##### Table of Contents



As filed with the Securities and Exchange Commission on December 17, 2010
   UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
 or
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the year ended August 31, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  or
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number: 000-30354
 City Telecom (H.K.) Limited
 (Exact name of registrant as Specified in its Charter)
 Hong Kong Special Administrative Region,
The Peoples Republic of China  (Jurisdiction of Incorporation or Organization)
 Level 39, Tower 1, Metroplaza
No. 223 Hing Fong Road
Kwai Chung, New Territories
Hong Kong  (Address of Principal Executive Offices)
 Mr. Lai Ni Quiaque
12th Floor, Trans Asia Centre
No.18 Kin Hong Street
Kwai Chung, New Territories
Hong Kong
 Telephone : (852) 3145 6068
Facsimile : (852) 2199 8445  (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Name Of EachExchange On WhichTitle Of Each Class
    
    RegisteredAmerican Depositary Shares, each representing 20 Ordinary Shares, par value HK$0.10 per share
    
    The Nasdaq Stock
Market LLCOrdinary Shares, par value HK$0.10 per share*
    
    The Nasdaq Stock
Market LLC*
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as at the close of the period covered by the annual report:
  o þ
  o þ
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  US GAAP o
    
    International Financial Reporting Standards as issued þ
    
    Other oby the International Accounting Standards Board
  o o
  o þ




---



##### 



Contents
 Use of defined and technical terms
    
    
    1Currency translation
    
    
    1Note regarding forward-looking statements
    
    
    2Special note on our financial information presented in this annual report
    
    
    3PART IItem 1 Identity of directors, senior management and advisers
    
    
    4Item 2 Offer statistics and expected timetable
    
    
    4Item 3 Key information
    
    
    4-18Item 4 Information on the Company
    
    
    18-33Item 5 Operating and financial review and prospects
    
    
    33-43Item 6 Directors, senior management and employees
    
    
    43-52Item 7 Major shareholders and related party transactions
    
    
    52-53Item 8 Financial information
    
    
    53-54Item 9 The offer and listing
    
    
    54-56Item 10 Additional information
    
    
    56-64Item 11 Quantitative and qualitative disclosures about market risk
    
    
    64Item 12 Description of securities other than equity securities
    
    
    64PART IIItem 13 Defaults, dividend arrearages and delinquencies
    
    
    64Item 14 Material modifications to the rights of security holders and use of proceeds
    
    
    64Item 15 Controls and procedures
    
    
    64-65Report of Independent Registered Public Accounting FirmItem 16A Audit committee financial expert
    
    
    65Item 16B Code of ethics
    
    
    65Item 16C Principal accountant fees and services
    
    
    66Item 16D Exemptions from the listing standards for audit committees
    
    
    66Item 16E Purchase of equity securities by the issuer and affiliated purchasers
    
    
    66Item 16F Change in Registrants Certifying Accountant
    
    
    66Item 16G Corporate Governance
    
    
    66-67PART IIIItem 17 Financial statements
    
    
    68Item 18 Financial statements
    
    
    68Item 19 Exhibits
    
    
    68EX-12.1EX-12.2EX-13




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##### Table of Contents



Use of defined and technical terms
  
    
    Hong Kong Companies Ordinance are to Chapter 32 of the laws of Hong Kong;
    
    City Telecom or the Company are to City Telecom (H.K.) Limited;
    
    fiscal year or fiscal are to the Companys fiscal year ended August 31 for the year referenced;
    
    FTNS business are to our business segment in which we provide fixed telecommunications network services, including dial up and
broadband Internet access services, local VoIP services, IP-TV services and corporate data services;
    
    FTNS Licenses are to the licenses issued by the Hong Kong regulatory authorities for fixed telecommunications network services;
    
    GPON are to Gigabit Passive Optical Network;
    
    Group are to the Company and its subsidiaries;
    
    HKBN are to Hong Kong Broadband Network Limited, a wholly owned subsidiary of the Company;
    
    HKFRSs are to Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants;
    
    IDD business are to our business segment in which we provide international telecommunications services, including
international long distance call services;
    
    IFRSs are to International Financial Reporting Standards, as issued by the International Accounting Standards Board;
    
    IP-TV services are to pay-television services through Internet Protocol;
    
    PNETS Licenses are to licenses issued by the Hong Kong regulatory authorities for the public non-exclusive telecommunications
services;
    
    UC License are to the Unified Carrier License issued by the Hong Kong regulatory authorities for fixed and mobile
telecommunication services; and
    
    VoIP are to Voice over Internet Protocol.
 
 Currency translation
  1




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##### Table of Contents



Note regarding forward-looking statements
   
    
    technological changes;
    
    changes in our regulatory environment, including changes in rules and policies promulgated by regulatory agencies from
time to time;
    
    increasing competition in the telecommunications, Internet access, local VoIP, pay-television and corporate data markets;
    
    the benefits we expect to derive from our Next Generation Network, which utilize Metro Ethernet and GPON technologies,
in which we have been making significant capital investments;
    
    our ability to maintain growth and successfully introduce new services;
    
    the continued development and stability of our technological infrastructure, a platform through which our local and
international telecommunications, Internet access, local VoIP, IP-TV and corporate data services are offered; and
    
    changes in the local and global economic environment.
  2




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Special note on our financial information presented in this annual report
   3




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PART I
 
 ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3 KEY INFORMATION
 A. Selected financial data
 City Telecoms historical financial information
  Selected consolidated statement of operations data:
 For the year ended August 31,2008
    
    
    2009
    
    
    2010
    
    
    2010HK$
    
    
    HK$
    
    
    HK$
    
    
    US$(Amounts in thousands except per share data and number of ordinary shares)Revenue:- FTNS business
    
    
    1,011,038
    
    
    
    1,230,880
    
    
    
    1,356,098
    
    
    
    174,348- IDD business
    
    
    291,943
    
    
    
    247,359
    
    
    
    218,589
    
    
    
    28,103Total operating revenue
    
    
    1,302,981
    
    
    
    1,478,239
    
    
    
    1,574,687
    
    
    
    202,451Network costs:- FTNS business
    
    
    (103,524
    )
    
    
    (107,670
    )
    
    
    (144,347
    )
    
    
    (18,558
    )- IDD business
    
    
    (74,843
    )
    
    
    (67,459
    )
    
    
    (50,945
    )
    
    
    (6,550
    )Total network costs
    
    
    (178,367
    )
    
    
    (175,129
    )
    
    
    (195,292
    )
    
    
    (25,108
    )Other operating expenses
    
    
    (966,094
    )
    
    
    (1,037,964
    )
    
    
    (1,105,604
    )
    
    
    (142,143
    )Interest expense, net
    
    
    (59,541
    )
    
    
    (50,258
    )
    
    
    (10,863
    )
    
    
    (1,397
    )Other income/(expense), net
    
    
    9,393
    
    
    
    36,671
    
    
    
    (3,383
    )
    
    
    (434
    )Income taxes benefit/(expense)
    
    
    16,818
    
    
    
    (38,730
    )
    
    
    (42,679
    )
    
    
    (5,487
    )Net income
    
    
    125,190
    
    
    
    212,829
    
    
    
    216,866
    
    
    
    27,882Basic earnings per share (cents)
    
    
    19.7
    
    
    
    32.4
    
    
    
    30.7
    
    
    
    3.9Diluted earnings per share (cents) (note 1)
    
    
    19.0
    
    
    
    31.8
    
    
    
    29.4
    
    
    
    3.8Dividends per share attributable to the year (cents)
    
    
    6.0
    
    
    
    19.0
    
    
    
    20.0
    
    
    
    2.6Weighted average number of ordinary shares
    
    
    634,015
    
    
    
    657,201
    
    
    
    706,605
    
    
    
    706,605Diluted weighted average number of ordinary shares
(note 2)
    
    
    657,997
    
    
    
    668,384
    
    
    
    736,616
    
    
    
    736,616
 4




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




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For the year ended August 31,2008
    
    
    2009
    
    
    2010
    
    
    2010HK$
    
    
    HK$
    
    
    HK$
    
    
    US$(Amounts in thousands)Loss/(gain) on disposal of fixed assets
    
    
    1,431
    
    
    
    1,016
    
    
    
    (1,375
    )
    
    
    (177
    )Equity settled share-based transaction
    
    
    4,204
    
    
    
    4,768
    
    
    
    5,347
    
    
    
    687Realized loss on derivatives financial instruments
    
    
    1,039
    
    
    
    
    
    
    
    
    
    
    
    Realized and unrealized gain on other financial assets
    
    
    (3,284
    )
    
    
    (189
    )
    
    
    
    
    
    
    (Gain)/loss on extinguishment of senior notes
    
    
    (2,582
    )
    
    
    (31,371
    )
    
    
    9,650
    
    
    
    1,241Taxation paid
    
    
    (4,250
    )
    
    
    (1,732
    )
    
    
    (3,013
    )
    
    
    (387
    )Change in long term receivable and prepayments
    
    
    1,346
    
    
    
    (505
    )
    
    
    917
    
    
    
    118Change in working capital, net
    
    
    (27,434
    )
    
    
    8,567
    
    
    
    (44,244
    )
    
    
    (5,688
    )Net cash inflow from operating activities
    
    
    381,991
    
    
    
    536,771
    
    
    
    485,340
    
    
    
    62,398
 Operating data:
 As of and for the year ended August 31,2008
    
    
    2009
    
    
    2010FTNS subscriptions:- Broadband Internet access
    
    
    316,000
    
    
    
    391,000
    
    
    
    526,000- Local VoIP
    
    
    329,000
    
    
    
    382,000
    
    
    
    431,000- IP-TV
    
    
    156,000
    
    
    
    170,000
    
    
    
    153,000Total
    
    
    801,000
    
    
    
    943,000
    
    
    
    1,110,000Registered international telecommunications accounts (note 5)
    
    
    2,336,000
    
    
    
    2,383,000
    
    
    
    2,445,000IDD outgoing minutes (in thousands)
    
    
    574,000
    
    
    
    487,000
    
    
    
    464,000
 
 Notes:(1)
    
    Diluted earnings per share is computed by dividing the net income by the diluted weighted
average number of ordinary shares during the year.(2)
    
    For the years ended August 31, 2008, 2009 and 2010, the diluted weighted average number of
ordinary shares was the weighted average number of ordinary shares outstanding during the
respective years, plus the weighted average number of additional ordinary shares which
would have been outstanding assuming all the outstanding share options have been exercised
at the beginning of the respective years or on the date of issue, whichever is earlier.(3)
    
    EBITDA for any period means, without duplication, net income for such period, plus the
following to the extent deducted in calculating such net income: interest expense, income
taxes, depreciation and amortization expense (excluding any such non-cash charge to the
extent it represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period not included in the
calculation), less interest income. EBITDA is not a measure of performance under IFRSs. We
believe that EBITDA is an additional measure utilized by investors in determining a
borrowers ability to meet debt service requirements. However, EBITDA does not represent,
and should not be used as a substitute for, net earnings or cash flows from operations as
determined in accordance with IFRSs, and EBITDA is not necessarily an indication of
whether cash flow will be sufficient to fund our cash requirements. In addition, our
definition of EBITDA may differ from that of other companies.(4)
    
    Capital expenditures represent additions to fixed assets and include non-cash transactions.(5)
    
    Registered accounts refer to international telecommunications customers that have a valid
account. Account holders may or may not be active users of our services. 6




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Selected Consolidated Statement of Operations Data:
 For the year ended August 31,2006 (note 6)
    
    
    2007HK$
    
    
    HK$(Amounts in thousands except per share data)HKFRSRevenues:Fixed telecommunications network services
    
    
    716,600
    
    
    
    816,800International telecommunications services
    
    
    418,276
    
    
    
    324,470Total operating revenue
    
    
    1,134,876
    
    
    
    1,141,270Network Costs:Fixed telecommunications network services
    
    
    (125,639
    )
    
    
    (103,795
    )International telecommunications services
    
    
    (174,954
    )
    
    
    (110,796
    )Total network costs
    
    
    (300,593
    )
    
    
    (214,591
    )Other operating expenses
    
    
    (919,795
    )
    
    
    (834,104
    )(Loss)/income from operations
    
    
    (85,512
    )
    
    
    92,575Interest (expense)/income, net
    
    
    (68,259
    )
    
    
    (64,833
    )Other income, net
    
    
    4,465
    
    
    
    3,149Income taxes credit/(expense)
    
    
    7,244
    
    
    
    (2,026
    )Net (loss)/income
    
    
    (142,062
    )
    
    
    28,865Basic (loss)/earnings per share (cents)
    
    
    (23.1
    )
    
    
    4.7Diluted (loss)/earnings per share (cents) (note 1)
    
    
    (23.1
    )
    
    
    4.6Dividends declared per share (cents)
    
    
    
    
    
    
    8.0Weighted average number of shares
    
    
    614,134
    
    
    
    614,840Diluted weighted average number of shares (note 2)
    
    
    614,134
    
    
    
    631,319
 For the year ended August 31,2006
    
    
    2007HK$
    
    
    HK$(Amounts in thousands except per share data)U.S. GAAPTotal operating revenue
    
    
    1,134,876
    
    
    
    1,141,270Total operating expenses
    
    
    (1,220,388
    )
    
    
    (1,048,695
    )Net (loss)/income
    
    
    (142,062
    )
    
    
    28,865Basic (loss)/earnings per share (cents)
    
    
    (23.1
    )
    
    
    4.7Diluted (loss)/earnings per share (cents) (note 1)
    
    
    (23.1
    )
    
    
    4.6Dividends declared per share (cents)
    
    
    
    
    
    
    8.0Weighted average number of shares
    
    
    614,134
    
    
    
    614,840Diluted weighted average number of shares (note 2)
    
    
    614,134
    
    
    
    631,319
 7




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##### Table of Contents



Selected Consolidated Balance Sheet Data:
 As of August 31,2006
    
    
    2007HK$
    
    
    HK$(Amounts in thousands)HKFRSTotal assets
    
    
    2,124,215
    
    
    
    2,161,133Debt
    
    
    (948,027
    )
    
    
    (952,593
    )Finance lease obligation
    
    
    (2,373
    )
    
    
    (1,210
    )Other liabilities
    
    
    (282,161
    )
    
    
    (303,448
    )Total liabilities
    
    
    (1,232,561
    )
    
    
    (1,257,251
    )Net assets employed
    
    
    891,654
    
    
    
    903,882Share capital
    
    
    61,417
    
    
    
    61,650Share premium
    
    
    620,298
    
    
    
    622,433Reserves
    
    
    209,939
    
    
    
    219,799Total shareholders equity
    
    
    891,654
    
    
    
    903,882
 As of August 31,2006
    
    
    2007HK$
    
    
    HK$(Amounts in thousands)U.S. GAAPTotal assets
    
    
    2,154,305
    
    
    
    2,189,086Total liabilities
    
    
    (1,257,034
    )
    
    
    (1,279,587
    )Net shareholders equity
    
    
    897,271
    
    
    
    909,499
 Other Financial Data:
 For the year ended August 31,2006 (note 6)
    
    
    2007HK$
    
    
    HK$(Amounts in thousands)HKFRSEBITDA (note 3)
    
    
    195,417
    
    
    
    353,827Net cash provided by operating activities
    
    
    184,151
    
    
    
    383,999Net cash (used in)/provided by investing activities
    
    
    (492,742
    )
    
    
    114,053Net cash used in financing activities
    
    
    (86,432
    )
    
    
    (109,504
    )Capital expenditures (note 4)
    
    
    322,935
    
    
    
    132,250
 8




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For the year ended August 312006
    
    
    2007HK$
    
    
    HK$(Amounts in thousands)EBITDA (note 3)
    
    
    195,417
    
    
    
    353,827Depreciation and amortization
    
    
    (276,464
    )
    
    
    (258,103
    )Interest expense, net
    
    
    (68,259
    )
    
    
    (64,833
    )Income taxes credit/(expense)
    
    
    7,244
    
    
    
    (2,026
    )Net (loss)/income
    
    
    (142,062
    )
    
    
    28,865Depreciation and amortization
    
    
    276,464
    
    
    
    258,103Impairment loss on investment property
    
    
    1,131
    
    
    
    Amortization of deferred expenditure
    
    
    13,973
    
    
    
    15,580Income taxes (credit)/expense
    
    
    (7,244
    )
    
    
    2,026Interest income
    
    
    (20,378
    )
    
    
    (22,671
    )Interest, amortization and exchange difference on senior notes
    
    
    86,664
    
    
    
    89,879Other borrowing costs
    
    
    1,919
    
    
    
    (739
    )Loss on disposal of fixed assets
    
    
    9,621
    
    
    
    1,714Equity settled share-based transaction
    
    
    6,823
    
    
    
    5,727Realized and unrealized loss on derivatives financial instruments
    
    
    125
    
    
    
    806Unrealized gain on other investments
    
    
    (668
    )
    
    
    (1,887
    )Taxation paid
    
    
    (2,532
    )
    
    
    (2,171
    )Change in long term receivable
    
    
    567
    
    
    
    5,600Change in working capital, net
    
    
    (40,252
    )
    
    
    3,167Net cash flow provided by operating activities
    
    
    184,151
    
    
    
    383,999
 Operating Data:
 As of and for the year ended August 31,2006
    
    
    2007FTNS Subscriptions:Broadband Internet Access
    
    
    220,000
    
    
    
    247,000Local VoIP
    
    
    281,000
    
    
    
    308,000IP-TV
    
    
    116,000
    
    
    
    128,000Total
    
    
    617,000
    
    
    
    683,000Registered international telecommunications accounts (note 5)
    
    
    2,201,963
    
    
    
    2,331,000IDD outgoing minutes (in thousands)
    
    
    788,000
    
    
    
    659,000
 9




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##### Table of Contents



Notes:(1)
    
    Diluted (loss)/earnings per share is computed by dividing the net (loss)/income by the diluted weighted average number of ordinary shares during the year.(2)
    
    For fiscal 2007, the diluted weighted average number of shares was the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of additional ordinary
shares which would have been outstanding assuming all the outstanding share options and share warrants (if any) have been exercised at the beginning of the respective years or on the date of issue,
whichever is earlier. For fiscal 2006, the diluted weighted average number of shares was equal to the weighted average number of ordinary shares outstanding during the respective years
because the incremental effect of share options and share warrants was anti-dilutive in a loss-making year.(3)
    
    EBITDA for any period means, without duplication, net income/(loss) for such period, plus the following to the extent deducted in calculating such net income/(loss): interest expense, income taxes,
depreciation and amortization expense (excluding any such non cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash
expense that was paid in a prior period not included in the calculation), less interest income. EBITDA is not a measure of performance under HKFRS or U.S. GAAP. We believe that EBITDA is an
additional measure utilized by investors in determining a borrowers ability to meet debt service requirements. However, EBITDA does not represent, and should not be used as a substitute for, net
earnings or cash flows from operations as determined in accordance with HKFRS or U.S. GAAP, and EBITDA is not necessarily an indication of whether cash flow will be sufficient to fund our cash
requirements. In addition, our definition of EBITDA may differ from that of other companies.(4)
    
    Capital expenditures represent additions to fixed assets and include non-cash transactions.(5)
    
    Registered accounts refer to international telecommunications customers that have a valid account. Account holders may or may not be active users of our services.(6)
    
    Due to additional evidence and information received with respect to the collectability of the mobile interconnection charges on January 30, 2006, we were required to reassess the conditions on which
the estimates on bad debt provision for mobile interconnection charges receivables were based. Such assessment were made after the publication of our Hong Kong statutory financial statements for
fiscal 2005 but prior to the filing of our annual report on Form 20-F for fiscal 2005. The effect of the reassessment was reflected in our annual report on Form 20-F for fiscal 2005 and in our Hong
Kong statutory financial statements for fiscal 2006.Our reassessment had the following effects on our consolidated statement of operations for fiscal 2005 and 2006: As previouslyreported inAs previously
    
    
    
    
    
    
    2006 Hong Kongreported in 2005 Hong
    
    
    As reported
    
    
    statutory
    
    
    As reportedKong statutory
    
    
    in 2005 Form
    
    
    financial
    
    
    in 2006financial statements
    
    
    20-F
    
    
    statements
    
    
    Form 20-FHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(Amounts in thousands except per share data)Total operating revenue
    
    
    1,137,356
    
    
    
    1,162,059
    
    
    
    1,159,579
    
    
    
    1,134,876Provision for doubtful debts
    
    
    (60,563
    )
    
    
    (35,445
    )
    
    
    7,668
    
    
    
    (17,450
    )Net loss after tax
    
    
    (206,352
    )
    
    
    (156,531
    )
    
    
    (92,241
    )
    
    
    (142,062
    )Loss per share  basic and diluted
    
    (33.6) cents
    
    (25.5) cents
    
    (15.0) cents
    
    (23.1) cents
 10




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##### Table of Contents



Exchange rate information
    Average
    
    
    High
    
    
    Low
    
    
    Period-end(note)HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$Fiscal 2006
    
    
    7.7601
    
    
    
    7.7796
    
    
    
    7.7506
    
    
    
    7.7767Fiscal 2007
    
    
    7.8029
    
    
    
    7.8289
    
    
    
    7.7665
    
    
    
    7.7968Fiscal 2008
    
    
    7.7915
    
    
    
    7.8159
    
    
    
    7.7497
    
    
    
    7.8036Fiscal 2009
    
    
    7.7550
    
    
    
    7.8094
    
    
    
    7.7495
    
    
    
    7.7505Fiscal 2010
    
    
    7.7646
    
    
    
    7.8040
    
    
    
    7.7495
    
    
    
    7.7781June 2010
    
    
    7.7880
    
    
    
    7.8040
    
    
    
    7.7690
    
    
    
    7.7865July 2010
    
    
    7.7753
    
    
    
    7.7962
    
    
    
    7.7651
    
    
    
    7.7672August 2010
    
    
    7.7702
    
    
    
    7.7788
    
    
    
    7.7605
    
    
    
    7.7781September 2010
    
    
    7.7643
    
    
    
    7.7738
    
    
    
    7.7561
    
    
    
    7.7599October 2010
    
    
    7.7580
    
    
    
    7.7642
    
    
    
    7.7513
    
    
    
    7.7513November 2010
    
    
    7.7547
    
    
    
    7.7656
    
    
    
    7.7506
    
    
    
    7.7649December 2010
(through December 10, 2010)
    
    
    7.7666
    
    
    
    7.7737
    
    
    
    7.7612
    
    
    
    7.7737
 
 Note:
    
    The average rates on the last business day of each month
during the relevant fiscal year period or the average rates
for each business day during the relevant monthly period.Source:
    
    For all periods prior to January 1, 2009, the exchange rate
refers to noon buying rate as reported by the Federal Reserve
Bank of New York. For periods beginning on or after January
1, 2009, the exchange rate refers to the exchange rate as set
forth in the H.10 statistical release of the Federal Reserve
Board. B. Capitalization and indebtedness
  C. Reasons for the offer and use of proceeds
  11




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D. Risk factors
 You should carefully consider the risks described below and other information contained in
this annual report before making an investment decision. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not presently known to us,
or that we currently deem immaterial, may also impair our business operations. We cannot assure you
that any of the events discussed in the risk factors below will not occur. If they do, our
business, financial condition or results of operations could be materially adversely affected.
 Risks relating to our business and operations
 In light of the intense competition in our target markets, we cannot assure you that our
revenues and net profit will continue to grow.
     Given the pace of change in the telecommunications industry and the characteristics of our
target markets, we cannot assure you that our FTNS business will continue to be profitable.
  
    
    Increasing liberalization of the telecommunications
industry in Hong Kong may continue to attract new local and
foreign entrants and broaden the variety of
telecommunications services available in the market,
thereby increasing the overall level of competition in our
industry.
    
    The Hong Kong government may continue to issue new wireless
and wire-line FTNS Licenses. For instance, 291 PNETS
Licenses had been issued in Hong Kong as of October 31,
2010 for the provision of external telecommunications
services (as defined in the Telecommunications Authoritys
Determination as of December 30, 1998). Some of these
licenses are held by subsidiaries of major foreign
telecommunications providers, which have competitive
advantages over us due to their global presence and size.
    
    Around December 31, 2007, Television Broadcasts Limited and
Asia Television Limited, commonly known as TVB and ATV,
respectively, the only two licensed domestic free
television programme broadcasters in Hong Kong, launched
their digital terrestrial television services and have
since broadened such services to cover an increasingly
large percentage of the viewing public in Hong Kong. As of
December 14, 2010, their services offered a total of 11
free channels in both standard and high definition. This
improvement in the quality of free television may result in
a reduction in the number of subscribers for pay-television
services.
 12




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Our services may become obsolete if we cannot address the changing needs of our customers.
  
    
    To compete successfully, we must constantly increase the
diversity and sophistication of the services we offer and
upgrade our telecommunications technologies. We may be
required to make substantial capital expenditures and may
not be successful in modifying our network infrastructure
in a timely and cost-effective manner in response to these
changes.
    
    New technology, such as the possible development of 4G
wireless data networks as a substitute for fiber-based
services, or other trends in the telecommunications
industry, could have an adverse effect on the services we
currently offer. For example, traditional fixed line home
telephones are being replaced by mobile telephones and/or
VoIP services. Technology substitution from global VoIP
providers, some of which offer free PC-to-PC based
international calls, is also becoming more prevalent.
Increased adoption of such competing technology may lead to
a decline in our revenues.
    
    Changing our services in response to market demand may
require the adoption of new technologies that could render
many of the technologies that we are currently implementing
less competitive or obsolete. We may also need to gain
access to related or enabling technologies in order to
integrate the new technology with our existing technology.
Our new services may contain design flaws or other defects
when first introduced to the market.
  The development of our Next Generation Network requires significant capital expenditures,
which may not be available on terms satisfactory to us or may impose a burden on our other business
activities.
    If any of our new services are not successful, our operating results could be adversely
affected.
  
    
    Developing new telecommunications services can be complex.
We may not be able to adapt the new services effectively,
promptly and economically to meet customer demand.
 13




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##### Table of Contents




    
    In developing new services, we are required to continue to
make significant investments in our network infrastructure
in order to support these services. If we exceed our
budgeted capital expenditure and cannot meet the additional
capital requirements in time through operating cash flows
and planned financings, we may have to delay the project.
    
    Any of our new services may not be commercially successful.
The failure of any of our services to achieve commercial
acceptance could result in additional capital expenditures
or, to the extent that we are required under the applicable
accounting standards to recognize a charge for the
impairment of assets. Any impairment charges could
materially adversely affect our financial condition and the
results of our operations.
  We may need to improve our internal controls over financial reporting and our independent
auditors may not be able to attest to their effectiveness.
    If we cannot manage the growth in our FTNS business, the quality of our services and our
operating results could be adversely affected.
   
    
    improve our existing operational, administrative and technological systems and our financial and management controls;
    
    enhance our infrastructure to support the expansion;
    
    develop effective marketing plans;
    
    control operational costs and maintain effective quality controls; and
    
    offer competitive prices to customers for our services.
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##### Table of Contents



We depend on certain key personnel, and our business and growth prospects may be disrupted by
the loss of their services.
  Our ability to further expand the coverage of our Next Generation Network may be limited by
the physical limitations or our ability to obtain access rights in certain buildings
  
    
    Because at least one of our competitors has already installed in-building wiring in virtually all buildings and many
buildings have limited physical space for additional in-building wiring, other FTNS providers, including us, may encounter
a bottleneck when installing our own in-building wiring;
    
    Some single-owner commercial buildings may grant rights of access to our competitors while barring us from installing our
own in-building wiring; and
    
    Certain developers may have affiliations with our competitors and may attempt to delay or inhibit our wiring installations.
  Internet security concerns could adversely affect our Internet access services.
  
    
    interruption, delays or cessation in services to our customers;
    
    a threat to the security of confidential information stored in the computer system of our customers; and
    
    illegal viewing or download of our contents.
  15




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##### Table of Contents



We may be unable to further expand the scope of our Internet access services unless we obtain
additional network capacity.
  
    
    the expansion and development of our own international telecommunications facilities;
    
    the availability of leased capacity from third party carriers at favorable rates; and
    
    the possible termination or cancellation of our existing contracts.
  Natural disasters and other disruptive regional events could damage our network and adversely
affect our business and operating results.
  The loss of key suppliers or their failure to deliver equipment on a timely basis could
negatively impact our business.
   Because we rely on third parties in delivering services through our Next Generation Network,
our operating results could be adversely affected if their services are not timely or do not meet
our standards.
  Risks relating to the regulatory, political and economic environment
 Regulatory reforms and currently contemplated regulatory initiatives in the telecommunications
industry may adversely affect us.
  
    
    In July 2004, a new provision of the Telecommunications Ordinance came
into force. This anti-competition provision specifically regulates the
conduct of all carrier licensees (in particular merger and acquisition
transactions) in the Hong Kong telecommunications industry by giving
the Telecommunications Authority the power to review the conducts and
transactions concerning carrier licensees and to take appropriate
actions if it determines that the transaction would, or is likely to,
prevent or substantially lessen competition in a telecommunications
market. The Telecommunications Authority has the power under this
provision to conduct an investigation into any questionable
transaction. It might consent to the transaction (unconditionally or
subject to any conditions it deems appropriate) or reject the
transaction outright. The decision of the Telecommunications Authority
will take into account whether the transaction will adversely affect
the public interest and benefit. This provision may have an adverse
effect on our ability to grow our business through mergers and
acquisitions.
    
    We offer local VoIP services through our Next Generation Network under
HKBNs FTNS License. Following the conclusion of a public consultation
on the regulation of Internet Protocol Telephony Services, the
Telecommunications Authority issued a statement on June 20, 2005,
setting out its views and decisions on the regulatory and licensing
framework for the provision of VoIP services, including the creation
of a licensing framework, conformance to the existing system of
assigning telephone numbers, imposition of interconnection charges and
establishing guidelines with respect to the quality of services.
 16




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##### Table of Contents




    
    We offer fixed but not mobile telecommunications network services. The
Telecommunications Authority has implemented a new fixed-mobile
convergence licensing practice by way of the UC License. The UC
License regime, which began on August 1, 2008, seeks to replace the
existing four classes of carrier licenses for the provision of fixed
and mobile services with a simple license. Going forward the UC
License will be the only carrier license to be issued for the
provision of fixed, mobile and/or converged services. Existing carrier
licenses will remain effective until their expiry date. Licensees can
choose to apply to convert their existing licenses to UC Licenses
before then or apply for a UC License upon expiry. This regulatory
change, together with the development of new technologies, may further
accelerate the convergence of fixed and mobile telecommunications
services, resulting in more structural competition between fixed-line
and mobile telecommunications operators. As we do not have a mobile
license, and are not currently authorized to provide mobile services,
our ability to compete may be hindered by our inability to offer such
services independently.
    
    We provide our IP-TV services over our Next Generation Network under
HKBNs FTNS License. The Hong Kong government has indicated that
because our IP-TV services are carried over the Internet, we are
exempted under the Broadcasting Ordinance from the requirement to
obtain a domestic pay-television programme service license. However, the
governments Communications and Technology Branch has informed us that
the government is considering a review of the broadcasting regulatory
regime and may introduce changes to the existing regulatory framework,
including the existing exemption in the Broadcasting Ordinance.
However, we cannot predict whether the government may require us to
obtain a pay-television programme service license in the future.
 We require licenses from the Telecommunications Authority to provide our services. If one of
these licenses is revoked or not renewed or there are substantial changes in its terms and
conditions, we may be unable to deliver the services authorized by that license.
  
    
    Our ability to adjust the tariffs for different services are governed
by the terms and conditions of the relevant licenses. The licenses,
however, are issued under different regulatory frameworks. The
differences in regulatory structure for these licenses may constrain
our flexibility to respond to market conditions, competition or cost
structure.
    
    We have been granted a waiver by the Telecommunications Authority to
comply with the tariff restrictions contained in HKBNs FTNS License.
If the waiver is revoked, our ability to adjust the tariffs for our
fixed telecommunication network services, including our offer of
discounts to subscribers from time to time, will be restricted.
    
    Our PNETS License is subject to the Telecommunications Authoritys
annual renewal. On October 19, 2009, the Telecommunications Authority
announced the replacement of the PNETS License by a new class of
Services-Based Operator License, Class 3 Modified Services-Based
Operator License. On November 10, 2009, the PNETS License of City
Telecom was replaced by a Class 3 Modified Services-Based Operator
License. It is noted that the PNETS License of HKBN would also be
replaced by a Class 3 Modified Services-Based Operator License on
December 7, 2009 through the renewal procedure. HKBNs FTNS License
was initially granted in 2000 for a term of 15 years and may be
renewed for such further period not exceeding 15 years at the
discretion of the Telecommunications Authority.
    
    The Telecommunications Authoritys failure to renew or its revocation
of any of these licenses or its amendment of any of the terms and
conditions contained in such licenses for any reason would prohibit us
from continuing to offer the services authorized by those licenses,
which would have a significant adverse impact on our revenues and
profitability. In addition, there may be future changes in Hong Kongs
telecommunications regulations or policies that would require us to
obtain additional licenses, which could have an adverse impact on our
operations.
 Our international telecommunications revenues may be adversely affected by increases in carrier
charges in China.
  As approximately 50% of our Talents are located in Guangzhou, China, changes in Chinese labor
or business laws may significantly affect our operations and our ability to serve our Hong Kong
based customers.
  17




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##### Table of Contents



Currency fluctuations of the Hong Kong dollar, our functional currency, may increase our
operating costs and long term liability.
  
    
    A major portion of our operating costs of interconnection
charges payable to overseas carriers for the delivery of
our international calls. Substantially all of these
interconnection charges are denominated in U.S. dollars or
other foreign currencies.
    
    The equipment and hardware we purchase for the expansion of
our Next Generation Network constitutes a large portion of
our capital expenditures and is also denominated in U.S.
dollars.
    
    Expenses incurred for the operation of our call center
located in Guangzhou, China are denominated exclusively in
Renminbi, the official currency of the Peoples Republic of
China. These include salaries paid to our personnel as well
as various operating expenses that we incur to maintain our
operations.
   Our Chairman and Vice Chairman have significant ownership interest in the company. We cannot
assure you that our Chairman and Vice Chairman will not engage in any transactions that lead to
conflicts of interest resulting from their ownership interests.
  
 Item 4 Information on the Company
 A. History and development of the Company
     
    
    In October 2006, our Liu Xiang Be Ahead of Yourself marketing campaign won the Certificate of Excellence of
HKMA/TVB Awards for Marketing Excellence 2006.
    
    In February 2007, we launched our bb50 and bb200 symmetric residential broadband service supported by SDU
personalized customer care service.
 18




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##### Table of Contents




    
    In June 2007, we were awarded Best Retention Strategies at the Hong Kong HR Awards 2007.
    
    In July 2007, we were awarded Integrated Support Team of the year at the Asia Pacific Customer Service Consortium
Customer Relationship Excellence Awards.
    
    In September 2007, we launched Fibre-To-The-Home residential broadband service, FibreHome100, FibreHome200 and
FibreHome1000. As the same time, we upgraded our entry level service broadband Internet access from 10 Mbps to 25
Mbps.
    
    In January 2008, we began to offer our Dual Mode High Definition Terrestrial TV Receiver and IPTV Set-Top Box to all
of our customers in Hong Kong.
    
    In February 2008, we were awarded contract for the provision of payphone service at the Hong Kong International Airport.
    
    In September 2008, we launched the National Geographic Channels first ever Interactive Channel.
    
    In June 2009, we launched the first Online Broadband Service Registration Platform in Hong Kong.
    
    In November 2009, we accepted the Innovation in Recruitment award and Champion of HR award at the Hong Kong HRM Awards
2009.
    
    In December 2009, we shattered the one-million mark for Fixed Telecommunications Network Services subscriptions.
    
    In March 2010, we launched our bb100 symmetric broadband and WiFi services at Hong Kong International Airport.
    
    In April 2010, we launched our 1Gbps symmetric residential broadband service at HK$199 per month.
 B. Business overview
 Principal Activities
   For the year ended August 31,2008
    
    
    2009
    
    
    2010HK$
    
    
    HK$
    
    
    HK$(Amounts in thousands)RevenueFTNS business
    
    
    1,011,038
    
    
    
    1,230,880
    
    
    
    1,356,098IDD business
    
    
    291,943
    
    
    
    247,359
    
    
    
    218,589Total operating revenue
    
    
    1,302,981
    
    
    
    1,478,239
    
    
    
    1,574,687
 
    
    FTNS business.Our FTNS business involves the provision of fixed
telecommunications network services through our self-owned Next
Generation Network. Such services include the following:
 
    
    high-speed broadband Internet access services at symmetric upstream and downstream access
speeds of 25 Mbps to 1000 Mbps;
    
    fixed line local telephony services using VoIP technology;
    
    pay television services consisting of more than 110 channels, including self-produced news,
childrens program, international drama, movies and documentary and local interest
programming, using our IP platform; and
    
    corporate data services, including the provision of dedicated bandwidth to corporate customers.
 19




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##### Table of Contents



As of August 31, 2010, we had a total of approximately 1,110,000 subscriptions for our fixed
telecommunications network services, consisting of 526,000 broadband Internet access, 431,000
local VoIP and 153,000 IP-TV services subscriptions.
    
    IDD business.Our IDD business involves the provision of international
telecommunications services. Such services include direct dial
services, international calling cards and mobile call forwarding
services in Hong Kong and Canada. As of August 31, 2010, the customer
base for our total international telecommunications services consisted
of approximately 2.4 million registered accounts.
 Strategy and Competitive Strengths
   
    
    Focus on the Residential Mass and Small-To-Medium Corporate
and Enterprise Market Segments.We focus on offering
high-bandwidth services to the residential mass and
small-to-medium enterprise markets in Hong Kong, which we
believe have significant growth potential. We price our
services attractively on a value-for-bandwidth basis and at
the same time offer bandwidth advantages over comparable
service offerings by our competitors. Our IP-TV services
focus on the residential mass market by providing
Chinese-language content that targets the Chinese-speaking
population of Hong Kong. We have also strengthened our
English language contents over the past year to increase
our competitiveness by adding Disney Channels, Discovery
Channels, National Geographic, AXN, Bloomberg and other
channels. Our focus on the residential mass and
small-to-medium corporate and enterprise markets has
enabled us to quickly grow our subscription base, and we
believe this will help us to up-sell our services.
    
    Leading-Edge Next Generation Network.We believe our
self-owned Next Generation Network, a fiber-based backbone,
gives us an inherent cost and performance advantage over
our competitors. The high capacity of this network has
enabled us to offer a suite of services on a single IP
network platform. This IP platform is highly scalable,
enabling us to offer broadband Internet access, local VoIP,
IP-TV and corporate data services over a single network. It
is also capable of providing up to 1000 Mbps symmetric
broadband Internet access. Whereas our competitors are on a
linear improvement path, we can upgrade our fiber based
services logarithmically from 100Mbps to 1000Mbps on our
existing passive fiber infrastructure which existing
technology cannot accomplish using legacy telephone lines.
    
    First Mover Advantage and High Barriers to Entry.Despite the intense
competition in the Hong Kong telecommunications industry, the inherent
characteristics of the fixed line telecommunications market create a
high entry barrier. Accordingly, we believe that our Next Generation
Networks current coverage of 1.77 million residential homes pass,
substantially all in densely populated areas, gives us a first mover
advantage over our competitors. Competitors who want to replicate our
business model to provide a full coverage network that includes remote
and difficult-to-reach areas of Hong Kong may encounter technological
difficulties. Attempting to deploy Metro Ethernet technology in such
locations would significantly increase costs and completion time of
such a network. While other telecommunications operators may lay their
own fiber-to-the-building, we believe some would encounter significant
in-building bottlenecks when attempting to complete an end-to-end
network. This is because a majority of Hong Kongs residential
properties have limited space for in-building wiring leading to
subscribers residences, making it difficult for new entrants to
replicate our end-to-end network build.
 Recent Development
  Our Services
 Fixed telecommunications network services
  20




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##### Table of Contents



As of August 31,2008
    
    
    2009
    
    
    2010Broadband Internet access
    
    
    316,000
    
    
    
    391,000
    
    
    
    526,000Local VoIP
    
    
    329,000
    
    
    
    382,000
    
    
    
    431,000IP-TV
    
    
    156,000
    
    
    
    170,000
    
    
    
    153,000Total FTNS subscriptions
    
    
    801,000
    
    
    
    943,000
    
    
    
    1,110,000
 Broadband Internet Access
 
    
    Scope of service.Our broadband Internet access services in Hong Kong
are offered through HKBN. We currently offer our residential and
corporate customers broadband Internet access speeds of up to 1000
Mbps, but the majority of our customers currently have access speeds
of 100 Mbps. We also offer Fiber-to-the-Home, or FTTH, broadband
service for 100 Mbps, 200 Mbps and 1000 Mbps. Rather than using
Category-5e copper wiring for the last mile, optical fiber is used in
FTTH broadband service. Currently, all of our broadband Internet
access packages include free e-mail and for additional charges, offer
customers for a variety of value added services, such as bbWatch, a
full-screen IP-TV service that is viewed with a desktop or laptop
computer; bbWi-Fi, a service in which subscribers can have wireless
Internet access through more than 2,000 hotspots; and Game.hkbn.net,
a game point portal that sells various game providers cards and
merchandises. We frequently alter our promotions in response to
changing market conditions or as a way of attracting additional
subscribers.
    
    Pricing.We currently offer broadband service for bb100 and
FibreHome1000 at monthly fees ranging from HK$169 to HK$199
for unlimited service access. On August 19, 2010, we
announced to the public that effective from September 1,
2010, we ended the promotional rate at HK$99 per month. By
paying HK$199 per month, customers can choose 100 Mbps
triple play service or HK$199 per month for 1000Mbps
broadband Internet access service. Our strategy is to
change from subscriber growth to revenue growth with a
reasonable and acceptable pricing to our customers.In addition to the residential packages described above, we
have also developed broadband and Metronet private network
service plans that target corporate customers. We offer
prepackaged plans that provide access at speeds of up to
1000 Mbps. Corporate customers that subscribe to
prepackaged plans pay fixed monthly subscription fees
ranging from HK$128 to HK$200,000 depending on bandwidth or
solution selected. Our prepackaged plans include on-site
training, on-site maintenance support, high capacity data
transfer and e-mail services.
    
    Competition.There have been many new entrants to the
Internet access business, but our main competitors are
PCCW-HKT, i-Cable and HGC. PCCW-HKT has been offering
broadband Internet access services since May 1998 and
mainly uses asymmetric digital subscriber line technology,
or ADSL, over its telephone network to provide asymmetric
Internet access at speeds up to 6 Mbps/8 Mbps downstream
and 640 Kbps/800 Kbps upstream. In November 2007, PCCW-HKT
announced the provision of 100 Mbps and 1000 Mbps fiber
direct broadband Internet access service to two-thirds of
Hong Kongs households. i-Cable began providing broadband
Internet access services in March 2000 using its hybrid
fiber coaxial network that provides symmetric typical
access speeds up to 8 Mbps shared by a cluster of
buildings. HGC predominantly uses VDSL technology and
typically provides access speeds up to 100 Mbps.Our main competitors have been in operation longer and may
have greater market presence, brand recognition and more
financial, technical and personnel resources. In addition,
they may have greater network coverage in terms of number
of homes pass.
    
    Market share.We had approximately 526,000 broadband
Internet access subscriptions as at August 31, 2010, which
represented a market share of approximately 25% with
respect to the total number of broadband Internet access
subscribers in Hong Kong.
 Local VoIP
 
    
    Scope of service.We offer our on-network local VoIP
services in Hong Kong by installing IP-based voice
switching equipment in locations covered by our Next
Generation Network. Voice signals are transmitted through
our Ethernet network by the VoIP switches installed in the
subscribers building. The quality of our local VoIP
service is comparable to traditional fixed line local
telephony services, and customers are able to use their
existing telephone equipment. In addition, with portability
of fixed line numbers, fixed line telephony subscribers
switching to our local VoIP services are able to retain
their existing local telephone number.
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We also offer hardware-based off-network local VoIP
services, or Broadband Phone services, via the broadband
network of other operators. In October 2005, we launched
our global software-based VoIP services under the brand
2b. This service is primarily targeted at the overseas
Chinese community, which we believe will enable us to
access a wider addressable market with higher tariff
compared to the Hong Kong market. For HK$98 per month, 2b
provides broadband users around the world with a standard
Hong Kong 8-digit fixed line number to make and receive
unlimited calls to/from Hong Kong. Moreover, we offer a
full range of value added services, including call waiting,
voice mail and conference call features.
    
    Pricing.We currently charge from HK$68 to HK$118 per
month, on standalone basis, for our on-network local VoIP
services depending on the service plan, and we offer a full
range of value added services, including call waiting,
caller display and conference call services. The majority
of our new local VoIP is included in our triple play
service offered at HK$199 per month for voice, IP-TV and
broadband.
    
    Competition.PCCW-HKT is the incumbent and largest fixed
telecommunications network operator in Hong Kong. Based on
public information, PCCW-HKT had a market share of
approximately 70% with respect to local telephony services
as of June 30, 2010. The remainder of the market is shared
among ourselves and three other alternative carriers: HGC,
New World and Wharf T&T. The principal basis of competition
for local telephony is price and brand name recognition.
PCCW-HKT has the highest brand name recognition, but we and
the other operators are contending by offering
competitively priced local telephony services that provide
comparable quality to PCCW-HKT.
    
    Market share.As of August 31, 2010, we had 431,000 local
VoIP subscriptions. Our market share with respect to local
residential and business telephony services was
approximately 10% as of August 31, 2010.
 IP-TV
 
    
    Scope of service.Our IP-TV services began in August 2003
and include the provision of standard definition and high
definition video via our Next Generation Network to an IP
set-top-box connected to the subscribers television set.
In May 2007, we renamed our IP-TV services as bbTV.
bbTV currently consists of more than 110 channels,
including a self-produced 24-hour news channel and kids
education and development channels and turnaround channels
from various international content providers. Since the
launch of our IP-TV services in August 2003, we have
progressively adjusted our content offerings and valued
added components of the services. We consider our IP-TV to
be an incremental component of our broadband and VoIP
service offerings, rather than a large standalone business.
    
    Pricing.We currently charge our IP-TV service together
with our broadband and VoIP services at HK$199 per month
for this subscription-based pay television service. Because
of the scalability of our Next Generation Network
infrastructure, the current cost of adding IP-TV services
to an existing broadband Internet access or local VoIP
subscriber is small.
    
    Competition.Our two main competitors in the pay-television
business are i-Cable and PCCW-HKT. The pay-television
services of i-Cable and PCCW-HKT include a significant
amount of exclusive contents, such as Barclays Premier
League Football until June 2013, HBO, Cinemax, ESPN and
others. We target a different market than these competitors
by offering a wide spectrum of content line-up and
attractive pricing, both of which we consider critical for
successful penetration in the residential mass market. We
have also strengthened our English language contents over
the past year to increase our competitiveness by adding
Disney Channels, Discovery Channels, National Geographic,
AXN, Bloomberg and other channels.TVB and ATV are indirect competitors of our pay-TV
services. TVB and ATV account for a substantial proportion
of Hong Kongs television viewership and we market our
services as supplemental to theirs. Because TVB and ATV
offer primarily subscription-free television services
supported by advertising revenues, we expect that their
programming is designed to attract the widest possible
audience. In contrast, we and the other pay-TV operators
rely on monthly subscription fees for most of our revenues.
Other competitors include satellite TV operators, such as
Star TV, as well as potential competition from
direct-to-home broadcasters and broadcasters using digital
terrestrial delivery methods.
    
    Market share. As of August 31, 2010, we had 153,000
IP-TV subscriptions, representing approximately 7% of the total
pay-television subscription base in Hong Kong.
 International telecommunications services
 
    
    Scope of services.We began providing international telecommunications services in 1992 and were among the
first companies to be granted a PNETS License. Our international telecommunications services are offered to
our FTNS business customers via our Next Generation Network and to other carriers customers via indirect
access. Indirect access allows any pre-registered telecom user in Hong Kong to access our services via our
two primary access codes 1666 and 0030. By dialing our access code, our registered customers can access
any destination in the world through our network, by paying us a usage charge.
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We have greatly expanded our range of services over the years to include a variety of international direct
dial services at competitive rates. We believe that our ability to deliver a range of calling plans with
varying features that cater to different customer needs has been one of the key factors of our success. We
market our international telecommunications services under the IDD 1666 and IDD 0030 brand names. These two
brands provide us with flexibility in our marketing strategies. The primary international
telecommunications services that we currently offer our customers are the following:
 Service
    
    DescriptionIDD 1666
    
    Provides subscribers with international direct dial using the access code 1666 in Hong Kong.IDD 0030
    
    Provides subscribers with international direct dial using the access code 0030 in Hong Kong.Mobile call forwarding services
    
    Allows call forwarding of Hong Kong mobile numbers to any overseas telephone number so that
subscribers can receive calls while in overseas.
 
    
    Pricing.We charge our IDD 1666 and IDD 0030 users a per
minute tariff rate that varies according to the destination
of the call and the calling prefix, with discounts
depending on the time of day or day of the week when the
call is placed as well as monthly plans. To maintain our
market share in a market segment with increasingly intense
competition, we have significantly reduced some of our
international telecommunications rates and introduce new
marketing and promotional offers from time to time. To
offset the effects of these price reductions, we have taken
steps to reduce our cost base, such as using our relatively
large traffic volume to negotiate lower prices from our
international partners, establishing a call center in
Guangzhou to provide customer service and back office
support services, and developing our own international
telecommunications infrastructure. Our employment of two
separate brand names, IDD 1666 and IDD 0030, also provide
us with flexibility in our marketing strategies.
    
    Competition.PCCW-HKT, HGC, New World, and Wharf T&T are
our main competitors in the international
telecommunications business. As in previous years, we
experienced fierce price competition in Hong Kong during
fiscal 2010. This competition drove down the average tariff
rates per minute and we expect this price competition to
continue in fiscal 2011.Further, technology substitution from global VoIP providers
such as Skype, which offers free PC-to-PC based
international calls, is becoming more prevalent.
    
    Market share.We experienced a reduction in total traffic
volume of 15.2% to 487 million minutes in fiscal 2009 and a
further reduction of 4.7% to 464 million minutes in fiscal
2010. The continuing reduction in traffic volume was mainly
due to intense competition as some of our integrated
competitors offered free or very low cost international
direct dial minutes as a customer incentive to gain local
fixed line and mobile market share.
 Our network infrastructure
 Fixed telecommunications network
    23




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International telecommunications network
  
    
    Undersea cables. In March 2002, we received our license to
provide undersea cable-based FTNS. This license allows us
to purchase and operate our own undersea cables. In 2000,
we entered into contracts with two large consortia of
international telecommunications companies to acquire
undersea cable capacity. Pursuant to the first contract, we
completed the construction of a Japan-U.S. undersea cable
in August 2001. Pursuant to the second contract, we agreed
to jointly construct and maintain the Asia-Pacific Cable
Network 2 undersea cable as an international transmission
facility. Construction of the cable was completed in May
2002, and commercial operation began immediately
thereafter. We spent a total of HK$120 million on these two
projects. We believe the utilization of these undersea
cables provides capacity for significant future growth of
our international and fixed-network telecommunications
services.Having our own undersea cables and our fiber-based backbone
have enabled us to better control international
transmission quality, reduce the costs associated with
international transmission and reduce our reliance on third
party infrastructure. Our international telecommunications
network currently has a monthly handling capacity of
approximately 130 million minutes. We believe that the
continuing improvement of our international
telecommunications network is important in supporting the
growth of our subscription base and the expansion of our
range of services.
    
    Interconnection arrangements.We have entered into
interconnection arrangements with other local fixed network
operators in Hong Kong and overseas carriers to transmit
calls between Hong Kong and overseas destinations for our
customers. We take into account a number of factors in
choosing the local fixed network operators and overseas
carriers with whom we cooperate, including the level of
termination charges and transmission efficiency and
quality. We evaluate the performance of parties with whom
we have interconnection arrangements periodically. We
believe that we will not have difficulty in finding
alternative overseas carriers if performance standards are
not being met or a change is otherwise necessary. We have
not experienced any disruption in the provision of our
services as a result of a change of arrangements with
overseas carriers or local fixed network operators.We pay a fixed monthly fee to local fixed network operators
for connection between our switches and their networks and
a variable access fee payable on a per-minute basis when
accessing their network. For customers using our own
network, no interconnection fee is charged. We negotiate
the termination charges we pay with the overseas carriers,
and the termination charges vary from one overseas carrier
to another. All of the interconnection and termination
charges we pay to local fixed network operators and
overseas carriers, respectively, are made on an open
account basis with credit terms ranging from 10 to 30 days.
The interconnection charges we pay to local fixed network
operators are denominated in Hong Kong dollars and
substantially all the interconnection charges we pay to
overseas carriers are denominated in U.S. dollars.
    
    International telecommunications switching systems.We own
five international telecommunications switching systems:
three in Hong Kong and two in Canada, one in Vancouver and
one in Toronto.Our three international telecommunications switching
systems in Hong Kong handle telephone calls originating or
terminating in Hong Kong as well as transit traffic. Our
telecommunications network mainly consists of switching
equipment by Nortel Networks Limited and compression units
supplied by Cisco Systems, Inc. and ECI Telecom Ltd. These
systems are programed to automatically choose the optimal
routing for each transmission. Optimal routing is a
function of a variety of factors, such as country or
territory of origination and destination, communication
quality, efficiency and costs, and the capacity of the
various communication methods available.Because our three international telecommunications
switching systems in Hong Kong operate independently of
each other, if one system breaks down, all transmissions
are immediately diverted to another switching system. We
have never experienced a period where all systems
experienced a failure at the same time since we commenced
operations in 1992.
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##### Table of Contents



Sales and marketing
     Maintenance and monitoring
  
    
    two separate network operation centers in two different locations that operate 24 hours a day, 7 days a week,
network operation center providing real-time service monitoring and maintenance services and supported by about
133 operational and field Talents;
    
    individual self-reporting mechanisms and centralized performance monitoring systems for our switches and equipment;
    
    an emergency self-reporting system that automatically contacts designated personnel; and
    
    back-up systems for our switches, critical software and hardware components.
  Research and development activities
  Customer service
    Billing and collection
  25




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##### Table of Contents



Seasonality
  Environmental matters
  Intellectual property rights
  C. Regulatory framework
 The following is a brief summary of the Hong Kong laws and regulations that currently
materially affect our business. This section does not purport to be a comprehensive summary of all
present and proposed regulations and legislation relating to the industries in which we operate.
   Telecommunications industry
 Licensing
    26




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##### Table of Contents



General Licensing Requirements
   Public Non-Exclusive Telecommunications Services License
     FTNS License
  
    
    to provide a public fixed telecommunications network service, covering internal services or external services, or both; and
    
    to establish and maintain a fixed telecommunications network, which may be wireline-based or wireless-based (Wi-Fi
spectrum included), or a combination of both.
   27




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##### Table of Contents



Interconnection
     Competition provisions
 Regulation of anti-competitive conduct
   Control on mergers and acquisitions
   Consumer protection
   28




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Regulation of pricing
     Universal service contribution and local access charge
     Fixed mobile interconnection charge
 29




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Television broadcasting industry
  Licensing
   Cross media ownership restrictions
    Foreign ownership restrictions
  Competition provisions
    30




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##### Table of Contents



Program standards and advertising standards
  D. Organizational structure
  
 
 Notes:(1)
    
    The other immediate subsidiaries of City Telecom (H.K.) Limited are SGBN Singapore Broadband
Network Pte. Limited and Golden Trinity Holdings Limited. The immediate subsidiaries of Golden
Trinity Holdings Limited are Warwick Gold Enterprises Limited and Attitude Holdings Limited.(2)
    
    The Company has only registered its Chinese name. The English name is an unregistered translation.(3)
    
    The other immediate subsidiaries of Automedia Holdings Limited are Global Courier Company
Limited, CTI International Limited, BBTV Company Limited, City Telecom (U.S.A.) Inc., City
Telecom (Vancouver) Inc. and City Telecom (Toronto) Inc.(4)
    
    The immediate subsidiaries of Hong Kong Broadband Network Limited are Excel Billion Profits
Limited, Hong Kong Television Network Limited, Hong Kong Broadband Television Company Limited,
Hong Kong Broadband Phone Limited and Hong Kong Broadband Digital TV Limited. 31




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Percentage of interestheld by City TelecomJurisdiction of
    
    Direct
    
    
    IndirectName
    
    incorporation
    
    %
    
    
    %963673 Ontario Limited
    
    Canada
    
    
    
    
    
    
    100Attitude Holdings Limited
    
    British Virgin Islands
    
    
    
    
    
    
    100Automedia Holdings Limited
    
    British Virgin Islands
    
    
    100
    
    
    
    BBTV Company Limited
    
    Hong Kong
    
    
    
    
    
    
    100City Telecom (B.C.) Inc.
    
    Canada
    
    
    
    
    
    
    100City Telecom (Canada) Inc.
    
    Canada
    
    
    
    
    
    
    100City Telecom (Toronto) Inc.
    
    Canada
    
    
    
    
    
    
    100City Telecom (U.S.A.) Inc.
    
    United States of America
    
    
    
    
    
    
    100City Telecom (Vancouver) Inc.
    
    Canada
    
    
    
    
    
    
    100City Telecom Inc.
    
    Canada
    
    
    
    
    
    
    100City Telecom International Limited
    
    British Virgin Islands
    
    
    100
    
    
    
    Credibility Holdings Limited
    
    British Virgin Islands
    
    
    100
    
    
    
    CTI Guangzhou Customer
Services Co. Ltd. (note)
    
    Peoples Republic of China
    
    
    100
    
    
    
    CTI International Limited
    
    Hong Kong
    
    
    
    
    
    
    100CTI Marketing Company Limited
    
    Hong Kong
    
    
    
    
    
    
    100Excel Billion Profits Limited
    
    Hong Kong
    
    
    
    
    
    
    100Global Courier Company Limited
    
    Hong Kong
    
    
    
    
    
    
    100Golden Trinity Holdings Limited
    
    British Virgin Islands
    
    
    100
    
    
    
    Hong Kong Broadband Digital TV Limited
    
    Hong Kong
    
    
    
    
    
    
    100Hong Kong Broadband Network Limited
    
    Hong Kong
    
    
    
    
    
    
    100Hong Kong Broadband Phone Limited
    
    Hong Kong
    
    
    
    
    
    
    100Hong Kong Broadband Television Company Limited
    
    Hong Kong
    
    
    
    
    
    
    100Hong Kong Television Network Limited
    
    Hong Kong
    
    
    
    
    
    
    100IDD1600 Company Limited
    
    Hong Kong
    
    
    
    
    
    
    100SGBN Singapore Broadband Network Pte. Limited
    
    Singapore
    
    
    100
    
    
    
    Warwick Gold Enterprises Limited
    
    Hong Kong
    
    
    
    
    
    
    100
 
 Note: The Company has only registered its Chinese name. The English name is an unregistered
translation. E. Property, plant and equipment
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Item 5 Operating and financial review and prospects
 You should read the following discussion together with the rest of this annual report,
including the consolidated financial statements and related notes included elsewhere in this annual
report. The results discussed below are not necessarily indicative of the results to be expected in
any future periods.
 Overview
  A. Factors affecting our results of operations
 Our revenues
  
    
    FTNS business.Revenues from our FTNS business primarily consist of
monthly service charges payable by our subscribers and interconnection
charges payable by other telecommunications operators.
 
    
    Monthly service charges.We charge our subscribers a
monthly service charge, which generally varies by the
number and nature of the fixed telecommunications network
services subscribed. Our strategy is to market additional
services to our subscribers by leveraging our broadband
Internet access subscription base of 526,000 as of August
31, 2010 and the scalability of our Next Generation
Network.
    
    Interconnection charges.We offer fixed telecommunications
network services through our self-owned Next Generation
Network. Under the terms of HKBNs fixed telecommunications
network services license, we are required to provide
interconnection services to other network operators,
including mobile network operators.
 
    
    IDD business.Substantially all of revenues from our IDD business
consists of tariffs, which generally varies by the destination of the
call and the calling prefix, with discounts depending on the time of
the day or day of the week when the call is placed.
 Our operating expenses
  
    
    Network costs. Network costs vary according to either our
network capacity or our traffic volume. Such costs mainly
include leased line rentals, program fees and production
costs for our IP-TV services and interconnection charges
payable to other local fixed network operators and
international bandwidth providers. Network costs do not
include depreciation charge, which is included in other
operating expenses.
    
    Other operating expenses.Other operating expenses mainly
consist of Talent costs, advertising and marketing
expenses, depreciation of owned fixed assets.
 
    
    Talent costs. Salaries and related costs incurred for services rendered by Talents.
    
    Advertising and marketing expenses.Due to our efforts in promoting our FTNS
services, our advertising and marketing expenses incurred in connection with
subscription acquisition activities have been relatively high. We expect that we
will be required to continue to invest significant financial and human resources
in our sales and marketing efforts as we strive to build our subscription base and
to enhance our brand value.
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##### Table of Contents




    
    Depreciation.Depreciation is calculated to write off the cost of fixed assets
less their estimated residual value, if any, using straight line method over their
estimated useful lives. We expect that we will continue to invest in our Next
Generation Network to expand our network coverage. In addition, any technological
advancement or obsolescence might affect the estimated useful lives of our fixed
assets.
 Critical accounting policies
 The following discussion and analysis is based on our consolidated financial statements, which
have been prepared in accordance with IFRSs for the fiscal years ended August 31, 2008, 2009 and
2010. Our significant accounting policies are more fully described in note 1 to our consolidated
financial statements.
    Revenue recognition
    
    
    The amount recognized for fiscal 2004 and before was
determined using the available rates under the
then-existing calculation model (fully distributed cost
model) for interconnection service between fixed and mobile
operators, which are based on historical cost data of
PCCW-HKT Telephone Limited. In May 2004, the
Telecommunications Authority confirmed that mobile network
operators are obliged to pay interconnection charges to us
in accordance with the charging principles promulgated by
the Telecommunications Authority. A number of mobile
network operators, however, disputed the basis of our
calculation. In August 2004, we requested the
Telecommunications Authority to make a determination (the
2004 Determination) on the level of mobile
interconnection charges payable by one of the mobile
network operators to us and the effective date of the
determined mobile interconnection charges.
    
    The amount recognized in fiscal 2005 reflected a discount
from the amounts billed which was determined based on our
assessment of the range of likely outcomes of the 2004
Determination. In November 2005, we entered into
contractual agreements with one of the mobile network
operators who agreed to pay interim mobile interconnection
charges at a rate based on PCCW-HKTs published fully
distributed cost model of HK$0.0436 per occupancy minute
until the Telecommunications Authority issued its final
ruling.
    
    The amount recognized in fiscal 2006 was based on the
preliminary rates published by the Telecommunications
Authority in March 2006 as we awaited a final ruling by the
Telecommunications Authority on the 2004 Determination.
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##### Table of Contents




    
    The amount recognized in fiscal 2007 was based on the 2004
Determination issued by the Telecommunications Authority in
June 2007, which set out the rates of mobile
interconnection charge payable by the mobile operator under
dispute for interconnection services provided by us for the
period from April 1, 2002 to August 31, 2004.
    
    The amount recognized in fiscal 2008 was based also on the
2004 Determination issued by the Telecommunications
Authority in June 2007. In February 2008, we requested the
Telecommunications Authority to make a new determination
with four mobile operators on the rates of mobile
interconnection charge and interest thereon. We
subsequently entered into contractual agreements with some
of these mobile operators, which agreed to pay mobile
interconnection charges based on the 2004 Determination for
the period from April 1, 2002 to August 31, 2004 and with
respect to the period after August 31, 2004 at the interim
rates stated in the agreements, which will be adjusted
based on further determination to be issued by the
Telecommunications Authority.
    
    The amount recognized in fiscal 2009 and before was based
on the 2004 Determination issued by the Telecommunications
Authority in June 2007 which set out the rates of mobile
interconnection charge payable by the mobile operators
under dispute for interconnection services provided by us
for the period from April 1, 2002 to August 31, 2004. In
September 2008, the Telecommunications Authority indicated
that it accepted our request for determination on the rate
of mobile interconnection charge for the period from April
1, 2002 to April 26, 2009 payable by the mobile operators
that have not reached contractual agreements with us, and
the rate for period from September 1, 2004 to April 26,
2009 payable by those mobile operators that have reached
contractual agreements with us and the interest thereon
(the 2008 Determination). On November 25, 2009, the
Telecommunications Authority issued a Preliminary Analysis
in relation to the 2008 Determination for the parties
comments.
    
    In May 2010, the Telecommunications Authority issued its
decision on the 2008 Determination, which set out the rates
of mobile interconnection charges payable by the mobile
operators involved in the dispute. Based on such decision on the 2008
Determination, we reversed approximately HK$19.7 million
revenue related to mobile interconnection charges and
recognized approximately HK$10.1 million interest income
in fiscal 2010.
  Useful lives of fixed assets
  Impairment of fixed assets
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Accounts receivable
    For the year ended August 31,2008
    
    
    2009
    
    
    2010HK$
    
    
    HK$
    
    
    HK$(Amounts in thousands)Balance at beginning of the year
    
    
    22,392
    
    
    
    11,944
    
    
    
    3,160Additions charged to expense
    
    
    14,293
    
    
    
    12,103
    
    
    
    14,742Write-off
    
    
    (24,741
    )
    
    
    (20,887
    )
    
    
    (12,079
    )Balance at the end of the year
    
    
    11,944
    
    
    
    3,160
    
    
    
    5,823
 Deferred taxation
   USC charges
  36




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##### Table of Contents



Operating Results
  For the year ended August 31,2008
    
    
    2009
    
    
    2010
    
    
    2010HK$
    
    
    HK$
    
    
    HK$
    
    
    US$(Amounts in thousands)RevenueFTNS business
    
    
    1,011,038
    
    
    
    1,230,880
    
    
    
    1,356,098
    
    
    
    174,348IDD business
    
    
    291,943
    
    
    
    247,359
    
    
    
    218,589
    
    
    
    28,1031,302,981
    
    
    
    1,478,239
    
    
    
    1,574,687
    
    
    
    202,451Network costs
    
    
    (178,367
    )
    
    
    (175,129
    )
    
    
    (195,292
    )
    
    
    (25,108
    )Other operating expenses
    
    
    (966,094
    )
    
    
    (1,037,964
    )
    
    
    (1,105,604
    )
    
    
    (142,143
    )Other income, net
    
    
    24,989
    
    
    
    41,540
    
    
    
    7,989
    
    
    
    1,028Finance costs
    
    
    (75,137
    )
    
    
    (55,127
    )
    
    
    (22,235
    )
    
    
    (2,859
    )Profit before taxation
    
    
    108,372
    
    
    
    251,559
    
    
    
    259,545
    
    
    
    33,369Income taxes benefit/(expense)
    
    
    16,818
    
    
    
    (38,730
    )
    
    
    (42,679
    )
    
    
    (5,487
    )Net income
    
    
    125,190
    
    
    
    212,829
    
    
    
    216,866
    
    
    
    27,882
 Fiscal 2010 Compared to Fiscal 2009
 Revenues.
 
    
    FTNS business.Revenues from our FTNS business increased by 10.2% to
HK$1,356.1 million in fiscal 2010 from HK$1,230.9 million in fiscal
2009. The increase was primarily caused by an increase of 17.7% of our
FTNS subscription base to 1,110,000 as of August 31, 2010 from 943,000
as of August 31, 2009.
 
    
    Broadband Internet access.The subscription base for our
Internet access services increased by 34.5%, to 526,000 as
of August 31, 2010 from 391,000 as of August 31, 2009.
During fiscal 2010, we are able to have a record growth of
135,000 net additions through our Member-Get-Member
marketing campaigns which reduced the price of our
symmetric 100Mbps broadband services by half to HK$99 per
month if a customer introduces a new customer at HK$99 per
month. Such marketing campaigns essentially allowed us to
increase our revenues by converting one subscriber at
HK$182 per month to two subscribers at a minimum rate of
HK$99 per month.
    
    Local VoIP.The subscription base for our local VoIP
services increased by 12.8%, to 431,000 as of August 31,
2010 from 382,000 as of August 31, 2009, mainly due to
improved branding that allowed us to increase sales of our
VoIP services to subscribers of our Internet access
services.
    
    IP-TV.The subscription base for our IP-TV services
decreased by 10.0% to 153,000 subscriptions as of August
31, 2010 from 170,000 as of August 31, 2009 because we
proactively churned off free or low paying IP-TV
subscribers and redeployed the set-top-boxes to higher
yielding customers. We continued to enhance our channel
variety so as to increase the content value to our customers. We currently offer more than 110 channels to our
customers.
 37




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##### Table of Contents



As a result of the Telecommunications Authoritys decision
on the 2008 Determination in May 2010 as stated above,
revenue of HK$19.7 million related to mobile
interconnection charges was reversed in fiscal 2010. In
addition, prior to April 26, 2009, the mobile network
operators were required to pay interconnection charges for
all calls originating to and from the mobile users. After
April 26, 2009, the chargeability of interconnection
charges is subject to commercial negotiation. With the
withdrawal of regulatory guidance on FMIC in favor of
mobile network operators on April 27, 2009, only an
insignificant amount of revenue related to mobile
interconnection charges was recognized.
 
    
    IDD business.Revenues from our IDD business decreased by
11.6% to HK$218.6 million in fiscal 2010 from HK$247.4
million in fiscal 2009. The decrease was primarily due to
the reduction in IDD traffic volume and the decrease in the
tariff rate we charged to our customers. Competition during
fiscal 2010 intensified as some of our competitors offered
international direct dial minutes for free or at
significantly lower rates as a marketing incentive to gain
local fixed line and mobile market shares. Further,
technology from global VoIP providers such as Skype, which
offer free PC-to-PC based international calls, was becoming
more prevalent.
 Network costs.
 Other operating expenses.
  For the year ended August 31,2009
    
    
    2010
    
    
    2010HK$
    
    
    HK$
    
    
    US$(Amounts in thousands)Talent costs
    
    
    (302,279
    )
    
    
    (301,760
    )
    
    
    (38,796
    )Advertising and marketing expenses
    
    
    (299,794
    )
    
    
    (372,727
    )
    
    
    (47,920
    )Depreciation
    
    
    (206,241
    )
    
    
    (199,029
    )
    
    
    (25,588
    )Others
    
    
    (229,650
    )
    
    
    (232,088
    )
    
    
    (29,839
    )Other operating expenses
    
    
    (1,037,964
    )
    
    
    (1,105,604
    )
    
    
    (142,143
    )
 
    
    Talent costs.Talent costs decreased by 0.2% to HK$301.8 million in fiscal 2010 from HK$302.3 million in fiscal 2009.
    
    Advertising and marketing expenses.Advertising and marketing expenses increased by 24.3% to HK$372.7 million in
fiscal 2010 from HK$299.8 million in fiscal 2009. Our salaries and commissions for our sales and marketing Talents
increased by HK$28.5 million due to our growth in broadband subscription base. Moreover, our marketing campaigns
resulted in an increase in mass media advertising costs of HK$21.6 million and other advertising costs of HK$14.9
million. In addition, the expansion of our sales channels through opening new shops resulted in an increase of
advertising and marketing related expenses of HK$7.9 million.
    
    Depreciation.Depreciation decreased by 3.5% to HK$199.0 million in
fiscal 2010 from HK$206.2 million in fiscal 2009. Notwithstanding our
purchase of additional fixed assets for our network infrastructure as
we increased the scale of operations in our FTNS business, a portion
of our owned fixed assets were fully depreciated. As a result, we
incurred lower depreciation expenses.
 Other income, net.
 Finance costs.
 38




---



##### Table of Contents



Income tax benefit/(expense).
 Net income.
 Fiscal 2009 Compared to Fiscal 2008
 Revenues.
 
    
    FTNS business.Revenues from our FTNS business increased by 21.8% to
HK$1,230.9 million in fiscal 2009 from HK$1,011.0 million in fiscal
2008. The increase was primarily caused by an increase of 17.7% of our
FTNS subscription base to 943,000 as of August 31, 2009 from 801,000
as of August 31, 2008 and, to a lesser extent, an increase in the
average revenue per user for our Internet access services. We believe
that there was growing market acceptance of premium pricing in fiscal
2009.
 
    
    Broadband Internet access.The subscription base for our
Internet access services increased by 23.7%, to 391,000 as
of August 31, 2009 from 316,000 as of August 31, 2008.
During fiscal 2009, partly as a result of our success in
differentiating our services by emphasizing our ultra high
Internet access speed, we were able to acquire and retain
customers who are willing to enter into subscription
contracts with a long service period. Revenues from our
Internet access services increased as a result.
    
    Local VoIP.The subscription base for our local VoIP
services rose by 16.1%, to 382,000 as of August 31, 2009
from 329,000 as of August 31, 2008, mainly due to improved
branding and our greater success in cross selling our VoIP
services to subscribers of our Internet access services.
    
    IP-TV.The subscription base for our IP-TV services
increased by 9.0% to 170,000 subscriptions, with the
majority of the new subscriptions coming from existing
subscribers of our Internet access and local VoIP services.
 Also as included in revenue from our FTNS business were
mobile interconnection charges of HK$20.6 million in fiscal
2009. The mobile interconnection charges in fiscal 2009
decreased by 30.5% compared to fiscal 2008 due to the
withdrawal of regulatory guidance on FMIC in favor of
Mobile Partys Network Pay on April 26, 2009. Prior to
April 26, 2009, the mobile network operators were required
to pay interconnection charges for all calls originating to
and from the mobile users. After April 26, 2009, the
chargeability of interconnection charges is subject to
commercial negotiation.
 
    
    IDD business.Revenues from our IDD business decreased by
15.3% to HK$247.4 million in fiscal 2009 from HK$292.0
million in fiscal 2008. The decrease was primarily due to
the reduction in IDD traffic volume. Competition during the
fiscal year was intense as some of our integrated
competitors offered international direct dial minutes for
free or at very low cost as a marketing incentive to gain
local fixed line and mobile market shares. Further,
technology from global VoIP providers such as Skype, which
offer free PC-to-PC based international calls, was also
becoming more prevalent.
 Network costs.
 Other operating expenses.
 39




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##### Table of Contents



For the year ended August 31,2008
    
    
    2009
    
    
    2009HK$
    
    
    HK$
    
    
    US$(Amounts in thousands)Talent costs
    
    
    (247,460
    )
    
    
    (302,279
    )
    
    
    (39,001
    )Advertising and marketing expenses
    
    
    (307,743
    )
    
    
    (299,794
    )
    
    
    (38,681
    )Depreciation
    
    
    (210,051
    )
    
    
    (206,241
    )
    
    
    (26,610
    )Others
    
    
    (200,840
    )
    
    
    (229,650
    )
    
    
    (29,630
    )Other operating expenses
    
    
    (966,094
    )
    
    
    (1,037,964
    )
    
    
    (133,922
    )
 
    
    Talent costs.Talent costs increased by 22.1% to
HK$302.3 million in fiscal 2009 from HK$247.5 million in
fiscal 2008. We increased our total work force by 4.0%
to 3,173 Talents as of August 31, 2009 from 3,051
Talents as of August 31, 2008, primarily due to the
increased scale of operations in our FTNS business and
the increasing scope in investing and developing our
Talents through Talents education partnership and Talent
infinity program.
    
    Advertising and marketing expenses.Advertising and
marketing expenses decreased by 2.6% to HK$299.8 million
in fiscal 2009 from HK$307.7 million in fiscal 2008. Our
salaries and commissions for our sales and marketing
Talents were increased by HK$19.5 million due to an
increase in total contract sum due to substantial growth
in subscription base. Moreover, our opening of
additional new shops caused shop related operating costs
to increase by HK$11.4 million. The effects of the
foregoing, however, were partially offset by a decrease
in mass media advertising costs of HK$34.4 million.
    
    Depreciation.Depreciation decreased by 1.9% to HK$206.2 million in
fiscal 2009. Notwithstanding our purchase of additional fixed assets
for our network infrastructure as we increased the scale of operations
in our FTNS business, a portion of our owned fixed assets were fully
depreciated and a lower depreciation expenses was incurred as a
result.
 Other income, net.
 Finance costs.
 Income tax benefit/(expense).
 Net income.
 Recent accounting pronouncements
  B. Liquidity and capital resources
   40




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##### Table of Contents



Cash flow
  For the year ended August 31,2008
    
    
    2009
    
    
    2010
    
    
    2010HK$
    
    
    HK$
    
    
    HK$
    
    
    US$(Amounts in thousands)Net cash inflow from operating activities
    
    
    381,991
    
    
    
    536,771
    
    
    
    485,340
    
    
    
    62,398Net cash outflow from investing activities
    
    
    (147,750
    )
    
    
    (176,488
    )
    
    
    (306,254
    )
    
    
    (39,374
    )Net cash (outflow)/inflow from financing activities
    
    
    (345,978
    )
    
    
    (561,292
    )
    
    
    178,307
    
    
    
    22,924(Decrease)/increase in cash and cash equivalents
    
    
    (111,737
    )
    
    
    (201,009
    )
    
    
    357,393
    
    
    
    45,948Cash and cash equivalents, at the beginning of year
    
    
    532,894
    
    
    
    421,610
    
    
    
    221,052
    
    
    
    28,420Effect of foreign exchange rate changes on cash
    
    
    453
    
    
    
    451
    
    
    
    (270
    )
    
    
    (35
    )Cash and cash equivalents, at the end of the year
    
    
    421,610
    
    
    
    221,052
    
    
    
    578,175
    
    
    
    74,333Analysis of the balances of cash and cash equivalentsCash at bank and in hand
    
    
    434,604
    
    
    
    226,416
    
    
    
    588,665
    
    
    
    75,682Bank overdrafts  unsecured
    
    
    (12,994
    )
    
    
    (5,364
    )
    
    
    (10,490
    )
    
    
    (1,349
    )421,610
    
    
    
    221,052
    
    
    
    578,175
    
    
    
    74,333
 Operating activities
  Investing activities
    Financing activities
   41




---



##### Table of Contents



Indebtedness
  10-year senior notes
     Banking facilities
  Capital expenditures
  C. Research and development, patents and licenses
  D. Trend information
  42




---



##### Table of Contents



E. Off-balance sheet arrangements
  F. Tabular disclosure of contractual obligations
  Payments due by periodMore than
    
    
    More than1 year
    
    
    3 yearsWithin
    
    
    but within
    
    
    but within
    
    
    More thanTotal
    
    
    1 year
    
    
    3 years
    
    
    5 years
    
    
    5 yearsContractual obligations
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(Amounts in thousands)Capital expenditure items
    
    
    132,340
    
    
    
    132,340
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    124,287
    
    
    
    88,821
    
    
    
    26,555
    
    
    
    4,062
    
    
    
    4,849Long-term bank loan
    
    
    133,996
    
    
    
    1,829
    
    
    
    4,326
    
    
    
    127,841
    
    
    
    Obligation under finance leases
    
    
    677
    
    
    
    242
    
    
    
    243
    
    
    
    192
    
    
    
    Other current liabilities
    
    
    264,904
    
    
    
    264,904
    
    
    
    
    
    
    
    
    
    
    
    Programming fees (IP-TV)
    
    
    73,626
    
    
    
    25,539
    
    
    
    41,506
    
    
    
    6,581
    
    
    
    Total
    
    
    729,830
    
    
    
    513,675
    
    
    
    72,630
    
    
    
    138,676
    
    
    
    4,849
 
 Note:
    
    The other current liabilities of HK$264.9 million is comprised
of bank overdrafts  unsecured of HK$10.5 million, accounts
payable of HK$35.1 million, other payables and accrued charges
of HK$195.9 million, deposits received of HK$21.8 million and
tax payable of HK$1.5 million. A detailed explanation of the
nature of accounts payable and other payables and accrued
charges is contained in Note 17 to the Companys audited
consolidated financial statements included in this Form 20-F. G. Safe Harbor
  
 Item 6 Directors, senior management and employees
 A. Directors and senior management
  43




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##### Table of Contents



DatejoinedCityName
    
    Age
    
    Position
    
    TelecomBoard of directors:WONG Wai Kay, Ricky
    
    
    49
    
    
    Executive Director and Chairman
    
    
    1992CHEUNG Chi Kin, Paul
    
    
    53
    
    
    Executive Director and Vice Chairman
    
    
    1992YEUNG Chu Kwong, William
    
    
    50
    
    
    Executive Director and Chief Executive Officer
    
    
    2005LAI Ni Quiaque
    
    
    41
    
    
    Executive Director, Chief Financial Officer,
Company Secretary and Head of Talent Engagement
    
    
    2004CHENG Mo Chi, Moses
    
    
    60
    
    
    Non-Executive Director
    
    
    1997LEE Hon Ying, John
    
    
    64
    
    
    Independent Non-Executive Director
    
    
    1997CHAN Kin Man
    
    
    51
    
    
    Independent Non-Executive Director
    
    
    1997PEH Jefferson Tun Lu
    
    
    51
    
    
    Independent Non-Executive Director
    
    
    2004Senior management:CHONG Kin Chun, John
    
    
    48
    
    
    Managing Director of Corporate Division
    
    
    1996LO Sui Lun
    
    
    46
    
    
    Director of Corporate Affairs Department
    
    
    1998TAM Ming Chit
    
    
    45
    
    
    Chief Technology Officer
    
    
    2008TO Wai Bing
    
    
    48
    
    
    Managing Director of Business Development
    
    
    2007
 Executive directors
    44




---



##### Table of Contents



Non-executive director
  Independent non-executive directors
    45




---



##### Table of Contents



Senior management
     B. Compensation
 Directors and senior managements compensation
     C. Board practices
 Service contracts
  46




---



##### Table of Contents



Controlled company exemption
    Audit committee
   
    
    overseeing the accounting and financial reporting process
of the Company and the audits of the Companys consolidated
financial statements on behalf of the board of directors;
and
    
    the appointment, compensation, retention and oversight of
the work of the Companys independent auditors (including
resolution of disagreements between management and the
auditors regarding financial reporting) for the purpose of
preparing or issuing an audit report or performing other
audit, review or attest services for the Company.
   
    
    Reviewed our consolidated financial statements for the year ended August 31, 2009 and for the six months ended February 28, 2010;
    
    Reviewed the internal audit progress, including procedures required for compliance with the Sarbanes-Oxley Act;
    
    Reviewed the external auditors report on the review of our interim
financial report for the six months ended February 28, 2010 and our
audited consolidated financial statements for the year ended August
31, 2009; and
    
    Pre-approved the audit and non-audit services provided by KPMG, our external auditor.
 Remuneration committee
  
    
    Establish formal, fair and transparent procedures for developing
policy and structure of all remuneration of directors and senior
management.
 47




---



##### Table of Contents




    
    Review and consider the Companys policy for remuneration of directors and senior management.
    
    Recommend the remuneration packages of non-executive directors (including independent non-executive directors).
  
    
    Reviewed and approved the discretionary performance bonus for the management committee members;
    
    Reviewed and approved the remuneration packages for management committee members; and
    
    Reviewed and approved the remuneration packages for the directors.
 D. Employees
  TalentsInformation technology and engineering
    
    
    363Sales and marketing, customer service and Special Duty Unit, or SDU
    
    
    2,499General administration and others
    
    
    370Total
    
    
    3,232
  TalentsHong Kong
    
    
    1,593Guangzhou
    
    
    1,620Canada
    
    
    19Total
    
    
    3,232
  E. Share ownership
 Share ownership
  Number
    
    
    Percentageof shares
    
    
    of sharesbeneficially
    
    
    beneficially
    
    
    OutstandingIdentity of person
    
    
    owned
    
    
    owned(note 3)
    
    
    shareTitle of class
    
    or Group
    
    
    (note 4)
    
    
    %
    
    
    optionsOrdinary shares
    
    Wong Wai Kay, Ricky
    
    389,245,732 
(note 1)
    
    
    
    50.66
    
    
    
    8,091,604Ordinary shares
    
    Cheung Chi Kin, Paul
    
    389,245,732 
(note 1)
    
    
    
    50.66
    
    
    
    8,091,604Ordinary shares
    
    Yeung Chu Kwong, William
    
    
    2,306,000
    
    
    Less than 1.0
    
    
    
    11,542,956Ordinary shares
    
    Lai Ni Quiaque
    
    
    12,415,405
    
    
    
    1.62
    
    
    
    6,044,791
 48




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##### Table of Contents



Number
    
    
    Percentageof shares
    
    
    of sharesbeneficially
    
    
    beneficially
    
    
    OutstandingIdentity of person
    
    
    owned
    
    
    owned(note 3)
    
    
    shareTitle of class
    
    or Group
    
    
    (note 4)
    
    
    %
    
    
    optionsOrdinary shares
    
    Chong Kin Chun, John
    
    
    
    2,777,089
    
    
    Less than 1.0
    
    
    
    2,022,900Ordinary shares
    
    Lo Sui Lun
    
    
    Nil    
    
    Nil    
    
    
    1,638,901Ordinary shares
    
    Tam Ming Chit
    
    
    Nil    
    
    Nil    
    
    
    629,665Ordinary shares
    
    To Wai Bing
    
    
    Nil
    
    
    Nil
    
    
    
    302,239
 
 Notes:(1)
    
    The 389,245,732 shares are held by a group consisting of Top Group International
Limited, Mr. Wong Wai Kay, Ricky, our chairman, and Mr. Cheung Chi Kin, Paul, our
vice chairman, Top Group International Limited is a special purpose vehicle
incorporated in the British Virgin Islands. Its board of directors consists of Mr.
Wong and Mr. Cheung. Mr. Wong and Mr. Cheung have entered into a voting agreement
pursuant to which they agreed to vote the 339,814,284 shares held by Top Group
International Limited, the 7,145,289 shares held by Mr. Wong individually, and the
42,286,159 shares held by Mr. Cheung individually, collectively as a group. The
registered address of Top Group International Limited is Akara Bldg, 24 De Castro
Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Top Group International Limited has
four shareholders: Mr. Wong, Mr. Cheung, Mr. Leung Ka Pak, and Mr. Yau Ming Yan,
Andrew, and their equity interests are 42.12%, 27.06%, 21.00% and 9.82%,
respectively.(2)
    
    Percentage ownership is based on 768,410,429 shares issued as of December 14, 2010.(3)
    
    Beneficial ownership is determined in accordance with the rules of the SEC. 49




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##### Table of Contents



Item 6 Directors, senior management and employees (continued)
 Share ownership (continued)
  Options
    
    
    
    
    
    
    Options
    
    
    OptionsBalance
    
    
    granted
    
    
    
    
    
    
    exercised
    
    
    cancelled/
    
    
    BalanceExercise
    
    
    as at
    
    
    during
    
    
    
    
    
    
    during
    
    
    lapsed
    
    
    as atDate of
    
    
    price
    
    
    December 15,
    
    
    the
    
    
    Exercise
    
    the
    
    
    during
    
    
    December 14,Directors
    
    grant
    
    
    HK$
    
    
    2009
    
    
    period
    
    
    period
    
    period
    
    
    the period
    
    
    2010Mr. Wong Wai Kay, Ricky
    
    January 5, 2005
    
    
    1.5224
    
    
    
    8,091,604
    
    
    
    
    
    
    January 5, 2005 to  October 20, 2014
    
    
    
    
    
    
    
    
    
    
    8,091,604Mr. Cheung Chi Kin, Paul
    
    January 5, 2005
    
    
    1.5224
    
    
    
    8,091,604
    
    
    
    
    
    
    January 5, 2005 to October 20, 2014
    
    
    
    
    
    
    
    
    
    
    8,091,604Mr. Yeung Chu Kwong, William
    
    May 22, 2006
    
    
    0.6523
    
    
    
    1,018,165
    
    
    
    
    
    
    May 22, 2007 to May  21, 2016
    
    
    1,018,000
    
    
    
    
    
    
    
    165February 6, 2008
    
    
    1.7568
    
    
    
    6,044,791
    
    
    
    
    
    
    (note 1)
    
    
    502,000
    
    
    
    
    
    
    
    5,542,791February 5, 2010
    
    
    4.2400
    
    
    
    
    
    
    
    6,000,000
    
    
    (note 2)
    
    
    
    
    
    
    
    
    
    
    6,000,000Mr. Lai Ni Quiaque
    
    May 22, 2006
    
    
    0.6523
    
    
    
    2,022,899
    
    
    
    
    
    
    May 22, 2007 to May 21, 2016
    
    
    2,022,899
    
    
    
    
    
    
    
    February 11, 2008
    
    
    1.8660
    
    
    
    6,044,791
    
    
    
    
    
    
    (note 3)
    
    
    
    
    
    
    
    
    
    
    6,044,791Senior managementMr. Chong Kin Chun, John
    
    October 21, 2004
    
    
    1.5224
    
    
    
    2,022,900
    
    
    
    
    
    
    January 1, 2005 to October 20, 2014
    
    
    
    
    
    
    
    
    
    
    2,022,900Mr. Lo Sui Lun
    
    October 21, 2004
    
    
    1.5224
    
    
    
    505,726
    
    
    
    
    
    
    January 1, 2005 to October 20, 2014
    
    
    
    
    
    
    
    
    
    
    505,726May 22, 2006
    
    
    0.6523
    
    
    
    1,517,175
    
    
    
    
    
    
    May 22, 2007 to May 21, 2016
    
    
    384,000
    
    
    
    
    
    
    
    1,133,175Dr. Tam Ming Chit
    
    May 2, 2008
    
    
    1.7866
    
    
    
    1,007,465
    
    
    
    
    
    
    (note 4)
    
    
    377,800
    
    
    
    
    
    
    
    629,665Ms. To Wai Bing
    
    February 15, 2008
    
    
    1.7568
    
    
    
    1,007,465
    
    
    
    
    
    
    (note 4)
    
    
    705,226
    
    
    
    
    
    
    
    302,239
 
 Notes:(1)
    
    The exercise of the Options is subject to certain conditions that
must be achieved by the grantee. During the year ended August
31, 2010, one of the clauses in the option agreement has been
modified. The Options shall be exercised not later than December
23, 2012.(2)
    
    The exercise of the Options is subject to certain conditions that
must be achieved by the grantee. The Options shall be exercised
not later than February 4, 2020.(3)
    
    The exercise of the Options is subject to the performance of the
Companys share and certain conditions that must be achieved by
the grantee. During the year ended August 31, 2010, one of the
clauses in the option agreement has been modified. The Options
shall be exercised not later than December 23, 2012. 50




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##### Table of Contents



(4)
    
    The exercise of the Options is subject to certain conditions that
must be advanced by the grantees. The Options shall be exercised
not later than December 23, 2012.  Share Option Schemes
        (a)
    
    the expiry date relevant to that option;(b)
    
    one month following the date a grantee ceases to be an eligible participant for any
reason other than death or termination of his relationship with us (or the relevant
subsidiary, as the case may be) on any of the grounds specified in (g) below;
 51




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##### Table of Contents



(c)
    
    12 months, or such longer period as the Board may determine, following the death of a
grantee whose relationship with us (or the relevant subsidiary, as the case may be) would
not have been terminated on any of the grounds specified in (g) below;(d)
    
    21 days following the date an effective resolution is passed for our voluntary winding-up;(e)
    
    subject to (d) above, the date of commencement of such winding-up;(f)
    
    the date on which any compromise or arrangement between us and our members or creditors
in connection with a scheme for our reconstruction or our amalgamation with any other
company or companies becomes effective;(g)
    
    the date on which the grantee ceases to be an eligible participant by reason of the
termination of his or her relationship with us or the relevant subsidiary on any one or
more of the grounds of serious misconduct or breach, bankruptcy, insolvency, composition
with his or her creditors or conviction of any criminal offence involving his or her
integrity or honesty or, in the case of a grantee-Talent and if so determined by the
Board, on any other common law, statutory or contractual ground on which an employer
would be entitled to terminate such grantees employment;(h)
    
    14 days following the date a general offer (which has been made to shareholders by way of
take-over offer, share repurchase offer or scheme of arrangement or otherwise in like
manner) becomes, or is declared unconstitutional; and(i)
    
    the date on which we cancel the options by reason that the grantee in any way sells,
transfers, charges, mortgages, encumbers or creates any interest in favor of any third
party over or in relation to any of his or her options or attempt to do so.
  
 Item 7 Major shareholders and related party transaction
 A. Major shareholders
  Percentagesof sharesBeneficiallybeneficially
    
    
    ownedIdentity of person
    
    
    owned
    
    
    (note 1)Title of class
    
    or Group
    
    
    (note 4)
    
    
    %Ordinary shares
    
    Wong Wai Kay, Ricky
    
    
    389,245,732 (note 2)
    
    
    
    50.66Ordinary shares
    
    Cheung Chi Kin, Paul
    
    
    389,245,732 (note 2)
    
    
    
    50.66Ordinary shares
    
    Top Group International Limited
    
    
    389,245,732 (note 2)
    
    
    
    50.66Ordinary shares
    
    Leung Ka Pak
    
    
    339,814,284 (note 3)
    
    
    
    44.22Ordinary shares
    
    Yau Ming Yan, Andrew
    
    
    339,814,284 (note 3)
    
    
    
    44.22
 
 Notes:(1)
    
    Percentage ownership is based on 768,410,429 shares issued as of December 14, 2010.(2)
    
    The 389,245,732 shares are held by a group consisting of Top Group International
Limited, Mr. Wong Wai 52




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##### Table of Contents



Kay, Ricky, our chairman, and Mr. Cheung Chi Kin, Paul, our
vice chairman, Top Group is a special purpose vehicle incorporated in
the British
Virgin Islands, and its board of directors consists of Mr. Wong and Mr. Cheung.
Mr. Wong and Mr. Cheung have entered into a voting agreement pursuant to which
they agreed to vote the 339,814,284 shares held by Top Group International
Limited, the 7,145,289 shares held by Mr. Wong individually, and the 42,286,159
shares held by Mr. Cheung individually, collectively as a group. The registered
address of Top Group International Limited is Akara Bldg, 24 De Castro Street,
Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Top Group
International Limited has four
shareholders: Mr. Wong, Mr. Cheung, Mr. Leung Ka Pak, and Mr. Yau Ming Yan, Andrew
(See Note (3) below), and their equity interests are 42.12%, 27.06%,
21.00% and 9.82%, respectively.(3)
    
    Mr. Leung Ka Pak and Mr. Yau Ming Yan, Andrew may be deemed to have beneficial
ownership in the 339,814,284 shares held by Top Group International
Limited. Each of them expressly
disclaims any beneficial ownership in such shares except to the extent of their
respective pecuniary interest therein. Mr. Leung was a director and the president
of all of our subsidiaries in Canada (other than City Telecom (Canada) Inc.) and
resigned as a director and president in October 2005. After Mr. Leungs
resignation, Mr. Yau became a director and the president of all of our
subsidiaries in Canada (other than City Telecom (Canada) Inc.). He resigned as a
director and president in July 2006.(4)
    
    Beneficial ownership is determined in accordance with the rules of the SEC.     B. Related party transactions
  Contracts with our directors and senior management
  C. Interests of experts and counsel
  
 Item 8 Financial information
 A. Consolidated statements and other financial information
 Financial statements
  Legal and regulatory proceedings
   53




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##### Table of Contents



Dividends
      B. Significant changes
  
 Item 9 The offer and listing
 A. Offer and listing details
     PriceHigh
    
    
    Low(In HK$)Annual Date2005
    
    
    1.530
    
    
    
    0.5502006
    
    
    0.830
    
    
    
    0.5702007
    
    
    3.670
    
    
    
    0.8302008
    
    
    2.170
    
    
    
    0.7502009
    
    
    3.950
    
    
    
    2.500
 54




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##### Table of Contents



PriceHigh
    
    
    Low(In HK$)Quarterly Data2008January to March
    
    
    2.170
    
    
    
    1.620April to June
    
    
    2.090
    
    
    
    1.670July to September
    
    
    1.950
    
    
    
    1.340October to December
    
    
    1.360
    
    
    
    0.7502009January to March
    
    
    1.140
    
    
    
    0.840April to June
    
    
    1.780
    
    
    
    1.100July to September
    
    
    2.630
    
    
    
    1.630October to December
    
    
    3.950
    
    
    
    2.5002010January to March
    
    
    6.210
    
    
    
    3.800April to June
    
    
    6.770
    
    
    
    4.420July to September
    
    
    5.200
    
    
    
    3.690October to December (through December 14, 2010)
    
    
    6.200
    
    
    
    4.800Monthly Data2010June
    
    
    5.280
    
    
    
    4.420July
    
    
    4.560
    
    
    
    3.690August
    
    
    4.570
    
    
    
    4.010September
    
    
    5.200
    
    
    
    4.720October
    
    
    5.270
    
    
    
    4.800November
    
    
    6.200
    
    
    
    5.000December (through December 14, 2010)
    
    
    5.960
    
    
    
    5.740
  PriceHigh
    
    
    Low(In US$)Annual Date2005
    
    
    3.980
    
    
    
    1.3702006
    
    
    2.009
    
    
    
    1.3802007
    
    
    10.750
    
    
    
    2.0102008
    
    
    5.750
    
    
    
    1.9152009
    
    
    10.300
    
    
    
    2.000Quarterly Data2008January to March
    
    
    5.580
    
    
    
    4.250April to June
    
    
    5.750
    
    
    
    4.370July to September
    
    
    4.910
    
    
    
    2.950October to December
    
    
    3.380
    
    
    
    1.915
 55




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##### Table of Contents



PriceHigh
    
    
    Low(In US$)2009January to March
    
    
    2.870
    
    
    
    2.000April to June
    
    
    4.650
    
    
    
    2.870July to September
    
    
    7.023
    
    
    
    4.050October to December
    
    
    10.300
    
    
    
    6.6102010January to March
    
    
    16.180
    
    
    
    10.150April to June
    
    
    17.330
    
    
    
    11.340July to September
    
    
    13.500
    
    
    
    9.670October to December(through December 14, 2010)
    
    
    15.980
    
    
    
    12.500Monthly Data2010June
    
    
    13.460
    
    
    
    11.340July
    
    
    11.850
    
    
    
    9.6700August
    
    
    11.980
    
    
    
    10.200September
    
    
    13.500
    
    
    
    12.450October
    
    
    13.620
    
    
    
    12.500November
    
    
    15.980
    
    
    
    12.770December (through December 14, 2010)
    
    
    15.650
    
    
    
    14.480
 B. Plan of distribution
  C. Markets
  D. Selling shareholders
  E. Dilution
  F. Expenses of the issue
  
 Item 10 Additional information
 A. Share capital
  B. Memorandum and Articles of Association
  56




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##### Table of Contents



General
  Directors interests
  (a)
    
    the giving of any security or indemnity to him or his associates(s) in
respect of money lent or obligations incurred or undertaken by him or
any of them at the request of or for the benefit of the Company or any
of its subsidiaries;(b)
    
    the giving of any security or indemnity to a third party in respect of
a debt or obligation of the Company or any of its subsidiaries for
which he or his associate(s) has himself/themselves assumed
responsibility in whole or in part and whether alone or jointly under
a guarantee or indemnity or by the giving of security;(c)
    
    any proposal concerning an offer of shares, debentures or other
securities of or by the Company or any other company which the Company
may promote or be interested in for subscription or purchase in which
offer he or his associate(s) is/are or is/are to be interested as a
participant in the underwriting or sub-underwriting thereof;(d)
    
    any proposal concerning any other company in which he or his
associate(s) is/are interested only, whether directly or indirectly,
as an officer, executive or shareholder or in which he or his
associate(s) is/are beneficially interested in shares of that Company,
provided that he and any of his associate(s) are not in aggregate
beneficially interested in five per cent or more of the issued shares
of any class of such Company (or of any third company through which
his interest or that of his associate(s) is derived) or of the voting
rights;(e)
    
    any proposal or arrangement concerning the benefit of Talents of the
Company or its subsidiaries, including the adoption, modification or
operation of any Talents share scheme or any share incentive or share
option scheme under which the director or his associate(s) may
benefit;(f)
    
    any proposal or arrangement concerning the benefit of Talents of the
Company or its subsidiaries, including the adoption, modification or
operation of a pension fund or retirement, death or disability
benefits scheme which relates both to directors (or his associate(s))
and Talents of the Company or any of its subsidiaries and does not
provide in respect of any director or his associate(s), as such any
privilege or advantage not generally accorded to the class of persons
to which such scheme or fund relates; and(g)
    
    any contract or arrangement in which he or his associate(s) is/are
interested in the same manner as other holders of shares or debentures
or other securities of the Company by virtue only of his/their
interest in shares or debentures or other securities of the Company.
  Dividends
    (a)
    
    such dividend be satisfied in whole or in part in the form of an
allotment of shares to the shareholders, credited as being fully paid
up, provided that all the shareholders entitled to receive the
dividend will also be entitled to choose to receive the dividend (or a
part of it) in cash; or(b)
    
    the shareholders entitled to such dividend are entitled to elect to
receive an allotment of shares credited as fully paid up instead of
the whole or part of the cash dividend our board of directors may
decide upon.
  57




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##### Table of Contents



Liquidation
  (a)
    
    divide among the shareholders the whole or any part of the assets of
the Company and set such value as the liquidator deems fair upon any
property to be divided and determine how the division shall be carried
out between the shareholders; or(b)
    
    vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories
as the liquidator shall think fit,
but no shareholder shall be compelled to accept any shares or other assets upon which there is any liability.
 Annual and extraordinary general meeting of shareholders
  (a)
    
    the declaration and sanctioning of dividends;(b)
    
    the consideration and adoption of the accounts, balance sheet and reports of the directors and auditors and
other documents required to be attached to the financial statements;(c)
    
    the appointment of directors in place of those retiring (by rotation or otherwise);(d)
    
    the appointment of auditors; and(e)
    
    the fixing of, or the determining of the method of fixing, the remuneration of the directors and of the auditors.
    Restrictions on ownership of shares
  Voting rights
  58




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##### Table of Contents



Issue of shares
      (a)
    
    the instrument of transfer, duly stamped, is lodged with us
accompanied by the certificate for the shares to which it relates and
such other evidence as our board of directors may reasonably require
to show the right of the seller to make the transfer;(b)
    
    such fee, not more than the maximum amount allowed by The Stock
Exchange of Hong Kong Limited from time to time, as our board of
directors may from time to time require is paid to us in respect of
it;(c)
    
    the instrument of transfer is in respect of only one class of share;(d)
    
    in the case of a transfer of a share jointly held by two or more
holders, the number of joint holders to whom the share is to be
transferred does not exceed four; and(e)
    
    the shares concerned are free of any lien in favor of us.
  Shareholders
  59




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##### Table of Contents



C. Material contracts
  D. Exchange controls
   E. Taxation
  Hong Kong Taxation
 Tax on dividends
  Profits tax
  (i)
    
    such profits are derived from or arise in Hong Kong;(ii)
    
    such profits are attributable to a trade, profession or business carried on in Hong Kong; and(iii)
    
    the property in question, such as shares and American depositary shares, are not capital assets of that trade, profession or business.
    Stamp duty
  60




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##### Table of Contents



Tax treaty
  United States Taxation
 Certain U.S. Federal Income Tax Considerations
    
    
    an individual who is a citizen or resident of the United States;
    
    a corporation, or other entity that is taxable as a corporation, created in or organized under the laws of the United States or
any State or political subdivision thereof;
    
    an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source;
    
    a trust the administration of which is subject to the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial decisions of the trust; or
    
    a trust that was in existence on August 20, 1996, was treated as a United States person, for United States federal income tax
purposes, on the previous day, and elected to continue to be so treated.
    61




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##### Table of Contents



U.S. Holders
  Dividends.
     Medicare Tax
  PFIC considerations
  62




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##### Table of Contents



Non-U.S. Holders
  
    
    the dividends received or gain recognized on the sale of the shares or
American depositary shares by such person is treated as effectively
connected with the conduct of a trade or business by such person in
the United States as determined under United States federal income tax
law, and the dividends are attributable to a permanent establishment
(or in the case of an individual, a fixed place of business) that you
maintain in the United States if that is required by an applicable
income tax treaty as a condition for subjecting you to U.S. taxation
on a net income basis. In such cases you generally will be taxed in
the same manner as a U.S. holder. If you are a corporate non-U.S.
Holder, effectively connected dividends may, under certain
circumstances, be subject to an additional branch profits tax at a
30% rate or a lower rate if you are eligible for the benefits of an
income tax treaty that provides for a lower rate, or
    
    in the case of gains recognized on a sale of shares or American
depositary shares by an individual, such individual is present in the
United States for 183 days or more and certain other conditions are
met. The non-U.S. Holder will be subject to United States federal
income tax at a rate of 30% on the amount by which the U.S.  source
capital gains exceed non-U.S.  source capital losses.
 Backup withholding and information reporting
    Information with Respect to Foreign Financial Assets
   F. Dividends and paying agents
  G. Statement by experts
  H. Documents on display
   63




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##### Table of Contents



I. Subsidiary information
  
 Item 11 Quantitative and qualitative disclosures about market risk
  
 Item 12 Description of securities other than equity securities
  
 PART II
 
 Item 13 Defaults, dividend arrearages and delinquencies
  
 Item 14 Material modifications to the rights of security holders and use of proceeds
  
 Item 15 Controls and procedures
 A. Disclosure controls and procedures
  B. Managements report on internal control over financial reporting
  C. Changes in internal control over financial reporting
  
 D. Report of Independent Registered Public Accounting Firm
  64




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##### Table of Contents



/s/ KPMGHong Kong, ChinaNovember 9, 2010 
 Item 16A Audit committee financial expert
  
 Item 16B Code of ethics
  65




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##### Table of Contents



Item 16C Principal accountant fees and services
  2010
    
    
    2009Nature of the service
    
    HK$ 
million
    
    
    HK$ 
millionAudit fees
    
    
    2.3
    
    
    
    2.6Audit-related fees
    
    
    0.2
    
    
    
    0.4Non-audit services fees
    
    
    0.3
    
    
    
    Total
    
    
    2.8
    
    
    
    3.0
 Audit fees
  Audit-related fees
  Non-audit services fees
  Pre-approval polices
  
 Item 16D Exemptions from the listing standards for audit committees
  
 Item 16E Purchase of equity securities by the issuer and affiliated purchasers
  
 Item 16F Change in Registrants Certifying Accountant
  
 Item 16G Corporate Governance
  
    
    Nasdaq Stock Market Rule 5605(b)(1) requires a Nasdaq
listed company to have a board of directors consisting of
a majority of independent members, In this regard we have
elected to adopt the practices of our home country, As a
listed company in Hong Kong, we are subject to the
requirement under the HKSE Listing Rules that at least
three members of our board of directors be independent as
determined under the HKSE Listing Rules. In compliance
with our home country practices, we currently have three
independent
 66




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##### Table of Contents



directors out of a total of eight directors.
The standards for establishing independence under the HKSE
Listing Rules also differ from those set forth in the
Nasdaq Stock Market Rules.
    
    Nasdaq Stock Market Rule 5605(b)(2) requires a Nasdaq
listed company to schedule regular executive sessions in
which non-management directors meet without management
participation. In this regard we have elected to adopt the
practices of our home country. Under the applicable Hong
Kong law, our board of directors is required to meet
regularly and at least four times a year and we are
required to ensure that there is active participation by a
majority of the directors and afford all directors an
opportunity to include matters on the agenda. In addition,
when a board meeting considers a matter in which a
substantial shareholder or a director has a conflict of
interest, the independent directors with no material
interest in such matter must be present. In compliance
with our home country practices, we do not organize
exclusive meetings for our independent non-executive
directors on a regular basis.
    
    Nasdaq Stock Market Rule 5605(d)(1) requires a Nasdaq
listed company to have the compensation of the chief
executive officer and the other executive officers be
determined, or recommended to the Board for determination,
by a compensation committee comprised solely of
independent directors. In this regard we have elected to
adopt the practices of our home country. Under the HKSE
Listing Rules, listed companies are required to establish
a remuneration committee with a majority of independent
non-executive directors. The compensation of our executive
officers is determined by a remuneration committee
consisting of six directors, three of whom are independent
non-executive directors.
    
    Nasdaq Stock Market Rule 5605(e)(1) requires a Nasdaq
listed company to have a nominations committee consisting
solely of independent directors to select or recommend for
selection director nominees. In this regard we have
elected to adopt the practices of our home country and do
not have a nominations committee consisting solely of
independent directors. Under the HKSE Listing Rules,
listed companies are recommended but not required to
establish a nomination committee consisting of the
independent non-executive directors with majority vote.
Our director nominees are selected by or recommended for
selection by the Board. Our current practice is not
inconsistent with our home country practices.
  67




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##### Table of Contents



PART III
 
 Item 17 Financial statements
  
 Item 18 Financial statements
  
 Item 19 Exhibits
 (a)
    
    Exhibit 12.1  Section 302 Certifications of the Chief Executive Officer.(b)
    
    Exhibit 12.2  Section 302 Certifications of the Chief Financial Officer.(c)
    
    Exhibit 13  Section 906 Certification of Chief Executive Officer and Chief Financial Officer.
 68




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##### Table of Contents



Index to Consolidated Financial Statements
 Audited Consolidated Financial Statements
    
    PagesReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Income Statements
    
    F-2Consolidated Statement of Comprehensive Income
    
    F-3Consolidated Balance Sheets
    
    F-4Consolidated Statements of Changes in Equity
    
    F-5Consolidated Cash Flow Statements
    
    F-7Notes to the Consolidated Financial Statements
    
    F-8




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
        F-1




---



##### Table of Contents



For the year ended August 31,2010
    
    
    2009
    
    
    2008Note
    
    
    HK$000
    
    
    HK$000
    
    
    HK $000Revenue
    
    
    2
    
    
    
    1,574,687
    
    
    
    1,478,239
    
    
    
    1,302,981Network costs
    
    
    3
    
    
    
    (195,292
    )
    
    
    (175,129
    )
    
    
    (178,367
    )Other operating expenses
    
    
    4
    (a)
    
    
    (1,105,604
    )
    
    
    (1,037,964
    )
    
    
    (966,094
    )Other income, net
    
    
    4
    (b)
    
    
    7,989
    
    
    
    41,540
    
    
    
    24,989Finance costs
    
    
    4
    (c)
    
    
    (22,235
    )
    
    
    (55,127
    )
    
    
    (75,137
    )Profit before taxation
    
    
    4
    
    
    
    259,545
    
    
    
    251,559
    
    
    
    108,372Income tax (expense)/benefit
    
    
    5
    
    
    
    (42,679
    )
    
    
    (38,730
    )
    
    
    16,818Profit attributable to shareholders
    
    
    
    
    
    
    216,866
    
    
    
    212,829
    
    
    
    125,190Basic earnings per share
    
    
    7
    
    
    HK30.7 cents
    
    
    HK32.4 cents
    
    
    HK19.7 centsDiluted earnings per share
    
    
    7
    
    
    HK29.4 cents
    
    
    HK31.8 cents
    
    
    HK19.0 cents
  F-2




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##### Table of Contents



For the year ended August 31,2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Profit for the year
    
    
    216,866
    
    
    
    212,829
    
    
    
    125,190Other comprehensive incomeExchange differences on translation of
financial statements of overseas
subsidiaries
    
    
    (97
    )
    
    
    70
    
    
    
    1,619Total comprehensive income for the year
    
    
    216,769
    
    
    
    212,899
    
    
    
    126,809
  F-3




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##### Table of Contents



As at August 31,2010
    
    
    2009Note
    
    
    HK$000
    
    
    HK$000Non-current assetsGoodwill
    
    
    11
    
    
    
    1,066
    
    
    
    1,066Fixed assets
    
    
    12
    
    
    
    1,431,813
    
    
    
    1,302,380Long term receivable and prepayment
    
    
    
    
    
    
    5,174
    
    
    
    6,091Deferred expenditure
    
    
    14
    
    
    
    6,626
    
    
    
    12,7861,444,679
    
    
    
    1,322,323Current assetsAccounts receivable
    
    
    15
    
    
    
    99,729
    
    
    
    120,192Other receivables, deposits and prepayments
    
    
    15
    
    
    
    89,490
    
    
    
    69,765Deferred expenditure
    
    
    14
    
    
    
    28,986
    
    
    
    36,674Pledged bank deposits
    
    
    27
    
    
    
    
    
    
    
    15,038Cash at bank and in hand
    
    
    16
    
    
    
    588,665
    
    
    
    226,416806,870
    
    
    
    468,085Current liabilitiesBank overdrafts  unsecured
    
    
    
    
    
    
    10,490
    
    
    
    5,364Accounts payable
    
    
    17
    
    
    
    35,128
    
    
    
    37,555Other payables and accrued charges
    
    
    17
    
    
    
    195,931
    
    
    
    206,487Deposits received
    
    
    
    
    
    
    21,822
    
    
    
    16,385Deferred service revenue
    
    
    18
    
    
    
    106,798
    
    
    
    115,070Tax payable
    
    
    
    
    
    
    1,533
    
    
    
    1,993Current portion  obligations under finance leases
    
    
    22
    
    
    
    212
    
    
    
    202371,914
    
    
    
    383,056Net current assets
    
    
    
    
    
    
    434,956
    
    
    
    85,029Total assets less current liabilities
    
    
    
    
    
    
    1,879,635
    
    
    
    1,407,352Non-current liabilitiesDeferred tax liabilities
    
    
    20
    
    
    
    55,843
    
    
    
    15,709Derivative financial instrument
    
    
    21
    
    
    
    11,293
    
    
    
    Long-term debt and other liabilities
    
    
    22
    
    
    
    123,960
    
    
    
    163,116191,096
    
    
    
    178,825Net assets
    
    
    
    
    
    
    1,688,539
    
    
    
    1,228,527Capital and reservesShare capital
    
    
    19
    
    
    
    76,500
    
    
    
    66,418Reserves
    
    
    19
    
    
    
    1,612,039
    
    
    
    1,162,109Total equity attributable to equity shareholders of the Company
    
    
    
    
    
    
    1,688,539
    
    
    
    1,228,527
  F-4




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##### Table of Contents



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




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##### Table of Contents



(Expressed in Hong Kong dollars)
 Share
    
    
    Share
    
    
    Capital
    
    
    Retained
    
    
    Exchangecapital
    
    
    premium
    
    
    reserve
    
    
    profits
    
    
    reserve
    
    
    TotalHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000At September 1, 2007
    
    
    61,650
    
    
    
    622,433
    
    
    
    18,109
    
    
    
    200,519
    
    
    
    1,171
    
    
    
    903,882Total comprehensive
income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,190
    
    
    
    1,619
    
    
    
    126,809Dividend paid in respect
of previous year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,915
    )
    
    
    
    
    
    
    (5,915
    )Shares issued in respect
of scrip dividend of
previous year
    
    
    1,123
    
    
    
    18,044
    
    
    
    
    
    
    
    (19,167
    )
    
    
    
    
    
    
    Dividend paid in respect
of current year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,371
    )
    
    
    
    
    
    
    (11,371
    )Shares issued in respect
of scrip dividend of
current year
    
    
    884
    
    
    
    13,347
    
    
    
    
    
    
    
    (14,231
    )
    
    
    
    
    
    
    Shares issued upon
exercise of share option
    
    
    1,405
    
    
    
    16,893
    
    
    
    (3,300
    )
    
    
    
    
    
    
    
    
    
    
    14,998Equity settled
share-based transactions
    
    
    
    
    
    
    
    
    
    
    4,204
    
    
    
    
    
    
    
    
    
    
    
    4,204At August 31, 2008
    
    
    65,062
    
    
    
    670,717
    
    
    
    19,013
    
    
    
    275,025
    
    
    
    2,790
    
    
    
    1,032,607
  F-6




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##### Table of Contents



(Expressed in Hong Kong dollars)
 For the year ended August 31,2010
    
    
    2009
    
    
    2008Note
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Net cash inflow from operations
    
    
    23
    (a)
    
    
    488,353
    
    
    
    538,503
    
    
    
    386,241Hong Kong profits tax (paid)/recovered
    
    
    
    
    
    
    (456
    )
    
    
    
    
    
    
    42Overseas tax paid
    
    
    
    
    
    
    (2,557
    )
    
    
    (1,732
    )
    
    
    (4,292
    )Net cash inflow from operating activities
    
    
    
    
    
    
    485,340
    
    
    
    536,771
    
    
    
    381,991Investing activitiesIncrease in pledged bank deposits
    
    
    
    
    
    
    15,038
    
    
    
    72,281
    
    
    
    Interest received
    
    
    
    
    
    
    11,372
    
    
    
    4,869
    
    
    
    15,596Purchases of fixed assets
    
    
    
    
    
    
    (349,076
    )
    
    
    (289,938
    )
    
    
    (189,903
    )Net proceeds from maturity of investment in debt securities
    
    
    
    
    
    
    
    
    
    
    28,051
    
    
    
    3,900Net proceeds from redemption of long-term bank deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,600Proceeds from disposal of fixed assets
    
    
    
    
    
    
    16,412
    
    
    
    8,249
    
    
    
    7,057Net cash outflow from investing activities
    
    
    
    
    
    
    (306,254
    )
    
    
    (176,488
    )
    
    
    (147,750
    )Net cash inflow before financing activities
    
    
    
    
    
    
    179,086
    
    
    
    360,283
    
    
    
    234,241Financing activitiesRepurchase of ordinary shares
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    Proceeds from issuance of new shares
    
    
    23
    (b)
    
    
    396,356
    
    
    
    1,399
    
    
    
    14,998Proceeds from new bank loans
    
    
    
    
    
    
    163,375
    
    
    
    
    
    
    
    Repayment of bank loan
    
    
    
    
    
    
    (40,000
    )
    
    
    
    
    
    
    Repayment of capital element of finance leases
    
    
    23
    (b)
    
    
    (217
    )
    
    
    (138
    )
    
    
    (834
    )Interest element of finance leases
    
    
    
    
    
    
    (42
    )
    
    
    (27
    )
    
    
    (34
    )Interest paid on bank loans
    
    
    
    
    
    
    (1,166
    )
    
    
    
    
    
    
    Other borrowing costs paid
    
    
    
    
    
    
    (3,260
    )
    
    
    (885
    )
    
    
    (3,428
    )Interest paid on 10-year senior notes
    
    
    
    
    
    
    (5,881
    )
    
    
    (52,670
    )
    
    
    (70,010
    )Repurchase of 10-year senior notes
    
    
    23
    (b)
    
    
    (172,423
    )
    
    
    (485,829
    )
    
    
    (269,399
    )Dividends paid
    
    
    
    
    
    
    (158,435
    )
    
    
    (23,008
    )
    
    
    (17,271
    )Net cash inflow/(outflow) from financing activities
    
    
    
    
    
    
    178,307
    
    
    
    (561,292
    )
    
    
    (345,978
    )Increase/(decrease) in cash and cash equivalent
    
    
    
    
    
    
    357,393
    
    
    
    (201,009
    )
    
    
    (111,737
    )Cash and cash equivalent at September 1
    
    
    
    
    
    
    221,052
    
    
    
    421,610
    
    
    
    532,894Effect of foreign exchange rate changes
    
    
    
    
    
    
    (270
    )
    
    
    451
    
    
    
    453Cash and cash equivalent at August 31
    
    
    
    
    
    
    578,175
    
    
    
    221,052
    
    
    
    421,610Analysis of the balances of cash and cash equivalentsCash at bank and in hand
    
    
    
    
    
    
    588,665
    
    
    
    226,416
    
    
    
    434,604Bank overdrafts  unsecured
    
    
    
    
    
    
    (10,490
    )
    
    
    (5,364
    )
    
    
    (12,994
    )578,175
    
    
    
    221,052
    
    
    
    421,610
  F-7




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##### Table of Contents



1
    
    Significant accounting policies(a)
    
    Statement of complianceCity Telecom (H.K.) Limited (the Company) was incorporated in Hong Kong on May 19, 1992 under the Hong Kong
Companies Ordinance. City Telecom (H.K.) Limited and its subsidiaries (collectively referred to as the Group)
are engaged in the provision of international telecommunications services and fixed telecommunications network
services to customers in Hong Kong and Canada.The accompanying consolidated financial statements have been prepared in accordance with all applicable
International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board
(IASB), which collective term includes all applicable individual International Financial Reporting Standards,
International Accounting Standards (IASs) and Interpretations issued by the IASB.The IASB has issued a number a new or revised IFRSs that are first effective or available for early adoption for
the current accounting period of the Group and the Company. The equivalent new or revised HKFRSs consequently
issued by HKICPA as a result of these developments have the same effective date as those issued by the IASB and
are in all material respects identical to the pronouncements issued by the IASB. Of these, the following
developments are relevant to the Groups financial statements:
 
    
    IFRS/HKFRS 8, Operating segments
    
    IAS/HKAS1 (revised 2007), Presentation of financial statements
    
    Amendments to IFRS/HKFRS 7, Financial instruments: disclosure  improving disclosures about financial
instruments
 The impact of these developments is as follows:IFRS/HKFRS 8 requires segment disclosure to be based on the way that the Groups chief operating
decision-maker regards and manages the Group, with the amounts reported for each reportable segment being the
measures reported to the Groups chief operating decision-marker for the purposes of assessing segment
performance and making decisions about operating matters. The new requirement under IFRS/HKFRS 8 is consistent
with the Groups segment information presented in prior years. The adoption of HKFRS 8 had no material impact on
the reportable segments being identified and disclosed.As a results of the adoption of IAS/HKAS 1 (revised 2007), details of changes in equity during the period
arising from transactions with equity shareholders in their capacity as such have been presented separately from
all other income and expenses in a revised consolidated statement of changes in equity. All other items of income
an expense are presented in the consolidated income statement, if they are recognized as part of profit or loss
for the period, or otherwise in a new primary statement, the consolidated statement of comprehensive income.
Corresponding amounts have been restated to conform to the new presentation. The change in presentation has no
effect on reported profit or loss, total income and expense or net assets for any period presented.As a result of the adoption of the amendments to IFRS/HKFRS 7, the financial statements include expanded
disclosure in note 24(e)(i) about the fair value measurement of the Groups financial instruments, categorizing
these fair value measurements into a three-level fair value hierarchy accordingly to the extent to which they are
based on observable market data.The Group has taken advantage of the transitional provisions set out in the amendments to IFRS/HKFRS 7, under
which comparative information for the newly required disclosures about the fair value measurements of financial
instruments has not been provided.
 F-8




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##### Table of Contents



1
    
    Significant accounting policies (continued)(a)
    
    Statement of compliance (continued)The Group has not applied any new standard or interpretation that is not yet effective for the current
accounting period (see note 32).The consolidated financial statements were authorized for issue by the Board of Directors on November 9, 2010.(b)
    
    Basis of preparation of the financial statementsThe measurement basis used in the preparation of the financial statements is the historical cost basis except
that certain financial assets are stated at their fair values or amortized costs as explained in the
accounting policies set out below (see notes 1(j), 1(l) and 1(r)).The preparation of financial statements in conformity with IFRSs requires management to make judgments,
estimates and assumptions that affect the application of policies and reported amounts of assets,
liabilities, income and expenses. The estimates and associated assumptions are based on historical experience
and various other factors that are believed to be reasonable under the circumstances, the results of which
form the basis of making the judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates.The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognized in the period in which the estimate is revised if the revision affects only that period, or in
the period of the revision and future periods if the revision affects both current and future periods.Judgments made by management in the application of IFRSs that have significant effect on the financial
statements and estimates with a significant risk of material adjustment in the next year are discussed in
note 31.(c)
    
    Subsidiaries and controlled entitiesSubsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the
financial and operating policies of an entity so as to obtain benefits from its activities. In assessing
control, potential voting rights that presently are exercisable are taken into account.(d)
    
    Group accounting(i)
    
    ConsolidationAn investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the
date that control ceases.Intra-group balances and transactions and any unrealized profits arising from intra-group transactions are eliminated in full in
preparing the consolidated financial statements. Unrealized losses resulting from intra-group transactions are eliminated in the same way
as unrealized gains but only to the extent that there is no evidence of impairment.(ii)
    
    Translation of foreign currenciesTransactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies are translated at exchange rates ruling at the balance sheet date. Exchange differences arising in
these cases are dealt with in profit or loss.For consolidation purposes, the balance sheets of foreign subsidiaries denominated in foreign currencies are translated at the rates of
exchange ruling at the balance sheet date whilst the income statement is translated at an average rate for the year. Exchange differences
are dealt with as a movement in reserves.The accompanying consolidated financial statements are presented in Hong Kong Dollars, which is the Groups functional currency. All
financial information have been rounded to the nearest thousand.
 F-9




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##### Table of Contents



1
    
    Significant accounting policies (continued)(e)
    
    GoodwillGoodwill represents the excess of the cost of a business combination or an investment in an associate or a jointly controlled
entity over the Groups interest in the net fair value of the acquirees identifiable assets, liabilities and contingent
liabilities.Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested
annually for impairment (see note 1(i)). In respect of associates or jointly controlled entities, the carrying amount of
goodwill is included in the carrying amount of the interest in the associate or jointly controlled entity.Any excess of the Groups interest in the net fair value of the acquirees identifiable assets, liabilities and contingent
liabilities over the cost of a business combination or an investment in an associate or a jointly controlled entity is
recognized immediately in profit or loss.On disposal of a cash generating unit, an associate or a jointly controlled entity during the year, any attributable amount of
goodwill is included in the calculation of the profit or loss on disposal.(f)
    
    Investment propertyInvestment properties are land and/or buildings which are owned and held to earn rental income and/or for capital appreciation.Investment properties are stated in the balance sheet at cost less accumulated depreciation (see note 1(g)) and impairment
losses (see note 1(i)) if any. Any gain or loss arising from the retirement or disposal of an investment property is
recognized in the income statement. Rental income from investment property is accounted for in accordance with the accounting
policy as set out in note 1(s)(v).(g)
    
    Fixed assetsFixed assets are stated at cost less accumulated depreciation and accumulated impairment losses.Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual
value, if any, using the straight-line method over their estimated useful lives as follows:
 
    
    Buildings situated on leasehold land are
depreciated over the shorter of the
unexpired term of lease and their estimated
useful lives of 50 years
 
    
    Furniture, fixtures and fittings
    
    4 years
    
    Telecommunications, computer and office equipment
    
    4 years  20 years
    
    Motor vehicles
    
    4 years
 
    
    Leasehold improvements are depreciated over the shorter of the unexpired term of the leases and their estimated useful lives.
 Where the parts of an item of property, plant and equipment have different
useful lives, the cost of the item is allocated on a reasonable basis between
the parts and each part is depreciated separately. Both the useful life of an
asset and its residual value, if any, are reviewed annually.Major costs incurred in restoring fixed assets to their normal working
condition are charged to profit or loss. Major improvements are capitalized and
depreciated over their expected useful lives to the Group.The gain or loss on disposal of a fixed asset is the difference between the net
sales proceeds and the carrying amount of the relevant asset, and is recognized
in profit or loss on the date of disposal.
 F-10




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##### Table of Contents



1
    
    Significant accounting policies (continued)(h)
    
    Assets held under leasesAn arrangement, comprising a transaction or a series of transactions, is or contains a
lease if the Group determines that the arrangement conveys a right to use a specific
asset or assets for an agreed period of time in return for a payment or a series of
payments. Such a determination is made based on an evaluation of the substance of the
arrangement and is regardless of whether the arrangement takes the legal form of a lease.(i)
    
    Classification of assets leased to the GroupAssets that are held by Group under leases which transfer to the Group substantially all
the risks and rewards of ownership are classified as being held under finance leases.
Leases which do not transfer substantially all the risks and rewards of ownership to the
Group are classified as operating leases.Land held for own use under an operating lease for which its fair value cannot be
measured separately from the fair value of a building situated thereon at the inception
of the lease, is accounted for as being held under a finance lease, unless the building
is also clearly held under an operating lease (see note 1(h)(iii)).(ii)
    
    Finance leasesWhere the Group acquired the use of assets under finance leases, the amounts representing
the fair value of the leased asset or, if lower, the present value of the minimum lease
payments of such assets, are included in fixed assets with the corresponding liabilities,
net of finance charges, recorded as obligations under finance leases. Depreciation and
impairment losses are accounted for in accordance with the accounting policy as set out
in note 1(g) and note 1(i). Finance charges implicit in the lease payments are charged to
profit or loss over the period of the leases so as to produce an approximately constant
periodic rate of charge on the remaining balance of the obligations for each accounting
period.(iii)
    
    Operating leasesLeases where substantially all the risks and rewards of ownership of assets remain with
the lessor are accounted for as operating leases. Receipts and payments made under
operating leases net of any incentives received by/from the lessor are credited/charged
to profit or loss on a straight-line basis over the lease periods.(i)
    
    Impairment of assets(i)
    
    Impairment of investments in debt and equity securities and accounts and other receivablesInvestments in debt and equity securities and other current and non-current receivables
that are stated at cost or amortized cost or are classified as available-for-sale
securities are reviewed at each balance sheet date to determine whether there is
objective evidence of impairment. Objective evidence of impairment includes observable
data that comes to the attention of the Group about one or more of the following loss
events:
 
    
    significant financial difficulty of the debtor;
    
    a breach of contract, such as a default or delinquency in interest or principal payments;
    
    it becoming probable that a debtor will enter bankruptcy or other financial reorganization; and
    
    a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.
 F-11




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##### Table of Contents



1
    
    Significant accounting policies (continued)(i)
    
    Impairment of assets (continued)(i)
    
    Impairment of investments in debt and equity securities and accounts and other receivables (continued)If any such evidence exists, any impairment loss is determined and recognized as follows:
 
    
    For trade and other current receivables and other financial assets
carried at amortized cost, the impairment loss is measured as the
difference between the assets carrying amount and the present value
of estimated future cash flows, discounted at the financial assets
original effective interest rate (i.e. the effective interest rate
computed at initial recognition of these assets). This assessment is
made collectively where financial assets carried at amortized cost
share similar risk characteristics, such as similar past due status,
and have not been individually assessed as impaired. Future cash flows
for financial assets which are assessed for impairment collectively
are based on historical loss experience for assets with credit risk
characteristics similar to the collective group.If in a subsequent period the amount of an impairment loss
decreases and the decrease can be linked objectively to an
event occurring after the impairment loss was recognized,
the impairment loss is reversed through profit or loss. A
reversal of an impairment loss shall not result in the
assets carrying amount exceeding that would have been
determined had no impairment loss been recognized in prior
years.
    
    For available-for-sale securities, the cumulative loss
that has been recognized directly in equity is removed
from equity and is recognized in profit or loss. The
amount of the cumulative loss that is recognized in profit
or loss is the difference between the acquisition cost
(net of any principal repayment and amortization) and
current fair value, less any impairment loss on that asset
previously recognized in profit or loss.Impairment losses recognized in profit or loss in respect
of available-for-sale equity securities are not reversed
through profit or loss. Any subsequent increase in the
fair value of such assets is recognized directly in
equity.Impairment losses in respect of available-for-sale debt
securities are reversed if the subsequent increase in fair
value can be objectively related to an event occurring
after the impairment loss was recognized. Reversals of
impairment losses in such circumstances are recognized in
profit and loss.
 Impairment losses are written off against the corresponding
assets directly, except for impairment losses recognized in
respect of accounts receivable, whose recovery is considered
doubtful but not remote. In this case, the impairment losses for
doubtful debts are recorded using an allowance account. When the
Group is satisfied that recovery is remote, the amount
considered irrecoverable is written off against accounts
receivable and any amounts held in the allowance account
relating to that debt are reversed. Subsequent recoveries of
amounts previously charged to the allowance account are reversed
against the allowance account. Other changes in the allowance
account and subsequent recoveries of amounts previously written
off directly are recognized in profit or loss.(ii)
    
    Impairment of other assetsInternal and external sources of information are reviewed at
each balance sheet date to identify indications that the
following assets may be impaired or, except in the case of
goodwill, an impairment loss previously recognized no longer
exists or may have decreased:
 
    
    fixed assets;
    
    investment property; and
    
    goodwill.
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##### Table of Contents



1
    
    Significant accounting policies (continued)(i)
    
    Impairment of assets (continued)(ii)
    
    Impairment of other assets (continued)If any such indication exists, the assets recoverable amount is estimated. In
addition, for goodwill, the recoverable amount is estimated annually whether or
not there is any indication of impairment.
 
    
    Calculation of recoverable amountThe recoverable amount of an
asset is the greater of its net
selling price and value in use.
In assessing value in use, the
estimated future cash flows are
discounted to their present value
using a pre-tax discount rate
that reflects current market
assessments of time value of
money and the risks specific to
the asset. Where an asset does
not generate cash inflows largely
independent of those from other
assets, the recoverable amount is
determined for the smallest group
of assets that generates cash
inflows independently (i.e. a
cash-generating unit).
    
    Recognition of impairment lossesAn impairment loss is recognized
in profit or loss whenever the
carrying amount of an asset, or
the cash-generating unit to which
it belongs, exceeds its
recoverable amount. Impairment
losses recognized in respect of
cash-generating units are
allocated first to reduce the
carrying amount of any goodwill
allocated to the cash-generating
unit (or group of units) and
then, to reduce the carrying
amount of the other assets in the
unit (or group of units) on a pro
rata basis, except that the
carrying value of an asset will
not be reduced below its
individual fair value less costs
to sell, or value in use, if
determinable.
    
    Reversals of impairment lossesIn respect of assets other than
goodwill, an impairment loss is
reversed if there has been a
favorable change in the estimates
used to determine the recoverable
amount. An impairment loss in
respect of goodwill is not
reversed.A reversal of an impairment loss
is limited to the assets
carrying amount that would have
been determined had no impairment
loss been recognized in prior
years. Reversals of impairment
losses are credited to profit or
loss in the year in which the
reversals are recognized.
 (j)
    
    Derivative financial instrumentsDerivative financial instruments are recognized
initially at fair value. At each balance sheet date,
the fair value is remeasured. The gain or loss on
remeasurement to fair value is recognized immediately
in profit or loss, except where the derivatives qualify
for cash flow hedge accounting or hedge of a net
investment in a foreign operation, in which case
recognition of any resultant gain or loss depends on
the nature of the item being hedged. For the years
presented in the consolidated financial statements,
none of the Groups derivative financial instruments
qualify as hedges or hedge accounting.(k)
    
    Deferred expenditureDeferred expenditure represents customer acquisition
costs incurred for successful acquisition or
origination of a service subscription agreement with a
customer. Such costs are deferred and amortized on a
straight-line basis over the period of the underlying
service subscription agreements.
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##### Table of Contents



1
    
    Significant accounting policies (continued)(l)
    
    Accounts receivableTrade and other receivables are initially recognized at fair value
and thereafter stated at amortized cost less allowance for
impairment of doubtful debts (see note 1(i)(i)), except where the
receivables are interest-free loans made to related parties without
any fixed repayment terms or the effect of discounting would be
immaterial. In such cases, the receivables are stated at cost less
impairment of doubtful debts (see note 1(i)(i)).(m)
    
    Cash, bank balances and pledged bank depositsCash and bank balances consist of cash on hand, cash in bank
accounts and interest-bearing savings accounts. Cash that is
restricted for use or pledged as security is disclosed separately
on the face of the balance sheet, and is not included in the cash
and bank balances total in the consolidated statements of cash
flows. The pledged bank deposits represent cash maintained at a
bank as security for bank facility and bank guarantees issued by
the bank to third party suppliers and utility vendors (see note
27).(n)
    
    Financial guarantees issued, provisions and contingent liabilities(i)
    
    Financial guarantees issuedFinancial guarantees are contracts that require the issuer (i.e.
the guarantor) to make specified payments to reimburse the
beneficiary of the guarantee (the holder) for a loss the holder
incurs because a specified debtor fails to make payment when due
in accordance with the terms of a debt instrument.Where the Group issues a financial guarantee, the fair value of
the guarantee (being the transaction price, unless the fair value
can otherwise be reliably estimated) is initially recognized as
deferred income within trade and other payables. Where
consideration is received or receivable for the issuance of the
guarantee, the consideration is recognized in accordance with the
Groups policies applicable to that category of asset. Where no
such consideration is received or receivable, an immediate
expense is recognized in profit or loss on initial recognition of
any deferred income.The amount of the guarantee initially recognized as deferred
income is amortized in profit or loss over the term of the
guarantee as income from financial guarantees issued. In
addition, provisions are recognized in accordance with note
1(n)(ii) if and when (i) it becomes probable that the holder of
the guarantee will call upon the Group under the guarantee, and
(ii) the amount of that claim on the Group is expected to exceed
the amount currently carried in trade and other payables in
respect of that guarantee i.e. the amount initially recognized,
less accumulated amortization.(ii)
    
    Other provisions and contingent liabilitiesProvisions are recognized for other liabilities of uncertain
timing or amount when the Group has a legal or constructive
obligation arising as a result of a past event, it is probable
that an outflow of economic benefits will be required to settle
the obligation and a reliable estimate can be made. Where the
time value of money is material, provisions are stated at the
present value of the expenditure expected to settle the
obligation.Where it is not probable that an outflow of economic benefits
will be required, or the amount cannot be estimated reliably, the
obligation is disclosed as a contingent liability, unless the
probability of outflow of economic benefits is remote. Possible
obligations, whose existence will only be confirmed by the
occurrence or non-occurrence of one or more future events are
also disclosed as contingent liabilities unless the probability
of outflow of economic benefits is remote.
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##### Table of Contents



1
    
    Significant accounting policies (continued)(o)
    
    Talent benefits(i)
    
    Leave entitlementsEntitlements to annual leave and long service leave are
recognized when they accrue to individuals employed by
the Group hereinafter (referred to as Talents), including directors of the Company. A provision is made for the
estimated liability for annual leave and long-service leave as a result of services rendered by Talents up to the
balance sheet date.Entitlements to sick leave and maternity or paternity leave are not recognized until the time of leave.(ii)
    
    Profit sharing and bonus plansProvisions for profit sharing and bonus plans are recognized when the Group has a present legal or constructive
obligation as a result of services rendered by Talents and a reliable estimate of the obligation can be made.(iii)
    
    Retirement benefit costsThe Group contributes to defined contribution retirement schemes which are available to certain Talents.
Contributions to the schemes by the Group are calculated as a percentage of Talents basic salaries and charged
to profit or loss. The Groups contributions are reduced by contributions forfeited by those Talents who leave
the scheme prior to vesting fully in the contributions.The assets of the scheme are held in an independently administered fund that is separated from the Groups assets.(iv)
    
    Share-based paymentsThe fair value of share options granted to Talents is recognized as an Talent cost with a corresponding increase
in capital reserve within equity. The fair value is measured at grant date using the Black-Scholes option pricing
model or Monte Carlo model, taking into account the terms and conditions upon which the options were granted.
Where the Talents have to meet vesting conditions before becoming unconditionally entitled to the share options,
the total estimated fair value of the share options is spread over the vesting period, taking into account the
probability that the options will vest.During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to
the cumulative fair value recognized in prior years is charged/credited to profit or loss, unless the original
Talent expenses qualify for recognition as an asset, with a corresponding adjustment to the capital reserve. On
vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that
vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not
achieving vesting conditions that relate to the market price of the Companys shares. The amount related to share
options expense is recorded in the capital reserve until either the option is exercised or the option expires.(p)
    
    Deferred taxationDeferred taxation is provided, using the balance sheet liability method, on temporary differences between the tax
bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also
arise from unused tax losses. Taxation rates enacted or substantively enacted at the balance sheet date are used
to measure deferred tax assets and liabilities.Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be
available against which the temporary differences can be utilized.
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##### Table of Contents



1
    
    Significant accounting policies (continued)(p)
    
    Deferred taxation (continued)The following temporary differences, of which deferred taxes are not provided for: initial
recognition of goodwill, the initial recognition of assets or liabilities that affect neither
accounting nor taxable profit (provided they are not part of a business combination), and
temporary differences relating to investments in subsidiaries to the extent that, in the case
of taxable differences, the Group controls the timing of the reversal and it is probable that
the temporary differences will not be reversed in the foreseeable future, or in the case of
deductible differences, unless it is probable that they will reverse in the future.Deferred tax assets and deferred tax liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities and when the
deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same
taxation authority on the same taxable entity.(q)
    
    Interest-bearing borrowingsInterest-bearing borrowings are recognized initially at fair value less attributable
transaction costs. Subsequent to initial recognition, the interest-bearing borrowings are
stated at amortized cost with the difference between amortized cost and redemption value
recognized in profit or loss over the period of borrowings using the effective interest
method.(r)
    
    Trade and other payablesTrade and other payables are initially recognized at fair value. Except for financial
guarantee liabilities measured in accordance with note 1(n), trade and other payables are
subsequently stated at amortized cost unless the effect of discounting would be immaterial, in
which case they are stated at cost.(s)
    
    Revenue recognition(i)
    
    Revenue for the provision of international telecommunications and fixed telecommunications
network services is recognized, when an arrangement exists, service is rendered, the fee is
fixed or determinable, and collectibility is probable.(ii)
    
    Tariff-free period granted to subscribers of fixed telecommunications network services are
recognized in profit or loss rateably over the term of the service subscription agreement.
Unbilled revenue represents revenue recognized in accordance with the requirement in note
1(s)(i) that has not been billed to the subscriber.(iii)
    
    Amount received in advance for the provision of fixed telecommunications network services is
deferred and included under deferred service revenue, and subsequently recognized as revenue
on a straight-line basis over the related service period.(iv)
    
    Interest income is recognized as it accrues using the effective interest method.(v)
    
    Rental income receivable under operating leases is recognized in profit or loss in equal
installments over the periods covered by the lease term. Lease incentives granted are
recognized in profit or loss as an integral part of the aggregate net lease payments
receivable.(t)
    
    Borrowing costsBorrowing costs that are directly attributable to the acquisition, construction or production
of an asset that necessarily takes a substantial period of time to get ready for its intended
use or sale are capitalized as part of the cost of that asset.All other borrowing costs are charged to profit or loss in the year in which they are incurred.
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##### Table of Contents



1
    
    Significant accounting policies (continued)(u)
    
    Segment reportingOperating segments, and the amounts of each segment item reported in the financial statements, are
identified from the financial information provided regularly to the Groups most senior executive
management for the purposes of allocating resources to, and assessing the performance of, the
groups two lines of business.Geographical information is not presented as the majority of the Groups revenue is attributed to
customers in Hong Kong and the majority of the assets are located in Hong Kong.(v)
    
    Accounting for barter transactionsWhen goods or services are exchanged for goods or services which are of a similar nature and value,
the exchange is not regarded as a revenue generating transaction.When goods are sold or services are rendered in exchange for dissimilar goods or services, the
exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair
value of the goods or services received, adjusted by the amount of any cash or cash equivalents
transferred. When the fair value of the goods or services received cannot be measured reliably, the
revenue is measured at the fair value of the goods or services rendered, adjusted by the amount of
any cash or cash equivalents transferred.(w)
    
    Related partiesFor the purposes of these financial statements, a party is considered to be related to the Group if:
 (i)
    
    the party has the ability, directly or indirectly through one or more intermediaries, to
control the Group or exercise significant influence over the Group in making financial and
operating policy decisions, or has joint control over the Group;(ii)
    
    the Group and the party are subject to common control;(iii)
    
    the party is an associate of the Group or a joint venture in which the Group is a venturer;(iv)
    
    the party is a member of key management personnel of the Group or the Groups parent, or a
close family member of such an individual, or is an entity under the control, joint
control or significant influence of such individuals;(v)
    
    the party is a close family member of a party referred to in (i) or is an entity under the
control, joint control or significant influence of such individuals; or(vi)
    
    the party is a post-employment benefit plan which is for the benefit of Talents of the
Group or of any entity that is a related party of the Group.
 Close family members of an individual are those family members who may be
expected to influence, or be influenced by, that individual in their dealings
with the entity.
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##### Table of Contents



2
    
    Turnover and segment information
 The Group is principally engaged in the provision of international
telecommunications services and fixed telecommunications network
services to customers in Hong Kong and Canada. Revenues recognized
during the year are as follows:
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000TurnoverInternational telecommunications services
    
    
    218,589
    
    
    
    247,359
    
    
    
    291,943Fixed telecommunications network services (note 2(b))
    
    
    1,356,098
    
    
    
    1,230,880
    
    
    
    1,011,0381,574,687
    
    
    
    1,478,239
    
    
    
    1,302,981
 (a)

    Primary reporting format  business segmentsThe Group is organized on a worldwide basis into two business segments:
 
    
    International telecommunications
    
    :
    
    provision of international long distance calls services
    
    Fixed telecommunications network
    
    :
    
    provision of dial up and broadband Internet access
services , local voice-over-IP services, IP-TV
services and corporate data services
 The Groups inter-segment transactions mainly consist of provision of leased
lines services. These transactions were entered into on similar terms as those
contracted with third parties.
 2010International
    
    
    Fixedtele-
    
    
    tele-communications
    
    
    communicationsservices
    
    
    network services
    
    
    Elimination
    
    
    GroupHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Turnover- External sales
    
    
    218,589
    
    
    
    1,356,098
    
    
    
    
    
    
    
    1,574,687- Inter-segment sales
    
    
    5,673
    
    
    
    16,673
    
    
    
    (22,346
    )
    
    
    224,262
    
    
    
    1,372,771
    
    
    
    (22,346
    )
    
    
    1,574,687Segment results
    
    
    54,173
    
    
    
    219,618
    
    
    
    
    
    
    
    273,791Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,989Finance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,235
    )Profit before taxation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259,545Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,679
    )Net profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216,866
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##### Table of Contents



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




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##### Table of Contents



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



2
    
    Revenue and segment information (continued)
 (b)
    
    Hong Kong Broadband Network Limited (HKBN), a wholly-owned
subsidiary of the Company, is a Fixed Telecommunications Network
Services (FTNS) licensee and provides interconnection services
to enable delivery of telecommunications service to customers of
different operators. Since the FTNS license was granted by the
Telecommunication Authority (TA) and interconnection services
have been provided, HKBN has been billing mobile operators for
the interconnection services provided to them and recognizing
revenue (mobile interconnection charges) based on managements
best estimate of the amounts to be collected. In prior years,
majority of the mobile operators rejected HKBNs demand for
payment of the mobile interconnection charges. As a result of
non-payment by certain mobile operators, in 2004, the Group
requested the TA to make a determination (the 2004
Determination) on the level of mobile interconnection charges
payable by one of the mobile operators (mobile operator under
dispute) to HKBN; and the effective date of the determined
mobile interconnection charges.In June 2007, TA issued the 2004 Determination which set out the
rates of mobile interconnection charge payable by the mobile
operator under dispute for interconnection services provided by
HKBN for the period from April 1, 2002 to August 31, 2004 and the
mobile operator under dispute paid mobile interconnection charge
for the relevant period accordingly.Subsequent to June 2007, HKBN entered into contractual agreements
with several mobile operators which agreed to pay mobile
interconnection charges based on the 2004 Determination for the
period from April 1, 2002 to August 31, 2004 and with respect to
the period after August 31, 2004 at the interim rate stated in
the contractual agreements. The interim rate is subject to
adjustment based on further determination to be issued by the TA.In February 2008, since certain mobile operators had still not
yet settled their mobile interconnection charges for
interconnection services provided by HKBN, HKBN requested TA to
make a new determination on the rate of mobile interconnection
charge and interest thereon with the four mobile operators.In September 2008, TA accepted HKBNs request for determination
on the rate of mobile interconnection charges for the period from
April 1, 2002 to April 26, 2009 payable by the mobile operators
that have not reached contractual agreements with HKBN, and the
rate for the period from September 1, 2004 to April 26, 2009
payable by those mobile operators that have reached contractual
agreements with HKBN, and the interest rate thereon (the 2008
Determination).In May 2010, TA issued its decision on the 2008 Determination
which set out the rates of mobile interconnection charges payable
by the mobile operators under dispute.Based on the 2008 determination, the Group reversed
approximately HK$19,706,000 revenue related to mobile
interconnection charges and recognized approximately
HK$10,053,000 interest income during the year ended August 31,
2010.Included in the accounts receivable balance as at August 31,
2010 were receivable relating to mobile interconnection charges
of HK$39,763,000 (August 31, 2009: HK$68,802,000) representing
the amount of mobile interconnection charges management expects
to collect.
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##### Table of Contents



3
    
    Network costs
 Network costs mainly include interconnection charges paid to local
and overseas carriers, leased line rentals, program fees, and
production costs for the IP-TV service, and do not include
depreciation charge which is included in other operating expenses.The Group estimates the Universal Services Contributions (USC)
payable to PCCW-HKT to fund the costs of network development in
remote areas in Hong Kong and includes such estimated costs as part
of the network costs. TA periodically reviews the actual costs of
such developments and revises the amounts owed to PCCW-HKT or to be
refunded by PCCW-HKT to the USC contributing parties.On December 28, 2007, TA issued a statement (the 2007 TA
Statement) on the USC and confirmed the actual contribution level
for the period from January 1, 2005 to June 30, 2007. Based on the
2007 TA Statement, HK$7,617,000 was recorded as a reduction against
the network costs of the Group for the year ended August 31, 2008.On April 8, 2009, TA issued a statement (the 2009 TA Statement)
on the USC and confirmed the actual contribution level for the
period from July 1, 2007 to June 30, 2008. Based on the 2009 TA
Statement, no additional payment or refund of USC from PCCW-HKT was
required.On April 27, 2010, TA issued a statement (the 2010 TA Statement)
on the USC and confirmed the actual contribution level for the
period from July 1, 2008 to April 30, 2009. Based on the 2010 TA
Statement, no additional payment or refund of USC from PCCW-HKKT
was requiredBased on the 2010 TA Statement, TA decided that USC
contributing parties are not required to pay provisional USC from
May 1, 2009 onwards until a further review of the USC.
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##### Table of Contents



4
    
    Profit before taxationProfit before taxation is arrived at after charging/(crediting) the following:
 (a)
    
    Other operating expenses
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Advertising and marketing expenses
    
    
    372,727
    
    
    
    299,794
    
    
    
    307,743Amortization of deferred expenditure (note 14)
    
    
    48,621
    
    
    
    53,160
    
    
    
    33,777Auditors remuneration
    
    
    2,910
    
    
    
    3,455
    
    
    
    3,687Depreciation of owned fixed assets
    
    
    198,323
    
    
    
    205,624
    
    
    
    209,464Depreciation of fixed assets held under finance lease
    
    
    706
    
    
    
    617
    
    
    
    587Operating lease charges in respect of land and buildings
    
    
    22,669
    
    
    
    17,010
    
    
    
    13,296Operating lease charges in respect of equipment
    
    
    39
    
    
    
    42
    
    
    
    50Provision for doubtful debts (note 15(b))
    
    
    14,742
    
    
    
    12,103
    
    
    
    14,293(Gain)/loss on disposal of fixed assets
    
    
    (1,375
    )
    
    
    1,016
    
    
    
    1,431Talent costs (note 4(d))
    
    
    301,760
    
    
    
    302,279
    
    
    
    247,460Others
    
    
    144,482
    
    
    
    142,864
    
    
    
    134,3061,105,604
    
    
    
    1,037,964
    
    
    
    966,094
 (b)
    
    Other income, net
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Interest income
    
    
    (11,372
    )
    
    
    (4,869
    )
    
    
    (15,596
    )Loss/(gain) on extinguishment of 10-year senior notes (note 22(a))
    
    
    9,650
    
    
    
    (31,371
    )
    
    
    (2,582
    )Net exchange gain
    
    
    (324
    )
    
    
    (3,038
    )
    
    
    (1,923
    )Others
    
    
    (5,943
    )
    
    
    (2,262
    )
    
    
    (4,888
    )(7,989
    )
    
    
    (41,540
    )
    
    
    (24,989
    )
 (c)
    
    Finance costs
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Interest element of finance leases
    
    
    42
    
    
    
    27
    
    
    
    34Interest on 10-year senior notes
    
    
    5,881
    
    
    
    52,670
    
    
    
    70,010Amortization of incidental issuance costs
    
    
    188
    
    
    
    1,545
    
    
    
    1,665Interest on bank borrowings
    
    
    1,379
    
    
    
    
    
    
    
    Amortization of upfront costs on bank borrowings
    
    
    192
    
    
    
    
    
    
    
    Change in fair value of derivative financial instrument
    
    
    11,293
    
    
    
    
    
    
    
    Other borrowing costs
    
    
    3,260
    
    
    
    885
    
    
    
    3,42822,235
    
    
    
    55,127
    
    
    
    75,137
 F-23




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##### Table of Contents



4 Profit before taxation (continued)
 (d)
    
    Talent costs
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Wages and salaries
    
    
    277,883
    
    
    
    278,905
    
    
    
    226,097Provision for annual leave
    
    
    561
    
    
    
    613
    
    
    
    2,642Equity settled share-based transaction
    
    
    5,347
    
    
    
    4,768
    
    
    
    4,114Retirement benefit costs  defined contribution plans (note 8)
    
    
    38,820
    
    
    
    34,614
    
    
    
    29,738Less: Talent costs capitalized as fixed assets
    
    
    (20,851
    )
    
    
    (16,621
    )
    
    
    (15,131
    )301,760
    
    
    
    302,279
    
    
    
    247,460
   (e)
    
    Other items
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Realized loss on derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    1,039Realized gain on long-term bank deposit
    
    
    
    
    
    
    
    
    
    
    (1,185
    )Realized and unrealized gain on other financial assets
    
    
    
    
    
    
    (189
    )
    
    
    (3,284
    )
 5 Income tax (expense)/benefit
   2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Current taxation:Hong Kong- Provision for the year
    
    
    
    
    
    
    
    
    
    
    (391
    )- Over-provision in prior years
    
    
    40
    
    
    
    
    
    
    
    Non-Hong Kong- Provision for the year
    
    
    (2,585
    )
    
    
    (1,622
    )
    
    
    (1,929
    )- Under-provision in prior years
    
    
    
    
    
    
    
    
    
    
    (2,552
    )Deferred taxation:- Origination and reversal of temporary differences (note 20)
    
    
    (40,134
    )
    
    
    (37,108
    )
    
    
    (4,645
    )- Recognition of previously unrecognized tax losses (note 20)
    
    
    
    
    
    
    
    
    
    
    26,335Income tax (expense)/benefit
    
    
    (42,679
    )
    
    
    (38,730
    )
    
    
    16,818
 F-24




---



##### Table of Contents



5 Income tax (expense)/benefit (continued)
  2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Profit before taxation
    
    
    259,545
    
    
    
    251,559
    
    
    
    108,372Notional tax on profit before taxation, calculated at the prevailing
tax rates applicable to profit in the jurisdictions concerned
    
    
    (43,781
    )
    
    
    (42,240
    )
    
    
    (18,927
    )Effect of non-taxable income
    
    
    4,692
    
    
    
    1,466
    
    
    
    3,452Effect of (loss)/gain on extinguishment of 10-year senior notes not
subject to taxation
    
    
    (1,592
    )
    
    
    5,176
    
    
    
    426Effect of non-deductible expenses
    
    
    (2,367
    )
    
    
    (3,648
    )
    
    
    (6,353
    )Effect of recognition of prior year unrecognized tax losses (note)
    
    
    
    
    
    
    
    
    
    
    26,335Over/(under)-provision in prior years
    
    
    40
    
    
    
    
    
    
    
    (2,552
    )Effect of utilization of prior year unrecognized tax losses
    
    
    
    
    
    
    
    
    
    
    12,013Effect of share based payment
    
    
    
    
    
    
    
    
    
    
    2,324Effect of tax losses not recognized
    
    
    
    
    
    
    
    
    
    
    (74
    )Others
    
    
    329
    
    
    
    516
    
    
    
    174Income tax (expense)/benefit
    
    
    (42,679
    )
    
    
    (38,730
    )
    
    
    16,818
 
 Note:
    
    Management projects future taxable income by considering all
available information, including tax planning strategies, historical
taxable income, and the expiration period of the unused tax losses
carry forwards of each of the Company and its subsidiaries. During
the year ended August 31, 2008, taking into consideration of the
results of operations, management assessed that it is probable that
sufficient future taxable profits will be generated to utilize the
unused tax losses of HK$159,606,000 which resulted in the
recognition of deferred tax assets of HK$26,335,000. F-25




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##### Table of Contents



6
    
    Dividends
 (a)
    
    Dividends payable to equity shareholders of the Company attributable to the year
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Interim dividend
declared and paid of HK6.5
cents per ordinary share
(2009: HK3 cents per
ordinary share, 2008: HK4
cents per ordinary share)
    
    
    49,725
    
    
    
    19,904
    
    
    
    25,602Final dividend proposed
after the balance sheet
date, of HK13.5 cents per
ordinary share (2009: HK16
cents per ordinary share,
2008: HK2 cents per
ordinary share)
    
    
    103,275
    
    
    
    106,269
    
    
    
    13,012153,000
    
    
    
    126,173
    
    
    
    38,614
  (b)
    
    Dividends attributable to the previous financial year, approved and paid during the year:
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Final dividend in respect of
the financial year ended August
31, 2009, approved and paid of
HK16 cents per ordinary share
(2009: HK2 cents per ordinary
share in respect of financial
year ended August 31, 2008, 2008:HK4 cents per ordinary share in
respect of financial year ended
August 31, 2007)
    
    
    108,735
    
    
    
    13,014
    
    
    
    25,082
  F-26




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##### Table of Contents



7 Earnings per share
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Profit attributable to shareholders
    
    
    216,866
    
    
    
    212,829
    
    
    
    125,190Weighted average number of ordinary shares2010
    
    
    2009
    
    
    2008Number
    
    
    Number
    
    
    Numberof shares
    
    
    of shares
    
    
    of shares000
    
    
    000
    
    
    000Issued ordinary shares at the beginning of the year
    
    
    664,180
    
    
    
    650,622
    
    
    
    616,503Effect of scrip dividend issued
    
    
    
    
    
    
    6,256
    
    
    
    7,353Effect of share options exercised
    
    
    14,856
    
    
    
    329
    
    
    
    10,159Effect of placement
    
    
    27,569
    
    
    
    
    
    
    
    Effect of shares repurchased and cancelled
    
    
    
    
    
    
    (6
    )
    
    
    Weighted average number of ordinary shares at the end of the
year (basic)
    
    
    706,605
    
    
    
    657,201
    
    
    
    634,015Incremental shares from assumed exercise of share options
    
    
    30,011
    
    
    
    11,183
    
    
    
    23,982Weighted average number of ordinary shares at the end of the
year (diluted)
    
    
    736,616
    
    
    
    668,384
    
    
    
    657,997Basic earnings per share
    
    HK30.7
    cents
    
    HK32.4
    cents
    
    HK19.7
    centsDiluted earnings per share
    
    HK29.4
    cents
    
    HK31.8
    cents
    
    HK19.0
    cents
 F-27




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##### Table of Contents



8 Retirement benefit costs
      2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Gross contributions
    
    
    38,820
    
    
    
    34,614
    
    
    
    29,738
  9 Directors and senior managements emoluments
 (a)
    
    Directors remuneration
  Employer'scontributionto definedDiscretionary
    
    
    Share-based
    
    
    contributionFee
    
    
    Salary
    
    
    bonuses
    
    
    payment
    
    
    scheme
    
    
    TotalName of director
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Wong Wai Kay, Ricky
    
    
    
    
    
    
    6,707
    
    
    
    1,800
    
    
    
    
    
    
    
    670
    
    
    
    9,177Cheung Chi Kin, Paul
    
    
    
    
    
    
    6,709
    
    
    
    1,800
    
    
    
    
    
    
    
    670
    
    
    
    9,179Yeung Chu Kwong, William
    
    
    
    
    
    
    8,264
    
    
    
    2,400
    
    
    
    2,526
    
    
    
    456
    
    
    
    13,646Lai Ni Quiaque
    
    
    
    
    
    
    2,642
    
    
    
    750
    
    
    
    2,455
    
    
    
    264
    
    
    
    6,111Cheng Mo Chi, Moses
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168Lee Hon Ying, John
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185Chan Kin Man
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174Peh Jefferson Tun Lu
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174Total
    
    
    701
    
    
    
    24,322
    
    
    
    6,750
    
    
    
    4,981
    
    
    
    2,060
    
    
    
    38,814
 F-28




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##### Table of Contents



9 Directors and senior managements emoluments (continued)
 (a)
    
    Directors remuneration (continued)
  Employerscontributionto definedDiscretionary
    
    
    Share-based
    
    
    contributionFee
    
    
    Salary
    
    
    bonuses
    
    
    payment
    
    
    scheme
    
    
    TotalName of director
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Wong Wai Kay, Ricky
    
    
    
    
    
    
    6,712
    
    
    
    1,500
    
    
    
    193
    
    
    
    670
    
    
    
    9,075Cheung Chi Kin, Paul
    
    
    
    
    
    
    6,714
    
    
    
    1,500
    
    
    
    193
    
    
    
    670
    
    
    
    9,077Yeung Chu Kwong, William
    
    
    
    
    
    
    7,049
    
    
    
    1,000
    
    
    
    1,764
    
    
    
    456
    
    
    
    10,269Lai Ni Quiaque
    
    
    
    
    
    
    2,403
    
    
    
    550
    
    
    
    1,141
    
    
    
    240
    
    
    
    4,334Cheng Mo Chi, Moses
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160Lee Hon Ying, John
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176Chan Kin Man
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165Peh Jefferson Tun Lu
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165Total
    
    
    666
    
    
    
    22,878
    
    
    
    4,550
    
    
    
    3,291
    
    
    
    2,036
    
    
    
    33,421
   (b)
    
    Five highest paid individuals
  2010
    
    
    2009HK$000
    
    
    HK$000Basic salaries, other allowances and benefits in kind
    
    
    2,492
    
    
    
    2,515Discretionary bonuses
    
    
    300
    
    
    
    150Share-based payments
    
    
    
    
    
    
    332Retirement benefit costs  defined contribution plans
    
    
    181
    
    
    
    1062,973
    
    
    
    3,103
  Number of individual2010
    
    
    2009HK$2,500,001  HK$3,000,000
    
    
    1
    
    
    
    HK$3,000,001  HK$3,500,000
    
    
    
    
    
    
    1
 F-29




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##### Table of Contents



10 Equity settled share-based transactions
   (a)
    
    The terms and conditions of the options
 Options that existed during the year ended August 31, 2010 are as follows, whereby all options are
settled by physical delivery of shares:
 Number
    
    
    Vesting
    
    Exercisableof option
    
    
    conditions
    
    period2002 Share Option SchemeOptions granted to directors:-January 5, 2005
    
    
    16,183,208
    
    
    Condition 1
    
    On or prior to October 20, 2014-May 22, 2006
    
    
    15,178,466
    
    
    Condition 1
    
    On or prior to May 21, 2016-February 6, 2008
    
    
    6,044,791
    
    
    Condition 3
    
    On or prior to December 23, 2012-February 11, 2008
    
    
    6,044,791
    
    
    Condition 2
    
    On or prior to December 23, 2012-February 5, 2010
    
    
    6,000,000
    
    
    Condition 4
    
    On or prior to February 4, 2020Options granted to Talents:-October 21, 2004
    
    
    6,909,527
    
    
    Condition 1
    
    On or prior to October 20, 2014-May 22, 2006
    
    
    6,414,433
    
    
    Condition 1
    
    On or prior to May 21, 2016-August 3, 2006
    
    
    40,540
    
    
    Condition 1
    
    On or prior to August 2, 2016-November 22, 2006
    
    
    136,545
    
    
    Condition 1
    
    On or prior to November 14, 2016-February 15, 2008
    
    
    1,007,465
    
    
    Condition 5
    
    On or prior to December 23, 2012-May 2, 2008
    
    
    1,007,465
    
    
    Condition 5
    
    On or prior to December 23, 2012Total share options
    
    
    64,967,231
 F-30




---



##### Table of Contents



10
    
    Equity settled share-based transactions (continued)
 (a)
    
    The terms and conditions of the options (continued)Options that existed during the year ended August 31, 2009 are as follows, whereby all options
are settled by physical delivery of shares:
 Number
    
    
    Vesting

    
    Exercisableof option
    
    
    conditions

    
    period2002 Share Option SchemeOptions granted to directors:-January 5, 2005
    
    
    16,183,208
    
    
    Condition 1
    
    On or prior to October 20, 2014-May 22, 2006
    
    
    15,178,466
    
    
    Condition 1
    
    On or prior to May 21, 2016-February 6, 2008
    
    
    6,044,791
    
    
    Condition 3
    
    On or prior to December 23, 2012-February 11, 2008
    
    
    6,044,791
    
    
    Condition 2
    
    On or prior to December 23, 2012Options granted to Talents:-October 21, 2004
    
    
    7,606,712
    
    
    Condition 1
    
    On or prior to October 20, 2014-May 22, 2006
    
    
    7,314,455
    
    
    Condition 1
    
    On or prior to May 21, 2016-August 3, 2006
    
    
    40,540
    
    
    Condition 1
    
    On or prior to August 2, 2016-November 22, 2006
    
    
    136,545
    
    
    Condition 1
    
    On or prior to November 14, 2016-February 15, 2008
    
    
    1,007,465
    
    
    Condition 5
    
    On or prior to December 23, 2012-March 11, 2008
    
    
    302,240
    
    
    Condition 1
    
    On or prior to December 23, 2012-May 2, 2008
    
    
    1,007,465
    
    
    Condition 5
    
    On or prior to December 23, 2012Total share options
    
    
    60,866,678
 The vesting conditions of the respective share option grant are as follows:Condition 1Options granted will be vested in one year or evenly vested over a period
of two to three years. Options are awarded without performance conditions
and are exercisable provided the participants have remained employed by
the end of respective vesting periods.Condition 2Vesting of the options is conditional upon the performance of the
Companys shares over the period from the close of trading in Hong Kong on
November 22, 2007 to November 21, 2010.Upon fulfillment of the market conditions, certain options granted vest
immediately, while other options affected by the same market conditions
vest evenly over a period of three years.During the year ended August 31, 2010, one of the clauses in the option
agreement has been modified. As a result of this modification, vesting of
certain options is now conditional upon the Company reaching a non-market
performance condition. Upon fulfillment of this non-market performance
condition, a portion of the options affected by this condition vest
immediately, while other options affected by this condition vest evenly
over a period of three years.The Group has accounted for the modification in accordance with IFRS/HKFRS
2 Share-based payment by measuring the incremental fair value which is
the difference between the fair value of the modified share options and
that of the original share options, both estimated as at the date of the
modification, and recognizing the incremental fair value over the period
from the modification date until the date when the modified share options
vest. The balance of the original grant-date fair value as at the date of
modification continues to be recognized over remaining original vesting
period. For the year ended August 31, 2010, the amount of incremental fair
value recognized in respect of the modification was HK$1,977,000.
 F-31




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##### Table of Contents



10
    
    Equity settled share-based transactions (continued)
 (a)
    
    The terms and conditions of the options (continued)The vesting conditions of the respective share option grant are as follows: (continued)Condition 3Vesting of the options is conditional upon the performance of the participants.
Options granted are vested over a period of three to four years from the date of
fulfillment of certain key performance indicators.During the year ended August 31, 2010, one of the performance conditions has been
modified. Such modification does not result in any incremental fair value, and
therefore, there is no financial impact in the financial statements.Condition 4Vesting of the options is conditional upon the performance of the participants.
Options granted are vested immediately from the date of fulfillment of the certain key
performance indicators.Condition 5Vesting of the options is conditional upon the performance of the participants.
Options granted are vested over a period of three to four years from the date of
fulfillment of certain key performance indicators.
 (b)
    
    The number and weighted average exercise prices of share options are as follows:
 2010
    
    
    2009Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exerciseprice
    
    
    Number of
    
    
    price
    
    
    Number ofHK$
    
    
    options
    
    
    HK$
    
    
    options2002 Share Option SchemeOutstanding at the beginning of the year
    
    
    1.27
    
    
    
    58,967,231
    
    
    
    1.27
    
    
    
    60,581,214Adjustment to number of options for 2008
Final Dividend (note)
    
    
    
    
    
    
    
    
    
    
    1.27
    
    
    
    285,464Granted during the year
    
    
    4.24
    
    
    
    6,000,000
    
    
    
    
    
    
    
    Exercised during the year
    
    
    0.82
    
    
    
    (20,317,374
    )
    
    
    0.99
    
    
    
    (1,416,005
    )Lapsed during the year
    
    
    
    
    
    
    
    
    
    
    1.65
    
    
    
    (483,442
    )Outstanding at the end of the year
    
    
    1.87
    
    
    
    44,649,857
    
    
    
    1.27
    
    
    
    58,967,231Exercisable at the end of the year
    
    
    1.35
    
    
    
    25,603,183
    
    
    
    1.12
    
    
    
    45,849,756
 The weighted average share price at the date of exercise for the share options exercised during the year was HK$3.85 (2009: HK$1.82).The options outstanding at August 31, 2010 had a weighted exercise price of HK$1.87 (2009: HK$1.27) and a weighted average remaining
contractual life of 4 years (2009: 5 years).
  As a result of allotment of 12,212,142 new shares to shareholders who elected
to receive the 2008 Final Dividend in shares on February 25, 2009, the exercise
price of and the number of share subject to the 60,299,426 share options
outstanding on December 19, 2008 (being the Record Date for determining the
entitlement of 2008 Final Dividend) were adjusted pursuant to the 2002 Share
Option Scheme with effect from February 25, 2009. The closing price per
ordinary share immediately before the date of the grant of the options was
HK$0.88.
 F-32




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##### Table of Contents



10
    
    Equity settled share-based transactions (continued)
 (c)
    
    Fair value of share options and assumptionsIn determining the value of the share options granted during the
year ended August 31, 2010, the Black-Scholes option pricing
model (the Black-Scholes Model) has been used. The
Black-Scholes Model is one of the most generally accepted
methodologies used to calculate the value of options. The
variables of the Black-Scholes Model includes expected life of
the options, risk-free interest rate, expected volatility and
expected dividend yield of the shares of the Company.In determining the value of the share options granted during the
year, the following variables have been applied to the
Black-Scholes Model:
 Measurement date
    
    February 5, 2010Variables-Expected life
    
    8 years-Risk-free rate
    
    
    2.33
    %-Expected volatility
    
    
    61.49
    %-Expected dividend yield
    
    
    2.99
    %
 The above variables were determined as follows:
 (i)
    
    The expected life is estimated to be 8 years from the date of grant (the Measurement date).(ii)
    
    The risk-fee rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to
the expected life of the options as at the Measurement date.(iii)
    
    The expected volatility represents the annualized standard deviation of the return on the daily
share price of the Company over the period commensurate to the expected life of the options
(taking into account the remaining contractual life of the option and the effect of the
expected early exercise of the option).(iv)
    
    The expected dividend yield is based on the historical dividend yield over the last eight years.
 The fair value of the options granted during the year is estimated as below:
 Date of grant
    
    February 5, 2010Fair value per share option
    
    HK$1.94
 The Group recognizes the fair value of share options as an expense in the
income statement over the vesting period, or as an asset, if the cost qualifies
for recognition as an asset. The fair value of the share options is measured
at the date of grant.The Black-Scholes Model applied for the determination of the estimated value of
the options granted under 2002 Share Option Scheme require input of highly
subjective assumptions, including the expected stock volatility. As the
Companys share options have characteristics significantly different from those
of traded options, changes in subjective inputs may materially affect the
estimated fair value of the options granted.
 F-33




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##### Table of Contents



11
    
    Goodwill
 HK$000Cost and carrying amount:At August 31, 2010/2009
    
    
    1,066
 Impairment tests for cash-generating units containing goodwillGoodwill is allocated to the Groups cash-generating units (CGU) identified according to
country of operation and business segment as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Fixed telecommunications network service segment
    
    
    1,066
    
    
    
    1,066
 The recoverable amount of the CGU is determined based on value-in-use calculations. These
calculations use cash flow projections based on financial budgets approved by management covering
a five-year period. Cash flows for the five-year period are estimated based on average growth
rates of 15% and a pre-tax discount rate of 16%. Cash flows beyond the five year period are
assumed to remain constant. The estimated growth rates used are comparable to the growth rate for
the industry.The key assumption used in the value-in-use calculation is the annual growth of the turnover of
the fixed telecommunications network services, which is determined based on the past performance
and managements expectation for market development. The discount rate used is pre-tax and
reflects specific risks relating to the fixed telecommunications services segment.Any adverse change in the key assumption could reduce the recoverable amount below carrying amount.
 F-34




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##### Table of Contents



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



12
    
    Fixed assets (continued)
 (a)
    
    The Groups total future aggregate lease income receivable under non-cancellable operating lease are as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Leases in respect of investment property which are receivable:- Within 1 year
    
    
    108
    
    
    
    258- After 1 year but within 5 years
    
    
    
    
    
    
    108
    
    
    
    258Leases in respect of telecommunications facilities and computer equipment which are receivable:- Within 1 year
    
    
    2,335
    
    
    
    1,566- After 1 year but within 5 years
    
    
    607
    
    
    
    1,0712,942
    
    
    
    2,6373,050
    
    
    
    2,895
 (b)
    
    At August 31, 2010, the fair value of the investment property is
HK$5,300,000. Management estimated the fair value of the investment
property based on its open market value.(c)
    
    The net book value of interests in leasehold land and buildings and
investment property situated in Hong Kong are analyzed as follows:
 2010
    
    
    2009HK$000
    
    

HK$000Leases of between 10 to 50 years
    
    
    79,411
    
    
    
    81,333Representing:Leasehold land and building carried at cost
    
    
    76,627
    
    
    
    78,445Investment property carried at cost less impairment loss
    
    
    2,784
    
    
    
    2,88879,411
    
    
    
    81,333
 (d)
    
    In addition to the leasehold land and buildings classified as
being held under a finance lease, the Group leases
telecommunications, computer and office equipment under finance
leases expiring from one to five years. At the end of the lease
term the Group has the option to purchase the equipment at a
price deemed to be a bargain purchase option. None of the leases
included contingent rental.At August 31, 2010, the net book value of telecommunications,
computer and office equipment under finance lease held by the
Group amounted to HK$674,000 (2009: HK$1,289,000).
 F-36




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##### Table of Contents



13
    
    Principal subsidiariesThe following is a list of the principal subsidiaries which principally affected the results, assets or liabilities
of the Group at August 31, 2010:
 Principalactivities
    
    ParticularsPlace of
    
    and place of
    
    of issued
    
    Percentage ofName
    
    incorporation
    
    operations
    
    share capital
    
    interest heldAttitude Holdings Limited
    
    British Virgin
Islands
    
    Inactive
    
    Ordinary
US$1
    
    
    100Automedia Holdings Limited
    
    British Virgin
Islands
    
    Investment holding in Hong Kong
    
    Ordinary
US$1
    
    
    * 100City Telecom (B.C.) Inc.#
    
    Canada
    
    Provision of international
telecommunications and dial-up
internet access services in
Canada
    
    Common
Canadian
dollar
(CAD)
501,000
    
    
    100City Telecom (Canada) Inc.#
    
    Canada
    
    Leasing and maintenance of
switching equipment and
provision of operational
services in Canada
    
    Common
CAD100
    
    
    100City Telecom Inc.#
    
    Canada
    
    Provision of international
telecommunications and dial-up
internet access services in
Canada
    
    Common
CAD1,000
    
    
    100City Telecom International Limited
    
    British Virgin
Islands
    
    Investment holding in Hong Kong
    
    Ordinary
US$5,294
    
    
    * 100Credibility Holdings Limited
    
    British Virgin
Islands
    
    Investment holding in Hong Kong
    
    Ordinary
US$1
    
    
    * 100
 F-37




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##### Table of Contents



13
    
    Principal subsidiaries (continued)The following is a list of the principal subsidiaries which principally affected the results, assets or
liabilities of the Group at August 31, 2010: (continued)
 Principalactivities
    
    ParticularsPlace of
    
    and place of
    
    of issued
    
    Percentage ofName
    
    incorporation
    
    operations
    
    share capital
    
    interest heldCTI Guangzhou
Customer Services Co.
Ltd. (translated from the
registered name in
Chinese)#
    
    PRC
    
    Provision of
administrative
support services in
the PRC
    
    Paid in capital of

HK$8,000,000
    
    
    * 100CTI Marketing 
Company Limited
    
    Hong Kong
    
    Inactive
    
    Ordinary
HK$10,000
    
    
    100Golden Trinity 
Holdings Limited
    
    British Virgin
Islands
    
    Investment holding in
Hong Kong
    
    Ordinary
US$1
    
    
    * 100Hong Kong 
Broadband 
Network Limited
    
    Hong Kong
    
    Provision of
international
telecommunications
and fixed
telecommunications
network services in
Hong Kong
    
    Ordinary
HK$383,049
    
    
    100IDD1600 Company 
Limited
    
    Hong Kong
    
    Provision of
international
telecommunications
services in Hong
Kong
    
    Ordinary
HK$2
    
    
    100SGBN Singapore Broadband
Network Pte. Limited
    
    Singapore
    
    Inactive
    
    Ordinary 

Singapore 

dollar (SG$) 1
    
    
    * 100
 
 *
    
    Shares held directly by the Company.#
    
    Subsidiaries not audited by KPMG 14 Deferred expenditure
 2010
    
    
    2009HK$000
    
    
    HK$000Balance as at the beginning of the year
    
    
    49,460
    
    
    
    56,095Additions during the year
    
    
    34,773
    
    
    
    46,525Less: amortization charge for the year (note 4(a))
    
    
    (48,621
    )
    
    
    (53,160
    )35,612
    
    
    
    49,460Current portion
    
    
    (28,986
    )
    
    
    (36,674
    )Balance as at the end of the year
    
    
    6,626
    
    
    
    12,786
 Deferred expenditure represents costs incurred to acquire
subscribers of the services offered by the Group, which is treated
as customer acquisition costs and are amortized over the period of
the underlying service subscription agreements.
 F-38




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##### Table of Contents



15 Accounts receivable, other receivables, deposits and prepayments
 2010
    
    
    2009HK$000
    
    
    HK$000Accounts receivable
    
    
    105,552
    
    
    
    123,352Less: Allowance for doubtful debts
    
    
    (5,823
    )
    
    
    (3,160
    )99,729
    
    
    
    120,192Other receivables, deposits and prepayments
    
    
    89,490
    
    
    
    69,765189,219
    
    
    
    189,957
 (a)
    
    Aging analysisThe aging analysis of accounts receivable is as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Current  30 days
    
    
    41,244
    
    
    
    32,42731  60 days
    
    
    9,024
    
    
    
    13,66361  90 days
    
    
    5,245
    
    
    
    3,953Over 90 days
    
    
    50,039
    
    
    
    73,309105,552
    
    
    
    123,352
 The majority of the Groups accounts receivable are due within 30 days from the date of billings. Subscribers with receivable
that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted.(b)
    
    Impairment of accounts receivableImpairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that
recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly (see
note 1(i)(i)).The movement in the allowance for doubtful debts during the year including both specific and collective loss components is as
follows:
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Balance as at the beginning of the year
    
    
    3,160
    
    
    
    11,944
    
    
    
    22,392Impairment loss recognized
    
    
    14,742
    
    
    
    12,103
    
    
    
    14,293Uncollectible amounts written off
    
    
    (12,079
    )
    
    
    (20,887
    )
    
    
    (24,741
    )Balance as at the end of the year
    
    
    5,823
    
    
    
    3,160
    
    
    
    11,944
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##### Table of Contents



15
    
    Accounts receivable, other receivables, deposits and prepayments (continued)(c)
    
    Accounts receivable that are not impairedThe aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Neither past due nor impaired
    
    
    41,244
    
    
    
    32,4270  30 past due
    
    
    9,024
    
    
    
    13,66331  60 past due
    
    
    5,245
    
    
    
    3,953Over 60 past due
    
    
    44,216
    
    
    
    70,14999,729
    
    
    
    120,192
 Receivables that were neither past due nor impaired relate to a
wide range of customers for whom there was no recent history of
default.The amounts over 60 days past due for the Group included
receivable relating to mobile interconnection charges of
HK$39,763,000 as at August 31, 2010 (August 31, 2009:
HK$68,802,000) (see note 2(b)).Other accounts receivable that were past due but not impaired
relate to a number of independent customers that have a good
track record of payment. Based on past experience, management
believes that no impairment allowance is necessary in respect of
these balances as there has not been a significant change in
credit quality and the balances are still considered fully
recoverable. The Group does not hold collateral over these
balances.(d)
    
    Other receivables, deposits and prepaymentsOther receivables, deposits and prepayments consist of deposits
for purchase of fixed assets, rental deposit, interest
receivable, unbilled revenue, prepayment and other receivables.
All of the other receivables, except rental deposits are expected
to be recovered within one year.
 F-40




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##### Table of Contents



16 Cash at bank and in hand
 2010
    
    
    2009HK$000
    
    
    HK$000Time deposits with banks and other financial institutions
    
    
    262,280
    
    
    
    77,500Cash at bank and in hand
    
    
    326,385
    
    
    
    148,916Cash at bank and in hand in the balance sheet
    
    
    588,665
    
    
    
    226,416
 17 Accounts payable, other payables and accrued charges
 2010
    
    
    2009HK$000
    
    
    HK$000Accounts payable
    
    
    35,128
    
    
    
    37,555Other payables and accrued charges
    
    
    195,931
    
    
    
    206,487231,059
    
    
    
    244,042
 (a)
    
    The aging analysis of the accounts payable was as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Current  30 days
    
    
    6,838
    
    
    
    12,62131  60 days
    
    
    1,982
    
    
    
    1,77861  90 days
    
    
    1,647
    
    
    
    189Over 90 days
    
    
    24,661
    
    
    
    22,96735,128
    
    
    
    37,555
 (b)
    
    Other payables and accrued chargesOther payables and accrued charges primarily consist of accrual
for Talents salaries and bonus, carrier fees and charges, payable
for purchase of fixed assets, advertising and promotional
expenses as well as interest payable.
 18
    
    Deferred service revenue
 Deferred service revenue primarily includes service fees received
from customers in advance for the Groups fixed
telecommunications network services. Service fees received in
advance is deferred and recognized as revenue on a straight-line
basis over the related contract period.
 F-41




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##### Table of Contents



19
    
    Capital and reserves
 (a)
    
    Share capital
 2010
    
    
    
    
    
    
    2009No. of
    
    
    Amount
    
    
    No. of
    
    
    AmountShares
    
    
    HK$000
    
    
    shares
    
    
    HK$000Authorized:Ordinary shares of HK$0.10 each
    
    
    2,000,000,000
    
    
    
    200,000
    
    
    
    2,000,000,000
    
    
    
    200,000Issued and fully paid:Ordinary shares of HK$0.10 eachAt the beginning of the year
    
    
    664,179,970
    
    
    
    66,418
    
    
    
    650,621,823
    
    
    
    65,062Shares issued in respect of scrip dividend of the previous
year (note (i))
    
    
    
    
    
    
    
    
    
    
    12,212,142
    
    
    
    1,221Shares issued upon exercise of share options
(note (ii))
    
    
    20,317,374
    
    
    
    2,032
    
    
    
    1,416,005
    
    
    
    142Shares issued upon placement (note (iii))
    
    
    80,500,000
    
    
    
    8,050
    
    
    
    
    
    
    
    Repurchase and cancellation of ordinary shares
    
    
    
    
    
    
    
    
    
    
    (70,000
    )
    
    
    (7
    )At the end of the year
    
    
    764,997,344
    
    
    
    76,500
    
    
    
    664,179,970
    
    
    
    66,418
  Notes:
 (i)
    
    On February 25, 2009, the Company issued and allotted
12,212,142 ordinary shares to shareholders who elected to
receive the 2008 final dividend in shares pursuant to the
scrip dividend scheme announced by the Company on January
9, 2009. These shares rank pari passu with the existing
shares of the Company in all respects.(ii)
    
    During the year ended August 31, 2010, 20,317,374
ordinary shares (2009: 1,416,005 ordinary shares) were
issued at a weighted average exercise price of HK$0.82
per ordinary share (2009: HK$0.99 per ordinary share) to
share option holders who had exercised their options.
These shares so issued rank pari passu with the then
existing ordinary shares in issue.(iii)
    
    On April 28, 2010, the Company completed its public
offering of 4,025,000 American Depositary Shares (ADSs).
An aggregate of 80,500,000 ordinary shares (4,025,000
ADSs) were issued at a price of HK$5.0455 per ordinary
share (US$13.00 per ADS) to independent professional,
institutional and private investors. The Company raised
net proceeds of approximately HK$379,612,000 from the ADS
offering.
 F-42




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##### Table of Contents



19
    
    Capital and reserves (continued)
 (a) Share capital (continued)
  (iv)
    
    The movement of outstanding share options during the year was as follows:
 Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number ofshare options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    share optionsExercise
    
    
    outstanding at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    outstandingprice
    
    
    September 1,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    at August 31,Date of grant
    
    per share
    
    
    2009
    
    
    Granted
    
    
    Exercised
    
    
    Lapsed
    
    
    2010October 21, 2004
    
    HK$1.5224
    
    
    
    6,909,527
    
    
    
    
    
    
    
    2,750,847
    
    
    
    
    
    
    
    4,158,680January 5, 2005
    
    HK$1.5224
    
    
    
    16,183,208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,183,208May 22, 2006
    
    HK$0.6523
    
    
    
    21,592,899
    
    
    
    
    
    
    
    16,409,456
    
    
    
    
    
    
    
    5,183,443August 3, 2006
    
    HK$0.7018
    
    
    
    40,540
    
    
    
    
    
    
    
    40,540
    
    
    
    
    
    
    
    November 22, 2006
    
    HK$0.7216
    
    
    
    136,545
    
    
    
    
    
    
    
    136,545
    
    
    
    
    
    
    
    February 6, 2008
    
    HK$1.7568
    
    
    
    6,044,791
    
    
    
    
    
    
    
    502,000
    
    
    
    
    
    
    
    5,542,791February 11, 2008
    
    HK$1.8660
    
    
    
    6,044,791
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,044,791February 15, 2008
    
    HK$1.7568
    
    
    
    1,007,465
    
    
    
    
    
    
    
    402,986
    
    
    
    
    
    
    
    604,479May 2, 2008
    
    HK$1.7866
    
    
    
    1,007,465
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    932,465February 5, 2010
    
    HK$4.2400
    
    
    
    
    
    
    
    6,000,000
    
    
    
    
    
    
    
    
    
    
    
    6,000,00058,967,231
    
    
    
    6,000,000
    
    
    
    20,317,374
    
    
    
    
    
    
    
    44,649,857
 During the year ended August 31, 2010, options were granted under the 2002 Share Option Scheme to eligible participant for
the subscription of 6,000,000 shares of the Company at an exercise price of HK$4.24 each.Each option entitles the holder to subscribe for one share of HK$0.10 each in the Company at a predetermined exercise price.
 (b)
    
    Nature and purpose of reserves(i)
    
    Share premiumThe application of the share premium account is governed by Sections 48B of the Hong Kong Companies Ordinance.(ii)
    
    Capital reserveThe capital reserve comprises the fair value of the actual or estimated number of unexercised share options
granted to Talents of the Group that was recognized in accordance with the accounting policy adopted for
share based payment in note 1(o).(iii)
    
    PRC statutory reserveIn accordance with Accounting Regulations for Business Enterprises, foreign investment enterprises in the PRC
are required to transfer at least 10% of their profit after taxation, as determined under accounting
principles generally accepted in the PRC (PRC GAAP) to the general reserve until the balance of the general
reserve is equal to 50% of their registered capital.For the year ended August 31, 2010, CTI Guangzhou Customer Services Co Ltd (CTIGZ), a wholly-owned
subsidiary of the Group, made appropriation to the statutory reserve of RMB597,000 (2009: RMB510,000). The
accumulated balance of the statutory reserve maintained at the CTIGZ as at August 31, 2010 was RMB2,012,000
(2009: RMB1,415,000). The statutory reserve can be used to reduce previous years losses and to increase the
capital of the subsidiary.(iv)
    
    Exchange reserveThe exchange reserve comprises all foreign exchange differences arising from the translation of the financial
statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set
out in note 1(d)(ii).
 F-43




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##### Table of Contents



19
    
    Capital and reserves (continued)(c)
    
    Capital managementThe Groups primary objectives when managing capital are to maintain a reasonable capital structure, safeguard the Groups ability
to continue as a going concern, and to provide returns for shareholders.The Group manages the amount of capital in proportion to risk, and makes adjustments to its capital structure through the amount of
dividend payment to shareholders, issuance of scrip and new shares, and managing its debt portfolio in conjunction with cash flow
requirements, taking into account its future financial obligations and commitments.The Group monitors its capital structure by reviewing its net debt to net asset gearing ratio. For this purpose, the Group defines
net debt as total loans less cash at bank and in hand and long-term bank deposits.The net debt to net asset gearing ratio as at August 31, 2010 and 2009 are as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Unsecured- 10-year senior notes
    
    
    
    
    
    
    162,586- Long-term bank loan
    
    
    123,567
    
    
    
    - Obligations under finance leases
    
    
    605
    
    
    
    732Total loans
    
    
    124,172
    
    
    
    163,318Less: Cash at bank and in hand
    
    
    (588,665
    )
    
    
    (226,416
    )Add: Bank overdrafts  unsecured
    
    
    10,490
    
    
    
    5,364Net cash
    
    
    (454,003
    )
    
    
    (57,734
    )Net asset
    
    
    1,688,539
    
    
    
    1,228,527Net debt to net asset gearing ratio
    
    
    
    
    
    
    
 Neither the Company nor any of its subsidiaries are currently subject to externally imposed capital requirements.
 20
    
    Deferred taxation
 The movements of net deferred tax (liabilities)/assets recognized in the balance sheet are as follows:
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Balance as at the beginning of the year
    
    
    (15,709
    )
    
    
    21,398
    
    
    
    (291
    )Exchange differences
    
    
    
    
    
    
    1
    
    
    
    (1
    )Deferred taxation (charged)/credited to income statement- relating to the origination and reversal of temporary differences
    
    
    (40,134
    )
    
    
    (37,108
    )
    
    
    (4,645
    )- relating to the recognition of unrecognized tax losses in prior years
    
    
    
    
    
    
    
    
    
    
    26,335Balance as at the end of the year
    
    
    (55,843
    )
    
    
    (15,709
    )
    
    
    21,398
 F-44




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##### Table of Contents



20
    
    Deferred taxation (continued)As at August 31, 2010, the Group has not recognized
deferred tax assets in respect of unused tax losses of
HK$8,242,000 (2009: HK$8,154,000) because it is not
probable that future taxable profits can be generated to
utilize the tax losses.
 2010
    
    
    2009HK$000
    
    
    HK$000After 5 years
    
    
    2,553
    
    
    
    2,455No expiry date
    
    
    5,689
    
    
    
    5,6998,242
    
    
    
    8,154
 According to the Corporate Income Tax (CIT) law and its relevant regulations, PRC-resident enterprises are levied withholding tax at 10% on dividends to their non-PRC-resident
corporate investors for earnings accumulated beginning on January 1, 2008, and undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. In addition,
under the Arrangement between the Mainland of China and Hong Kong Special Administration Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasionand its related
regulations, a qualified Hong Kong Company will be liable for withholding tax at the rate of 5% for the dividend income derived from the PRC, if the Hong Kong company is the beneficial
owner and holds 25% of equity interest or more of the PRC company directly. At August 31, 2010, the Group has not recognized deferred tax liabilities in respect of temporary differences
relating to the undistributed earnings of its PRC subsidiary approximately amounting HK$12,283,000 (2009: HK$5,393,000) as the Group controls the dividend policy of the subsidiary and it does
not consider that it is probable that profits will not be distributed in the foreseeable future.The components in deferred tax assets and liabilities recognized in the balance sheet and the related movements during the year are as follows:
 Accelerated depreciation allowance2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Deferred tax liabilitiesAt the beginning of the year
    
    
    (131,766
    )
    
    
    (126,447
    )
    
    
    (134,910
    )Charged to consolidated income statement
    
    
    (15,027
    )
    
    
    (5,326
    )
    
    
    8,463Exchange differences
    
    
    (6
    )
    
    
    7
    
    
    
    At the end of the year
    
    
    (146,799
    )
    
    
    (131,766
    )
    
    
    (126,447
    )
 Tax losses2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Deferred tax assetsAt the beginning of the year
    
    
    116,057
    
    
    
    147,845
    
    
    
    134,619Charged to consolidated income statement
    
    
    (25,107
    )
    
    
    (31,782
    )
    
    
    13,227Exchange differences
    
    
    6
    
    
    
    (6
    )
    
    
    (1
    )At the end of the year
    
    
    90,956
    
    
    
    116,057
    
    
    
    147,845
 The following amounts, determined after appropriate offsetting, are shown in the balance sheet:
 2010
    
    
    2009HK$000
    
    
    HK$000Deferred tax assets
    
    
    
    
    
    
    Deferred tax liabilities
    
    
    (55,843
    )
    
    
    (15,709
    )(55,843
    )
    
    
    (15,709
    )
 F-45




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##### Table of Contents



21
    
    Derivative financial instrument
 2010
    
    
    2009HK$000
    
    
    HK$000Non-current liabilityInterest rate swap, at fair value through profit or loss
    
    
    11,293
    
    
    
    
 During the year ended August 31, 2010, the Group entered into a 5-year
interest rate swap contract with a HK$175,000,000 notional amount to hedge
against interest rate risk. Under this arrangement, the Group will pay a fixed
rate interest on the notional amount on a quarterly basis, and receive a
floating interest rate at HIBOR rate. The contract is recognized initially at
fair value and is remeasured at each balance sheet date.The Interest rate swap does not quality for hedge accounting under IAS/HKAS 39,
Financial instruments: Recognition and measurement, and therefore changes in
its fair value is recognized immediately in profit or loss.22
    
    Long-term debt and other liabilities
 2010
    
    
    2009HK$000
    
    
    HK$00010-year senior notes (note (a))
    
    
    
    
    
    
    162,586Long-term bank loan  unsecured (note (b))
    
    
    123,567
    
    
    
    Obligations under finance leases (note (c))
    
    
    605
    
    
    
    732124,172
    
    
    
    163,318Current portion of  obligations under finance leases
    
    
    (212
    )
    
    
    (202
    )123,960
    
    
    
    163,116
 At August 31, 2010, the Groups long-term debt and other liabilities were repayable as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Long-term debt- after 2 years but within 5 years
    
    
    123,567
    
    
    
    - after 5 years
    
    
    
    
    
    
    162,586Obligations under finance leases- Within 1 year
    
    
    212
    
    
    
    202- After 1 year but within 2 years
    
    
    105
    
    
    
    197- After 2 years but within 5 years
    
    
    288
    
    
    
    263- After 5 years
    
    
    
    
    
    
    70605
    
    
    
    732Less: Current portion of obligations under finance leases
    
    
    (212
    )
    
    
    (202
    )393
    
    
    
    530123,960
    
    
    
    163,116
 F-46




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##### Table of Contents



22
    
    Long-term debt and other liabilities (continued)
  (a)
    
    On January 20, 2005, the Company issued unsecured 10-year senior fixed rates notes (the 10-year senior notes) with a principle amount of US$125 million at an issue price
equal to 100 per cent of the principal amount. The 10-year senior notes have a maturity date on February 1, 2015 and bear interest at the fixed rate of 8.75% per annum
payable semi-annually on February 1 and August 1 of each year, commencing August 1, 2005.The 10-year senior notes are unconditionally and irrevocably guaranteed on a joint and several basis by the Companys subsidiaries (other than CTI Guangzhou Customer
Services Co. Ltd.) as subsidiary guarantors.On December 4, 2009, the Group repurchased a portion of the 10-year senior notes with a cumulative principal value of US$1,500,000 (equivalent to HK$11,625,000) in the
open market. The total consideration paid including accrued interest was approximately US$1,562,000 (equivalent to HK$12,103,000). The loss on extinguishment of the senior
notes was US$41,000 (equivalent to HK$318,000) which has been recorded in other income, net.On February 1, 2010, the Company redeemed the then outstanding 10-year senior notes with principal value of US$19,863,000 (equivalent to HK$153,948,000) with the
redemption price equal to 104.375% of the principal amount. The total consideration paid including accrued interest was approximately US$21,601,000 (equivalent to
HK$167,624,000). The loss on extinguishment of the 10-year senior notes was US$1,203,000 (equivalent to HK$9,332,000) which has been recorded in other income, net.(b)
    
    As at August 31, 2010, HK$125,000,000 was drawn which bears floating interest rate and is repayable on December 23, 2014. The borrowing is subject to the fulfillment of
covenants relating to certain of the Groups balance sheet ratios, as are commonly found in lending arrangements with financial institutions. If the Group were to breach
the covenants the drawn down facilities would become payable on demand. The Group regularly monitors its compliance with these covenants. As at August 31, 2010, none of
the covenants relating to drawn down facilities had been breached.(c)
    
    At August 31, 2010, the Group had obligations under finance leases repayable as follows:
 2010
    
    
    2009Present
    
    
    
    
    
    
    
    
    
    
    Presentvalue
    
    
    Interest
    
    
    
    
    
    
    value
    
    
    Interestof the
    
    
    expense
    
    
    Total
    
    
    of the
    
    
    expense
    
    
    Totalminimum
    
    
    relating to
    
    
    minimum
    
    
    minimum
    
    
    relating to
    
    
    minimumlease
    
    
    future
    
    
    lease
    
    
    lease
    
    
    future
    
    
    leasepayments
    
    
    periods
    
    
    payments
    
    
    payments
    
    
    periods
    
    
    paymentsHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Within 1 year
    
    
    212
    
    
    
    30
    
    
    
    242
    
    
    
    202
    
    
    
    35
    
    
    
    237After 1 year but within 2 years
    
    
    105
    
    
    
    20
    
    
    
    125
    
    
    
    197
    
    
    
    22
    
    
    
    219After 2 years but within 5 years
    
    
    288
    
    
    
    22
    
    
    
    310
    
    
    
    263
    
    
    
    30
    
    
    
    293After 5 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    1
    
    
    
    71393
    
    
    
    42
    
    
    
    435
    
    
    
    530
    
    
    
    53
    
    
    
    583605
    
    
    
    72
    
    
    
    677
    
    
    
    732
    
    
    
    88
    
    
    
    820
 F-47




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##### Table of Contents



23
    
    Notes to the consolidated cash flow statement
 (a)
    
    Reconciliation of profit before taxation to net cash inflow from operations
 2010
    
    
    2009
    
    
    2008HK$000
    
    
    HK$000
    
    
    HK$000Profit before taxation
    
    
    259,545
    
    
    
    251,559
    
    
    
    108,372Depreciation of owned fixed assets
    
    
    198,323
    
    
    
    205,624
    
    
    
    209,464Depreciation of fixed assets held under finance lease
    
    
    706
    
    
    
    617
    
    
    
    587Amortization of deferred expenditure
    
    
    48,621
    
    
    
    53,160
    
    
    
    33,777Interest income
    
    
    (11,372
    )
    
    
    (4,869
    )
    
    
    (15,596
    )Interest element of finance lease
    
    
    42
    
    
    
    27
    
    
    
    34(Gain)/loss on disposal of fixed assets
    
    
    (1,375
    )
    
    
    1,016
    
    
    
    1,431Realized and unrealized gain on other financial assets
    
    
    
    
    
    
    (189
    )
    
    
    (3,284
    )Realized gain on long term bank deposit
    
    
    
    
    
    
    
    
    
    
    (1,185
    )Realized loss on derivative financial instrument
    
    
    
    
    
    
    
    
    
    
    1,039Equity settled share-based transactions
    
    
    5,347
    
    
    
    4,768
    
    
    
    4,204Loss/(gain) on extinguishment of 10-year senior notes
    
    
    9,650
    
    
    
    (31,371
    )
    
    
    (2,582
    )Change in fair value of derivative financial instruments
    
    
    11,293
    
    
    
    
    
    
    
    Interest, amortization and exchange difference on 10-year senior notes
    
    
    6,069
    
    
    
    49,214
    
    
    
    72,640Interest on other borrowings
    
    
    3,260
    
    
    
    885
    
    
    
    3,428Amortization of upfront cost on bank loans
    
    
    192
    
    
    
    
    
    
    
    Interest expenses on bank loans
    
    
    1,379
    
    
    
    
    
    
    
    Net cash inflow before working capital changes
    
    
    531,680
    
    
    
    530,441
    
    
    
    412,329Decrease/(increase) in long-term receivable and prepayment
    
    
    917
    
    
    
    (505
    )
    
    
    1,346Decrease in accounts receivable, other receivables, deposits and prepayments
    
    
    738
    
    
    
    33,052
    
    
    
    6,914Decrease in inventories
    
    
    
    
    
    
    
    
    
    
    477Increase in deferred expenditure
    
    
    (34,773
    )
    
    
    (46,525
    )
    
    
    (68,505
    )(Decrease)/increase in accounts payable, other payables, accrued charges
and deposits received
    
    
    (1,937
    )
    
    
    17,419
    
    
    
    (12,567
    )(Decrease)/increase in deferred service revenue
    
    
    (8,272
    )
    
    
    4,621
    
    
    
    46,247Net cash inflow generated from operations
    
    
    488,353
    
    
    
    538,503
    
    
    
    386,241
 F-48




---



##### Table of Contents



23
    
    Notes to the consolidated cash flow statement (continued)
 (b)
    
    Analysis of changes in financing during the year
 Share capital(including share
    
    
    Obligationspremium and
    
    
    under finance
    
    
    10-yearcapital reserve)
    
    
    leases
    
    
    senior notesHK$000
    
    
    HK$000
    
    
    HK$000Balance at September 1, 2007
    
    
    702,192
    
    
    
    1,210
    
    
    
    952,593Share issued upon exercise of share options
    
    
    14,998
    
    
    
    
    
    
    
    Share issued in respect of scrip dividend
    
    
    33,398
    
    
    
    
    
    
    
    Repayment of capital element of finance lease
    
    
    
    
    
    
    (834
    )
    
    
    Repurchase of 10-year senior notes
    
    
    
    
    
    
    
    
    
    
    (269,399
    )Gain on extinguishment of 10-year senior notes
    
    
    
    
    
    
    
    
    
    
    (2,582
    )Amortization of incidental issuance costs
    
    
    
    
    
    
    
    
    
    
    1,665Equity settled share-based transactions
    
    
    4,204
    
    
    
    
    
    
    
    Effect of foreign exchange rate changes
    
    
    
    
    
    
    
    
    
    
    965Balance at August 31, 2008
    
    
    754,792
    
    
    
    376
    
    
    
    683,242Balance at September 1, 2008
    
    
    754,792
    
    
    
    376
    
    
    
    683,242Share issued upon exercise of share options
    
    
    1,399
    
    
    
    
    
    
    
    Repurchase and cancellation of ordinary shares
    
    
    (7
    )
    
    
    
    
    
    
    Share issued in respect of scrip dividend
    
    
    9,906
    
    
    
    
    
    
    
    Purchase of fixed assets under finance lease
    
    
    
    
    
    
    494
    
    
    
    Repayment of capital element of finance lease
    
    
    
    
    
    
    (138
    )
    
    
    Repurchase of 10-year senior notes
    
    
    
    
    
    
    
    
    
    
    (485,829
    )Gain on extinguishment of 10-year senior notes
    
    
    
    
    
    
    
    
    
    
    (31,371
    )Amortization of incidental issuance costs
    
    
    
    
    
    
    
    
    
    
    1,545Equity settled share-based transactions
    
    
    4,768
    
    
    
    
    
    
    
    Effect of foreign exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (5,001
    )Balance at August 31, 2009
    
    
    770,858
    
    
    
    732
    
    
    
    162,586Balance at September 1, 2009
    
    
    770,858
    
    
    
    732
    
    
    
    162,586Share issued upon exercise of share options
    
    
    16,744
    
    
    
    
    
    
    
    Shares issued upon placement
    
    
    379,612
    
    
    
    
    
    
    
    Purchase of fixed assets under finance lease
    
    
    
    
    
    
    90
    
    
    
    Repayment of capital element of finance lease
    
    
    
    
    
    
    (217
    )
    
    
    Repurchase and redemption of 10-year senior notes
    
    
    
    
    
    
    
    
    
    
    (172,423
    )Loss on extinguishment of 10-year senior notes
    
    
    
    
    
    
    
    
    
    
    9,650Amortization of incidental issuance costs
    
    
    
    
    
    
    
    
    
    
    188Equity settled share-based transactions
    
    
    5,347
    
    
    
    
    
    
    
    Effect of foreign exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (1
    )Balance at August 31, 2010
    
    
    1,172,561
    
    
    
    605
    
    
    
    
 F-49




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##### Table of Contents



24
    
    Financial instruments
 Exposure to credit, liquidity, interest rate and currency risks
arises in the normal course of the Groups business. These risks
are limited by the Groups financial management policies and
practices described below.(a)
    
    Credit riskThe Groups credit risk is primarily attributable to accounts
receivable and other receivables. Management has a credit policy
in place and the exposure to the credit risk is monitored on an
ongoing basis.In respect of accounts receivable and other receivables, credit
evaluations are performed on all customers requiring credit over
a certain amount. These evaluations focus on the customers past
history of making payments when due and current ability to pay,
and take into account information specific to the customer as
well as pertaining to the economic environment in which the
customer locates. These receivables are due within 30 days from
the date of billing. Subscribers with receivables that are more
than 3 months overdue are requested to settle all outstanding
balances before any further credit is granted. The Group
generally does not obtain collateral from customers.The Groups exposure to credit risk is influenced mainly by
individual characteristics of each customer. The default risk of
the country in which customer locates also has an influence on
credit risk but to a lesser extent. Concentrations of credit risk
with respect to accounts receivable are limited due to the
Groups customer base being large and unrelated. As such,
management does not expect any significant losses of accounts
receivable that have not been provided for by way of allowances
as disclosed in note 15.The maximum exposure to credit risk is represented by the
carrying amount of each financial asset after deducting any
impairment allowance, in the balance sheet. Except for the
financial guarantee given by the Group as disclosed in note 25,
the Group does not provide any other guarantees which expose the
Group to credit risk. The maximum exposure to credit risk in
respect of these financial guarantees at the balance sheet date
is disclosed in note 25.Further quantitative disclosures in respect of the Groups
exposure to credit risk arising from accounts receivable are set
out in note 15.
 F-50




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##### Table of Contents



24
    
    Financial instruments (continued)
 (b)
    
    Liquidity riskThe Group has a cash management policy, which includes the short
term investment of cash surpluses and the raising of loans and
other borrowings to cover expected cash demands. The Groups
policy is to regularly monitor current and expected liquidity
requirements and its compliance with lending covenants, to ensure
that it maintains sufficient cash and readily realizable
marketable securities and adequate amount of committed credit
facilities from major financial institutions to meet its
liquidity requirements in the short and long term. Due to the
dynamic nature of the underlying business, the Group aims to
maintain flexibility in funding by maintaining committed credit
lines available.The following table details the remaining contractual maturities
at the balance sheet date of the Groups financial liabilities,
which are based on undiscounted cash flows (including interest)
and the earliest date the Group are required to pay.
 2010
    
    
    2009Total
    
    
    
    
    
    
    More than
    
    
    More than
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    More than
    
    
    More thancontractual
    
    
    Within
    
    
    1 year but
    
    
    2 years but
    
    
    
    
    
    
    
    
    
    
    contractual
    
    
    Within
    
    
    1 year but
    
    
    2 years butCarrying
    
    
    undiscounted
    
    
    1 year or
    
    
    less than
    
    
    less than
    
    
    More than
    
    
    Carrying
    
    
    undiscounted
    
    
    1 year or
    
    
    less than
    
    
    Less than
    
    
    More thanamount
    
    
    cash flow
    
    
    on demand
    
    
    2 years
    
    
    5 years
    
    
    5 years
    
    
    amount
    
    
    cash flow
    
    
    on demand
    
    
    2 years
    
    
    5 years
    
    
    5 yearsHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Current liabilitiesBank overdrafts -
unsecured
    
    
    10,490
    
    
    
    10,490
    
    
    
    10,490
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,364
    
    
    
    5,364
    
    
    
    5,364
    
    
    
    
    
    
    
    
    
    
    
    Accounts payable
    
    
    35,128
    
    
    
    35,128
    
    
    
    35,128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,555
    
    
    
    37,555
    
    
    
    37,555
    
    
    
    
    
    
    
    
    
    
    
    Other payables and
accrued charges
    
    
    195,931
    
    
    
    195,931
    
    
    
    195,931
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206,487
    
    
    
    206,487
    
    
    
    206,487
    
    
    
    
    
    
    
    
    
    
    
    Deposits received
    
    
    21,822
    
    
    
    21,822
    
    
    
    21,822
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,385
    
    
    
    16,385
    
    
    
    16,385
    
    
    
    
    
    
    
    
    
    
    
    Obligations under
finance leases
    
    
    212
    
    
    
    242
    
    
    
    242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    237
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    Tax payable
    
    
    1,533
    
    
    
    1,533
    
    
    
    1,533
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,993
    
    
    
    1,993
    
    
    
    1,993
    
    
    
    
    
    
    
    
    
    
    
    Non-current
liabilitiesLong-term bank loan
    
    
    123,567
    
    
    
    133,996
    
    
    
    1,829
    
    
    
    2,166
    
    
    
    130,001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Derivative
financial
instrument
    
    
    11,293
    
    
    
    11,435
    
    
    
    4,580
    
    
    
    3,441
    
    
    
    3,414
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10-year senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,586
    
    
    
    244,117
    
    
    
    14,489
    
    
    
    14,489
    
    
    
    43,467
    
    
    
    171,672Obligations under
finance leases
    
    
    393
    
    
    
    435
    
    
    
    
    
    
    
    125
    
    
    
    310
    
    
    
    
    
    
    
    530
    
    
    
    583
    
    
    
    
    
    
    
    219
    
    
    
    293
    
    
    
    71400,369
    
    
    
    411,012
    
    
    
    271,555
    
    
    
    5,732
    
    
    
    133,725
    
    
    
    
    
    
    
    431,102
    
    
    
    512,721
    
    
    
    282,510
    
    
    
    14,708
    
    
    
    43,760
    
    
    
    171,743
 F-51




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##### Table of Contents



24
    
    Financial instruments (continued)(c)
    
    Interest rate riskThe Groups interest-rate risk arises mainly from the HK$125,000,000 bank loan which bears floating interest rate. Bank loans at variable rates
expose the Group to cash flow interest rate risk.(i)
    
    Interest rate profileThe following table details the interest rate profile of the Groups borrowings at the balance sheet date.
 2010
    
    
    2009Effective
    
    
    
    
    
    
    Effectiveinterest
    
    
    
    
    
    
    interestrate
    
    
    
    
    
    
    rate%
    
    
    HK$000
    
    
    %
    
    
    HK$000Fixed rate borrowings:10-year senior notes
    
    
    
    
    
    
    
    
    
    
    9.2
    
    
    
    162,586Obligations under finance leases
    
    
    5.6
    
    
    
    605
    
    
    
    5.6
    
    
    
    732605
    
    
    
    
    
    
    
    163,318Floating rate borrowings:Bank overdrafts  unsecured
    
    
    5.3
    
    
    
    10,490
    
    
    
    5.3
    
    
    
    5,364Long-term bank loan
    
    
    1.7
    
    
    
    123,567
    
    
    
    
    
    
    
    
 (ii)
    
    Sensitivity analysisThe Groups profit attributable to shareholders would decrease by
approximately HK$1,250,000 in response to a 100 basis-points
increase in market interest rates applicable as at August 31, 2010,
with all other variables held constant.
 F-52




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##### Table of Contents



24
    
    Financial instruments (continued)(d)
    
    Foreign currency riskAll the Groups monetary assets and liabilities are primarily denominated in either Hong Kong dollars or United States dollars. Given the exchange rate of
the Hong Kong dollar to the U.S. dollar has remained close to the current pegged rate of HKD7.80 = USD1.00 since 1983, management does not expect
significant foreign exchange gains or losses between the two currencies.The Group is also exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollars and the Renminbi arising from its
operations in the PRC. In order to limit this foreign currency risk exposure, the Group maintained Renminbi cash balance that approximate two to three
months of operating cash flows.(i)
    
    Exposure to currency riskThe following table details the Groups exposure at the balance sheet date to currency risk arising from recognized assets or liabilities denominated in a
currency other than the functional currency of the entity to which they relate.
 2010
    
    
    2009United
    
    
    
    
    
    
    
    
    
    
    UnitedStates
    
    
    Japanese
    
    
    Canadian
    
    
    States
    
    
    Japanese
    
    
    CanadianDollars
    
    
    Yen
    
    
    Dollars
    
    
    Dollars
    
    
    Yen
    
    
    Dollars000
    
    
    000
    
    
    000
    
    
    000
    
    
    000
    
    
    000Cash at bank and in hand and
pledged bank deposits
    
    
    30,443
    
    
    
    591
    
    
    
    435
    
    
    
    11,599
    
    
    
    696
    
    
    
    282Bank overdrafts  unsecured
    
    
    (294
    )
    
    
    
    
    
    
    
    
    
    
    (161
    )
    
    
    
    
    
    
    Accounts payable
    
    
    (1,350
    )
    
    
    
    
    
    
    
    
    
    
    (3,183
    )
    
    
    
    
    
    
    Other payables and accrued charges
    
    
    (1,075
    )
    
    
    
    
    
    
    
    
    
    
    (390
    )
    
    
    
    
    
    
    10-year senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,979
    )
    
    
    
    
    
    
    Overall net exposure
    
    
    27,724
    
    
    
    591
    
    
    
    435
    
    
    
    (13,114
    )
    
    
    696
    
    
    
    282
 (ii)
    
    Sensitivity analysisManagement determines that the Groups exposure of foreign
currency risk was not significant and hence no sensitivity
analysis is prepared.
 F-53




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##### Table of Contents



24
    
    Financial instruments (continued)
 (e)
    
    Fair values(i)
    
    Financial instrument carried at fair valueThe following table presents the carrying
value of financial instrument measured at
fair value at the balance sheet date
across the three levels of the fair value
hierarchy defined in IFRS/HKFRS 7,
Financial Instruments: Disclosures, with
the fair value of each financial
instrument categorized in its entirety
based on the lowest level of input that is
significant to that fair value
measurement. The levels are defined as
follows:
 
    
    Level 1 (highest level): fair values
measured using quoted prices (unadjusted)
in active markets for identical financial
instruments
    
    Level 2: fair values measured using
quoted prices in active markets for
similar financial instruments, or using
valuation techniques in which all
significant inputs are directly or
indirectly based on observable market data
    
    Level 3 (lowest level): fair values
measured using valuation techniques in
which any significant input is not based
on observable market data
 2010
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000LiabilityDerivative financial instrument:- Interest rate swap
    
    
    
    
    
    
    11,293
    
    
    
    
    
    
    
    11,293
 The carrying amounts of the Groups financial instruments carried at cost or amortized cost are
not materially different from their fair values as at August 31, 2010 and 2009 except as follows:
 2010
    
    
    2009Carrying
    
    
    
    
    
    
    Carryingamount
    
    
    Fair value
    
    
    amount
    
    
    Fair valueHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000The Group10-year senior notes
    
    
    
    
    
    
    
    
    
    
    162,586
    
    
    
    157,285
 (f)
    
    Estimation of fair valuesFair value of financial instruments is estimated as follows:
 (i)
    
    The fair value of the 10-year senior notes was determined based on quoted market price.(ii)
    
    Trade receivables less impairment provision and account payables are assumed to approximate their fair values.(iii)
    
    The fair value of the long-term bank loan is estimated as the present value of future cash flows, discounted
at current market interest rate for similar financial instruments.(iv)
    
    The fair value of the interest rate swap is determined based on the discounted cash flow technique which
takes into account estimated amount that the Group would receive or pay to terminate the swap at the balance
sheet date, taking into account current interest rates and the current creditworthiness of the swap
counterparties. Where discounted cash flow techniques are used, estimated future cash flows are based on
managements best estimates and the discount rate is a market related rate for a similar instrument at the
balance sheet date.
 F-54




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##### Table of Contents



25
    
    Contingent liabilities
 2010
    
    
    2009HK$000
    
    
    HK$000Bank guarantees provided to suppliers (notes 27(i) and (ii))
    
    
    2,770
    
    
    
    2,490Bank guarantee in lieu of payment of utility deposits (note 27(iii))
    
    
    5,572
    
    
    
    5,2728,342
    
    
    
    7,762
 At August 31, 2010, HK$133,342,000 (2009: HK$7,762,000) of the HK$353,840,000
(2009: HK$205,038,000) total banking facility and revolving loan facility was
utilized by the Company and its subsidiary.
 26
    
    Commitments
 (a)
    
    Capital commitments
 2010
    
    
    2009HK$000
    
    
    HK$000Purchase of telecommunications, computer and office equipment
- contracted but not provided for
    
    
    132,340
    
    
    
    150,099
 (b)
    
    Commitments under operating leasesAt August 31, 2010 and 2009, the Group has future aggregate minimum lease payments under
non-cancellable operating leases as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Leases in respect of land and buildings which are payable:- Within 1 year
    
    
    24,873
    
    
    
    21,387- After 1 year but within 5 years
    
    
    16,417
    
    
    
    13,80241,290
    
    
    
    35,189Leases in respect of telecommunications facilities and computer equipment which are payable- Within 1 year
    
    
    63,948
    
    
    
    45,321- After 1 year but within 5 years
    
    
    14,200
    
    
    
    9,600- After 5 years
    
    
    4,849
    
    
    
    6,27182,997
    
    
    
    61,192124,287
    
    
    
    96,381
 (c)
    
    Program fee commitmentsThe Group entered into several long-term agreements with program content
providers for the rights to use certain program contents in the Groups IP-TV
services. Minimum amounts of program fees to be paid by the Group are as
follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Program fee in respect of program rights which are payable:- Within 1 year
    
    
    25,539
    
    
    
    9,094- After 1 year but within 5 years
    
    
    48,087
    
    
    
    6,23873,626
    
    
    
    15,332
 F-55




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##### Table of Contents



27
    
    Pledge of assets
 As at August 31, 2010, the Group has no pledged bank deposits.As at August 31, 2009, the Group has pledged bank deposits of
US$650,000 (equivalent to HK$5,038,000) and HK$10,000,000 as
security for the following significant banking facilities:
 (i)
    
    bank facility of US$650,000 (equivalent to HK$5,038,000)
granted by a bank for issuance of bank guarantees to
third party suppliers, letters of credit, short-term
loan, overdraft, foreign exchange and interest rate
hedging arrangements. As of August 31, 2009, bank
guarantees of HK$500,000 were issued against this bank
facility;(ii)
    
    bank guarantees of HK$1,990,000 issued by the bank to
third party suppliers of the Company and one of its
subsidiaries for payment of certain products and services
procured by the Group from these third party suppliers;
and(iii)
    
    bank guarantees of HK$5,272,000 issued by the bank to
certain utility vendors of the Group in lieu of payment
of utility deposits.
 28
    
    Barter transaction
 During the year ended August 31, 2010, HKBN entered into an agreement
with a third party (the Contract Party). Pursuant to the agreement,
HKBN would provide network capacity to the Contract Party for a service
term of 10 years commencing on May 1, 2010 or after the respective
activation of the relevant network capacity, and in exchange, the
Contract Party would provide HKBN the right to use telecommunications
facilities for a term of 10 years commencing on May 1, 2010 or after
the respective activation of the relevant network capacity. The
transaction has been entered into on a barter basis at no consideration
being exchange. The agreement expires on April 30, 2020.The Directors of the Company made an assessment and determined that
since the arrangement above involves exchange of services of a similar
nature and value, the exchange is not regarded as a transaction which
generates revenue. Accordingly, the network capacity of the Contract
Party under the arrangement have not been recognized as an asset and no
revenue or deferred revenue have been recognized in the financial
statements of the Group since inception of the arrangement.
 29
    
    Material related party transactions
 In addition to the transactions and balances disclosed elsewhere in
these financial statements, the Group entered into the following
material related party transactions.Key management personnel remunerationRemuneration for key management personnel, including amounts paid to
the Companys directors as disclosed in note 9(a) and certain of the
highest paid Talents as disclosed in note 9(b), is as follows:
 2010
    
    
    2009HK$000
    
    
    HK$000Short-term Talent benefits
    
    
    40,716
    
    
    
    34,687Post-employment benefits
    
    
    2,725
    
    
    
    2,614Equity compensation benefits
    
    
    5,347
    
    
    
    4,07148,788
    
    
    
    41,372
 30
    
    Comparative figure
 During the year, management performed a review of the presentation
of the Groups cash at bank and in hand balance. As a result of
the review, the Groups bank overdrafts  unsecured balances
amounted to HK$5,364,000 and HK$12,994,000 which previously
included in the cash at bank and in hand balance at August 31,
2009 and August 31, 2008 respectively have been reclassified as a
current liability to conform to the current years presentation.
This change in presentation had no effect on the reported results
of the prior year.
 F-56




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##### Table of Contents



31
    
    Accounting estimates and judgments
 (a)
    
    Key sources of estimation uncertaintyNotes 10 and 24 contain information about the assumptions and
risk factors relating to fair value of share options and
financial instruments. Other key sources of estimation
uncertainty are as follows:(b)
    
    Impairment loss for doubtful accountsThe Group maintains impairment loss for doubtful accounts based
upon evaluation of the recoverability of the accounts receivable
and other receivables which takes into account the historical
write-off experience and recovery rates. If the financial
condition of the customers were to deteriorate, additional
impairment may be required.(c)
    
    DepreciationDepreciation is calculated to write off the cost of items of
property, plant and equipment, less their estimated residual
value, if any, using the straight-line method over their
estimated useful lives. The Group reviews the estimated useful
lives of the assets annually in order to determine the amount of
depreciation expense to be recorded during any reporting period.
The useful lives are based on the Groups historical experience
with similar assets and takes into account anticipated
technological changes. The depreciation expense for future
periods is adjusted if there are significant changes from
previous estimates.(d)
    
    Income taxesDetermining income tax provisions involves judgment on the
future tax treatment of certain transactions and interpretation
of tax rules. The Group carefully evaluates tax implications of
transactions and tax provisions are set up accordingly. The tax
treatment of such transactions is reconsidered periodically to
take into account all changes in tax legislation and practices.Deferred tax assets are recognized for certain unused tax losses
as set out in note 20. In assessing the recognition of deferred
tax assets, management considers all available evidence,
including available taxable temporary differences, projected
future taxable income, tax planning strategies, historical
taxable income, and the expiration periods of the tax losses.
For certain subsidiaries, deferred tax assets can only be
recognized to the extent that it is probable that future taxable
profits will be available against which they can be utilized.
Managements judgment is thus required to assess the
probability of future taxable profits and this assessment is
constantly reviewed and additional deferred tax assets are
recognized if it becomes probable that future taxable profits
will allow the deferred tax assets to be recovered.
 F-57




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##### Table of Contents



32
    
    Possible impact of amendments, new standards and interpretations
issued but not yet effective for the year ended August 31, 2010
 Up to the date of issue of these financial statements, the IASB/HKICPA has issued a number of
amendments, new standards and interpretations which are not yet effective for the year ended
August 31, 2010 and which have not been adopted in these financial statements.
 Effective foraccounting periodsbeginning on or afterAmendment to IFRS/HKFRS 2
    
    Share-based payment  Group cash-settled
    
    January 1, 2010share-based payment transactionsIFRSs/HKFRSs (Amendments)
    
    Improvements to IFRSs (2009)
    
    January 1, 2010Amendment to IAS/HKAS 32
    
    Financial instruments: Presentation 
    
    February 1, 2010Classification of rights issuesIFRIC/HK (IFRIC)  Int 19
    
    Extinguishing financial liabilities with equity
    
    July 1, 2010instrumentsIFRSs/HKFRSs (Amendments)
    
    Improvement to IFRSs/HKFRSs (2010)
    
    July 1, 2010 orJanuary 1, 2011Amendments to
    
    IAS/HKAS 19  The limitation on a defined
    
    January 1, 2011IFRIC/HK (IFRIC)  Int 14
    
    benefit asset, minimum funding requirements andtheir interaction  Prepayments of a minimumfunding requirementIAS/HKAS 24 (Revised)
    
    Related party disclosures
    
    January 1, 2011Amendments to IFRS/HKFRS 7
    
    Financial instruments: Disclosures  Transfer of
    
    July 1, 2011financial assetsIFRS/HKFRS 9
    
    Financial instruments
    
    January 1, 2013
 The Group is in the process of making an assessment of what the impact of these amendments, new
standards and new interpretations is expected to be in the period of initial application. So
far the Group is not yet in a position to state whether they would have a significant impact on
the Groups results of operations and financial position.
 F-58




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##### Table of Contents



33
    
    Supplemental guarantors consolidated financial information
 The 10-year senior notes mentioned above in note 22 are fully,
irrevocably and unconditionally guaranteed, jointly and
severally, on a senior unsecured basis by all of the
subsidiaries of City Telecom (H.K.) Limited (collectively
defined as Guarantor Subsidiaries), except CTI Guangzhou
Customer Services Co. Ltd. in the PRC (Non-guarantor
Subsidiary).The condensed consolidated financial information is presented
below and should be read in connection with the consolidated
financial statements of City Telecom (H.K.) Limited prepared
under IFRSs. Separate financial statements of the Guarantor
Subsidiaries are not presented because the Guarantor
Subsidiaries are wholly-owned and have fully and
unconditionally guaranteed the Notes on a joint and several
basis.On February 1, 2010, we redeemed all the outstanding
10-year senior notes with a cumulative principal amount of HK$153.9 million
(US$19.9 million) at the redemption price equal to 104.375% of the principal
amount.Since as of August 31, 2010, all the outstanding 10-year
senior notes has been fully redeemed, the following condensed
consolidated financial information is limited to the years
ended August 31, 2009 and 2008.The following condensed consolidated financial information
presents the consolidated balance sheets as of August 31, 2008
and 2009 and the related consolidated income statements and
cash flow statements for the years ended August 31, 2008 and
2009 of (a) City Telecom (H.K.) Limited, the parent; (b) the
Guarantor Subsidiaries on a combined basis; (c) the
Non-guarantor Subsidiary; (d) eliminating entries; and (e) the
total consolidated amounts.
 F-59




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##### Table of Contents



33 Supplemental guarantors consolidated financial information (continued)
 Consolidated balance sheet as of August 31, 2009
 CityTelecom
    
    
    
    
    
    
    Non-(H.K.)
    
    
    Guarantor
    
    
    guarantor
    
    
    Eliminating
    
    
    ConsolidatedLimited
    
    
    subsidiaries
    
    
    subsidiary
    
    
    entries
    
    
    totalHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Non-current assetsInvestments in subsidiaries (note)
    
    
    1,258,726
    
    
    
    228,875
    
    
    
    
    
    
    
    (1,487,601
    )
    
    
    Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,066
    
    
    
    1,066Fixed assets
    
    
    74,688
    
    
    
    1,221,172
    
    
    
    6,520
    
    
    
    
    
    
    
    1,302,380Long term receivable and prepayment
    
    
    
    
    
    
    16,573
    
    
    
    
    
    
    
    (10,482
    )
    
    
    6,091Deferred expenditure
    
    
    
    
    
    
    12,786
    
    
    
    
    
    
    
    
    
    
    
    12,7861,333,414
    
    
    
    1,479,406
    
    
    
    6,520
    
    
    
    
    
    
    
    1,322,323Current assetsAccounts receivable
    
    
    9,220
    
    
    
    110,972
    
    
    
    
    
    
    
    
    
    
    
    120,192Other receivables, deposits and prepayments
    
    
    3,393
    
    
    
    67,584
    
    
    
    2,492
    
    
    
    (3,704
    )
    
    
    69,765Deferred expenditure
    
    
    
    
    
    
    36,674
    
    
    
    
    
    
    
    
    
    
    
    36,674Pledged bank deposits
    
    
    15,038
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,038Cash at bank and in hand
    
    
    120,315
    
    
    
    78,665
    
    
    
    27,436
    
    
    
    
    
    
    
    226,416147,966
    
    
    
    293,895
    
    
    
    29,928
    
    
    
    
    
    
    
    468,085Current liabilitiesBank overdrafts  unsecured
    
    
    896
    
    
    
    4,468
    
    
    
    
    
    
    
    
    
    
    
    5,364Amounts due to subsidiaries/ fellow subsidiaries
    
    
    10,830
    
    
    
    905,460
    
    
    
    4,427
    
    
    
    (920,717
    )
    
    
    Accounts payable
    
    
    20,484
    
    
    
    17,071
    
    
    
    
    
    
    
    
    
    
    
    37,555Other payables and accrued charges
    
    
    23,530
    
    
    
    172,676
    
    
    
    10,281
    
    
    
    
    
    
    
    206,487Deposits received
    
    
    7,886
    
    
    
    8,499
    
    
    
    
    
    
    
    
    
    
    
    16,385Deferred service revenue
    
    
    10,848
    
    
    
    107,904
    
    
    
    
    
    
    
    (3,682
    )
    
    
    115,070Tax payable
    
    
    356
    
    
    
    496
    
    
    
    1,141
    
    
    
    
    
    
    
    1,993Current portion  obligation under finance leases
    
    
    193
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    20275,023
    
    
    
    1,216,583
    
    
    
    15,849
    
    
    
    
    
    
    
    383,056Net current assets/(liabilities)
    
    
    72,943
    
    
    
    (922,688
    )
    
    
    14,079
    
    
    
    
    
    
    
    85,029
 F-60




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##### Table of Contents



33 Supplemental guarantors consolidated financial information (continued)
 Consolidated balance sheet as of August 31, 2009 (continued)
 CityTelecom
    
    
    
    
    
    
    Non-(H.K.)
    
    
    Guarantor
    
    
    guarantor
    
    
    Eliminating
    
    
    ConsolidatedLimited
    
    
    subsidiaries
    
    
    subsidiary
    
    
    entries
    
    
    totalHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Total assets less current liabilities
    
    
    1,406,357
    
    
    
    556,718
    
    
    
    20,599
    
    
    
    
    
    
    
    1,407,352Non-current liabilitiesDeferred tax liabilities
    
    
    7,047
    
    
    
    8,662
    
    
    
    
    
    
    
    
    
    
    
    15,709Long-term deferred service revenue
    
    
    10,535
    
    
    
    
    
    
    
    
    
    
    
    (10,535
    )
    
    
    Long-term debt and other liabilities
    
    
    163,108
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    163,116180,690
    
    
    
    8,670
    
    
    
    
    
    
    
    
    
    
    
    178,825Net assets
    
    
    1,225,667
    
    
    
    548,048
    
    
    
    20,599
    
    
    
    
    
    
    
    1,228,527Capital and reservesShare capital
    
    
    66,418
    
    
    
    15,485
    
    
    
    8,131
    
    
    
    (23,616
    )
    
    
    66,418Reserves
    
    
    1,159,249
    
    
    
    532,563
    
    
    
    12,468
    
    
    
    (542,171
    )
    
    
    1,162,109Total equity attributable to equity shareholders of the Company
    
    
    1,225,667
    
    
    
    548,048
    
    
    
    20,599
    
    
    
    
    
    
    
    1,228,527
 
 Note:
    
    The amounts of investment in subsidiaries and retained profits at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting. F-61




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##### Table of Contents



Consolidated income statement for the year ended August 31, 2009
 CityTelecom
    
    
    
    
    
    
    Non-(H.K.)
    
    
    Guarantor
    
    
    guarantor
    
    
    Eliminating
    
    
    ConsolidatedLimited
    
    
    subsidiaries
    
    
    subsidiary
    
    
    entries
    
    
    TotalHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Revenue
    
    
    95,386
    
    
    
    1,390,697
    
    
    
    142,603
    
    
    
    (150,447
    )
    
    
    1,478,239Network costs
    
    
    (29,973
    )
    
    
    (177,655
    )
    
    
    
    
    
    
    32,499
    
    
    
    (175,129
    )Other operating expenses
    
    
    (90,557
    )
    
    
    (959,960
    )
    
    
    (136,750
    )
    
    
    149,303
    
    
    
    (1,037,964
    )Other income, net
    
    
    108,933
    
    
    
    31,684
    
    
    
    576
    
    
    
    (99,653
    )
    
    
    41,540Finance costs
    
    
    (54,241
    )
    
    
    (69,017
    )
    
    
    
    
    
    
    68,131
    
    
    
    (55,127
    )Share of net profit from subsidiaries (note)
    
    
    185,391
    
    
    
    
    
    
    
    
    
    
    
    (185,391
    )
    
    
    Profit before taxation
    
    
    214,939
    
    
    
    215,749
    
    
    
    6,429
    
    
    
    
    
    
    
    251,559Income tax expense
    
    
    (2,110
    )
    
    
    (34,998
    )
    
    
    (1,622
    )
    
    
    
    
    
    
    (38,730
    )Net profit
    
    
    212,829
    
    
    
    180,751
    
    
    
    4,807
    
    
    
    
    
    
    
    212,829
 
 Note:
    
    The net profit amounts at City Telecom (H.K.) Limited level have included the share of net profit of its subsidiaries using the equity method of accounting. Consolidated income statement for the year ended August 31, 2008
 CityTelecom
    
    
    
    
    
    
    Non-(H.K.)
    
    
    Guarantor
    
    
    guarantor
    
    
    Eliminating
    
    
    ConsolidatedLimited
    
    
    subsidiaries
    
    
    subsidiary
    
    
    entries
    
    
    TotalHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Revenue
    
    
    116,130
    
    
    
    1,283,296
    
    
    
    135,374
    
    
    
    (231,819
    )
    
    
    1,302,981Network costs
    
    
    (28,398
    )
    
    
    (184,851
    )
    
    
    
    
    
    
    34,882
    
    
    
    (178,367
    )Other operating expenses
    
    
    (87,551
    )
    
    
    (978,990
    )
    
    
    (130,481
    )
    
    
    230,928
    
    
    
    (966,094
    )Other income, net
    
    
    93,494
    
    
    
    37,752
    
    
    
    1,336
    
    
    
    (107,593
    )
    
    
    24,989Finance costs
    
    
    (71,702
    )
    
    
    (71,753
    )
    
    
    
    
    
    
    68,318
    
    
    
    (75,137
    )Share of net profit from subsidiaries (note)
    
    
    108,154
    
    
    
    
    
    
    
    
    
    
    
    (108,154
    )
    
    
    Profit before taxation
    
    
    130,127
    
    
    
    85,454
    
    
    
    6,229
    
    
    
    
    
    
    
    108,372Income tax (expense)/benefit
    
    
    (4,937
    )
    
    
    26,306
    
    
    
    (4,551
    )
    
    
    
    
    
    
    16,818Net profit
    
    
    125,190
    
    
    
    111,760
    
    
    
    1,678
    
    
    
    
    
    
    
    125,190
 
 Note:
    
    The net profit amounts at City Telecom (H.K.) Limited level have included the share of net profit of its subsidiaries using the equity method of accounting. F-62




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##### Table of Contents



33 Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated cash flow statement for the year ended August 31, 2009
 CityTelecom
    
    
    
    
    
    
    Non-(H.K.)
    
    
    Guarantor
    
    
    guarantor
    
    
    Eliminating
    
    
    ConsolidatedLimited
    
    
    subsidiaries
    
    
    subsidiary
    
    
    entries
    
    
    totalHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Net cash inflow/(outflow) from operating activities
    
    
    487,691
    
    
    
    88,243
    
    
    
    (38,930
    )
    
    
    (233
    )
    
    
    536,771Net cash inflow/(outflow) from investing activities
    
    
    101,605
    
    
    
    (276,843
    )
    
    
    (1,250
    )
    
    
    
    
    
    
    (176,488
    )Net cash outflow from financing activities
    
    
    (560,397
    )
    
    
    (895
    )
    
    
    
    
    
    
    
    
    
    
    (561,292
    )Increase/(decrease) in cash at bank and in hand
    
    
    28,899
    
    
    
    (189,495
    )
    
    
    (40,180
    )
    
    
    
    
    
    
    (201,009
    )Cash at bank in hand at September 1, 2008
    
    
    90,386
    
    
    
    263,386
    
    
    
    67,838
    
    
    
    
    
    
    
    421,610Effects of foreign exchange rates changes
    
    
    134
    
    
    
    306
    
    
    
    (222
    )
    
    
    233
    
    
    
    451Cash at bank and in hand at August 31, 2009
    
    
    119,419
    
    
    
    74,197
    
    
    
    27,436
    
    
    
    
    
    
    
    221,052Analysis of the balances of cash and cash equivalent:Cash at bank and in hand
    
    
    120,315
    
    
    
    78,665
    
    
    
    27,436
    
    
    
    
    
    
    
    226,416Bank overdrafts  unsecured
    
    
    (896
    )
    
    
    (4,468
    )
    
    
    
    
    
    
    
    
    
    
    (5,364
    )119,419
    
    
    
    74,197
    
    
    
    27,436
    
    
    
    
    
    
    
    221,052
 F-63




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##### Table of Contents



33 Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated cash flow statement for the year ended August 31, 2008
 CityTelecom
    
    
    
    
    
    
    Non-(H.K.)
    
    
    Guarantor
    
    
    guarantor
    
    
    Eliminating
    
    
    ConsolidatedLimited
    
    
    subsidiaries
    
    
    subsidiary
    
    
    entries
    
    
    totalHK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000
    
    
    HK$000Net cash inflow from operating activities
    
    
    193,028
    
    
    
    128,939
    
    
    
    59,866
    
    
    
    158
    
    
    
    381,991Net cash inflow/(outflow) from investing activities
    
    
    18,775
    
    
    
    (164,222
    )
    
    
    (2,303
    )
    
    
    
    
    
    
    (147,750
    )Net cash outflow from financing activities
    
    
    (341,813
    )
    
    
    (4,165
    )
    
    
    
    
    
    
    
    
    
    
    (345,978
    )(Decrease)/increase in cash at bank and in hand
    
    
    (130,010
    )
    
    
    (39,448
    )
    
    
    57,563
    
    
    
    
    
    
    
    (111,737
    )Cash at bank and in hand at September 1, 2007
    
    
    220,531
    
    
    
    303,227
    
    
    
    9,136
    
    
    
    
    
    
    
    532,894Effects of foreign exchange rates changes
    
    
    (135
    )
    
    
    (393
    )
    
    
    1,139
    
    
    
    (158
    )
    
    
    453Cash at bank and in hand at August 31, 2008
    
    
    90,386
    
    
    
    263,386
    
    
    
    67,838
    
    
    
    
    
    
    
    421,610Analysis of the balances of cash and cash equivalent:Cash at bank and in hand
    
    
    91,764
    
    
    
    275,002
    
    
    
    67,838
    
    
    
    
    
    
    
    434,604Bank overdrafts  unsecured
    
    
    (1,378
    )
    
    
    (11,616
    )
    
    
    
    
    
    
    
    
    
    
    (12,994
    )90,386
    
    
    
    263,386
    
    
    
    67,838
    
    
    
    
    
    
    
    421,610
 F-64




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##### Table of Contents



SIGNATURE
  CITY TELECOM (H.K.) LIMITEDBy:
    /s/ Yeung Chu Kwong, WilliamName:
    Yeung Chu Kwong, WilliamTitle:
    Chief Executive OfficerBy:
    /s/ Lai Ni QuiaqueName:
    Lai Ni QuiaqueTitle:
    Chief Financial Officer