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
(e) Programming library
Programming library consists of presentation rights for
commissioned programs and acquired programs for showing on the Group's
television channels, and commissioned programs for licencing purposes.
Presentation rights are stated in the balance sheet at cost less
accumulated amortization and any impairment losses (see Note 2(t) below).
Amortization is charged to the statement of operations on an accelerated basis
over the license period or over the estimated number of future showings.
Subsequent expenditure on programs after initial acquisition is recognized as
an expense when incurred. Costs of in-house programs are written off in the
period in which they are incurred.
Commissioned programs for licencing purposes comprise direct
production costs and production overheads, and are stated at the lower of
amortized cost or net realizable value. Costs are amortized on an individual
program basis in the ratio of the current year's gross revenues to
management's forecast of the total ultimate gross revenues from all sources.
(f) Inventories
Inventories are stated at the lower of cost and net realizable
value. Cost is calculated on the weighted average basis and comprises all
costs of purchase, costs of conversion and other costs incurred in bringing
the inventories to their present location and condition. Net realizable value
is determined by the Group based on the expected replacement cost of the
inventories net of provisions for obsolescence.
(g) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and on hand, demand
deposits with banks and other financial institutions, and short-term, highly
liquid investments that are readily convertible into known amounts of cash and
which are subject to an insignificant risk of changes in value, having been
within three months of maturity at acquisition. Bank overdrafts that are
repayable on demand and form an integral part of the Group's cash management
are also included as a component of cash and cash equivalents for the purpose
of the cash flow statement. None of the Group's cash and cash equivalents are
restricted as to withdrawal.
(h) Revenue recognition
Revenue is recognized in the statement of operations provided it is
probable that the economic benefits will flow to the Group and the revenue and
costs, if any, can be measured reliably as follows:
(i) Income from the provision of subscription television and
Internet services is recognized at the time when the
services are provided.
(ii) Installation fees are recognized upon completion of the
related installation work to the extent of direct
selling costs.
(iii) Where packaged service fees comprise a number of
elements and the fees can be allocated on a reasonable
basis into elements of subscription service and
installation service, revenue is recognized in
accordance with the accounting policies set out in Note
2(h)(i) and (ii) above. Where packaged service fees
cannot be allocated into individual elements, the fees
are deferred and recognized evenly over the term of the
service period.
(iv) Advertising income net of agency deductions is
recognized on telecast of the advertisement. When an
advertising contract covers a specified period, the
related income is recognized evenly over the contract
period.
(v) Program licencing income is recognized on a
straight-line basis over the license period or in full
upon delivery of the programs concerned in accordance
with the terms of the license contracts, and is stated
net of withholding tax.
F-9
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
(h) Revenue recognition (continued)
(vi) When the outcome of construction contracts relating to
the Group's satellite television services business can
be estimated reliably, revenue from a fixed price
contract is recognized using the percentage of
completion method, measured with reference to the
percentage of contract costs incurred to date relative
to the estimated total contract costs. When the outcome
of such construction contracts cannot be estimated
reliably, revenue is recognized only to the extent that
recovery of contract costs is probable.
(vii) Dividend income from unlisted investments is recognized
when the shareholder's right to receive payment is
established.
(viii) Interest income is accrued on a time-apportioned basis
by reference to the principal outstanding and the rate
applicable.
(i) Borrowing costs
Borrowing costs are expensed in the statement of operations in the
period in which they are incurred, except to the extent that they are
capitalized as being directly attributable to the acquisition, construction or
production of an asset that necessarily takes a substantial period of time to
get ready for its intended use.
(j) Income tax
(i) Income tax for the year comprises current tax and
movements in deferred tax assets and liabilities.
(ii) Current tax is the expected tax payable on the taxable
income for the year, using tax rates enacted or
substantively enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
(iii) Deferred tax assets and liabilities arise from
deductible and taxable temporary differences
respectively, being the differences between the carrying
amounts of assets and liabilities for financial
reporting purposes and their tax bases. Deferred tax
assets also arise from unused tax losses and unused tax
credits.
Apart from certain limited exceptions, all deferred tax
liabilities, and all deferred tax assets to the extent
that it is probable that future taxable profits will be
available against which the asset can be utilized, are
recognized. Future taxable profits that may support the
recognition of deferred tax assets arising from
deductible temporary differences include those that will
arise from the reversal of existing taxable temporary
differences, provided those differences relate to the
same taxation authority and the same taxable entity, and
are expected to reverse either in the same period as the
expected reversal of the deductible temporary difference
or in periods into which a tax loss arising from the
deferred tax asset can be carried back or forward. The
same criteria are adopted when determining whether
existing taxable temporary differences support the
recognition of deferred tax assets arising from unused
tax losses and credits, that is, those differences are
taken into account if they relate to the same taxation
authority and the same taxable entity, and are expected
to reverse in a period, or periods, in which the tax
loss or credit can be utilized.
The limited exceptions to recognition of deferred tax
assets and liabilities are those temporary differences
arising from goodwill not deductible for tax purposes,
negative goodwill treated as deferred income, the
initial recognition of assets or liabilities that affect
neither accounting nor taxable profit (provided they are
not part of a business combination), and temporary
differences relating to investments in subsidiaries to
the extent that, in the case of taxable differences, the
Group controls the timing of the reversal and it is
probable that the differences will not reverse in the
foreseeable future, or in the case of deductible
differences, unless it is probable that they will
reverse in the future.
F-10
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
(j) Income tax (continued)
The amount of deferred tax recognized is measured based
on the expected manner of realization or settlement of
the carrying amount of the assets and liabilities, using
tax rates enacted or substantively enacted at the
balance sheet date. Deferred tax assets and liabilities
are not discounted.
The carrying amount of a deferred tax asset is reviewed
at each balance sheet date and is reduced to the extent
that it is no longer probable that sufficient taxable
profit will be available to allow the related tax
benefit to be utilized. Any such reduction is reversed
to the extent that it becomes probable that sufficient
taxable profit will be available.
Current tax balances and deferred tax balances, and
movements therein, are presented separately from each
other and are not offset. Current tax assets are offset
against current tax liabilities, and deferred tax assets
against deferred tax liabilities if, and only if, the
Group has the legally enforceable right to set off
current tax assets against current tax liabilities and
the following additional conditions are met:
- in the case of current tax assets and
liabilities, the Group intends either to
settle on a net basis, or to realize the
asset and settle the liability
simultaneously; or
- in the case of deferred tax assets and
liabilities, if they relate to income taxes
levied by the same taxation authority on
either:
- the same taxable entity; or
- different taxable entities, which,
in each future period in which
significant amounts of deferred
tax liabilities or assets are
expected to be settled or
recovered, intend to realize the
current tax assets and settle the
current tax liabilities on a net
basis or realize and settle
simultaneously.
(k) Advertising costs
Advertising costs are expensed as incurred. Advertising costs
amounted to HK$78,833,903, HK$63,689,974 and HK$40,924,164 for each of the
years ended December 31, 2001, 2002 and 2003, respectively.
(l) Operating leases
Rentals payable and rentals receivable in respect of assets held or
provided under operating leases are recognized in the statement of operations
in equal instalments over the accounting periods covered by the lease term,
except where an alternative basis is more representative of the pattern of
benefits to be derived from the leased asset. Lease incentives received or
granted are recognized in the statement of operations as an integral part of
the aggregate net lease rentals payable or receivable.
(m) Foreign currency translation
The functional currency of the Group's operations is the Hong Kong
dollar.
Foreign currency transactions during the year are translated into
Hong Kong dollars at the exchange rates ruling at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies are
translated into Hong Kong dollars at the exchange rates ruling at the balance
sheet date. Exchange gains and losses are dealt with in the statement of
operations.
The results of foreign subsidiaries are translated into Hong Kong
dollars at the average exchange rates for the year; balance sheet items are
translated into Hong Kong dollars at the rates of exchange ruling at the
balance sheet date. The resulting exchange differences are dealt with as a
movement in reserves.
F-11
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
(m) Foreign currency translation (continued)
On disposal of a foreign subsidiary, the cumulative amount of the
exchange differences which relate to that foreign enterprise is included in
the calculation of the profit and loss on disposal.
(n) Allowance for doubtful accounts
An allowance for doubtful accounts is provided upon the evaluation
of the recoverability of the receivables at the balance sheet date.
(o) Retirement benefits
The principal retirement scheme operated by the Group is a defined
contribution retirement scheme which has been closed to new employees joining
after October 1, 2000 while existing members of the scheme can continue to
accrue future benefits. Employees joining after October 1, 2000 will
participate in the Mandatory Provident Fund ("MPF") with terms as stipulated
by the MPF Authority. Assets of both schemes are maintained independently from
those of the Group. Contributions to the retirement schemes are charged to the
statement of operations as and when incurred. Retirement contributions
incurred by the Group for the years ended December 31, 2001, 2002 and 2003
amounted to HK$39,054,236, HK$40,716,728 and HK$30,939,810 respectively.
Effective from April 1, 2003, the Group has lowered the employer's
contribution rates on the defined contribution retirement scheme from 5%-15%
to 5%-10% of eligible employees' monthly salaries, which gives rise to an
annual reduction in retirement contributions of approximately HK$14 million.
(p) Construction contracts
The accounting policy for contract revenue is set out in Note
2(h)(vi) above. When the outcome of a construction contract can be estimated
reliably, contract costs are recognized as an expense with reference to the
stage of completion of the contract activity at the balance sheet date. When
it is probable that the total contract costs will exceed the total contract
revenue, the expected loss is recognized as an expense immediately. When the
outcome of a construction contract cannot be estimated reliably, contract
costs are recognized as an expense in the period in which they are incurred.
Construction contracts in progress at the balance sheet date are
recorded in the balance sheet at the net amount of costs incurred plus
recognized profits less recognized losses and progress billings. Amounts
received before the related work is performed are included under current
liabilities, and amounts billed but not yet paid by the customer for work
performed on a contract are included under current assets.
(q) Related party transactions
For the purposes of these financial statements, parties are
considered to be related to the Group if the Group has the ability, directly
or indirectly, to control the party or exercise significant influence over the
party in making financial and operation decisions, or vice versa, or where the
Group and the party are subject to common control or common significant
influence. Related parties may be individuals or other entities.
(r) Use of estimates
The preparation of the Group's consolidated financial statements
requires the management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the amounts
of revenues and expenses reported for the reporting period. Actual results
could differ from those estimates. Estimates are used when accounting for
items and matters such as allowance for uncollectible accounts receivable,
inventory obsolescence, amortization, taxes, provisions, and contingencies
(see also Note 2(v) below).
F-12
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
(s) Other investments in securities
(i) Non-trading securities are stated in the balance sheet
at fair value. Changes in fair value are recognized in
the investment revaluation reserve until the security is
sold, collected, or otherwise disposed of, or until
there is objective evidence that the security is
impaired, at which time the relevant cumulative gain or
loss is transferred from the investment revaluation
reserve to the statement of operations.
In determining whether there is objective evidence that
a security is impaired, the Group considers such factors
as significant deterioration in the earnings
performance, business prospects, adverse changes in the
regulatory, economic or technological environment, etc.
to determine if the Group expects to recover the
carrying value of the security.
Transfers from the investment revaluation reserve to the
statement of operations as a result of impairments are
reversed when the circumstances and events that led to
the impairment cease to exist and there is persuasive
evidence that the new circumstances and events will
persist for the foreseeable future.
(ii) Trading securities are stated in the balance sheet at
fair value. Changes in fair value are recognized in the
statement of operations as they arise.
(t) Impairment of assets
Internal and external sources of information are reviewed at each
balance sheet date to identify indications that the following assets may be
impaired or any impairment loss previously recognized no longer exists or may
have decreased:
- property, plant and equipment;
- programming library; and
- goodwill.
If any such indication exists, the asset's recoverable amount is
estimated. An impairment loss is recognized in the statement of operations
whenever the carrying amount of an asset or its cash-generating unit exceeds
its recoverable amount.
(i) Calculation of recoverable amount
The recoverable amount of an asset is the greater of its
net selling price and value in use. In assessing value
in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate
that reflects current market assessments of time value
of money and the risks specific to the asset. Where an
asset does not generate cash inflows largely independent
of those from other assets, the recoverable amount is
determined for the smallest group of assets that
generates cash inflows independently (ie a
cash-generating unit).
(ii) Reversals of impairment losses
In respect of assets other than goodwill, an impairment
loss is reversed if there has been a favourable change
in the estimates used to determine the recoverable
amount. An impairment loss in respect of goodwill is
reversed only if the loss was caused by a specific
external event of an exceptional nature that is not
expected to recur, and the increase in recoverable
amount relates clearly to the reversal of the effect of
that specific event.
A reversal of impairment losses is limited to the
asset's carrying amount that would have been determined
had no impairment loss been recognized in prior years.
Reversals of impairment losses are credited to the
statement of operations in the year in which the
reversals are recognized.
F-13
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
(u) Segment reporting
A segment is a distinguishable component of the Group that is
engaged either in providing services (business segment), or in providing
services within a particular economic environment (geographical segment),
which is subject to risks and rewards that are different from those of other
segments.
Segment revenue, expenses, results, assets and liabilities include
items directly attributable to a segment as well as those that can be
allocated on a reasonable basis to that segment. Segment revenue, expenses,
assets and liabilities are determined before intra-group balances and
intra-group transactions are eliminated as part of the consolidation process,
except to the extent that such intra-group balances and transactions are
between group enterprises within a single segment.
Segment capital expenditure is the total cost incurred during the
period to acquire segment assets (both tangible and intangible) that are
expected to be used for more than one period.
Corporate items mainly comprise financial and corporate assets,
interest-bearing borrowings and corporate and financing expenses.
(v) Provisions and contingent liabilities
Provisions are recognized for liabilities of uncertain timing or
amount when the Group has a legal or constructive obligation arising as a
result of a past event, it is probable that an outflow of economic benefits
will be required to settle the obligation and a reliable estimate can be made.
Where the time value of money is material, provisions are stated at the
present value of the expenditures expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will
be required, or the amount cannot be estimated reliably, the obligation is
disclosed as a contingent liability, unless the probability of outflow of
economic benefits is remote. Possible obligations, whose existence will only
be confirmed by the occurrence or non-occurrence of one or more future events,
are also disclosed as contingent liabilities unless the probability of outflow
of economic benefits is remote.
(w) Employee benefits
(i) Salaries, annual bonuses, paid annual leave, leave
passage and the cost to the Group of non-monetary
benefits are accrued in the year in which the associated
services are rendered by employees of the Group.
(ii) Contributions to defined contribution plans, including
contributions to Mandatory Provident Funds as required
under the Hong Kong Mandatory Provident Fund Schemes
Ordinance, are recognized as an expense in the statement
of operations as incurred, except to the extent that
they are included in the cost of property, plant and
equipment not yet recognized as an expense.
(iii) When the Group grants employees options to acquire
shares of the Company, no employee benefit cost or
obligation is recognized at the date of grant. When the
options are exercised, equity is increased by the amount
of the proceeds received.
3. Service revenues
The principal activity of the Company is investment holding. The
principal activities of the subsidiaries are set out in Note 27 to the
consolidated financial statements.
Service revenues comprise principally subscription and installation
fees for cable television and Internet services and also include equipment
rental, advertising income net of agency deductions, marketing contributions,
channel service fees, television relay service income, programme licencing
income, fiber network and satellite television systems maintenance income,
project management service fees, sales of satellite television systems,
television magazine sales, late payment charges to subscribers and similar
income.
F-14
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
4. Segment information
The Company's reportable segments are strategic business units. The
Company evaluates segment performance based on a number factors, of which the
primary financial measures are business segment revenues and operating
income/loss.
Pay television Internet and multimedia Consolidated
2001 2002 2003 2001 2002 2003 2001 2002
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
(restated)
Revenue
External revenue 1,595,362 1,710,767 1,734,208 335,637 450,021 408,605 1,930,999 2,160,788
============ ============ =========== ============ ============ ============ =========== ============
Results
Segment result 349,323 331,757 444,138 (49,692) 8,668 (84,775) 299,631 340,425
============ ============ =========== ============ ============ ============
Corporate expenses (119,802) (113,990)
----------- ------------
Profit from operations 179,829 226,435
Interest income 58,649 26,355
Non-operating
income/(expenses) 1,027 (198)
Impairment loss on
investments - (72,870)
Finance costs (72,013) (62,463)
Income tax - -
----------- ------------
Profit attributable to 167,492 117,259
shareholders
=========== ============
Assets
Segment assets 1,619,901 1,616,550 948,179 881,402 2,568,080
Corporate assets 656,023
------------
Consolidated total
assets 3,224,103
- ------------------------ ============
Liabilities
Segment liabilities 485,752 539,354 265,331 181,550 751,083
Corporate liabilities 948,252
------------
Consolidated total 1,699,335
liabilities
============
Depreciation
Segment depreciation 285,016 296,826 289,362 143,198 201,758 243,597 428,214 498,584
Corporate depreciation 6,445 5,674
----------- ------------
Consolidated total
depreciation 434,659 504,258
=========== ============
Other information
Capital expenditure
- property, plant and
equipment 352,115 251,533 200,825 173,992
- programming library 91,092 81,934
Amortization 103,200 152,728 94,485
2003
HK$'000
Revenue
External revenue 2,142,813
============
Results
Segment result 359,363
Corporate expenses (108,753)
------------
Profit from operations 250,610
Interest income 8,485
Non-operating
income/(expenses) (9,885)
Impairment loss on
investments -
Finance costs (15,610)
Income tax (13,142)
------------
Profit attributable to 220,458
shareholders
============
Assets
Segment assets 2,497,952
Corporate assets 182,899
------------
Consolidated total
assets 2,680,851
- ------------------------ ============
Liabilities
Segment liabilities 720,904
Corporate liabilities 275,299
------------
Consolidated total 996,203
liabilities
============
Depreciation
Segment depreciation 532,959
Corporate depreciation 5,640
------------
Consolidated total
depreciation 538,599
============
Other information
Capital expenditure
- property, plant and
equipment
- programming library
Amortization
F-15
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
4. Segment information (continued)
Pay television services include cable television services,
advertising services, television relay services, program licencing, satellite
television systems maintenance services, project management services, sales of
satellite television systems and network rental. Internet and multimedia
services include dial-up and Broadband Internet access services.
The Group's operating activities are primarily undertaken in one
geographical area, Hong Kong.
5. Profit before taxation
Profit before taxation is stated after charging/(crediting):
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Interest income
Interest income from listed investments (8,691) (1,402) (205)
Interest income from deposits with banks
and other financial institutions (49,655) (24,259) (8,280)
Other interest income (303) (694) -
---------------- ---------------- ----------------
(58,649) (26,355) (8,485)
================ ================ ================
Finance costs
Interest expenses on bank loans and
overdrafts repayable within five years 13 1,861 4,843
Interest expenses on convertible bonds
repayable within five years 72,000 60,602 10,767
---------------- ---------------- ----------------
72,013 62,463 15,610
================ ================ ================
Other items
Depreciation:
- - assets held for use in operating leases 32,453 59,265 71,346
- - others 402,206 444,993 467,253
Amortization of programming library* 103,253 152,861 95,152
Cost of inventories 23,841 12,671 21,093
Rentals payable under operating leases
in respect of land and buildings 42,736 43,271 42,603
Contribution to defined contribution
plans, net of capitalized costs 32,925 35,405 27,110
Impairment loss on investments - 72,870 -
Rentals receivable under operating leases in respect of:
- - subleased land and buildings (7,146) (5,773) (5,392)
- - owned plant and machinery (30,955) (27,865) (55,491)
Net realized gain on disposal of investments - (469) (99)
================ ================ ================
*Amortization of programming library is included within programming
costs in the consolidated results of the Group.
F-16
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
5. Profit before taxation (continued)
Operating expenses are analyzed by nature in compliance with SSAP
1, "Presentation of Financial Statements" as follows:
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Depreciation and amortization
(including amortization of programming library) 537,912 657,119 633,751
Staff costs 627,455 620,276 647,313
Other operating expenses 585,803 656,958 611,139
---------------- ---------------- ----------------
Total operating costs 1,751,170 1,934,353 1,892,203
================ ================ ================
6. Non-operating income/(expenses)
These comprise:
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Net gain/(loss) on disposal of property, plant and equipment 1,027 (198) (7,593)
Net realized exchange loss on foreign currency deposits - - (2,292)
---------------- ---------------- ----------------
1,027 (198) (9,885)
================ ================ ================
7. Income tax in the consolidated statement of operations
(a) Taxation in the consolidated statement of operations represents:
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Current tax - Provision for Hong Kong Profits Tax
Tax for the year (8,825) (10,827) (139,933)
Over provision in respect of prior year - 4 -
---------------- ---------------- ----------------
(8,825) (10,823) (139,933)
---------------- ---------------- ----------------
Current tax - Overseas
Tax for the year - - (5)
---------------- ---------------- ----------------
Deferred tax
Reversal of temporary differences 8,825 10,823 138,683
Effect of increase in tax rate on
deferred tax balances at January 1 - - (11,887)
---------------- ---------------- ----------------
8,825 10,823 126,796
---------------- ---------------- ----------------
Net taxation - - (13,142)
================ ================ ================
F-17
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
7. Income tax in the consolidated statement of operations (continued)
In March 2003, the Government of Hong Kong SAR announced an
increase in the Profits Tax rate applicable to the Group's operations in Hong
Kong from 16% to 17.5% starting from the 2003/04 year of assessment. This
increase is taken into account in the preparation of the Group's 2003
financial statements. Accordingly, the provision for Hong Kong Profits Tax for
2003 is calculated at 17.5% (2001 and 2002: 16%) of the estimated assessable
profits for the year. Taxation for the overseas subsidiary is charged at the
appropriate current rate of taxation ruling in the relevant country.
The differences between the profits tax rate in Hong Kong and the
Group's effective tax rate were as follows for the years ended December 31,
2001, 2002 and 2003:
2001 2002 2003
---- ---- ----
% % %
Hong Kong Profits Tax rate 16.0 16.0 17.5
Tax effect of non-deductible expenses 0.8 12.2 1.0
Tax effect of non-taxable revenue (12.5) (13.1) (3.7)
Utilization of unrecognized tax losses of previous years (4.3) (15.1) (14.3)
Effect of opening deferred tax balances resulting
from increase in tax rate during the year - - 5.1
---------------- ---------------- ----------------
Average effective tax rate - - 5.6
================ ================ ================
8. Dividends attributable to the year
(a) Dividends attributable to the year
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Interim dividend declared and paid of 1.5 cents per share
(2001: Nil; 2002: 1.5 cents per share) - 30,289 30,289
Final dividend proposed after the balance sheet date
of 4 cents per share (2001: 2.5 cents per share;
2002: 1.5 cents per share) 50,350 30,289 80,769
---------------- ---------------- ----------------
50,350 60,578 111,058
================ ================ ================
The final dividend proposed after the balance sheet date has not
been recognized as a liability at the balance sheet date.
(b) Dividend attributable to the previous financial year, approved and paid
during the year
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Final dividend in respect of the previous financial year,
approved and paid during the year, of 1.5 cents per
share (2001: Nil; 2002: 2.5 cents per share) - 50,350 30,289
================ ================ ================
F-18
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
9. Basic and diluted earnings per share
(a) Basic earnings per share
The calculation of basic earnings per share is based on the net
profit of HK$167,492,000, HK$117,259,000 and HK$220,458,000 for each of the
years ended December 31, 2001, 2002 and 2003 respectively and the weighted
average of 2,014,000,000, 2,016,284,165 and 2,019,234,400 ordinary shares
outstanding for each respective year.
(b) Diluted earnings per share
The calculation of diluted earnings per share is based on the net
profit of HK$167,492,000, HK$117,259,000 and HK$220,458,000 for each of the
years ended December 31, 2001, 2002 and 2003 respectively and the weighted
average of 2,022,501,763, 2,026,931,374 and 2,019,234,400 ordinary shares
outstanding for each respective year after adjusting for the effects of all
dilutive potential ordinary shares as shown below:
(c) Reconciliations
2001 2002 2003
---- ---- ----
Number of Number of Number of
shares shares shares
Weighted average number of ordinary
shares used in calculating
basic earnings per share 2,014,000,000 2,016,284,165 2,019,234,400
Deemed issue of ordinary shares for
no consideration pursuant
to the Company's share option scheme 8,501,763 10,647,209 -
------------------- ------------------- -------------------
Weighted average number of ordinary
shares used in calculating
diluted earnings per share 2,022,501,763 2,026,931,374 2,019,234,400
=================== =================== ===================
The Company's convertible bonds were all redeemed at par in 2003.
During 2001 and 2002, the potential issue of ordinary shares in connection
with the Company's convertible bonds (see Note 19) would not give rise to a
decrease in earnings per share. Accordingly, the convertible bonds had no
dilutive effect on the calculation of diluted earnings per share in 2001, 2002
and 2003. All of the Company's share options did not have intrinsic value
throughout 2003 and had no dilutive effect on the calculation of diluted
earnings per share in 2003.
Basic and diluted earnings per ADS is calculated on the same basis
based on 20 ordinary shares per ADS.
10. Change in accounting policy
In prior years, deferred tax liabilities were provided using the
liability method in respect of the taxation effect arising from all material
timing differences between the accounting and tax treatment of income and
expenditure, which were expected with reasonable probability to crystallize in
the foreseeable future. Deferred tax assets were not recognized unless their
realization was assured beyond reasonable doubt. With effect from January 1,
2003, in order to comply with SSAP 12 (revised) "Income taxes" issued by the
HKSA, the Group has adopted a new policy for deferred tax as set out in Note
2(j) .
The new accounting policy has been adopted retrospectively with the
debit balance of revenue reserve as at January 1, 2001 restated and reduced by
HK$13 million. The comparative information has been adjusted for the amounts
relating to prior periods as disclosed in the consolidated statement of
changes in equity.
F-19
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
11. Inventories
2002 2003
---- ----
HK$'000 HK$'000
Spare parts, consumables and equipment held for resale 41,739 33,487
Less: Provision for obsolescence (17,262) (15,976)
--------------- ---------------
24,477 17,511
=============== ===============
Included in spare parts, consumables and equipment held for resale
are inventories of HK$17,511,000 (2002: HK$24,477,000) stated net of provision
made in order to state these inventories at the lower of their cost and
estimated net realizable value.
12. Accounts receivable from trade debtors
An ageing analysis of accounts receivable from trade debtors (net
of allowance for doubtful accounts of HK$18,054,000 and HK$12,831,000 at
December 31, 2002 and 2003 respectively) is set out as follows:
2002 2003
---- ----
HK$'000 HK$'000
0 to 30 days 63,700 67,615
31 to 60 days 12,951 19,526
61 to 90 days 6,327 12,530
Over 90 days 6,502 12,383
--------------- ---------------
89,480 112,054
=============== ===============
Allowance for doubtful accounts is analyzed as follows:
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Balance at beginning of year 18,221 12,431 18,054
Provision for the year 5,085 10,902 10,449
Written off (9,738) (4,746) (15,672)
Bad debt recovered (1,137) (533) -
-------------- -------------- --------------
-------------- -------------- --------------
Balance at end of year 12,431 18,054 12,831
============== ============== ==============
============== ============== ==============
The Group has a defined credit policy. The general credit terms
allowed range from 0 to 60 days. Full provisions for doubtful debts have been
made for all subscription fees overdue for more than 90 days and airtime sales
overdue for more than 150 days.
F-20
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
13. Amounts due from fellow subsidiaries
Amounts due from fellow subsidiaries are unsecured, interest free
and repayable on demand.
14. Deposits with financial institutions
The deposits placed with financial institutions, all matured in
2003, were credit-linked to investment grade debt securities issued by
corporates, including a fellow subsidiary.
15. Investments in debt securities
2002 2003
---- ----
HK$'000 HK$'000
Listed outside Hong Kong, at market value 15,746 -
============ ============
16. Property, plant and equipment
Network,
decoders, Furniture,
cable fixtures,
modems and other
television equipment
production and motor Leasehold land and buildings
systems vehicles in Hong Kong
------------------------------------------
Leasehold
Long term Medium term Short term improvements Total
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
Cost
At January 1, 2003 4,926,874 473,575 3,306 2,673 70 278,648 5,685,146
Additions 382,526 43,658 - - - 11,242 437,426
Disposals (204,626) (3,033) - - - (8,681) (216,340)
Reclassification (11,205) - - - - - (11,205)
---------------------------- ------------- ------------- -------------- ------------- -------------
At December 31, 2003 5,093,569 514,200 3,306 2,673 70 281,209 5,895,027
---------------------------- ------------- ------------- -------------- ------------- -------------
Accumulated depreciation
At January 1, 2003 2,842,491 381,117 1,065 147 70 158,067 3,382,957
Charge for the year 482,488 30,557 76 67 - 25,411 538,599
Impairment loss 5,169 565 - - - - 5,734
Written back on disposals (190,138) (2,937) - - - (6,513) (199,588)
Reclassification (2,404) - - - - - (2,404)
---------------------------- ------------- ------------- -------------- ------------- -------------
At December 31, 2003 3,137,606 409,302 1,141 214 70 176,965 3,725,298
============================ ============= ============= ============== ============= =============
Net book value
At December 31, 2003 1,955,963 104,898 2,165 2,459 - 104,244 2,169,729
============================ ============= ============= ============== ============= =============
At December 31, 2002 2,084,383 92,458 2,241 2,526 - 120,581 2,302,189
============================ ============= ============= ============== ============= =============
As at December 31, 2003, the gross carrying amounts of property,
plant and equipment of the Group held for use in operating leases were
HK$331,896,000 (2002: HK$322,921,000) and the related accumulated depreciation
was HK$151,377,000 (2002: HK$132,796,000).
F-21
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
17. Programming library
HK$'000
Cost
At January 1, 2003 480,397
Programming licenses and rights acquired 88,472
Written off (136,357)
----------------
At December 31, 2003 432,512
----------------
Accumulated amortization
At January 1, 2003 331,546
Charge for the year 95,152
Written off (136,357)
----------------
At December 31, 2003 290,341
================
Net book value
At December 31, 2003 142,171
================
At December 31, 2002 148,851
================
18. Non-current investments
2002 2003
---- ----
HK$'000 HK$'000
Unlisted equity securities 20,957 9,725
================ ================
19. Interest-bearing borrowings
2002 2003
---- ----
HK$'000 HK$'000
Convertible bonds 300,000 -
Unsecured bank loans 386,299 -
---------------- ----------------
Due within one year included
under current liabilities 686,299 -
================ ================
At December 31, 2002, convertible bonds of principal value HK$300
million were held by the Wharf group and were convertible to shares at a price
of HK$11.95 per share. The term of the bonds was four years from November 24,
1999, the date on which the Company's shares commenced trading on The Stock
Exchange of Hong Kong Limited. Interest was payable at the rate of 4% per
annum, semi-annually in arrears.
The Company redeemed the convertible bonds at par upon their
maturity on November 23, 2003.
At December 31, 2002, the unsecured bank loans were repayable on
demand, bearing interest at rates ranging from 2.03% to 4% per annum.
F-22
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
20. Amounts due to trade creditors
An ageing analysis of amounts due to trade creditors is set out as
follows:
2002 2003
---- ----
HK$'000 HK$'000
0 to 30 days 13,746 17,493
31 to 60 days 15,304 7,952
61 to 90 days 16,560 14,125
Over 90 days 7,838 8,950
---------------- ----------------
53,448 48,520
================ ================
21. Amounts due to fellow subsidiaries
Amounts due to fellow subsidiaries are unsecured, interest free,
and repayable on demand.
22. Amount due to immediate holding company
Amount due to immediate holding company is unsecured, interest
free, and has no fixed terms of repayment. The average balances during the
years ended December 31, 2002 and 2003 are HK$15,019,000 and HK$2,246,000,
respectively.
23. Current assets and current liabilities
Included under current assets and current liabilities that are
expected to be recovered/settled after more than one year as follows:
2002 2003
---- ----
HK$'000 HK$'000
Inventories 21,518 5,258
Accounts receivable from trade debtors - 61
Deposits, prepayments and other receivables 6,418 12,982
Amounts due from fellow subsidiaries 7,510 2,292
Accrued expenses and other payables (15,785) (1,712)
Receipts in advance and customers' deposits (94,797) (82,444)
Amounts due to fellow subsidiaries - (44)
============= =============
F-23
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
24. Income tax in the balance sheet
(a) Current taxation in the balance sheet represents:
2002 2003
---- ----
HK$'000 HK$'000
Provision for Hong Kong Profits Tax for the year 10,827 139,933
Overseas taxation - 5
Provisional Profits Tax paid (8,820) (8,883)
----------- -----------
2,007 131,055
=========== ===========
(b) Deferred tax assets and liabilities recognized:
The components of deferred tax (assets)/liabilities recognized in
the consolidated balance sheet and the movements during the year are as
follows:
Depreciation
allowances in
excess of
related Tax
Deferred tax arising from: depreciation losses Total
HK$'000 HK$'000 HK$'000
At January 1, 2002
- as previously reported 150,619 - 150,619
- prior period adjustments 112,106 (125,106) (13,000)
----------------- ----------------- ----------------
- as restated 262,725 (125,106) 137,619
Charged / (credited) to consolidated statement of operations (Note 7(a)) 1,710 (12,533) (10,823)
----------------- ----------------- ----------------
At December 31, 2002 (restated) 264,435 (137,639) 126,796
Credited to consolidated statement of operations (Note 7(a)) (13,199) (113,597) (126,796)
----------------- ----------------- ----------------
At December 31, 2003 251,236 (251,236) -
================= ================= ================
2002 2003
---- ----
HK$'000 HK$'000
(restated)
Net deferred tax assets recognized on the balance sheet (107,198) (112,600)
Net deferred tax liabilities recognized on the balance sheet 233,994 112,600
--------------- ---------------
126,796 -
=============== ===============
F-24
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
24. Income tax in the balance sheet (continued)
(c) Deferred tax assets not recognized
The Group has not recognized deferred tax assets in respect of the
following:
2002 2003
---- ----
HK$'000 HK$'000
(restated)
Future benefit of tax losses 902,275 954,093
Provision for obsolete inventories 32 35
--------------- ---------------
902,307 954,128
=============== ===============
25. Share capital
2002 2002 2003 2003
---- ---- ---- ----
No. of shares HK$'000 No. of shares HK$'000
`000 `000
Authorized
Ordinary shares of HK$1 each 8,000,000 8,000,000 8,000,000 8,000,000
================== ================= ================== =================
Issued and fully paid
At January 1 2,014,000 2,014,000 2,019,234 2,019,234
Shares issued under share option scheme 5,234 5,234 - -
------------------ ----------------- ------------------ -----------------
At December 31 2,019,234 2,019,234 2,019,234 2,019,234
================== ================= ================== =================
During 2002, options were exercised to subscribe for 5,234,000
ordinary shares in the Company at a consideration of HK$17,273,000, of which
HK$5,234,000 was credited to share capital and the balance of HK$12,039,000
was credited to the share premium account. No options were exercised during
2003.
F-25
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
26. Equity compensation benefits
Pursuant to the Company's share option scheme, the Board of
Directors is authorized to grant options to eligible employees to subscribe
for ordinary shares of the Company at prices as determined by the Board of
Directors in accordance with the terms of the scheme.
(a) Movements in share options
2002 2003
---- ----
Number Number
At January 1 66,843,000 58,543,600
Issued 380,000 -
Exercised (5,234,400) -
Lapsed (3,445,000) (29,752,100)
------------------- -------------------
At December 31 58,543,600 28,791,500
=================== ===================
Options vested at December 31 18,520,500 10,170,300
=================== ===================
(b) Terms of unexpired and unexercised share options at balance sheet
date
Date granted Exercise period Exercise price 2002 2003
Number Number
February 8, 2000 April 1, 2001 to December 31, 2009 HK$10.49 17,820,000 16,270,000
February 19, 2001 July 1, 2002 to December 31, 2003 HK$3.30 27,243,800 -
February 19, 2001 July 1, 2002 to December 31, 2005 HK$3.30 13,099,800 12,141,500
October 9, 2002 January 1, 2004 to December 31, 2005 HK$3.30 380,000 380,000
---------------- ---------------
58,543,600 28,791,500
================ ===============
(c) No share options were granted during the year. Details of share options
granted during 2002 at a consideration of HK$10 were:
Date granted Exercise period Exercise price 2002
Number
October 9, 2002 January 1, 2004 to December 31, 2005 HK$3.30 380,000
================
(d) During the year, no share options were exercised. Details of share options exercised during 2002 were:
Exercise period Exercise price Market value per share at exercise Proceeds received Number
date
July 2, 2002 HK$3.30 Range from HK$3.60 to HK$4.75 HK$17,273,000 5,234,400
to September 13,
2002
F-26
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
27. Particulars of subsidiaries
The subsidiaries of the Company at December 31, 2003 were as
follows:
Percentage of ordinary
Place of Particulars of issued shares held
incorporation/ capital, all fully ------------------------
Name of company operation Principal activities paid Directly Indirectly
- ---------------------------- ---------------------- ------------------------- ----------------------- ------------- ------------
Apex Victory Limited British Virgin Programme licensing 500 ordinary shares 100 -
Islands of US$1 each
Cable Network Hong Kong Investment holding 100 ordinary shares 100 -
Communications Limited of HK$1 each
2 non-voting deferred - -
shares of HK$1 each
Hong Kong Cable Hong Kong Advertising airtime, 2 ordinary shares of - 100
Enterprises Limited program licencing and HK$1 each
channel carriage service
Hong Kong Cable Television Hong Kong Pay television 1,000,000,000 - 100
Limited services ordinary shares of
HK$1 each
i-CABLE Cineplex Limited Hong Kong Inactive 10,000,000 ordinary - 100
shares of HK$1 each
i-CABLE China Limited British Virgin Inactive 500 ordinary shares - 100
Islands of US$1 each
i-CABLE Network Limited Hong Kong Network operation 100 ordinary shares - 100
services of HK$1 each
2 non-voting deferred - -
shares of HK$1 each
i-CABLE Satellite Hong Kong Non-domestic television 2 ordinary shares of - 100
Television Limited services and program HK$1 each
licencing
i-CABLE WebServe Limited Hong Kong Internet and multimedia 2 ordinary shares of - 100
services HK$1 each
i-CABLE Ventures Limited British Virgin Investment holding 500 ordinary shares 100 -
Islands of US$1 each
Kreuger Assets Limited British Virgin Investment holding 500 ordinary shares - 100
Islands of US$1 each
Maspon Company Limited Hong Kong Investment holding 100 ordinary shares - 100
of HK$1 each
2 non-voting deferred - -
shares of HK$1 each
F-27
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
27. Particulars of subsidiaries (continued)
Percentage of ordinary
Place of Particulars of issued shares held
incorporation/ capital, all fully ------------------------
Name of company operation Principal activities paid Directly Indirectly
- ---------------------------- ---------------------- ------------------------- ----------------------- ------------- ------------
Moscan Assets Limited British Virgin Investment holding 500 ordinary shares - 100
Islands of US$1 each
New Television and Film Hong Kong Inactive 2 ordinary shares of - 100
International Limited HK$10 each
Rediffusion Engineering Hong Kong Systems installation 100 ordinary shares - 100
Limited and operation of HK$1 each
2 non-voting deferred - -
shares of HK$1 each
Rediffusion (Hong Kong) Hong Kong Cable television relay 100 ordinary shares - 100
Limited services of GBP0.50 each
40,000 non-voting - -
deferred shares of
GBP0.50 each
Rediffusion Satellite Hong Kong Satellite television 1,000 ordinary shares - 100
Services Limited systems of HK$10 each
Riddlewood Company Limited Hong Kong Investment holding 2 ordinary shares of - 100
HK$1 each
Wisdom Global Holdings British Virgin Investment holding 500 ordinary shares - 100
Limited Islands of US$1 each
Guangzhou Kuan Xun The People's Technical services HK$1,000,000 - 100
Customer Services Republic of China
Limited *
Details of partnerships held indirectly through subsidiaries at
December 31, 2003 were as follows:
Law under which
Name of partnership incorporated Principal activities Percentage of interest
- ----------------------------------------------------- ------------------------- ----------------------- -------------------------
The Cable Leasing Partnership Hong Kong Leasing 100
The Network Leasing Partnership Hong Kong Leasing 100
* English translation of Chinese name
F-28
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
28. Commitments and contingencies
(a) Significant leasing arrangements
The Group leases a number of premises under operating leases for
use as office premises, carparks, warehouses, district centres, retail shops,
remote camera sites, multipoint microwave distribution system transmission
sites and hub sites. The terms of the leases vary and may be renewable on a
monthly basis or run for an initial period of three to fifteen years, with an
option to renew the lease after that date at which time all terms are
renegotiated. Lease payments are usually adjusted every two to three years to
reflect market rentals. None of the leases includes contingent rentals.
Some of the leased properties have been sublet by the Group under
operating leases. The terms of the subleases vary and may be renewable on a
monthly basis or run for an initial period of three years, with an option to
renew the lease after that date at which time all terms are renegotiated.
The Group leases out cable modem equipment to subscribers under
operating leases. Prior to June 2002, the terms of the leases varied and ran
for an initial period of not more than twelve months with automatic renewal on
a year-to-year basis at rates prevailing at the time of expiry, unless
terminated by the lessees by giving 30 days' written notice prior to the lease
expiry date. With effect from June 2002, the terms of the leases were revised
to become renewable on a monthly basis. The Group also leases out decoders to
cable television subscribers under operating leases starting from year 2002
with the leases renewable on a monthly basis. None of the leases includes
contingent rentals.
(b) Operating leases
The total future minimum lease payments payable under
non-cancellable operating leases are as follows:
2002 2003
---- ----
HK$'000 HK$'000
Within one year 35,366 31,982
After one year but within five years 81,633 46,235
After five years 2,753 -
--------------- ---------------
119,752 78,217
=============== ===============
Future minimum lease payments, in respect of land and buildings, as
of December 31, 2003 under non-cancellable operating leases having initial or
remaining lease terms of more than one year are as follows:
2002 2003
---- ----
HK$'000 HK$'000
Year ending December 31, 2003 34,466 -
Year ending December 31, 2004 34,894 30,928
Year ending December 31, 2005 26,615 23,651
Year ending December 31, 2006 9,958 9,872
Year ending December 31, 2007 10,182 10,092
Year ending December 31, 2008 2,753 2,730
--------------- ---------------
118,868 77,273
=============== ===============
Total rental expenses for each of the years ended December 31,
2001, 2002 and 2003 were HK$42,736,000, HK$43,271,000 and HK$42,603,000,
respectively.
F-29
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
28. Commitments and contingencies (continued)
(c) Future operating lease income
(i) The total future minimum sublease payments receivable
under non-cancellable subleases at December 31, 2002 and
2003 amounted to HK$9,412,000 and HK$6,037,000,
respectively.
(ii) The total future minimum lease payments receivable in
respect of cable modem equipment and decoders under
non-cancellable operating leases are as follows:
2002 2003
---- ----
HK$'000 HK$'000
Within one year 1,829 6,735
=============== ===============
(d) License agreements
The Group is required to pay license fees to the Government of the
Hong Kong Special Administrative Region ("SAR") each year for the provision of
certain services. At December 31, 2003, these comprise mainly:
(i) an annual fixed domestic pay television program service
license of HK$1,371,000 plus a fee of HK$4 for every
subscriber to the domestic pay television program
service provided under the license;
(ii) an annual fixed telecommunication network services
("FTNS") license fee of HK$1,000,000 plus a fee of
HK$700 for every 100 customer connections and spectrum
utilization annual fee based on a variable fee for every
1 kHz or part thereof of spectrum assigned;
(iii) an annual fixed carrier (restricted) license fee of
HK$100,000 plus a fee of HK$700 for every 100 customer
connections and spectrum utilization annual fee based on
a variable fee for every 1 kHz or part thereof of
spectrum assigned; and
(iv) a satellite master antenna television ("SMATV") annual
license fee of HK$750 plus outlet fee of HK$700 for
every 100 outlet points or part thereof.
The total amounts of royalties and license fees paid to the Hong
Kong SAR Government for the years ended December 31, 2001, 2002 and 2003 were
HK$14,760,725, HK$12,666,273 and HK$12,730,473, respectively.
The Group has also entered into program license agreements with
content providers and has commitments to pay amounts under such license
agreements, which have been negotiated on normal commercial terms. The related
program costs are recognized in the period in which they are incurred and
accounted for in accordance with Note 2(e).
F-30
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
28. Commitments and contingencies (continued)
(e) Capital commitments
Capital commitments outstanding as of December 31, 2003 not
provided for in the financial statements were as follows:
2002 2003
---- ----
HK$'000 HK$'000
Authorized and contracted for
- Plant and equipment 61,006 78,240
- Programming rights 13 58,659
--------------- ---------------
61,019 136,899
=============== ===============
Authorized but not contracted for
- Plant and equipment 77,871 154,487
- Programming rights 13,672 25,652
--------------- ---------------
91,543 180,139
=============== ===============
(f) Contingent liabilities
As of December 31, 2003, there were contingent liabilities in
respect of the following:
(i) Nil amount of performance bond (2002: HK$10 million)
given to the Telecommunications Authority of Hong Kong
as required under the Group's fixed telecommunications
network services license.
(ii) Guarantees, indemnities and letters of awareness to
banks totaling HK$185 million (2002: HK$19 million) in
respect of overdraft and guarantee facilities given by
those banks to the subsidiaries. Of this amount, at
December 31, 2003, HK$55 million (2002: HK$7 million)
was utilized by the subsidiaries.
The Company has provided guarantees to certain of its
subsidiaries as a waiver of utility deposits and
indemnification for line of credit related to
transportation of equipment, with total amounting to
HK$8 million and all of which will expire in 2004.
Should these subsidiaries default, the Company will be
obliged to cover the amounts. The Company considers the
likelihood of the execution of such guarantee to be
remote and the amount involved, in any case, will not
have adverse impact on the financial position of the
Company. Accordingly, no liability has been accrued for
losses related to the Company's obligation under these
guarantee arrangements.
(iii) The Group is currently in discussion with the Inland
Revenue Department regarding the deductibility of
certain interest payments claimed in previous years' tax
computations. The outcome of the discussion is
uncertain. The management of the Group is of the view
that there are ample grounds to support the
deductibility of the interest expense and accordingly,
no provision has been made in this respect. In addition,
the immediate holding company has indemnified the Group
against any liability for tax which may arise in
consequence of an event occurring on or before November
1, 1999. It is estimated that the maximum tax exposure
at December 31, 2003 amounted to HK$106 million (2002:
HK$99 million), of which HK$64 million (2002: HK$64
million) will be indemnified by the immediate holding
company.
F-31
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
28. Commitments and contingencies (continued)
(f) Contingent liabilities (continued)
(iv) During the year, the Group entered into a forward
foreign exchange contract with a financial institution
to hedge certain firmly committed, non-Hong Kong dollar
commercial transactions in 2004. The Group had, as at
December 31, 2003, an outstanding forward contract to
buy foreign currency with a notional principal value of
HK$5.8 million equivalent.
The forward contract has not been designated as a
hedging instrument. The change in the fair value of the
forward contract is insignificant.
29. Related party transactions
The following represent material related party transactions between
the Group and related parties during the year ended December 31, 2003:
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Interest expenses on convertible bonds held by the Wharf group (Note(i)) 72,000 60,602 10,767
Rentals payable and related management fees on land and buildings
(Note(ii)) 40,700 40,551 38,360
Rentals receivable on land and buildings (Note(iii)) (5,769) (4,446) (4,455)
Network repairs and maintenance services charge (Note (iv)) (16,307) (20,556) (21,344)
Management fees (Note(v)) 12,797 13,423 11,634
Computer services (Note (vi)) 9,106 12,236 14,158
Leased line and PNETS charges and international bandwidth access charges
(Note (vii)) 20,916 23,799 24,496
Project management fees (Note (viii)) (10,371) (7,558) (7,135)
================ ================ ================
Notes:
(i) This represents interest expenses on convertible bonds held by the
Wharf group.
(ii) These represent rentals and related management fees paid to fellow
subsidiaries in respect of office premises, car parks, warehouses,
district centres, retail shops and hub sites. As at December 31,
2003, related rental deposits amounted to HK$7,513,000 (2002:
HK$8,711,000).
(iii) This represents rental received from a fellow subsidiary in respect
of the lease of office premises.
(iv) This represents service charges to a fellow subsidiary in relation
to the operation, repair and maintenance of ducts, cables and
ancillary equipment.
(v) This represents costs incurred by a fellow subsidiary on the
Group's behalf which were recharged to the Group.
(vi) This represents service charges paid to a fellow subsidiary for
computer system maintenance and consulting services provided.
(vii) This represents service fees paid to a fellow subsidiary in respect
of leasing of datalines, PNETS charges and international bandwidth
access charges incurred.
(viii) This represents fees received from a fellow subsidiary for the
provision of project management services.
F-32
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
29. Related party transactions (continued)
Included in Note 16 were additions to property, plant and equipment
totaling HK$920,000 (2002: HK$1,397,000) constructed by a fellow subsidiary on
behalf of the Group during the year ended December 31, 2003.
During 2002, the Company redeemed at face value a portion of the
convertible bonds in the principal amount of HK$1,500 million. The early
redemption was approved by independent shareholders at an extraordinary
general meeting held on October 22, 2002. On November 23, 2003 the remaining
portion of the convertible bonds of HK$300 million were redeemed at their
principal amount upon maturity.
The immediate holding company has issued deeds of indemnity in
respect of certain litigation, taxation and costs arising in respect of the
period prior to the Reorganization. The Group is not charged for these
indemnities.
30. Post balance sheet event
After the balance sheet date the directors proposed a final
dividend. Further details are disclosed in Note 8.
31. Comparative figures
Comparative figures have been adjusted as a result of the change in
accounting policy for deferred taxation, details of which are set out in note
10.
32. Ultimate holding company
The Directors consider the ultimate holding company at December 31,
2003 to be The Wharf (Holdings) Limited, which is incorporated in Hong Kong.
F-33
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP
The Group's accounting policies conform with HK GAAP, which differ
in certain significant respects from US GAAP. Information relating to the
nature and effect of such differences is presented below.
(a) Deferred pre-maturity and franchise costs
Under HK GAAP, all pre-maturity costs incurred during the
pre-maturity period of the Group's cable television operations and all
pre-operating costs incurred before the launch of the Group's cable television
operations on October 31, 1993 are recognized as an expense in the period in
which they are incurred.
Under US GAAP, certain pre-maturity and franchise costs are
deferred and amortized on a straight-line basis over the remaining term of the
initial subscription television broadcasting license which expires on May 31,
2005. The pre-maturity period began with the first earned subscriber revenue
on October 31, 1993 and was to continue until the earlier of the attainment of
a predetermined subscriber level and December 31, 1996. The pre-maturity
period ended on November 30, 1996 when the predetermined subscriber level was
attained. For US GAAP purposes, an adjustment has been made to reflect the
amortization of certain pre-maturity and franchise costs that have been
written off under HK GAAP that were allowed to be capitalized under US GAAP.
Management has evaluated the amortization periods of pre-maturity
and franchise costs and determined that no events or circumstances warrant a
revision to the estimates of useful lives. The aggregate amortization expense
was HK$90,229,000 (2002 and 2001: HK$90,410,000 for each year) for the year.
At December 31, 2003, the estimated aggregate amortization expense for the
next five succeeding fiscal years is as follows:
Year HK$'000
2004 89,686
2005 37,360
2006 -
2007 -
2008 -
(b) Goodwill
Goodwill arising on consolidation represents the excess of the cost
of the acquisition over the Group's share of the fair value of the
identifiable assets and liabilities acquired.
Under HK GAAP, for acquisitions before January 1, 2001, positive
goodwill is eliminated against reserves and is reduced by impairment losses.
For acquisitions on or after January 1, 2001, positive goodwill is amortized
to earnings on a straight-line basis over its estimated useful life. Goodwill
is stated in the consolidated balance sheet at cost less any accumulated
amortization and any impairment losses.
The Group has not made any acquisitions since January 1, 2001 that
would give rise to positive goodwill subject to amortization under HK GAAP.
Under US GAAP, prior to January 1, 2002, goodwill arising from the
application of the purchase method of accounting was capitalized and amortized
on a straight-line basis over its estimated useful life of 12 years from the
relevant acquisition date. Upon the adoption of Statement of Financial
Accounting Standard ("SFAS") 142, "Goodwill and Other Intangible Assets" with
effect from January 1, 2002, goodwill is assigned to the relevant reporting
units and a transitional impairment test was conducted by reference to the
carrying value of each reporting unit and their respective fair value at
January 1, 2002. Thereafter, goodwill is no longer subject to amortization,
but the recorded value is subject to an annual assessment for impairment using
a fair-value-based approach. An impairment loss is recorded if the recorded
goodwill exceeds its fair value. All reporting units to which goodwill is
assigned are tested for impairment and no impairment loss was identified as of
January 1, 2002, December 31, 2002 and December 31, 2003.
F-34
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(b) Goodwill (continued)
Had the Company ceased to recognize goodwill amortization expense
in the three years ended December 31, 2003 presented, the Company's net profit
and basic and diluted earnings per share and per ADS would have been as
follows:
Year ended December 31,
2001 2002
---- ----
Basic and
diluted Basic Diluted
Net earnings earnings earnings
profit/(loss) per share Net profit per share per share
HK$'000 HK$'000
As reported (5,748) (0.3) cents 100,320 5.0 cents 4.9 cents
Add: Amortization of
goodwill 16,826 0.9 cents - - -
---------------- -------------- -------------- ------------- ------------
Proforma 11,078 0.6 cents 100,320 5.0 cents 4.9 cents
================ ============== ============== ============= ============
Proforma basic earnings
per ADS* 11.0 cents 99.5 cents
============== =============
Proforma diluted 11.0 cents 99.0 cents
earnings per ADS*
============== ============
2003
----
Basic and
diluted
earnings per
Net profit share
HK$'000
As reported 127,826 6.3 cents
Add: Amortization of
goodwill - -
-------------- --------------
Proforma 127,826 6.3 cents
============== ==============
Proforma basic earnings
per ADS* 126.6 cents
==============
Proforma diluted 126.6 cents
earnings per ADS*
==============
* 1 ADS represents 20 ordinary shares
(c) Impairment of long-lived assets
Under HK GAAP, certain long-lived assets were reviewed for
impairment and a provision of HK$180 million was recorded against those assets
in prior years. Under US GAAP, long-lived assets and certain identifiable
intangibles to be held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. If the sum of the undiscounted expected future cash
flows is less than the carrying amount of the asset, the Group recognizes an
impairment loss. Measurement of an impairment loss for long-lived assets and
certain identifiable intangibles that management expects to hold and use are
based on the fair value of the asset. The fair value of an asset is the amount
at which the asset could be bought or sold in a current transaction between
willing parties, that is, other than in a forced or liquidation sale.
Accordingly, under US GAAP, the provision did not meet the criteria
for recognition of an impairment write-down and was reversed, with
depreciation expense recognized on the reversed amount.
(d) Deferred taxation
Prior to January 1, 2003, under HK GAAP, the Group provided for
deferred tax liabilities to the extent that there was a reasonable probability
that such deferred taxes would become payable in the foreseeable future.
Deferred tax benefits were not recognized unless their realization was assured
beyond reasonable doubt.
Under US GAAP, a provision is made for all deferred taxes as they
arise, and a valuation allowance is provided against deferred tax assets when
realization of such amounts does not meet the criterion of "more likely than
not". A valuation allowance on deferred tax assets is recorded if it is more
likely than not that some portion or all of the deferred tax assets will not
be realized through recovery of taxes previously paid and/or future taxable
income. The allowance is subject to ongoing adjustments based on changes in
circumstances that affect the Group's assessment of the realizability of the
deferred tax assets. The Company has considered the scheduled reversal of
deferred tax assets to the extent such assets can be realized through future
reversals of existing taxable temporary differences and operating loss
carryforwards.
F-35
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(d) Deferred taxation (continued)
The following table shows the principal items included in deferred
income taxes under US GAAP:
2002 2003
---- ----
HK$'000 HK$'000
Deferred tax assets:
Operating loss carryforwards 1,039,899 954,093
Inventories 32 35
---------------- ----------------
1,039,931 954,128
Less: Valuation allowance (867,426) (680,617)
---------------- ----------------
172,505 273,511
---------------- ----------------
Deferred tax liabilities:
Deferred expenses (34,764) (22,233)
Property, plant and equipment (264,537) (251,278)
---------------- ----------------
(299,301) (273,511)
================ ================
Net deferred income tax liabilities (126,796) -
================ ================
Prior to 2003, US GAAP adjustments were required to recognize all
deferred tax liabilities and all deferred tax assets to the extent such
amounts meet the "more likely than not" criterion. During 2002, deferred tax
assets of HK$107.2 million were recognized under US GAAP. This was pursuant to
a change in circumstances that caused a change in management judgment about
the realizability of operating loss carryforwards from losses incurred by a
subsidiary in prior years. In order to realize these operating loss
carryforwards, the subsidiary will need to generate additional taxable income
in the amount of approximately HK$670 million. Based upon projections for
future taxable income over the periods in which the deferred tax assets are
deductible, including management's expectations of market prospects of the
subsidiary's business, management believes it is more likely than not that the
subsidiary will realize these operating loss carryforwards in the amount of
HK$107.2 million, at December 31, 2002. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced and the effect on the Group's
consolidated financial position and results of operations could be
significant. The operating loss carryforwards do not expire.
At December 31, 2003, the Group had operating loss carryforwards of
HK$6,887.3 million which do not expire.
The valuation allowance at January 1, 2001 was HK$946.7 million.
During 2001, the valuation allowance increased by HK$27.9 million and
decreased by HK$107.2 million and HK$186.8 million during 2002 and 2003,
respectively.
F-36
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(d) Deferred taxation (continued)
Under HK GAAP, Statement of Standard Accounting Practice 12
(revised) ("SSAP 12 (revised)") became effective for all accounting periods
beginning on or after January 1, 2003. SSAP 12 (revised) requires full
recognition of all deferred tax liabilities and deferred tax assets to the
extent there is sufficient future taxable profit against which the asset can
be utilized, and requires, as far as practicable, restatement of all prior
period financial statements. Therefore, management re-evaluated the above
subsidiary's tax position for each previous year. Management has concluded
that, based on the amounts of previously unrecognized operating loss
carryforwards actually utilized by the above subsidiary in recent years, the
set of changes in circumstances that supported the recognition of deferred tax
assets from operating loss carryforwards in 2002 under US GAAP is considered
to have emerged before 2002 but of which existence was confirmed in 2002. For
the purposes of restating prior period financial statements under HK GAAP,
management considers that the above subsidiary could have recognized deferred
tax assets from operating loss carryforwards in amounts sufficient to offset
the amounts of deferred tax liabilities from taxable temporary differences
arising from another subsidiary within the i-CABLE Group, beginning from the
year 2001. Accordingly, a prior period adjustment has been made to the Group's
opening revenue reserve at January 1, 2001 under HK GAAP to eliminate the
amount of deferred tax liabilities of HK$13 million previously recognized
prior to the adoption of SSAP 12 (revised). Under US GAAP, however, this was
reflected in the 2002 reconciliation of net profit.
Based on the foregoing, the GAAP difference has been eliminated and
therefore US GAAP adjustments are no longer required in 2003.
(e) Installation fees and costs
Under HK GAAP, installation fees relating to the Broadband Internet
access services are recognized upon completion of the installation to the
extent that they do not exceed the direct selling costs incurred. The
incremental direct costs (excluding selling costs) incurred that are
associated with the installation are capitalized and amortized over the
estimated customer service period.
Under US GAAP, installation fees relating to the Broadband Internet
access services and the related incremental direct costs (excluding selling
costs) up to, but not exceeding, the amount of the installation revenue, are
deferred and recognized on a straight-line basis over the estimated customer
service period, which is four years as of December 31, 2003, with respect to
customers under monthly service contracts, or over the contract period, with
respect to customers under 12 to 18 month service contracts. The excess of
incremental direct costs (excluding selling costs) over the related
installation fees, to the extent that they are recoverable from future
contractual revenues, are deferred and amortized over the contract period.
Under HK GAAP, where packaged service fees comprise a number of
elements and the fees can be allocated on a reasonable basis into separate
elements, revenue is recognized in accordance with the accounting policies
applicable for the respective elements. Where packaged service fees cannot be
allocated into individual elements, the fees are deferred and recognized over
the term of the service period.
Under US GAAP, consideration received for components of enforceable
contracts involving multiple element arrangements are accounted for as
separate units only if the individual components meet all the criteria for
separation accounting, and the arrangement consideration can be allocated to
the individual components based on the fair value of the respective
components. Otherwise, the entire arrangement consideration is accounted for
as one single unit, and is deferred and recognized over the contract period.
Installation fees in certain multiple element arrangements did not meet all
the criteria for separation accounting. Accordingly, revenue that was
separated and recorded as installation fees upon the completion of the
installation under HK GAAP was reversed, giving rise to a corresponding
increase in subscription fees to be recognized over the term of the contract.
F-37
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(f) Valuation of cost method investments
Under HK GAAP, unlisted non-trading securities are measured at fair
value in the balance sheet. Unrealized holding gains and losses on such
securities are reported in the investment revaluation reserve. To the extent
such securities are deemed to be impaired under HK GAAP, the unrealized
holding losses are included in earnings.
Under US GAAP, cost method investments that do not have a readily
determinable market value are recorded at cost less any decline in value
deemed to be "other-than-temporary". A decline in the fair value of an
investment below its carrying amount that is "other-than-temporary" is
accounted for as a realised loss, whereby the cost basis of the investment
must be written down to fair value. Under US GAAP, in 2001, the decline in
fair value of a cost method investment below its carrying amount of
HK$14,500,000 was deemed to be "other-than-temporary" and recorded as a charge
to earnings due to the stricter guidance on determining when a decline in
value should be deemed "other-than-temporary". The charge was reversed from
the reconciliation of net profit in 2002 upon recognition of the same as
impairment loss under HK GAAP in 2002.
(g) Share option scheme
Under the Company's share option scheme, the Company may grant
options to employees to purchase the ordinary shares of the Company for up to
10 per cent of the issued share capital of the Company from time to time,
excluding for this purpose shares issued pursuant to the exercise of options
granted under the share option scheme.
During the year ended December 31, 2000, options to purchase a
total of 22,910,000 ordinary shares at exercise price of HK$10.49 per share
were granted by the Company to eligible employees. 20 per cent of the options
vest on or after April 1, 2001, 40 per cent on or after the date on which it
is announced that the Company's audited consolidated revenue in the preceding
financial year has exceeded HK$2,300 million and the remaining 40 per cent on
or after the date on which it is announced that the Company's audited
consolidated revenue in the preceding financial year has exceeded HK$3,900
million. The options, to the extent not exercised, will lapse on December 31,
2009.
During the year ended December 31, 2001, options to purchase a
total of 50,034,000 ordinary shares at exercise price of HK$3.30 per share
were granted by the Company to eligible employees. These options were granted
with the exercise price lower than the market price of the Company's stock at
the time of grant. Of the options granted, options to purchase a total of
34,813,000 ordinary shares ("the former series") vest on or after July 1, 2002
(50%) and April 1, 2003 (50%) respectively while the remaining options ("the
latter series") vest on or after July 1, 2002 (30%), July 1, 2003 (30%) and
July 1, 2004 (40%) respectively. To the extent not exercised, the options will
lapse on December 31, 2003 for the former series and on December 31, 2005 for
the latter series.
During the year ended December 31, 2002, options to purchase a
total of 380,000 ordinary shares at exercise price of HK$3.30 per share were
granted by the Company to an eligible employee. On the grant date, the
exercise price exceeded the market price of the Company's stock. 50 per cent
of the options vest on or after January 1, 2004 and 50 per cent on or after
January 1, 2005. To the extent not exercised, the options will lapse on
December 31, 2005.
F-38
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(g) Share option scheme (continued)
Movement of the Company's share options is as follows:
2001 2002 2003
---- ---- ----
Weighted-average Weighted-average Weighted-average
exercise exercise exercise
Number of price per Number of price per Number of price per
options share options share options share
HK$ HK$ HK$
Outstanding at January 1 19,520,000 10.49 66,843,000 5.34 58,543,600 5.49
Granted 50,034,000 3.30 380,000 3.30 -
Exercised - (5,234,400) 3.30 -
Lapsed (2,711,000) 4.78 (3,445,000) 5.68 (29,752,100) 3.67
---------------- ---------------- ----------------
Outstanding at December 31 66,843,000 5.34 58,543,600 5.49 28,791,500 7.36
================ ================ ================
Exercisable at December 31 3,792,000 10.49 18,520,500 4.68 10,170,300 5.60
================ ================ ================
Information in respect of the Company's share options outstanding
at December 31, 2003 is as follows:
Options standing at December 31, 2001 2002 2003
---- ---- ----
Number of options 66,843,000 58,543,600 28,791,500
Range of exercise prices per share HK$3.30 to HK$3.30 to HK$3.30 to
HK$10.49 HK$10.49 HK$10.49
Weighted average exercise price HK$5.34 HK$5.49 HK$7.36
Weighted average remaining contractual life 4.15 years 4.05 years 3.76 years
Under HK GAAP, no accounting entry is made upon the granting of
share options to employees.
Under US GAAP, the Group applies the intrinsic value-based method
for share options prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees", and related
interpretations to account for its fixed plan stock options. Under this
method, compensation expense is recognized and amortized over the vesting
period of the options concerned to the extent that the fair value of the
equity instruments exceeds the exercise price of the options granted at a
defined measurement date. The measurement date is the first date on which both
the number of shares that an individual employee is entitled to receive and
the exercise price are known. Other than options granted to employees during
the year ended December 31, 2000 which require the achievement of specific
hurdles by the Company prior to their vesting and accordingly, need to be
accounted for utilizing variable plan accounting, all other options granted by
the Company are accounted for utilizing fixed plan accounting under US GAAP.
F-39
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(g) Share option scheme (continued)
Had the Company determined compensation cost based on the fair
value model at the grant date for its stock options under SFAS 123,
"Accounting for Stock-Based Compensation", the Company's pro forma net
profit/(loss) and basic and diluted earnings/(loss) per share and per ADS
would have been as follows:
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
(in thousands, except per share and per ADS data)
Net profit/(loss) as reported (5,748) 100,320 127,826
Add: Compensation cost recognized based
on intrinsic value method 16,283 11,976 2,457
Less: Compensation cost based on fair value (35,675) (26,014) (8,411)
------------------ ------------------- -------------------
Pro forma net profit/(loss) (25,140) 86,282 121,872
================== =================== ===================
Basic earnings/(loss) per share
- as reported (0.3) cents 5.0 cents 6.3 cents
- pro forma (1.2) cents 4.3 cents 6.0 cents
================== =================== ===================
Diluted earnings/(loss) per share
- as reported (0.3) cents 4.9 cents 6.3 cents
- pro forma (1.2) cents 4.3 cents 6.0 cents
================== =================== ===================
Basic earnings/(loss) per ADS*
- as reported (5.7) cents 99.5 cents 126.6 cents
- pro forma (25.0) cents 85.6 cents 120.7 cents
================== =================== ===================
Diluted earnings/(loss) per ADS*
- as reported (5.7) cents 99.0 cents 126.6 cents
- pro forma (24.9) cents 85.1 cents 120.7 cents
================== =================== ===================
* 1 ADS represents 20 ordinary shares
The weighted-average fair value of the options granted during 2002
was HK$0.86 per share (2001: HK$1.20 per share) on the date of grant estimated
using the Black-Scholes option-pricing model, with the following
weighted-average assumptions:
2001 2002
---- ----
Risk-free rate 5.00% per annum 2.20% per annum
Expected dividend yield 1% per annum 1% per annum
Expected term 2 to 4 years 1.7 to 2.7 years
Expected volatility 30% per annum 55% per annum
The effects of applying SFAS 123 for disclosing compensation cost
under pronouncement may not be representative of the effects on reported net
results for future years.
F-40
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(h) Offsetting amounts related to certain contracts
Under HK GAAP, certain restricted bank deposits and corresponding
bank loans arising in respect of the Group's leasing partnerships have been
offset against each other and are not shown in the consolidated financial
statements as the Group effectively has the ability to insist on net
settlement of the loans and deposits.
Under US GAAP, the offsetting of such assets and liabilities in the
balance sheet is not permitted. As such, under US GAAP, the restricted bank
deposits and the bank loans would be reflected separately in the consolidated
balance sheet.
The bank deposits matured and the bank loans were repaid during
2003. Accordingly, US GAAP adjustments are not required at December 31, 2003.
(i) Statement of cash flows
The Group applies SSAP 15 (revised 2001) "Cash Flow Statements"
effective from January 1, 2002. Its objectives and principles are similar to
those set out in the SFAS 95, "Statement of Cash Flows". The principal
differences between the standards relate to classification and the offsetting
arrangement described in Note 33(h).
Under SSAP 15, cash equivalents are defined as short-term, highly
liquid investments that are readily convertible into known amounts of cash and
which are subject to an insignificant risk of changes in value, having been
within three months of maturity at acquisition. The definition under SFAS 95
is similar to that under SSAP 15, but does not require that advances from
banks should be included as part of cash equivalents. Such amounts relate to
the Group's financing activities and, accordingly, the net movement in bank
overdraft for each year is classified as a financing activity under SFAS 95.
Under HK GAAP, certain bank deposits and bank loans at December 31,
2002 were offset against each other and are not included above, as described
in Note 33(h) of the consolidated financial statements. As at December 31,
2003, these bank deposits and bank loans have been settled.
Summarized cash flow data by operating, investing and financing
activities in accordance with SFAS 95 are as follows:
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Net cash inflow/(outflow) from:
Operating activities 734,148 863,397 719,553
Investing activities (989,521) (802,257) 49,543
Financing activities (73,157) (1,266,854) (746,877)
----------------- ----------------- -----------------
Change in cash and cash equivalents (328,530) (1,205,714) 22,219
Cash and cash equivalents at January 1 1,540,940 1,212,410 6,696
----------------- ----------------- -----------------
Cash and cash equivalents at December 31 1,212,410 6,696 28,915
================= ================= =================
F-41
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(j) Valuation of derivative instruments
Under US GAAP, an entity is required to recognize derivative
instruments as assets or liabilities in the balance sheet at fair value. As at
December 31, 2002, the Group placed deposits with principal amounts totaling
US$60 million with international financial intermediaries, which matured in
2003. The deposits carried interest at rates higher than United States dollar
bank deposits with comparable maturity and they were credit linked to bonds
issued by corporates, including a fellow subsidiary.
The Group expected to receive the principal amounts upon maturity
of the deposits. However, upon occurrence of certain credit events as provided
under the terms of the arrangements, including but not limited to: (i)
bankruptcy of the relevant corporates, including our ultimate holding company;
(ii) the failure by the corporates, including our ultimate holding company, to
make, when and where due, any payments in an aggregate amount of not less than
US$1 million under one or more of their bonds or loans; the financial
intermediaries will deliver to the Group the bonds issued by the relevant
corporates, including a fellow subsidiary, and demand payment, which will be
satisfied by foregoing the principal amounts of the deposits. The fair value
of the bonds may be less than the carrying amounts of the deposits.
Given that the eventual principal repayment of the deposits was
linked to the credit events, there was an embedded derivative element within
the deposit contracts. US GAAP requires that an embedded derivative be
separated from its host contract, be recognized as assets or liabilities in
the balance sheet and measured at fair value. As at December 31, 2002, the
Group considered the fair value of the embedded derivative to be zero. The
deposits matured during 2003 and the Group received the principal amounts in
full upon maturity.
Under HK GAAP, no accounting entry is made to this embedded
derivative.
(k) Recent accounting pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on
the existing disclosure requirements for most guarantees to be made by a
guarantor in its financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that, with certain exceptions, all
guarantees issued or modified after December 31, 2002 are required to be
recognized as a liability at fair value at their inception. The types of
guarantees issued by the Group are not subject to the initial recognition and
measurement provisions of FIN 45. Additional disclosures have been made in
Note 28(f)(ii) above.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
149 is effective for contracts entered into or modified after June 30, 2002,
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS 149 did not have a material effect on the Group's financial position or
results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS 150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity, and requires the classification of a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have a
material effect on the Group's financial position or results of operations.
F-42
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(k) Recent accounting pronouncements (continued)
In December 2003, the FASB issued Interpretation No. 46 (revised
December 2003) ("FIN 46R"), "Consolidation of Variable Interest Entities". The
primary objective of the Interpretation is to provide guidance on the
identification of, and financial reporting for, entities over which control is
achieved through means other than voting rights; such entities are known as
variable-interest entities ("VIEs"). FIN 46R replaces FASB Interpretation No.
46, "Consolidation of Variable Interest Entities", which was issued in January
2003. The Company will be required to apply FIN 46R to variable interests in
variable interest entities created after December 31, 2003. For variable
interests in variable interests in variable interest entities created before
December 31, 2003, the FIN 46R will be applied beginning on March 31, 2004.
However, as the Group did not identify any entity in which it holds a variable
interest and which would be considered to be a VIE once the Interpretation
goes into effect, management believes the adoption of FIN 46R will not have a
material effect on the Group's financial position or results of operations.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB")
No. 104, "Revenue Recognition". SAB No. 104 revises or rescinds portions of
interpretative guidance on revenue recognition in SAB No. 101. SAB No. 104
became effective immediately upon release and requires registrants to either
restate prior financial statements or report a change in accounting principle.
The adoption of SAB No. 104 did not have a material impact on the Group's
financial position or results of operations.
(l) Classification of items in the statement of operations
Under HK GAAP, profit or loss on disposal of long-lived assets is
disclosed as a separate item after profit/(loss) from operations in the
consolidated statement of operations as management considers that any such
profit or loss is incidental to the core operations of the Group.
Under US GAAP, profit or loss on disposal of long-lived assets is
included in the determination of profit from operations in the consolidated
statement of operations.
Set out below is a reconciliation of profit from operations
determined under HK GAAP, between the HK GAAP and the US GAAP classifications:
Year ended December 31,
----------------------------------------------------------------
2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
Profit from operations determined under HK GAAP
As reported, under HK GAAP classification 179,829 226,435 250,610
Add: Net gain/(loss) on disposal of long-lived assets 1,027 (198) (7,593)
-------------------- -------------------- --------------------
Under US GAAP classification 180,856 226,237 243,017
==================== ==================== ====================
F-43
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(m) Summary of significant differences between HK GAAP and US GAAP
The effect on net profit/(loss) of significant differences between
HK GAAP and US GAAP is as follows:
Year ended December 31,
----------------------------------------------------------------
Note 2001 2002 2003
---- ---- ----
HK$'000 HK$'000 HK$'000
(in thousands except for per share and per ADS data)
Net profit under HK GAAP 167,492 117,259 220,458
Adjustments:
Deferred pre-maturity and franchise costs (a) (90,410) (90,410) (90,229)
Amortization of goodwill (b) (16,826) - -
Depreciation on reversal of impairment write-down (c) (2,787) (478) (478)
Provision for deferred tax liabilities (d) (20,100) (4,800) -
Recognition of deferred tax assets (d) - 107,200 -
Installation costs (e) (11,072) (11,049) (7,584)
Installation fees (e) (1,262) (29,973) (1,310)
Subscription fees (e) - 10,047 9,426
Valuation of cost method investments (f) (14,500) 14,500 -
Share option scheme (g) (16,283) (11,976) (2,457)
-------------------- -------------------- --------------------
Net profit/(loss) under US GAAP (5,748) 100,320 127,826
==================== ==================== ====================
Earnings/(loss) per share under US GAAP
- Basic (0.3) cents 5.0 cents 6.3 cents
==================== ==================== ====================
- Diluted (0.3) cents 4.9 cents 6.3 cents
==================== ==================== ====================
Earnings/(loss) per ADS under US GAAP*
- Basic (5.7) cents 99.5 cents 126.6 cents
==================== ==================== ====================
- Diluted (5.7) cents 99.0 cents 126.6 cents
==================== ==================== ====================
* 1 ADS represents 20 ordinary shares
F-44
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
33. Significant differences between HK GAAP and US GAAP (continued)
(m) Summary of significant differences between HK GAAP and US GAAP
(continued)
The effect on shareholders' equity of significant differences
between HK GAAP and US GAAP is as follows:
At December 31,
----------------------------------------
Note 2002 2003
---- ----
HK$'000 HK$'000
Shareholders' equity under HK GAAP (2002: restated) 1,524,768 1,684,648
Adjustments:
Deferred pre-maturity and franchise costs (a) 217,275 127,046
Goodwill, net of amortization (b) 57,491 57,491
Reversal of impairment write-down, net of depreciation (c) 716 238
Installation costs (e) (24,423) (32,007)
Installation fees (e) (32,040) (33,350)
Subscription fees (e) 10,047 19,473
Bank loans (h) (555,748) -
Bank deposits (h) 555,748 -
------------------ ------------------
Shareholders' equity under US GAAP 1,753,834 1,823,539
================== ==================
34. Fair value of financial instruments
Financial assets of the Group include cash and cash equivalents,
accounts receivable, other receivables, and amounts due from related parties.
Financial liabilities of the Group include amounts due to trade creditors,
other payables and amounts due to related parties. It is not practicable to
estimate the fair value of the amounts due from and due to related parties
without incurring excessive cost. The fair value of all other financial
instruments approximate their carrying amounts due to the nature or short
maturity of these instruments.
The Group has not developed an internal valuation model necessary
to make the estimate of the fair value of amounts due from and due to related
parties, as it is not considered practicable. The costs incurred in obtaining
discount and borrowing rates for comparable borrowings would be excessive
based on the existing capital structure of the Group and the terms of the
borrowings.
35. Concentrations of risk
(a) Business risks
The Group conducts its principal operations in Hong Kong and,
accordingly, is subject to risks not typically associated with investments in
equity securities of the United States of America. These include risks
associated with the political, economic and legal environment in Hong Kong.
(b) Foreign currency risk
The Group sources its programming both locally in Hong Kong and
also from overseas content providers, some of which is not invoiced in HK
dollars, the Group's functional currency. The Group is exposed to foreign
currency risk should the value of the HK dollar fluctuate adversely against
other foreign currencies, which could lead to an increase in costs that the
Group may not be able to recover from subscribers.
F-45
i-CABLE Communications Limited
Notes to Consolidated Financial Statements (continued)
For the year ended December 31, 2003
35. Concentrations of risk (continued)
(c) Credit risk
Credit risk arises from the potential for counterparties to default
on their contractual obligations to the Group. The Group is exposed to credit
risk in the event of nonperformance, but does not anticipate nonperformance by
any of its counterparties. The Group limits its credit risk by dealing with
counterparties that are considered to be of high quality and by actively
monitoring the credit exposure of the Group. The Group is also exposed to
credit risk from customers.
(d) Changes in television and fixed telecommunication regulations in
Hong Kong
The Group's business is subject to extensive governmental
legislation and regulatory control. Changes in legislation and regulations
could affect the Group's costs and revenues. The Group is required to maintain
licenses for its subscription television business and its Broadband Internet
business. Should the licenses be withdrawn or not renewed upon their
expiration, or should the terms be varied, this may affect the Group's ability
to continue operating its subscription television business and its Broadband
Internet business, which in turn may affect the recoverability of assets and
its ability to generate cash flows to meet its financial obligations.
The granting of new pay television licenses by the Hong Kong SAR
Government might lead to greater competition and the Group could face loss of
customers, which in turn may affect the recoverability of assets and its
ability to generate cash flows to meet its financial obligations.
(e) Interest rate risk
The interest rates and terms of repayment of the Group's borrowings
are set out in Notes 19, 21 and 22.
F-46