##### Table of Contents



As filed with the Securities and Exchange Commission on January 16, 2009.
 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 fiscal year ended August 31, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from  or
 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: 333-11012
 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:
 Title Of Each Class
    
    Name Of Each Exchange On Which 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 þ
  o o þ
  o þ
  o þ




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##### 



CONTENTS
 USE OF DEFINED AND TECHNICAL TERMS
    
    
    1CURRENCY TRANSLATION
    
    
    1FORWARD-LOOKING STATEMENTS
    
    
    1PART I
    
    
    2ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    2ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    2ITEM 3. KEY INFORMATION
    
    
    2ITEM 4. INFORMATION ON THE COMPANY
    
    
    11ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    25ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    37ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    44ITEM 8. FINANCIAL INFORMATION
    
    
    45ITEM 9. THE OFFER AND LISTING
    
    
    46ITEM 10. ADDITIONAL INFORMATION
    
    
    48ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    54ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    54PART II
    
    
    54ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    54ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    54ITEM 15. CONTROLS AND PROCEDURES
    
    
    54ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    55ITEM 16B. CODE OF ETHICS
    
    
    55ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    55ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    56ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    56PART III
    
    
    56ITEM 17. FINANCIAL STATEMENTS
    
    
    56ITEM 18. FINANCIAL STATEMENTS
    
    
    56ITEM 19. EXHIBITS
    
    
    56EX-12.1EX-12.2EX-13




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##### Table of Contents



USE OF DEFINED AND TECHNICAL TERMS
  
    
    Hong Kong Companies Ordinance are references to Chapter 32 of the laws of Hong Kong;
    
    City Telecom or the Company are references to City Telecom (H.K.) Limited;
    
    fiscal year or fiscal are references to the Companys fiscal year ended August 31 for the year referenced;
    
    FTNS Licenses are references to fixed telecommunications network services licenses;
    
    GPON are references to our Gigabit Passive Optical Network;
    
    HKBN are references to Hong Kong Broadband Network Limited;
    
    HKFRS are references to Hong Kong Financial Reporting Standards;
    
    IP-TV services are references to pay-television services through Internet Protocol;
    
    PNETS Licenses are references to public non-exclusive telecommunications service licenses;
    
    VoIP are references to Voice over Internet Protocol.
 
 CURRENCY TRANSLATION
  
 FORWARD-LOOKING STATEMENTS
   
    
    technology changes;
    
    changes in the regulatory environment in which we operate, including changes in
rules and policies promulgated by regulatory agencies from time to time;
    
    the increasing competition in the local or international telecommunications,
Internet access, local VoIP or pay-television markets;
    
    the benefits we expect to derive from our Next Generation Network, which consists
of our Metro Ethernet Network and our newly-deployed GPON, in which we have been
making significant capital investments;
    
    our ability to maintain growth and successfully introduce new products and
services;
    
    the continued development and stability of our technological infrastructure
platform through which our local and international telecommunications, Internet
access, local VoIP and IP-TV services are offered; and
    
    changes in local and global economic and financial environment.
  1




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##### Table of Contents



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:
 As of and for the year ended August 31,2004
    

2005 (6)
    

2006 (6)
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(Amounts in thousands except per share data)HKFRSRevenues:Fixed telecommunications network services
    
    
    541,902
    
    
    
    629,464
    
    
    
    716,600
    
    
    
    816,800
    
    
    
    1,011,038
    
    
    
    129,561International telecommunications services
    
    
    627,978
    
    
    
    532,595
    
    
    
    418,276
    
    
    
    324,470
    
    
    
    291,943
    
    
    
    37,411Total operating revenue
    
    
    1,169,880
    
    
    
    1,162,059
    
    
    
    1,134,876
    
    
    
    1,141,270
    
    
    
    1,302,981
    
    
    
    166,972Network Costs:Fixed telecommunications network services
    
    
    (122,476
    )
    
    
    (118,383
    )
    
    
    (125,639
    )
    
    
    (103,795
    )
    
    
    (103,524
    )
    
    
    (13,266
    )International telecommunications services
    
    
    (208,932
    )
    
    
    (221,019
    )
    
    
    (174,954
    )
    
    
    (110,796
    )
    
    
    (74,843
    )
    
    
    (9,591
    )Total network costs
    
    
    (331,408
    )
    
    
    (339,402
    )
    
    
    (300,593
    )
    
    
    (214,591
    )
    
    
    (178,367
    )
    
    
    (22,857
    )Other operating expenses
    
    
    (793,212
    )
    
    
    (958,031
    )
    
    
    (919,795
    )
    
    
    (834,104
    )
    
    
    (966,094
    )
    
    
    (123,801
    )Income/(loss) from operations
    
    
    45,260
    
    
    
    (135,374
    )
    
    
    (85,512
    )
    
    
    92,575
    
    
    
    158,520
    
    
    
    20,314Interest income/(expense), net
    
    
    3,578
    
    
    
    (40,884
    )
    
    
    (68,259
    )
    
    
    (64,833
    )
    
    
    (59,541
    )
    
    
    (7,630
    )Other income, net
    
    
    2,668
    
    
    
    6,037
    
    
    
    4,465
    
    
    
    3,149
    
    
    
    9,393
    
    
    
    1,204Income taxes (expense)/credit
    
    
    (2,043
    )
    
    
    6,725
    
    
    
    7,244
    
    
    
    (2,026
    )
    
    
    16,818
    
    
    
    2,155Net income/(loss)
    
    
    49,463
    
    
    
    (163,496
    )
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190
    
    
    
    16,043Basic earnings/(loss) per share (cents)
    
    
    8.1
    
    
    
    (26.6
    )
    
    
    (23.1
    )
    
    
    4.7
    
    
    
    19.7
    
    
    
    2.5Diluted earnings/(loss) per share (cents) (1)
    
    
    8.1
    
    
    
    (26.6
    )
    
    
    (23.1
    )
    
    
    4.6
    
    
    
    19.0
    
    
    
    2.4Dividends declared per share (cents)
    
    
    9.0
    
    
    
    
    
    
    
    
    
    
    
    8.0
    
    
    
    6.0
    
    
    
    0.8Weighted average number of shares
    
    
    610,095
    
    
    
    613,525
    
    
    
    614,134
    
    
    
    614,840
    
    
    
    634,015
    
    
    
    634,015Diluted weighted average number of shares (2)
    
    
    614,365
    
    
    
    613,525
    
    
    
    614,134
    
    
    
    631,319
    
    
    
    657,997
    
    
    
    657,997
 As of and for the year ended August 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(Amounts in thousands except per share data)U.S. GAAPTotal operating revenue
    
    
    1,169,880
    
    
    
    1,162,059
    
    
    
    1,134,876
    
    
    
    1,141,270
    
    
    
    1,302,981
    
    
    
    166,972Total operating expenses
    
    
    (1,123,198
    )
    
    
    (1,289,014
    )
    
    
    (1,220,388
    )
    
    
    (1,048,695
    )
    
    
    (1,144,461
    )
    
    
    (146,658
    )Net income/(loss)
    
    
    51,565
    
    
    
    (149,148
    )
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190
    
    
    
    16,043Basic earnings/(loss) per share (cents)
    
    
    8.5
    
    
    
    (24.3
    )
    
    
    (23.1
    )
    
    
    4.7
    
    
    
    19.7
    
    
    
    2.5Diluted earnings/(loss) per share (cents)(1)
    
    
    8.4
    
    
    
    (24.3
    )
    
    
    (23.1
    )
    
    
    4.6
    
    
    
    19.0
    
    
    
    2.4Dividends declared per share (cents)
    
    
    9.0
    
    
    
    
    
    
    
    
    
    
    
    8.0
    
    
    
    6.0
    
    
    
    0.8Weighted average number of shares
    
    
    610,095
    
    
    
    613,525
    
    
    
    614,134
    
    
    
    614,840
    
    
    
    634,015
    
    
    
    634,015Diluted weighted average number of shares (2)
    
    
    614,365
    
    
    
    613,525
    
    
    
    614,134
    
    
    
    631,319
    
    
    
    657,997
    
    
    
    657,997
 2




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##### Table of Contents



Selected Consolidated Balance Sheet Data:
 As of and for the year ended August 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(Amounts in thousands)HKFRSTotal assets
    
    
    1,683,408
    
    
    
    2,347,428
    
    
    
    2,124,215
    
    
    
    2,161,133
    
    
    
    2,080,416
    
    
    
    266,597Debt
    
    
    (119,170
    )
    
    
    (945,348
    )
    
    
    (948,027
    )
    
    
    (952,593
    )
    
    
    (683,242
    )
    
    
    (87,555
    )Finance lease obligation
    
    
    
    
    
    
    (3,135
    )
    
    
    (2,373
    )
    
    
    (1,210
    )
    
    
    (376
    )
    
    
    (48
    )Other liabilities
    
    
    (388,540
    )
    
    
    (378,491
    )
    
    
    (282,161
    )
    
    
    (303,448
    )
    
    
    (364,191
    )
    
    
    (46,670
    )Total liabilities
    
    
    (507,710
    )
    
    
    (1,326,974
    )
    
    
    (1,232,561
    )
    
    
    (1,257,251
    )
    
    
    (1,047,809
    )
    
    
    (134,273
    )Net assets employed
    
    
    1,175,698
    
    
    
    1,020,454
    
    
    
    891,654
    
    
    
    903,882
    
    
    
    1,032,607
    
    
    
    132,324Share capital
    
    
    61,057
    
    
    
    61,412
    
    
    
    61,417
    
    
    
    61,650
    
    
    
    65,062
    
    
    
    8,337Share premium
    
    
    617,986
    
    
    
    619,408
    
    
    
    620,298
    
    
    
    622,433
    
    
    
    670,717
    
    
    
    85,950Reserves
    
    
    496,655
    
    
    
    339,634
    
    
    
    209,939
    
    
    
    219,799
    
    
    
    296,828
    
    
    
    38,037Total shareholders equity
    
    
    1,175,698
    
    
    
    1,020,454
    
    
    
    891,654
    
    
    
    903,882
    
    
    
    1,032,607
    
    
    
    132,324
 As of and for the year ended August 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(Amounts in thousands)U.S. GAAPTotal assets
    
    
    1,688,640
    
    
    
    2,385,556
    
    
    
    2,154,305
    
    
    
    2,189,086
    
    
    
    2,100,638
    
    
    
    269,188Total liabilities
    
    
    (507,710
    )
    
    
    (1,352,876
    )
    
    
    (1,257,034
    )
    
    
    (1,279,587
    )
    
    
    (1,062,414
    )
    
    
    (136,144
    )Net shareholders equity
    
    
    1,180,930
    
    
    
    1,032,680
    
    
    
    897,271
    
    
    
    909,499
    
    
    
    1,038,224
    
    
    
    133,044
 Other Financial Data:
 As of and for the year ended August 31,2004
    

2005 (6)
    

2006 (6)
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(Amounts in thousands)HKFRSEBITDA (3)
    
    
    244,945
    
    
    
    108,377
    
    
    
    195,417
    
    
    
    353,827
    
    
    
    377,964
    
    
    
    48,435Net cash provided by operating activities
    
    
    203,763
    
    
    
    77,383
    
    
    
    184,151
    
    
    
    383,999
    
    
    
    378,529
    
    
    
    48,507Net cash (used in) / provided by investing activities
    
    
    (406,244
    )
    
    
    (557,440
    )
    
    
    (492,742
    )
    
    
    114,053
    
    
    
    (147,750
    )
    
    
    (18,934
    )Net cash provided by /(used in) financing activities
    
    
    47,221
    
    
    
    792,216
    
    
    
    (86,432
    )
    
    
    (109,504
    )
    
    
    (342,516
    )
    
    
    (43,892
    )Capital expenditures (4)
    
    
    410,046
    
    
    
    419,126
    
    
    
    322,935
    
    
    
    132,250
    
    
    
    211,684
    
    
    
    27,126
  As of and for the year ended August 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(Amounts in thousands)EBITDA(3)
    
    
    244,945
    
    
    
    108,377
    
    
    
    195,417
    
    
    
    353,827
    
    
    
    377,964
    
    
    
    48,435Depreciation and amortization
    
    
    (197,017
    )
    
    
    (237,714
    )
    
    
    (276,464
    )
    
    
    (258,103
    )
    
    
    (210,051
    )
    
    
    (26,917
    )Interest income/(expense), net
    
    
    3,578
    
    
    
    (40,884
    )
    
    
    (68,259
    )
    
    
    (64,833
    )
    
    
    (59,541
    )
    
    
    (7,630
    )Income taxes (expense)/credit
    
    
    (2,043
    )
    
    
    6,725
    
    
    
    7,244
    
    
    
    (2,026
    )
    
    
    16,818
    
    
    
    2,155Net income/(loss)
    
    
    49,463
    
    
    
    (163,496
    )
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190
    
    
    
    16,043Depreciation and amortization
    
    
    197,017
    
    
    
    237,714
    
    
    
    276,464
    
    
    
    258,103
    
    
    
    210,051
    
    
    
    26,917Impairment loss on investment property
    
    
    
    
    
    
    
    
    
    
    1,131
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred expenditure
    
    
    1,828
    
    
    
    12,927
    
    
    
    13,973
    
    
    
    15,580
    
    
    
    33,777
    
    
    
    4,329Income taxes expense/(credit)
    
    
    2,043
    
    
    
    (6,725
    )
    
    
    (7,244
    )
    
    
    2,026
    
    
    
    (16,818
    )
    
    
    (2,155
    )Interest income
    
    
    (3,753
    )
    
    
    (13,578
    )
    
    
    (20,378
    )
    
    
    (22,671
    )
    
    
    (15,596
    )
    
    
    (1,999
    )Interest, amortization and exchange difference on senior notes
    
    
    
    
    
    
    54,065
    
    
    
    86,664
    
    
    
    89,879
    
    
    
    72,640
    
    
    
    9,309Other borrowing costs
    
    
    
    
    
    
    
    
    
    
    1,919
    
    
    
    (739
    )
    
    
    (1,185
    )
    
    
    (152
    )(Gain) / loss on disposal of fixed assets
    
    
    (34
    )
    
    
    (134
    )
    
    
    9,621
    
    
    
    1,714
    
    
    
    1,431
    
    
    
    183Equity settled share-based transaction
    
    
    87
    
    
    
    6,965
    
    
    
    6,823
    
    
    
    5,727
    
    
    
    4,204
    
    
    
    539Realized and unrealized loss on derivatives financial instruments
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    806
    
    
    
    1,039
    
    
    
    133Unrealized losses/(gain) on other investments
    
    
    1,696
    
    
    
    (300
    )
    
    
    (668
    )
    
    
    (1,887
    )
    
    
    (3,284
    )
    
    
    (421
    )Gain on extinguishment of senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,582
    )
    
    
    (331
    )Taxation paid
    
    
    (24,819
    )
    
    
    (1,393
    )
    
    
    (2,532
    )
    
    
    (2,171
    )
    
    
    (4,250
    )
    
    
    (545
    )Change in long term receivable
    
    
    (6,206
    )
    
    
    (6,893
    )
    
    
    567
    
    
    
    5,600
    
    
    
    1,346
    
    
    
    173Change in working capital, net
    
    
    (13,559
    )
    
    
    (41,769
    )
    
    
    (40,252
    )
    
    
    3,167
    
    
    
    (27,434
    )
    
    
    (3,516
    )
 3




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##### Table of Contents



As of and for the year ended August 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(Amounts in thousands)Net cash flow provided by operating activities
    
    
    203,763
    
    
    
    77,383
    
    
    
    184,151
    
    
    
    383,999
    
    
    
    378,529
    
    
    
    48,507
 Operating Data:
 As of and for the year ended August 31,2004
    
    2005
    
    2006
    
    2007
    
    2008Fixed Telecommunications Network Services Subscriptions:Broadband Internet Access
    
    
    197,000
    
    
    
    229,000
    
    
    
    220,000
    
    
    
    247,000
    
    
    
    316,000Local VoIP
    
    
    237,000
    
    
    
    293,000
    
    
    
    281,000
    
    
    
    308,000
    
    
    
    329,000IP-TV
    
    
    31,000
    
    
    
    109,000
    
    
    
    116,000
    
    
    
    128,000
    
    
    
    156,000Total
    
    
    465,000
    
    
    
    631,000
    
    
    
    617,000
    
    
    
    683,000
    
    
    
    801,000Registered international telecommunications accounts (5)
    
    
    1,916,235
    
    
    
    2,054,036
    
    
    
    2,201,963
    
    
    
    2,331,000
    
    
    
    2,336,000IDD outgoing minutes (in thousands)
    
    
    1,007,000
    
    
    
    947,100
    
    
    
    788,000
    
    
    
    659,000
    
    
    
    574,000
 
 (1)
    
    Diluted earnings/(loss) per share is computed by dividing the
net income/(loss) by the
diluted weighted average number of ordinary shares during the year.(2)
    
    For fiscal 2004, 2007 and 2008, the diluted weighted average number of 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 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 2005 and 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
 4




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##### Table of Contents



Exchange Rate Information
   :
 Average (1)
    
    High
    
    Low
    
    Period-EndHK$
    
    HK$
    
    HK$
    
    HK$Fiscal 2004
    
    
    7.7821
    
    
    
    7.8010
    
    
    
    7.7085
    
    
    
    7.8000Fiscal 2005
    
    
    7.7869
    
    
    
    7.8002
    
    
    
    7.7684
    
    
    
    7.7718Fiscal 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
    
    
    
    7.8036July 2008
    
    
    7.8001
    
    
    
    7.8039
    
    
    
    7.7959
    
    
    
    7.8017August 2008
    
    
    7.8076
    
    
    
    7.8142
    
    
    
    7.8036
    
    
    
    7.8036September 2008
    
    
    7.7854
    
    
    
    7.8094
    
    
    
    7.7582
    
    
    
    7.7659October 2008
    
    
    7.7589
    
    
    
    7.7736
    
    
    
    7.7503
    
    
    
    7.7503November 2008
    
    
    7.7507
    
    
    
    7.7560
    
    
    
    7.7497
    
    
    
    7.7501December 2008
    
    
    7.7504
    
    
    
    7.7522
    
    
    
    7.7497
    
    
    
    7.7499January 2009 (through January 9, 2009)
    
    
    7.7533
    
    
    
    7.7572
    
    
    
    7.7504
    
    
    
    7.7572
 
 (1)
    
    The average of the noon buying rates on the last business day of each
month during the relevant fiscal year period or the average noon
buying rates for each business day during the relevant monthly period.  B. Capitalization and indebtedness
  C. Reasons for the offer and use of proceeds
  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
 We cannot assure you that we will be able to maintain an increase in total revenues and operating results
  .
 5




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We have substantially less financial and human resources for the development of our business than some of our main competitors.
  
    
    greater financial, technical, marketing and other resources;
    
    greater existing infrastructure;
    
    greater name recognition; and
    
    larger customer bases.
  Our growth and profitability could be affected by an increasing number of local and foreign
entrants in the international and local telecommunications, Internet access and television broadcasting markets.
  
    
    As of January 6, 2009, 246 PNETS Licenses had been issued in Hong Kong for the
provision of external telecommunications services as defined in the
Telecommunications Authoritys Determination as of December 30, 1998. Some of these
licenses are held by subsidiaries of major foreign telecommunications providers,
which have competitive advantages due to their global presence and size.
    
    Around December 31, 2007, TVB and ATV, the only two licensed domestic territorial
broadcasters in Hong Kong, launched their digital terrestrial television services and
have since broadened such services to cover an increasingly large percentage of the
viewing public in Hong Kong. The services offer a total of 13 free channels in both
standard and high definition. This improvement in the quality of free television may
result in a reduction in the number of subscribers for pay-television services.
  The development of our Next Generation Network requires significant capital expenditures. These
capital expenditures may vary materially from those currently planned and may impose a burden on our financing and operating activities.
   6




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We may not realize the commercial benefits we expect from our investments, which may adversely
impact our business.
  We may need to improve our internal controls over financial reporting and our independent
auditors may not be able to attest to their effectiveness.
     Our growth and expansion may impact our ability to manage our operations, increase our costs of
operation and adversely affect the quality of our services.
  
    
    simultaneously manage implementation of our infrastructure development and marketing plans;
    
    effectively monitor our operations so as to contain costs and maintain effective quality controls; and
    
    continue to offer competitive prices to customers for our services.
  We depend on certain key personnel, and our business and growth prospects may be disrupted by
the loss of their services.
  7




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##### Table of Contents



Expansion of our Next Generation Network into certain buildings and residences may be limited by
physical limitations or our ability to obtain access rights.
  
    
    Because at least one of our competitors has already installed in-building wiring in
virtually all buildings, other fixed telecommunications network service providers,
including us, may encounter a bottleneck when installing our own in-building wiring
because many buildings have limited physical space for additional in-building wiring.
    
    Some single-owner commercial buildings may grant rights of access to our competitors
while barring us from installing our own in-building wiring.
    
    Certain developers may have affiliations with our competitors and may attempt to
delay our wiring installations.
  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.
  Although we have expressed our interest in obtaining a Broadband Wireless Access (BWA)
license, we cannot assure you that we will be the successful bidder, and, if we are granted the
license, that the business in relation to BWA will be
successful.
  Risks Relating to Our Technological Infrastructure
 We may be unable to further expand our Internet access business 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.
  We are vulnerable to natural disasters and other disruptive regional events, which could cause
damage to our network and result in lost revenue and perhaps lost customers.
  8




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The loss of key suppliers or their failure to deliver equipment on a timely basis could
negatively impact our business prospects.
   Our reliance on third parties to provide maintenance and repairs for our Next Generation Network
could adversely affect our operating results if their services are not timely or do not meet our standards.
  If we are unable to stay ahead of technology trends and evolving industry standards, our
services may become obsolete.
    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 conduct and transactions concerning carrier licensees and to take
appropriate actions if it determines that the transaction would, or is likely to,
prevent or substantially lessen competition in a telecommunications market. The
Telecommunications Authority has the power under this provision to conduct an
investigation into any questionable transaction. It might consent to the transaction
(unconditionally or subject to any conditions it deems appropriate) or reject the
transaction outright. The decision of the Telecommunications Authority will take into
account of whether the transaction will adversely affect the public interest and
benefit. This provision may have an adverse effect on our ability to grow our business
through mergers and acquisitions.
    
    We offer local VoIP services through our Next Generation Network under HKBNs FTNS
License. Following the conclusion of a public consultation on the regulation of
Internet Protocol Telephony Services, the Telecommunications Authority issued a
statement on June 20, 2005, setting out its views and decisions on the regulatory and
licensing framework for the provision of VoIP services, including the creation of a
licensing framework, conformance to the existing system of assigning telephone numbers,
imposition of interconnection charges and establishing guidelines with respect to the
quality of services.
    
    We offer fixed but not mobile telecommunications network services. The
Telecommunications Authority has implemented a new fixed-mobile convergence licensing
practice by way of the Unified Carrier License (UCL). The implementation of the UCL
regime started from August 1, 2008 and replaces the existing four classes of carrier
licenses for the provision of fixed and mobile services. Going forward the UCL will be
the only carrier licence to be issued for the provision of fixed, mobile and/or
converged services. Existing carrier licenses will remain effective until their expiry
date. Licensees can choose to apply to convert their existing licences to UCLs before
then or apply for a UCL upon expiry. This regulatory change, together with the
 9




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development of new technologies, may further accelerate the convergence of fixed and
mobile telecommunications services, resulting in more structural competition between
fixed-line and mobile telecommunications operators. As we do not have a mobile license,
and are not currently authorised to provide mobile services, our ability to compete may
be hindered by our inability to offer such services independently.
    
    We provide our IP-TV services over our Next Generation Network under HKBNs FTNS
License. The Hong Kong government has indicated that because our IP-TV services are
carried over the Internet, we are exempt under the Broadcasting Ordinance from the
requirement to obtain a domestic pay-television program service license. However, the
governments Communications and Technology Branch has informed us that the government
is considering a review of the broadcasting regulatory regime and may introduce changes
to the existing regulatory framework, including the existing exemption in the
Broadcasting Ordinance. However, we cannot predict whether the government may require
us to obtain a pay-television program service license in the future.
 We require licenses from the Telecommunications Authority to provide our services. If one of
these licenses is revoked or not renewed, we would be unable to deliver the services authorized by that license.
  Our international telecommunications revenues may be adversely affected by increases in tariffs
in China.
  As approximately 49% of our staff are located in Guangzhou, China, changes in Chinese labor or
business laws may significantly affect our operations and our ability to service our Hong Kong
based customers.
  Currency fluctuations of the Hong Kong dollar, our functional currency, may increase our
operating costs and long term liability.
    Impact of credit crunch on local and global economy may negatively impact our business and our
progress on NGN development.
  10




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Risks Relating to our Securities
 We cannot assure you that we will be able to generate sufficient cash from operations to fund
our operations.
   Our 8.75% senior notes due 2015 contain covenants that limit our financial and operating
flexibility.
  
    
    pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;
    
    incur additional indebtedness or issue certain equity interests;
    
    merge, consolidate or sell all or substantially all of our assets;
    
    issue or sell capital stock of some of our subsidiaries;
    
    sell or exchange assets or enter into new businesses;
    
    create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;
    
    create liens on assets;
    
    enter into sale and lease back transactions; and
    
    enter into certain transactions with affiliates or related persons.
  
 ITEM 4. INFORMATION ON THE COMPANY
 A. History and Development of the Company
    
    
    In September 2005, HKBN was conferred as the winner of the Global
Entrepolis@Singapore Award 2005, which was presented by the Asian Wall Street Journal
in association with the Economic Development Board of Singapore. This award recognizes
innovation in the application of technology to a strong business model with
commercial potential to be an industry or market leader.
    
    In October 2005, HKBN became the first service provider in the world to achieve
the Cisco Powered Network Metro Ethernet QoS Certified status.
    
    In October 2005, HKBN launched our 2b Broadband Phone Service, providing VoIP
services to local and overseas users via a software-based broadband phone.
    
    In November 2005, we announced cooperation with China Telecom Hong Kong Limited to
provide Pan-China Internet Protocol Virtual Private Network services to corporate
customers.
 11




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##### Table of Contents




    
    In March 2006, HKBN launched our bb25 Internet access service with symmetric 25
Mbps access for the residential mass market. This supplemented our existing bb10,
bb100 and bb1000 service offerings.
    
    In July 2006, HKBN was conferred Call Center of the Year & Customer Service
Center of the Year awards at the Customer Relationship Excellence Awards 2005.
    
    In October 2006, Liu Xiang Be Ahead of Yourself marketing campaign won the
Certificate of Excellence of HKMA/TVB Awards for Marketing Excellence 2006.
    
    In February 2007, HKBN launched bb50 and bb200 symmetric residential broadband
service supported by SDU personalized customer care service.
    
    In June 2007, CTI Group was awarded Best Retention Strategies at the Hong Kong
HR Awards 2007
    
    In July 2007, HKBN was awarded Integrated Support Team of the year at the Asia
Pacific Customer Service Consortium Customer Relationship Excellence Awards
    
    In September 2007, HKBN launched Fiber-To-The-Home residential broadband
service, FiberHome100, FiberHome200 and FiberHome1000. As the same time, we
upgraded our entry level service broadband Internet access from 10 Mbps to 25 Mbps.    
    In January 2008, HKBN launched Dual Mode High Definition Terrestrial TV Receiver
and IPTV Set-Top Box to all customers in Hong Kong.
    
    In February 2008, HKBN was awarded the contract for the provision of payphone
service at the Hong Kong International Airport.
    
    In September 2008, HKBN launched the National Geographic Channels first ever
Interactive Channel.
 B. Business Overview
 Principal Activities
  Year ended August 31,Revenue
    
    2006
    
    2007
    
    2008HK$
    
    HK$
    
    HK$(Amounts in thousands)Fixed telecommunications network services (1)
    
    
    716,600
    
    
    
    816,800
    
    
    
    1,011,038International telecommunications services
    
    
    418,276
    
    
    
    324,470
    
    
    
    291,943Total operating revenue
    
    
    1,134,876
    
    
    
    1,141,270
    
    
    
    1,302,981
 
 (1)
    
    Includes Internet access, local telephony services, pay-TV services and corporate data services.  
    
    high-speed broadband Internet access services at symmetric upstream and downstream
access speeds of 25 Mbps to 1,000 Mbps;
    
    fixed line local telephony services using VoIP technology;
    
    pay television services consisting of more than 88 channels, including
self-produced news, childrens programming, international drama, movies and
documentary and local interest programming, using our IP platform; and
    
    corporate data services, including the provision of dedicated bandwidth to
corporate customers.
  .
  12




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##### Table of Contents



Our 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, which we believe have significant growth
potential. We price our services attractively on a value for bandwidth basis and at
the same time offer bandwidth advantages over comparable service offerings by our
competitors. Our IP-TV services focus on the residential mass market by providing
Chinese-language content that targets the Chinese-speaking population of Hong Kong.
Our focus on the residential mass and small-to-medium corporate and enterprise
markets has enabled us to quickly grow our subscription base, and we believe this
will help us to up-sell our services.
    
    Leading-Edge Next Generation Network. We believe our Next Generation Network gives
us an inherent cost and performance advantage over our competitors. Our IP platform
is highly scalable, enabling us to offer broadband Internet access, local VoIP, IP-TV
and corporate data services over a single network. It is also capable of providing up to
1,000 Mbps symmetric broadband Internet access.
    
    First Mover Advantage and High Barriers to Entry. Our first mover advantage and
the inherent characteristics of the Hong Kong telecommunications infrastructure,
which present a natural barrier to entry, make it difficult for our competitors to
replicate our business model. Metro Ethernet technology is not appropriate for our
competitors who intend to offer a full coverage network that includes remote and
difficult to reach areas of Hong Kong. Attempting to deploy Metro Ethernet technology
in such locations would significantly increase costs and completion time of such a
network. While other telecommunications operators may lay their own
fiber-to-the-building, we believe some would encounter significant in-building
bottlenecks when attempting to complete an end-to-end network. This is because a
majority of Hong Kongs residential properties have limited space for in-building
wiring leading to subscribers residences, making it difficult for new entrants to
replicate our end-to-end network build.
 Recent
Developments
      Our Services
 Fixed Telecommunications Network Services
  13




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##### Table of Contents



As of August 31,2006
    
    
    2007
    
    
    2008Broadband Internet Access
    
    
    220,000
    
    
    
    247,000
    
    
    
    316,000Local VoIP
    
    
    281,000
    
    
    
    308,000
    
    
    
    329,000IP-TV
    
    
    116,000
    
    
    
    128,000
    
    
    
    156,000Total Subscriptions
    
    
    617,000
    
    
    
    683,000
    
    
    
    801,000
 Broadband Internet Access
    Competition
    Local VoIP
     14




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##### Table of Contents



Competition
  IP-TV
   Competition
   International Telecommunications Services
    Service
    
    DescriptionIDD 1666
    
    Provides subscribers with international direct dial using the access
number 1666 in Hong Kong.IDD 0030
    
    Provides subscribers with international direct dial using the access
number 0030 in Hong Kong.Mobile Call Forwarding Services
    
    Allows call forwarding of Hong Kong mobile numbers so
that subscribers can receive calls while overseas.
  15




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##### Table of Contents



Competition
  Our Network Infrastructure
 Fixed Telecommunications Network
        International Telecommunications Network
  16




---



##### Table of Contents



Undersea Cables
   Interconnection Arrangements
   International Telecommunications Switching Systems
    Sales and Marketing
    Maintenance and Monitoring
  17




---



##### Table of Contents




    
    a year round, 24-hour a day, 7 days a week, network operation center providing
real-time service monitoring and maintenance services and supported by about 120
operational and field staff;
    
    individual self-reporting mechanisms and centralized performance monitoring
systems for our switches and equipment;
    
    an emergency self-reporting system that automatically contacts designated personnel; and
    
    back-up systems for our switches, critical software and hardware components.
  Research and Development Activities
  Customer Service
    Billing and Collection
   Seasonality
  Environmental Matters
  18




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##### Table of Contents



Intellectual Property Rights
   C.     Regulatory Framework
   Telecommunications Industry
 Licensing
    19




---



##### Table of Contents



General Licensing Requirements
   Public Non-Exclusive Telecommunications Services License
     Fixed Telecommunications Network Services 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.
   Interconnection
   20




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##### Table of Contents



Competition Provisions
 Regulation of Anti-Competitive Conduct
   Control on Mergers and Acquisitions
   Consumer Protection
    Regulation of Pricing
    21




---



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Universal Service Contribution and Local Access Charge
    Fixed Mobile Interconnection Charge
    Television Broadcasting Industry
  Licensing
   22




---



##### Table of Contents



Cross Media Ownership Restrictions
    Foreign Ownership Restrictions
  Competition Provisions
    Program Standards and Advertising Standards
  C. Organizational Structure
  23




---



##### Table of Contents



(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.  Percentage of interestheld by City Telecom(%)Name
    
    Jurisdiction of Incorporation
    
    Direct
    
    Indirect963673 Ontario Limited
    
    Canada
    
    
    
    
    
    
    100Attitude Holdings Limited
    
    British Virgin Islands
    
    
    
    
    
    
    100Automedia Holdings Limited
    
    British Virgin Islands
    
    
    100BBTV 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
 24




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##### Table of Contents



Percentage of interestheld by City Telecom(%)Name
    
    Jurisdiction of Incorporation
    
    Direct
    
    IndirectCredibility Holdings Limited
    
    British Virgin Islands
    
    
    100CTI Guangzhou Customer Services Company Limited (1)
    
    Peoples Republic of China
    
    
    100CTI 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
    
    
    100Hong 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
    
    
    100Warwick Gold Enterprises Limited
    
    Hong Kong
    
    
    
    
    
    
    100
 
 (1)
    
    The company has only registered its Chinese name. The English name is an unregistered translation. D. Property, Plants and Equipment
     
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 You should read the following discussion together with the rest of this annual report,
including the 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
  25




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##### Table of Contents



Our Revenues
 Fixed telecommunications network services.
 
    
    Monthly service charges.We charge our customers a monthly service charge for each type
of fixed telecommunications network services that we provide. After a customer has begun
to use one of our services, we then try to up-sell additional services to the customer to
generate more revenues.
    
    Interconnection charges.As a FTNS licensee, HKBN, a wholly-owned subsidiary of the
Company, is obliged to provide interconnection services to enable delivery of
telecommunications service to customers of different operators, including mobile network
operators.
          26




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##### Table of Contents



International telecommunications services
   Our Operating Expenses
 Network Costs
 Other Operating Expenses .
  Critical Accounting Policies
 Introduction
     Useful lives of fixed assets
  27




---



##### Table of Contents



Impairment of fixed assets
      Accounts Receivable
   28




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##### Table of Contents



Year ended August 31,2006
    
    2007
    
    2008(Thousands of HK$)Balance at beginning of the year
    
    
    48,316
    
    
    
    55,745
    
    
    
    22,392Additions charged to expense (1)(2)
    
    
    17,450
    
    
    
    15,973
    
    
    
    14,293Reversals
    
    
    
    
    
    
    (9,404
    )
    
    
    Write-off (2)
    
    
    (10,021
    )
    
    
    (39,922
    )
    
    
    (24,741
    )Balance at the end of the year
    
    
    55,745
    
    
    
    22,392
    
    
    
    11,944
 
 (1)
    
    Allowance for doubtful debts as at August 31, 2006 includes allowance
for mobile interconnection charges receivables of HK$20.8 million (For
more information regarding our provision for mobile interconnection
charges, see Our RevenuesFixed Telecommunications Network Services
above in this annual report.).(2)
    
    Following the TAs 2004 Determination issued in June 2007, in fiscal
2007 the Company has reversed HK$9.4 million of the allowance for
doubtful debts previously recognized for mobile interconnection
charges to the consolidated statement of operations and has written
off the remaining balance of the allowance of HK$11.4 million against
the accounts receivable relating to mobile interconnection charges. Deferred Taxation
       USC charges
   Revenue Recognition
  29




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##### Table of Contents



Operating Results
  Year Ended August 31,2006
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    US$(In thousands)HKFRSRevenuesFixed telecommunications network services
    
    
    716,600
    
    
    
    816,800
    
    
    
    1,011,038
    
    
    
    129,561International telecommunications
    
    
    418,276
    
    
    
    324,470
    
    
    
    291,943
    
    
    
    37,4111,134,876
    
    
    
    1,141,270
    
    
    
    1,302,981
    
    
    
    166,972Operating Expenses:Network costs
    
    
    (300,593
    )
    
    
    (214,591
    )
    
    
    (178,367
    )
    
    
    (22,857
    )Other operating expensesSalaries and related costs
    
    
    (256,721
    )
    
    
    (221,102
    )
    
    
    (247,460
    )
    
    
    (31,711
    )Sales and marketing expenses
    
    
    (204,952
    )
    
    
    (203,673
    )
    
    
    (307,743
    )
    
    
    (39,436
    )Office, general and administrative expenses
    
    
    (164,208
    )
    
    
    (144,657
    )
    
    
    (186,547
    )
    
    
    (23,905
    )Depreciation and amortization
    
    
    (276,464
    )
    
    
    (258,103
    )
    
    
    (210,051
    )
    
    
    (26,917
    )Provision for doubtful accounts
    
    
    (17,450
    )
    
    
    (6,569
    )
    
    
    (14,293
    )
    
    
    (1,832
    )Total other operating expenses
    
    
    (919,795
    )
    
    
    (834,104
    )
    
    
    (966,094
    )
    
    
    (123,801
    )Total Operating Expenses
    
    
    (1,220,388
    )
    
    
    (1,048,695
    )
    
    
    (1,144,461
    )
    
    
    (146,658
    )(Loss)/income from operations
    
    
    (85,512
    )
    
    
    92,575
    
    
    
    158,520
    
    
    
    20,314Interest income
    
    
    20,378
    
    
    
    22,671
    
    
    
    15,596
    
    
    
    1,999Interest expense
    
    
    (88,637
    )
    
    
    (87,504
    )
    
    
    (75,137
    )
    
    
    (9,629
    )Other income, net
    
    
    4,465
    
    
    
    3,149
    
    
    
    9,393
    
    
    
    1,204(Loss)/income before taxation
    
    
    (149,306
    )
    
    
    30,891
    
    
    
    108,372
    
    
    
    13,888Income taxes (expense)/credit
    
    
    7,244
    
    
    
    (2,026
    )
    
    
    16,818
    
    
    
    2,155Net (loss)/income
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190
    
    
    
    16,043
 Year Ended August 31, 2008 Compared to Year Ended August 31, 2007
 Revenues.
 Fixed telecommunications network services.
 
    
    Broadband Internet access.Subscription base for our Internet access services rose by
27.9%, to 316,000 as of August 31, 2008 from 247,000 as of August 31, 2007. During fiscal
2008, our average revenue per user increased, mainly because we focused on differentiating
our services by emphasizing our ultra high Internet access speed. Our strategy was to
acquire and retain customers who
 30




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##### Table of Contents



are willing to enter into subscription contracts with a longer service period and to pay higher prices in return for a more stable and higher
speed broadband service and a reliable customer support. This strategy was proven
successful as evidenced by the increase in revenues from our Internet access services.
    
    Local VoIP.Subscription base for our local VoIP services rose by 6.8%, to 329,000 as
of August 31, 2008 from 308,000 as of August 31, 2007, mainly due to improved branding and
our greater success in cross selling our VoIP services to subscribers of our Internet
access services.
    
    IP-TV.Subscription base for our IP-TV services increased by 21.9% to 156,000
subscriptions, with the majority of the new subscriptions coming from existing subscribers
of our Internet access and local VoIP services.
  International telecommunications services.
 Operating expenses.
 Network costs.
 Other operating expenses .
 
    
    Salaries and related costs.Salaries and related costs increased by 11.9% to HK247.5
million in fiscal 2008. We increased our total work force by 13.3% to 3,051 employees as
of August 31, 2008 from 2,692 employees as of August 31, 2007, primarily due to the
increased operating scale in fixed telecommunications network services.
    
    Sales and marketing expenses.Sales and marketing expenses increased by 51.1% to
HK$307.7 million in fiscal 2008 from HK$203.7 million in fiscal 2007, as we increased our
salaries and commissions for our sales and marketing employees of HK$59.9 million and the
increased mass media advertising costs of HK$30.3 million. In fiscal 2008, we started a
strategy of promoting the brand to a wider audience.
    
    Office, general and administrative expenses.Office, general and administrative
expenses increased by 28.9% to HK$186.5 million in fiscal 2008 from HK$144.7 million in
fiscal 2007, mainly due to the expanded operating scale of our fixed telecommunications
network services.
    
    Depreciation and amortization.Depreciation and amortization expenses decreased by
18.6% to HK$210.1 million in fiscal 2008 from HK$258.1 million in fiscal 2007. Our
management revised the estimated useful lives of our fiber network and related peripherals
from 4-15 years to 6-20 years, and the revisions became effective from June 1, 2007. As a
result, fiscal 2008 was the first full year in which the impact on depreciation charges
resulting from such revision was realized. The effect of the decrease in depreciation
expense for fiscal 2008 due to the changes in estimated useful lives which was estimated
to be HK$63.6 million.
    
    Provision for doubtful accounts.Provision for doubtful accounts increased to HK$14.3
million in fiscal 2008 from HK$6.6 million in fiscal 2007. Included in the provision for
fiscal 2007 was the reversal of HK$9.4 million of the allowance for doubtful debts
previously recognized for mobile interconnection charges. If such effect was excluded, the
provision for doubtful accounts decreased by HK$1.7 million due to better collection
efforts. For more information regarding our provisions for mobile interconnection
charges, see Factors Affecting Our Results of OperationsOur Revenues above in this annual report.
 Income from operations.
 Interest income and expense.
 31




---



##### Table of Contents



Other income, net.
 Income tax (expense)/credit.
 Net income.
 Year Ended August 31, 2007 Compared to Year Ended August 31, 2006
 Revenues.
 Fixed telecommunications network services.
 
    
    Internet access.Subscription base for our Internet access services rose by 12.3%, to
247,000 as of August 31, 2007 from 220,000 as of August 31, 2006. During fiscal 2007, we
focused on differentiating our services by emphasizing our ultra high Internet access
speed. which allow us to increase our average revenue per user. By providing stable and
high speed broadband services and reliable customer service, we aim to acquire and retain
customers with longer subscription period to higher price. This has significantly
increased our revenue from Internet access services.
    
    Local VoIP.Subscription base for our local VoIP services rose by 9.6%, to 308,000 as
of August 31, 2007 from 281,000 as of August 31, 2006, mainly due to improved branding and
cross selling our VoIP services to subscribers of our Internet access services.
    
    IP-TV.Subscription base for our IP-TV services increased by 10.3% to 128,000
subscriptions, with the majority of the new subscriptions coming from existing subscribers
of our Internet access and local VoIP services.
 International telecommunications services.
 Operating expenses.
 Network costs.
 Other operating expenses .
 
    
    Salaries and related costs.Salaries and related costs decreased by 13.9% to HK$221.1
million in fiscal 2007 from HK$256.7 million in fiscal 2006 mainly due to the benefits
from streamlining the work force in fiscal 2006.
    
    Sales and marketing expenses.Sales and marketing
expenses in fiscal 2007 was comparable to that in fiscal 2006.
 32




---



##### Table of Contents




    
    Office, general and administrative expenses.Office, general and administrative
expenses decreased by 13.6% to HK$144.6 million in fiscal 2007 from HK$164.2 million in
fiscal 2006, mainly as a result of last years operational efficiency plan and cost
savings due to the decentralization of authority to department heads.
    
    Depreciation and amortization.Depreciation and amortization expenses decreased by 6.7%
to HK$258.1 million in fiscal 2007 from HK$276.5 million in fiscal 2006, mainly due to
changes in the estimated useful lives of certain assets amounting to HK$15.9 million. Our
management revised the estimated useful lives of our fiber network and related peripherals
from 4-15 years to 6-20 years, effective on June 1, 2007. The change in the estimated
useful lives is a change in accounting estimate that is accounted for prospectively from
June 1, 2007. This change does not have any effect on the total depreciation charges of
those assets during their remaining useful lives.
    
    Provision for doubtful accounts.Provision for doubtful accounts decreased by 62.3% to
HK$6.6 million in fiscal 2007, mainly due to the reversal of previously recognized
provisions for mobile interconnection charges receivable. In fiscal 2006, we recorded a
provision of HK$20.8 million for mobile interconnection charges receivable accumulated
from previous years following our assessment of the collectability of these charges. In
fiscal 2007, we reversed a portion of this provision by HK$9.4 million based on the rates
set by the Telecommunications Authority in the 2004 determination issued in June 2007. Our provision for other trade
receivables recorded in fiscal 2007 was HK$16.0 million compared to the HK$17.5 million in
fiscal 2006. For more information regarding our provisions for mobile interconnection
charges, see Factors Affecting our Results of OperationsOur Revenues above in this annual report.
 Income from operations.
 Interest income and expense.
 Other income, net.
 Income tax (expense)/credit.
 Net income.
 U.S. GAAP Reconciliation
   As of and for the Year Ended August 31,2006
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    US$(in thousands)Shareholders EquityHKFRS
    
    
    891,654
    
    
    
    903,882
    
    
    
    1,032,607
    
    
    
    132,324U.S. GAAP
    
    
    897,271
    
    
    
    909,499
    
    
    
    1,038,224
    
    
    
    133,044
  33




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##### Table of Contents



Recent Accounting Pronouncements
  B. Liquidity and Capital Resources
    Cash Flow
  Year Ended August 31,2006
    
    2007
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    US$(In thousands)Net cash flow from operating activities
    
    
    184,151
    
    
    
    383,999
    
    
    
    378,529
    
    
    
    48,507Net cash (used in)/provided by investing activities
    
    
    (492,742
    )
    
    
    114,053
    
    
    
    (147,750
    )
    
    
    (18,934
    )Net cash used in financing activities
    
    
    (86,432
    )
    
    
    (109,504
    )
    
    
    (342,516
    )
    
    
    (43,892
    )(Decrease)/increase in cash and bank balances
    
    
    (395,023
    )
    
    
    388,548
    
    
    
    (111,737
    )
    
    
    (14,319
    )Cash and bank balances, at the beginning of year
    
    
    539,591
    
    
    
    144,917
    
    
    
    532,894
    
    
    
    68,289Effect of foreign exchange rate changes on cash
    
    
    349
    
    
    
    (571
    )
    
    
    453
    
    
    
    58Cash and bank balances, at the end of the year
    
    
    144,917
    
    
    
    532,894
    
    
    
    421,610
    
    
    
    54,028
 Operating Activities
     34




---



##### Table of Contents



Investing Activities
    Financing Activities
    Indebtedness
  8.75% Senior Notes
    
    
    pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;
    
    incur additional indebtedness or issue certain equity interests;
    
    merge, consolidate or sell all or substantially all of our assets;
    
    issue or sell capital stock of some of our subsidiaries;
    
    sell or exchange assets or enter into new businesses;
    
    create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;
    
    create liens on assets;
    
    enter into certain transactions with affiliates or related persons; and
    
    enter into sale and lease back transactions.
   35




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##### Table of Contents



Banking Facilities
  Capital Expenditures
  Contractual Obligations and Commercial Commitments
  Payments due by periodMore than 1
    
    More thanyear but
    
    3 years but
    
    MoreWithin
    
    within 3
    
    within 5
    
    thanContractual Obligations
    
    Total
    
    1 year
    
    years
    
    years
    
    5 years(Thousands of HK$)Capital expenditure items
    
    
    143,888
    
    
    
    143,888
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    87,000
    
    
    
    55,095
    
    
    
    21,077
    
    
    
    3,444
    
    
    
    7,3848.75% senior notes
    
    
    1,093,852
    
    
    
    61,012
    
    
    
    122,024
    
    
    
    122,024
    
    
    
    788,792Obligation under finance leases
    
    
    414
    
    
    
    142
    
    
    
    272Other current liabilities
    
    
    248,805
    
    
    
    248,805
    
    
    
    
    
    
    
    
    
    
    
    Programming fees (IP-TV)
    
    
    6,862
    
    
    
    6,583
    
    
    
    219
    
    
    
    60
    
    
    
    Total
    
    
    1,580,821
    
    
    
    515,525
    
    
    
    143,592
    
    
    
    125,528
    
    
    
    796,176
   C. Research and development, patents and licenses
  D. Trend information
  36




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##### Table of Contents



E Off-Balance Sheet Arrangements
  F. Tabular disclosure of contractual obligations.
  
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
   DateJoined CityName
    
    Age
    
    Position
    
    TelecomBoard of Directors :WONG Wai Kay, Ricky
    
    
    47
    
    
    Chairman
    
    
    1992CHEUNG Chi Kin, Paul
    
    
    51
    
    
    Vice Chairman
    
    
    1992YEUNG Chu Kwong, William
    
    
    48
    
    
    Executive Director and Chief Executive Officer
    
    
    2005LAI Ni Quiaque
    
    
    39
    
    
    Executive Director, Chief Financial Officer,
Company Secretary and Head of Staff
Engagement
    
    
    2004CHENG Mo Chi, Moses
    
    
    58
    
    
    Non-Executive Director
    
    
    1997LEE Hon Ying, John
    
    
    62
    
    
    Independent Non-Executive Director
    
    
    1997CHAN Kin Man
    
    
    49
    
    
    Independent Non-Executive Director
    
    
    1997PEH Jefferson Tun Lu
    
    
    49
    
    
    Independent Non-Executive Director
    
    
    2004Senior Management :CHONG Kin Chun, John
    
    
    46
    
    
    Director of Corporate Division
    
    
    1996LO Sui Lun
    
    
    44
    
    
    Director of Infrastructure Development
    
    
    1998TAM Ming Chit
    
    
    42
    
    
    Chief Technology Officer
    
    
    2008TO Wai Bing
    
    
    46
    
    
    Managing Director of Business Development
    
    
    2007
 Executive Directors
   37




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##### Table of Contents



Non-Executive Director
  Independent Non-Executive Directors
    38




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##### Table of Contents



Senior Management
     B. Compensation
 Directors and Senior Managements Compensation
   .
  C. Board Practices
 Service Contracts
  Controlled Company Exemption
  39




---



##### Table of Contents



Audit Committee
      
    
    Reviewed the Companys financial statements for the year ended August 31, 2007 and for
the six months ended February 29, 2008;
    
    Reviewed the internal audit progress, especially on the compliance of the
Sarbanes-Oxley Act;
    
    Reviewed the external auditors report on the review of the Companys interim financial
report for the six months ended February 29, 2008 and the Companys audited consolidated
financial statements for the year ended August 31, 2007; and
    
    Pre-approved the audit and non-audit services provided by KPMG, the Companys external
auditor.
 Remuneration Committee
  
    
    Establish formal, fair and transparent procedures for developing policy and structure
of all remuneration of directors and senior management.
    
    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 proposed discretionary performance bonus for the management committee members.
    
    Reviewed and approved the remuneration packages for management committee members.
    
    Reviewed and approved the remuneration for the Directors.
 D. Employees
  40




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##### Table of Contents



EmployeesInformation technology and engineering
    
    
    380Sales and marketing, customer service and Special Duty Unit, or SDU
    
    
    2,367General administration and others
    
    
    304Total
    
    
    3,051
  EmployeesHong Kong
    
    
    1,538Guangzhou
    
    
    1,489Canada
    
    
    24Total
    
    
    3,051
  E. Share Ownership
 Share Ownership
  Number of Shares
    
    Percentage of
    
    OutstandingBeneficially
    
    Shares Beneficially
    
    ShareTitle of Class
    
    Identity of Person or Group
    
    Owned(4)
    
    Owned (%)(3)
    
    OptionsOrdinary Shares
    
    Wong Wai Kay, Ricky
    
    
    332,688,495
    (1)
    
    
    51.13
    
    
    
    14,093,586Ordinary Shares
    
    Cheung Chi Kin, Paul
    
    
    366,983,820
    (2)
    
    
    56.40
    
    
    
    14,093,586Ordinary Shares
    
    Yeung Chu Kwong, William
    
    
    3,000,000
    
    
    
    Less than 1.0
    
    
    
    7,029,678Ordinary Shares
    
    Lai Ni Quiaque
    
    
    10,142,446
    
    
    
    1.56
    
    
    
    8,029,678Ordinary Shares
    
    Chong Kin Chun, John
    
    
    2,271,364
    
    
    
    Less than 1.0
    
    
    
    2,516,710Ordinary Shares
    
    Lo Sui Lun
    
    
    700,000
    
    
    
    Less than 1.0
    
    
    
    2,013,369Ordinary Shares
    
    Tam Ming Chit
    
    
    Nil
    
    
    
    Nil
    
    
    
    1,002,718Ordinary Shares
    
    To Wai Bing
    
    
    Nil
    
    
    
    Nil
    
    
    
    1,002,718
 
 (1)
    
    Of the 332,688,495 shares, 331,637,811 shares are
beneficially owned through Mr. Wongs 42.12 % interest in
Top Group International Limited, or Top Group, and
1,050,684 shares are owned directly by Mr. Wong.(2)
    
    Of the 366,983,820 shares, 331,637,811 shares are
beneficially owned through Mr. Cheungs 27.06% interest in
Top Group,11,021,389 shares are owned directly by Mr.
Cheung and 24,324,620 shares are beneficially owned through
Mr. Cheungs 50% interest in Worship Limited.(3)
    
    Percentage ownership is based on 650,722,409 shares issued as of January 9, 2009.(4)
    
    Beneficial ownership is determined in accordance with the rules of the SEC. 41




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##### Table of Contents



Adjustment
    
    
    AdjustmentOptions
    
    
    
    
    to number
    
    
    to number
    
    
    Options
    
    
    OptionsBalance
    
    
    granted
    
    
    
    
    of options
    
    
    of options
    
    
    exercised
    
    
    cancelled/
    
    
    Balanceas at
    
    
    during
    
    
    
    
    for 2007
    
    
    for 2008
    
    
    during
    
    
    lapsed
    
    
    as atDate of
    
    Exercise
    
    January
    
    
    the
    
    
    Exercise
    
    Final
    
    
    Interim
    
    
    the
    
    
    during
    
    
    Januarygrant
    
    price
    
    21 ,2008
    
    
    period
    
    
    period
    
    Dividend
    
    
    Dividend
    
    
    period
    
    
    the period
    
    
    9, 2009HK$
    
    
    
    
    
    
    
    
    
    
    
    (note 1)
    
    
    (note 2)DirectorsMr. Wong Wai
Kay, Ricky
    
    January 5,
2005
    
    1.5297(note 5)
    
    
    8,000,000
    
    
    
    
    
    
    January 5, 2005 toOctober 20, 2014
    
    
    31,646
    
    
    
    21,832
    
    
    
    
    
    
    
    
    
    
    
    8,053,478May 22, 2006
    
    0.6554(note 6)
    
    
    6,000,000
    
    
    
    
    
    
    May 22, 2007 toMay 21, 2016
    
    
    23,734
    
    
    
    16,374
    
    
    
    
    
    
    
    
    
    
    
    6,040,108Mr. Cheung Chi Kin,Paul
    
    January 5, 2005
    
    1.5297(note 5)
    
    
    8,000,000
    
    
    
    
    
    
    January 5, 2005 toOctober 20, 2014
    
    
    31,646
    
    
    
    21,832
    
    
    
    
    
    
    
    
    
    
    
    8,053,478May 22,
2006
    
    0.6554(note 6)
    
    
    6,000,000
    
    
    
    
    
    
    May 22, 2007 toMay 21, 2016
    
    
    23,734
    
    
    
    16,374
    
    
    
    
    
    
    
    
    
    
    
    6,040,108Mr. Yeung Chu
Kwong,
William
    
    May 22,
2006
    
    0.6554(note 6)
    
    
    2,000,000
    
    
    
    
    
    
    May 22, 2007 toMay 21, 2016
    
    
    7,911
    
    
    
    5,458
    
    
    
    1,000,000
    
    
    
    
    
    
    
    1,013,369February 6, 2008
    
    1.7652(note 7)
    
    
    
    
    
    
    6,000,000
    
    
    (note 3)
    
    
    
    
    
    
    16,309
    
    
    
    
    
    
    
    
    
    
    
    6,016,309Mr. Lai Ni
Quiaque
    
    June 3, 2004
    
    
    1.4700
    
    
    
    6,000,000
    
    
    
    
    
    
    May 1, 2005 toJune 2,2014
    
    
    
    
    
    
    
    
    
    
    6,000,000
    
    
    
    
    
    
    May 22, 2006
    
    0.6554(note 6)
    
    
    3,000,000
    
    
    
    
    
    
    May 22, 2007 toMay 21, 2016
    
    
    7,911
    
    
    
    5,458
    
    
    
    1,000,000
    
    
    
    
    
    
    
    2,013,369February 11, 2008
    
    1.8749(note 8)
    
    
    
    
    
    
    6,000,000
    
    
    (note 4)
    
    
    
    
    
    
    16,309
    
    
    
    
    
    
    
    
    
    
    
    6,016,309Senior ManagementMr. Chong Kin
Chun, John
    
    October 21,
2004
    
    1.5297(note 5)
    
    
    2,000,000
    
    
    
    
    
    
    January 1, 2005 toOctober 20, 2014
    
    
    7,911
    
    
    
    5,457
    
    
    
    
    
    
    
    
    
    
    
    2,013,368May 22, 2006
    
    0.6554(note 6)
    
    
    1,000,000
    
    
    
    
    
    
    May 22, 2007 toMay 21, 2016
    
    
    3,956
    
    
    
    1,364
    
    
    
    501,978
    
    
    
    
    
    
    
    503,342Mr. Lo Sui Lun
    
    October 21, 2004
    
    1.5297(note 5)
    
    
    500,000
    
    
    
    
    
    
    January 1, 2005 toOctober 20, 2014
    
    
    1,978
    
    
    
    1,365
    
    
    
    
    
    
    
    
    
    
    
    503,343May 22, 2006
    
    0.6554(note 6)
    
    
    1,500,000
    
    
    
    
    
    
    May 22, 2007 toMay 21, 2016
    
    
    5,934
    
    
    
    4,092
    
    
    
    
    
    
    
    
    
    
    
    1,510,026Dr. Tam Ming Chit
    
    May 2, 2008
    
    1.7951(note 9)
    
    
    
    
    
    
    1,000,000
    
    
    (note 3)
    
    
    
    
    
    
    2,718
    
    
    
    
    
    
    
    
    
    
    
    1,002,718Ms. To Wai Bing
    
    February 15, 2008
    
    1.7652(note 7)
    
    
    
    
    
    
    4,000,000
    
    
    (note 3)
    
    
    
    
    
    
    10,873
    
    
    
    
    
    
    
    3,008,155
    
    
    
    1,002,718
 
 Notes:(1)
    
    As a result of allotment of 11,227,213 new shares to shareholders who elected to
receive the 2007 Final Dividend in shares on February 4, 2008, the exercise price of and
the number of share subject to the 51,805,000 share options outstanding on December 21,
2007 (being the Record Date for determining the entitlement of 2007 Final Dividend) were
adjusted pursuant to the 2002 Share Option Scheme with effect from February 4, 2008. The
closing price per share immediately before the date of the grant of the Options was
HK$1.70. 42




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##### Table of Contents



(2)
    
    As a result of allotment of 8,838,938 new shares to shareholders who elected to
receive the 2008 Interim Dividend in shares on July 23, 2008, the exercise price of and
the number of share subject to the 65,235,809 share options outstanding on June 6, 2008
(being the Record Date for determining the entitlement of 2008 Interim Dividend) were
adjusted pursuant to the 2002 Share Option Scheme with effect from July 23, 2008. The
closing price per share immediately before the date of the grant of the Options was
HK$1.79.(3)
    
    The exercise of the Options is subject to certain conditions that must be achieved
by the employee. The Options shall be exercised not later than December 23, 2012.(4)
    
    The exercise of the Options is subject to the performance of the Companys share.
The Options shall be exercised not later than 23 December 2012.(5)
    
    Exercise price of the share options was adjusted from HK$1.54 to HK$1.5339 per
ordinary share as a result of our payment of the 2007 Final Dividend (see Note 1).
Exercise price of the share options was adjusted from HK$1.5339 to HK$1.5297 per ordinary
share as a result of our payment of the 2008 Interim Dividend (see Note 2).(6)
    
    Exercise price of the share options was adjusted from HK$0.66 to HK$0.6573 per
ordinary share as a result of our payment of the 2007 Final Dividend (see Note 1).
Exercise price of the share options was adjusted from HK$0.6573 to HK$0.6554 per ordinary
share as a result of our payment of the 2008 Interim Dividend (see Note 2).(7)
    
    Exercise price of the share options was adjusted from HK$1.77 to HK$1.7652 per
ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).(8)
    
    Exercise price of the share options was adjusted from HK$1.88 to HK$1.8749 per
ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).(9)
    
    Exercise price of the share options was adjusted from HK$1.80 to HK$1.7951 per
ordinary share as a result of our payment of the 2008 Interim Dividend (see Note 2).  Share Option Schemes
      43




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##### Table of Contents



(i)
    
    the expiry date relevant to that option;(ii)
    
    one month following the date a grantee ceases to be an eligible
participant for any reason other than death or termination of his
relationship with us (or the relevant subsidiary, as the case may be)
on any of the grounds specified in (vii) below;(iii)
    
    12 months, or such longer period as the Board may determine,
following the death of a grantee whose relationship with us (or the
relevant subsidiary, as the case may be) would not have been
terminated on any of the grounds specified in (vii) below;(iv)
    
    21 days following the date an effective resolution is passed for our voluntary winding-up;(v)
    
    subject to (iv) above, the date of commencement of such winding-up;(vi)
    
    the date on which any compromise or arrangement between us and our
members or creditors in connection with a scheme for our
reconstruction or our amalgamation with any other company or
companies becomes effective;(vii)
    
    the date on which the grantee ceases to be an eligible participant
by reason of the termination of his or her relationship with us or
the relevant subsidiary on any one or more of the grounds of serious
misconduct or breach, bankruptcy, insolvency, composition with his
or her creditors or conviction of any criminal offence involving his
or her integrity or honesty or, in the case of a grantee-employee
and if so determined by the Board, on any other common law,
statutory or contractual ground on which an employer would be
entitled to terminate such grantees employment;(viii)
    
    14 days following the date a general offer (which has been made to
shareholders by way of take-over offer, share repurchase offer or
scheme of arrangement or otherwise in like manner) becomes, or is
declared unconstitutional; and(ix)
    
    the date on which we cancel the options by reason that the grantee in
any way sells, transfers, charges, mortgages, encumbers or creates
any interest in favor of any third party over or in relation to any
of his or her options or attempt to do so.
  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  Percentages of SharesBeneficially
    
    Beneficially OwnedTitle of Class
    
    Identity of Person or Group
    
    Owned (5)
    
    (%) (1)Ordinary Shares
    
    Wong Wai Kay, Ricky
    
    
    332,688,495
    (2)
    
    
    51.13Ordinary Shares
    
    Cheung Chi Kin, Paul
    
    
    366,983,820
    (3)
    
    
    56.40Ordinary Shares
    
    Top Group International Limited
    
    
    331,637,811
    
    
    
    50.96Ordinary Shares
    
    Leung Ka Pak
    
    
    331,637,811
    (4)
    
    
    50.96Ordinary Shares
    
    Yau Ming Yan, Andrew
    
    
    331,637,811
    (4)
    
    
    50.96
 
 (1)
    
    Percentage ownership is based on 650,722,409 shares issued as of January 9, 2009.(2)
    
    Of the 332,688,495 shares, 331,637,811 shares are
beneficially owned through Mr. Wongs 42.12 % interest
in Top Group International Limited or Top Group, and
1,050,684 shares are owned directly by him. Top Group
International Limited, Top Group is a holding company
incorporated in British Virgin Islands with no active
operations. Top Group has two directors, Mr. Wong Wai
Kay, Ricky and Mr. Cheung Chi Kin, Paul, who are our
chairman and vice chairman respectively. They are two of
shareholders of Top Group. Mr. Leung Ka Pak and Mr. Yau
Ming Yan, Andrew are the two other shareholders of Top
Group. 44




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##### Table of Contents



(3)
    
    Of the 366,983,820 shares, 331,637,811 shares are
beneficially owned through Mr. Cheungs 27.06% interest
in Top Group, 11,021,389 shares are owned directly by
Mr. Cheung and 24,324,620 shares are beneficially owned
through Mr. Cheungs 50% interest in Worship Limited.(4)
    
    The 331,637,811 shares are beneficially owned through
Mr. Leungs 21.00% and Mr. Yaus 9.82% interest in Top
Group. Mr. Leung Ka Pak was a director and the president
of all of the Companys subsidiaries in Canada (other
than City Telecom (Canada) Inc.. He resigned as a
director and president in October 2005. After Mr. Leung
resigned, Mr. Yau Ming Yan, Andrew was a director and
the president of all subsidiaries in Canada (other than
City Telecom (Canada) Inc.). He resigned as a director
and president in July 2006.(5)
    
    Beneficial ownership is determined in accordance with the rules of the SEC.   Except as disclosed above, we are not directly or indirectly owned or controlled by any other
person, corporation or foreign government.We are not aware of any arrangement the operation of which may at a subsequent date result in
a change of control of City Telecom. 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
  FMIC.
  Dividends
  45




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##### Table of Contents



B. Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 A. Offer and Listing Details
   PriceHigh
    
    Low(In HK$)2003
    
    
    3.375
    
    
    
    1.3202004
    
    
    2.975
    
    
    
    1.3102005
    
    
    1.530
    
    
    
    0.5502006
    
    
    0.830
    
    
    
    0.5702007
    
    
    3.670
    
    
    
    0.8302006January to March
    
    
    0.770
    
    
    
    0.570April to June
    
    
    0.820
    
    
    
    0.600July to September
    
    
    0.710
    
    
    
    0.630October to December
    
    
    0.830
    
    
    
    0.6002007January to March
    
    
    1.560
    
    
    
    0.830April to June
    
    
    2.200
    
    
    
    1.250July to September
    
    
    2.120
    
    
    
    1.780October to December
    
    
    3.670
    
    
    
    1.9302008January to March
    
    
    2.170
    
    
    
    1.620April to June
    
    
    2.090
    
    
    
    1.670July to September
    
    
    1.950
    
    
    
    1.340October to December
    
    
    1.360
    
    
    
    0.7502008August
    
    
    1.910
    
    
    
    1.650September
    
    
    1.750
    
    
    
    1.340October
    
    
    1.360
    
    
    
    0.750November
    
    
    1.110
    
    
    
    0.840December
    
    
    1.160
    
    
    
    0.950
 46




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##### Table of Contents



PriceHigh
    
    Low(In HK$)2009January (through January 9, 2009)
    
    
    1.050
    
    
    
    0.970
  PriceHigh
    
    Low(In US$)2003
    
    
    9.550
    
    
    
    3.1002004
    
    
    7.720
    
    
    
    3.3202005
    
    
    3.980
    
    
    
    1.3702006
    
    
    2.009
    
    
    
    1.3802007
    
    
    10.750
    
    
    
    2.0102006January to March
    
    
    1.900
    
    
    
    1.440April to June
    
    
    1.970
    
    
    
    1.380July to September
    
    
    1.760
    
    
    
    1.540October to December
    
    
    2.009
    
    
    
    1.4002007January to March
    
    
    4.350
    
    
    
    2.010April to June
    
    
    5.830
    
    
    
    3.100July to September
    
    
    5.600
    
    
    
    4.050October to December
    
    
    10.750
    
    
    
    4.8302008January to March
    
    
    5.580
    
    
    
    4.250April to June
    
    
    5.750
    
    
    
    4.370July to September
    
    
    4.910
    
    
    
    2.950October to December
    
    
    3.380
    
    
    
    1.9152008August
    
    
    4.910
    
    
    
    4.410September
    
    
    4.720
    
    
    
    2.950October
    
    
    3.380
    
    
    
    1.930November
    
    
    2.560
    
    
    
    1.915December
    
    
    2.850
    
    
    
    2.2202009January (through January 9, 2009)
    
    
    2.820
    
    
    
    2.660
 B. Plan of distribution
  C. Markets
  D. Selling shareholders
  E. Dilution
  F. Expenses of the issue
  47




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##### Table of Contents



ITEM 10. ADDITIONAL INFORMATION
 A. Share Capital
  B. Memorandum and Articles of Association
  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 employees of the
Company or its subsidiaries, including the adoption, modification or
operation of any employees share scheme or any share incentive or
share option scheme under which the director or his associate(s) may
benefit;(f)
    
    any proposal or arrangement concerning the benefit of employees of the
Company or its subsidiaries, including the adoption, modification or
operation of a pension fund or retirement, death or disability
benefits scheme which relates both to directors (or his associate(s))
and employees of the Company or any of its subsidiaries and does not
provide in respect of any director or his associate(s), as such any
privilege or advantage not generally accorded to the class of persons
to which such scheme or fund relates; and(g)
    
    any contract or arrangement in which he or his associate(s) is/are
interested in the same manner as other holders of shares or debentures
or other securities of the Company by virtue only of his/their
interest in shares or debentures or other securities of the Company.
  Dividends
    48




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##### Table of Contents



(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.
   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,
  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
  49




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##### Table of Contents



Voting Rights
    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 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
  50




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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
   51




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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.
   U.S. Holders
  Dividends
 52




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##### Table of Contents



Sale or Other Disposition of Shares or American depositary shares
 PFIC Considerations
  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.
 53




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##### Table of Contents



Backup Withholding and Information Reporting
    F. Dividends and paying agents
  G. Statement by experts
  H. Documents on Display
   I. Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Foreign Currency Risk
   As of August 31, 2008(Thousands of HK$)Cash and bank balances:Denominated in U.S. dollars
    
    
    174,397Denominated in Canadian dollars
    
    
    1,311Accounts payable and other payables:Denominated in U.S. dollars
    
    
    46,001
   
 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
 Disclosure Controls and Procedures
  54




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##### Table of Contents



Managements Report on Internal Control Over Financial Reporting
   Changes in Internal Control Over Financial Reporting
   
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Nature of the service
    
    2007
    
    2008(HK$ million)
    
    (HK$ million)Audit fees
    
    
    2.2
    
    
    
    2.8Audit-related fees
    
    
    0.4
    
    
    
    0.4Total
    
    
    2.6
    
    
    
    3.2
 Audit Fees
  Audit-Related Fees
  55




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##### Table of Contents



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
  
 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.
 56




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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 Statements of Operations
    
    F-2Consolidated Balance Sheets
    
    F-3, 4Consolidated Statements of Changes in Shareholders Equity
    
    F-5Consolidated Statements of Cash Flows
    
    F-6, 7, 8Notes to the Consolidated Financial Statements
    
    F-9




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
        F-1




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 
 
   Year ended August 31,Note
    
    2006
    
    2007
    
    2008HK$
    
    HK$
    
    HK$Revenue
    
    
    
    
    1,134,876
    
    
    
    1,141,270
    
    
    
    1,302,981Operating expensesNetwork costs, net
    
    4
    
    
    (300,593
    )
    
    
    (214,591
    )
    
    
    (178,367
    )Salaries and related costs
    
    
    
    
    (256,721
    )
    
    
    (221,102
    )
    
    
    (247,460
    )Sales and marketing expenses
    
    
    
    
    (204,952
    )
    
    
    (203,673
    )
    
    
    (307,743
    )General and administrative expenses
    
    
    
    
    (440,672
    )
    
    
    (402,760
    )
    
    
    (396,598
    )Provision for doubtful accounts
    
    
    
    
    (17,450
    )
    
    
    (6,569
    )
    
    
    (14,293
    )(Loss)/income from operations
    
    
    
    
    (85,512
    )
    
    
    92,575
    
    
    
    158,520Interest income
    
    
    
    
    20,378
    
    
    
    22,671
    
    
    
    15,596Interest expense
    
    5
    
    
    (88,637
    )
    
    
    (87,504
    )
    
    
    (75,137
    )Other income, net
    
    5
    
    
    4,465
    
    
    
    3,149
    
    
    
    9,393(Loss)/income before taxation
    
    5
    
    
    (149,306
    )
    
    
    30,891
    
    
    
    108,372Income tax credit/(expense)
    
    6
    
    
    7,244
    
    
    
    (2,026
    )
    
    
    16,818Net (loss)/income
    
    
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190(Loss)/Earnings per shareBasic
    
    7
    
    

    (23.1) cents
    
    
    

    4.7 cents
    
    
    

    19.7 centsDiluted
    
    7
    
    

    (23.1) cents
    
    
    

    4.6 cents
    
    
    

    19.0 cents
  F-2




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 
 
   August 31,Note
    
    2007
    
    2008HK$
    
    HK$ASSETSCurrent assetsCash and bank balances
    
    20
    
    
    532,894
    
    
    
    421,610Pledged bank deposits
    
    16
    
    
    87,220
    
    
    
    87,319Investment securities
    
    17
    
    
    3,779
    
    
    
    27,997Trade receivables, net
    
    8(a)
    
    
    170,551
    
    
    
    140,283Other receivables, deposits and prepayments
    
    8(d)
    
    
    59,372
    
    
    
    82,726Inventories
    
    
    
    
    477
    
    
    
    Deferred expenditure
    
    13
    
    
    13,584
    
    
    
    40,704Total current assets
    
    
    
    
    867,877
    
    
    
    800,639Goodwill
    
    9
    
    
    1,066
    
    
    
    1,066Fixed assets, net
    
    10
    
    
    1,237,223
    
    
    
    1,231,399Investment securities
    
    17
    
    
    39,213
    
    
    
    Derivative financial instrument
    
    18
    
    
    1,039
    
    
    
    Long term receivables and prepayment
    
    
    
    
    6,932
    
    
    
    5,586Deferred expenditure
    
    13
    
    
    7,783
    
    
    
    15,391Deferred taxation
    
    12
    
    
    
    
    
    
    26,335Total assets
    
    
    
    
    2,161,133
    
    
    
    2,080,416LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesTrade payables
    
    
    
    
    76,019
    
    
    
    52,324Deposits received
    
    
    
    
    16,188
    
    
    
    16,264Deferred services income
    
    
    
    
    64,202
    
    
    
    110,449Other payables and accrued charges
    
    11
    
    
    145,267
    
    
    
    178,114Income tax payable
    
    
    
    
    1,481
    
    
    
    2,103Current portion of obligations under finance leases
    
    14
    
    
    835
    
    
    
    121Total current liabilities
    
    
    
    
    303,992
    
    
    
    359,375Long-term liabilitiesDeferred taxation
    
    12
    
    
    291
    
    
    
    4,937Long-term debt and obligations under finance leases, excluding current portion
    
    14
    
    
    952,968
    
    
    
    683,497Total liabilities
    
    
    
    
    1,257,251
    
    
    
    1,047,809
 F-3




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 
  August 31,Note
    
    2007
    
    2008HK$
    
    HK$Commitments and contingencies
    
    15Shareholders equityOrdinary shares, par value HK$0.10 per share 2,000,000,000 shares authorized 616,503,404 and 650,621,823 shares issued
and outstanding at August 31, 2007 and
2008, respectively
    
    19
    
    
    61,650
    
    
    
    65,062Share premium
    
    
    
    
    622,433
    
    
    
    670,717Retained profits
    
    
    
    
    200,519
    
    
    
    275,025Capital reserve
    
    
    
    
    18,109
    
    
    
    19,013Translation reserve
    
    
    
    
    1,171
    
    
    
    2,790Total shareholders equity
    
    
    
    
    903,882
    
    
    
    1,032,607Total liabilities and shareholders equity
    
    
    
    
    2,161,133
    
    
    
    2,080,416
  F-4




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
  
   Year ended August 31,Note
    
    2006
    
    2007
    
    2008HK$
    
    HK$
    
    HK$Total equity as of beginning of the yearAs previously reported
    
    
    
    
    
    
    1,020,454
    
    
    
    891,654
    
    
    
    903,882Adjustment arising from adoption of HKAS 39
    
    
    
    
    
    
    6,609
    
    
    
    
    
    
    
    After opening balance adjustment
    
    
    
    
    
    
    1,027,063
    
    
    
    891,654
    
    
    
    903,882Net (loss)/gain recognized directly in equity:Foreign currency translation adjustment
    
    
    
    
    
    
    (183
    )
    
    
    514
    
    
    
    1,619(Loss)/profit attributable to shareholders
    
    
    
    
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190Dividend paid in respect of the current year
    
    
    
    
    
    
    
    
    
    
    (24,635
    )
    
    
    (11,371
    )Dividend paid in respect of the previous year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,915
    )Movements in equity arising from capital transactions:Equity settled share-based compensation
    
    
    
    
    
    
    6,823
    
    
    
    5,727
    
    
    
    4,204Shares issued upon exercise of options
    
    
    
    
    
    
    13
    
    
    
    1,757
    
    
    
    14,998Total equity as of the end of the year
    
    
    19
    
    
    
    891,654
    
    
    
    903,882
    
    
    
    1,032,607
  F-5




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
  
   Year ended August 31,Note
    
    2006
    
    2007
    
    2008HK$
    
    HK$
    
    HK$Cash flows from operating activities(Loss)/income before taxation
    
    
    
    
    
    
    (149,306
    )
    
    
    30,891
    
    
    
    108,372Adjustments to reconcile(Loss)/income before taxation to net cash inflow from operating activities:Depreciation of purchased fixed assets
    
    
    
    
    
    
    275,538
    
    
    
    257,052
    
    
    
    209,464Depreciation of fixed assets held under finance leases
    
    
    
    
    
    
    926
    
    
    
    1,051
    
    
    
    587Impairment loss on investment property
    
    
    
    
    
    
    1,131
    
    
    
    
    
    
    
    Amortization of deferred expenditure
    
    
    
    
    
    
    13,973
    
    
    
    15,580
    
    
    
    33,777Interest income
    
    
    
    
    
    
    (20,378
    )
    
    
    (22,671
    )
    
    
    (15,596
    )Interest element of finance leases
    
    
    
    
    
    
    54
    
    
    
    62
    
    
    
    34Loss on disposal of fixed assets
    
    
    
    
    
    
    9,621
    
    
    
    1,714
    
    
    
    1,431Realized and unrealized gain on investment securities
    
    
    
    
    
    
    (668
    )
    
    
    (1,887
    )
    
    
    (3,284
    )Interest, amortization and exchange difference on senior notes
    
    
    
    
    
    
    86,664
    
    
    
    89,879
    
    
    
    72,640Other borrowing costs
    
    
    
    
    
    
    1,919
    
    
    
    (739
    )
    
    
    (1,185
    )Equity settled share-based compensation
    
    
    
    
    
    
    6,823
    
    
    
    5,727
    
    
    
    4,204Realized and unrealized loss on derivative financial instruments
    
    
    
    
    
    
    125
    
    
    
    806
    
    
    
    1,039Gain on extinguishment of 10-year senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,582
    )Decrease in long-term receivable and prepayment
    
    
    
    
    
    
    567
    
    
    
    5,600
    
    
    
    1,346
 F-6




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 
  Year ended August 31,Note
    
    2006
    
    2007
    
    2008HK$
    
    HK$
    
    HK$Cash flows from operating activities (continued)Adjustments to reconcile (continued)Changes in operating assets and liabilities: (Increase)/decrease in trade receivables, other receivables, deposits and prepayments
    
    
    
    
    
    
    (9,413
    )
    
    
    (11,742
    )
    
    
    6,914 Decrease in inventories
    
    
    
    
    
    
    1,101
    
    
    
    379
    
    
    
    477 Increase in deferred expenditure
    
    
    
    
    
    
    (5,287
    )
    
    
    (24,502
    )
    
    
    (68,505
    ) (Decrease)/increase in trade payables, other payables, accrued charges, and deposits
received
    
    
    
    
    
    
    (23,652
    )
    
    
    8,573
    
    
    
    (12,567
    ) (Decrease)/increase in deferred service income
    
    
    
    
    
    
    (3,001
    )
    
    
    30,459
    
    
    
    46,247Net cash inflow generated from operations
    
    
    
    
    
    
    186,737
    
    
    
    386,232
    
    
    
    382,813Interest element of finance leases
    
    
    
    
    
    
    (54
    )
    
    
    (62
    )
    
    
    (34
    )Hong Kong profits tax (paid)/recovered
    
    
    
    
    
    
    (961
    )
    
    
    (263
    )
    
    
    42Overseas tax paid
    
    
    
    
    
    
    (1,571
    )
    
    
    (1,908
    )
    
    
    (4,292
    )Net cash inflow from operating activities
    
    
    
    
    
    
    184,151
    
    
    
    383,999
    
    
    
    378,529Investing activitiesDecrease/(Increase) in pledged bank deposits
    
    
    
    
    
    
    3,425
    
    
    
    (198
    )
    
    
    (Increase)/decrease in term bank deposits
    
    
    
    
    
    
    (144,646
    )
    
    
    237,496
    
    
    
    Purchases of fixed assets
    
    
    
    
    
    
    (382,214
    )
    
    
    (149,300
    )
    
    
    (189,903
    )Interest received
    
    
    
    
    
    
    20,378
    
    
    
    22,671
    
    
    
    15,596Proceeds from disposal of fixed assets
    
    
    
    
    
    
    5,676
    
    
    
    3,384
    
    
    
    7,057Net proceeds from maturity of derivative financial instruments
    
    
    
    
    
    
    4,639
    
    
    
    
    
    
    
    3,900Net proceeds from redemption of long-term bank deposit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,600Net cash (outflow)/inflow from investing activities
    
    
    
    
    
    
    (492,742
    )
    
    
    114,053
    
    
    
    (147,750
    )Net cash (outflow)/inflow before financing activities
    
    
    
    
    
    
    (308,591
    )
    
    
    498,052
    
    
    
    230,779
 F-7




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 
  Year ended August 31,Note
    
    2006
    
    2007
    
    2008HK$
    
    HK$
    
    HK$Financing activitiesProceeds from exercise of share options
    
    
    
    
    
    
    13
    
    
    
    1,757
    
    
    
    14,998Interest paid on senior notes
    
    
    
    
    
    
    (85,235
    )
    
    
    (85,313
    )
    
    
    (70,010
    )Repayment of capital element of finance leases
    
    
    
    
    
    
    (1,210
    )
    
    
    (1,321
    )
    
    
    (834
    )Repurchase of senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (269,399
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    (24,627
    )
    
    
    (17,271
    )Net cash outflow from financing activities
    
    
    
    
    
    
    (86,432
    )
    
    
    (109,504
    )
    
    
    (342,516
    )(Decrease)/increase in cash and bank balances
    
    
    
    
    
    
    (395,023
    )
    
    
    388,548
    
    
    
    (111,737
    )Cash and bank balances at the beginning of year
    
    
    
    
    
    
    539,591
    
    
    
    144,917
    
    
    
    532,894Effect of foreign exchange rate changes on cash and bank balances
    
    
    
    
    
    
    349
    
    
    
    (571
    )
    
    
    453Cash and bank balances at the end of year
    
    
    19
    
    
    
    144,917
    
    
    
    532,894
    
    
    
    421,610
  F-8




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 1
    
    Description of business and basis of presentation
 City Telecom (H.K.) Limited (the Company) was incorporated in Hong Kong on May 19, 1992 under
the Hong Kong Companies Ordinance. City Telecom (H.K.) Limited and its subsidiaries
(collectively referred to as the Group) are engaged in the provision of international
telecommunications services and fixed telecommunications network services to customers in Hong
Kong and Canada.The following is a list of principal subsidiaries which principally affect the results, assets
or liabilities of the Group as of August 31, 2008:
 PercentageholdingPlace and date of
    
    
    
    
    
    
    
    
    
    
    
    Nature ofName
    
    establishment/ operation
    
    Issued capital
    
    Directly
    
    Indirectly
    
    Business963673 Ontario Limited
    
    CanadaNovember 12, 1991
    
    Common Canadian
dollar (CAD)
502,000
    
    
    
    
    
    
    100
    
    
    Investment holding
in CanadaAttitude Holdings Limited
    
    British Virgin IslandsNovember 3, 1997
    
    Ordinary US$1
    
    
    
    
    
    
    100
    
    
    InactiveAutomedia Holdings Limited
    
    British Virgin IslandsJanuary 23, 2001
    
    Ordinary US$1
    
    
    100
    
    
    
    
    
    
    Investment holding
in Hong KongCity Telecom (B.C.) Inc.
    
    CanadaFebruary 25, 1992
    
    CommonCAD501,000
    
    
    
    
    
    
    100
    
    
    Provision of
international
telecommunications
and dial-up Internet
access services in
CanadaCity Telecom (Canada) Inc.
    
    CanadaOctober 6, 1997
    
    CommonCAD100
    
    
    
    
    
    
    100
    
    
    Leasing and
maintenance of
switching
equipment and
provision of
operational services
in Canada
 F-9




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 1
    
    Description of business and basis of presentation (continued)
 Place and
    
    
    
    Percentagedate of establishment/
    
    
    
    holding
    
    Nature ofName
    
    operation
    
    Issued capital
    
    Directly
    
    Indirectly
    
    businessCity Telecom Inc.
    
    CanadaSeptember 19,
1991
    
    Common
CAD1,000
    
    
    
    
    
    
    100
    
    
    Provision of
international
telecommunications
and dial-up Internet
access services in
CanadaCity Telecom 
International 
Limited
    
    British Virgin IslandsMay 8, 1997
    
    Ordinary
US$5,294
    
    
    100
    
    
    
    
    
    
    Investment holding
in Hong KongCity Telecom
(U.S.A.) Inc.
    
    USAMay 5, 1997
    
    Common
US$1
    
    
    
    
    
    
    100
    
    
    InactiveCredibility
Holdings Limited
    
    British Virgin
IslandsDecember 18,
1998
    
    Ordinary
US$1
    
    
    100
    
    
    
    
    
    
    Investment holding
in Hong KongCTI Guangzhou
Customer Service
Co. Ltd (translated
from the registered
name in Chinese)
    
    The Peoples Republic
of China (the PRC)
April 29, 2002
    
    Paid in capital of
HK$8,000,000
    
    
    100
    
    
    
    
    
    
    Provision of
administrative
support services in
the PRCCTI International 
Limited
    
    Hong KongAugust 23, 1999
    
    Ordinary
HK$10,000,000
    
    
    
    
    
    
    100
    
    
    InactiveCTI Marketing 
Company Limited
    
    Hong KongAugust 23, 1999
    
    Ordinary
HK$10,000
    
    
    
    
    
    
    100
    
    
    Provision of media
marketing services
in Hong KongGolden Trinity 
Holdings Limited
    
    British Virgin
Islands
June 11, 1997
    
    Ordinary
US$1
    
    
    100
    
    
    
    
    
    
    Investment holding
in Hong Kong
 F-10




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 1
    
    Description of business and basis of presentation (continued)
 Place and
    
    
    
    Percentagedate of establishment/
    
    
    
    holding
    
    Nature ofName
    
    operation
    
    Issued capital
    
    Directly
    
    Indirectly
    
    businessHong Kong Broadband 
Network Limited
    
    Hong Kong August 23,
1999
    
    Ordinary
HK$383,049
    
    
    
    
    
    
    100
    
    
    Provision of
international
telecommunications
and fixed
telecommunications
network services in
Hong KongIDD 1600 Company 
Limited
    
    Hong Kong November 4,
1998
    
    Ordinary
HK$2
    
    
    
    
    
    
    100
    
    
    Provision of
international
telecommunications
services in Hong
KongGlobal Courier
Company Limited
(formerly known as
iStore.com Limited)
    
    Hong KongSeptember 17, 1999
    
    OrdinaryHK$10,000
    
    
    
    
    
    
    100
    
    
    InactiveSGBN Singapore
Broadband Network
Pte. Limited
    
    SingaporeMarch 29, 2007
    
    OrdinarySingapore
dollar 1
    
    
    100
    
    
    
    
    
    
    Inactive
 2
    
    Basis of preparation and principal accounting policies
 (a)
    
    Statement of complianceThe accompanying consolidated financial statements have been prepared in accordance with all
applicable Hong Kong Financial Reporting Standards (HKFRSs) which collective term includes all
applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards
(HKASs) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants
(HKICPA), as well as accounting principles generally accepted in Hong Kong and the
requirements of the Hong Kong Companies Ordinance. HKFRSs differ in certain significant respects
from accounting principles generally accepted in the United States of America (U.S. GAAP),
details of which are set out in note 31.
 F-11




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (b)
    
    Basis of preparationThe consolidated financial statements consist of the balance sheets of the Company and all its
subsidiaries as of August 31, 2007, and 2008 and the related statements of operations, cash
flows and changes in shareholders equity for the years ended August 31, 2006, 2007 and 2008.The measurement basis used in the preparation of the consolidated financial statements is the
historical cost basis except that certain financial assets are stated at their fair value or
amortized cost as explained in the accounting policies set out below
(see notes 2(j), 2(k) and 2(s)).The preparation of financial statements in conformity with HKFRSs requires management to make
judgments, estimates and assumptions that affect the application of policies and reported
amounts of assets, liabilities, income and expenses. The estimates and associated assumptions
are based on historical experience and various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis of making the judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. The estimates and underlying assumptions are
reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimate is revised if the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current and future periods.All amounts are expressed in Hong Kong Dollars, the functional currency of City Telecom (H.K.)
Limited. Unless indicated otherwise, amounts in Hong Kong Dollars have been rounded to the
nearest thousand.
 (c)
    
    Subsidiaries and controlled entities
 Subsidiaries are entities controlled by the Company. Control exists when the Company has the
power to govern the financial and operating policies of an entity so as to obtain benefits from
its activities. In assessing control, potential voting rights that presently exercisable are
taken into account.
 F-12




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (d)
    
    Group accounting(i)
    
    ConsolidationA controlled subsidiary is consolidated into the consolidated financial statements from the date
that control commences until the date that control ceases.Intercompany balances and transactions and any unrealized profits arising from intercompany
transactions are eliminated in full in preparing the consolidated financial statements.
Unrealized losses resulting from intercompany transactions are eliminated in the same way as
unrealized gains but only to the extent that there is no evidence of impairment.(ii)
    
    Translation of foreign currenciesTransactions in foreign currencies are translated at exchange rates ruling at the transaction
dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date
are translated at rates of exchange ruling at the balance sheet date. Exchange differences
arising from these transactions are dealt with in the consolidated statement of operations.For consolidation purposes, the balance sheets of subsidiaries with functional currencies other
than Hong Kong Dollars are translated at the rate of exchange ruling at the balance sheet date.
Revenues and expenses are translated at the average rate prevailing during the year. The
resulting exchange differences are dealt with in the consolidated statement of shareholders
equity as translation reserves.
 (e)
    
    Goodwill
 Goodwill represents the excess of the cost of a business combination or an investment in an
associate or a jointly controlled entity over the Groups interest in the net fair value of the
acquirees identifiable assets, liabilities and contingent liabilities at the acquisition date.
Any excess of the Groups interest in the net fair value of the acquirees identifiable assets,
liabilities and contingent liabilities over the cost of a business combination or an investment
in an associate of a jointly controlled entity is recognized immediately in the consolidated
statement of operations.Goodwill is stated at cost less accumulated impairment losses, if any. Goodwill is allocated to
cash-generating units and is tested annually for impairment (see note 2(i)). In respect of
associates or jointly controlled entities, the carrying amount of goodwill is included in the
carrying amount of the interest in the associate or jointly controlled entity.On disposal of a cash generating unit, an associate or a jointly controlled entity during the
year, any attributable amount of purchased goodwill is included in the calculation of the profit
or loss on disposal.
 F-13




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (f)
    
    Investment propertyInvestment properties are land and/or buildings held to earn rental income and/or for capital
appreciation.Investment properties are stated in the balance sheet at cost less accumulated depreciation (see
note 2(g)) and impairment losses (see note 2(i)), if any. Any gain or loss arising from the
retirement or disposal of an investment property is recognized in the consolidated statement of
operations. Rental income from investment property is accounted for as described in note
2(u)(vi).
 (g)
    
    Fixed assets
 Fixed assets are stated at cost less accumulated depreciation and impairment losses.Depreciation is calculated to write off the cost of items of property, plant and equipment, less
their estimated residual value, if any, using the straight-line method over their estimated
useful lives as follows:
 
    
    Buildings and investment property situated on
leasehold land
    
    over the shorter of
the unexpired term
of the leases and
their estimated
useful lives of 50
years
    
    Furniture, fixtures and fittings
    
    4 years
    
    Telecommunications, computer and office equipment
    
    4 - 20 years
    
    Motor vehicles
    
    4 years
    
    Leasehold improvements
    
    over the shorter of
the unexpired term
of the leases and
their estimated
useful lives
 Where the parts of an item of property, plant and equipment have different useful lives, the
cost of the item is allocated on a reasonable basis between the parts and each part is
depreciated separately. Both the useful life of an asset and its residual value, if any, are
reviewed annually.Major costs incurred in restoring fixed assets to their normal working condition are charged to
the consolidated statement of operations. Major improvements are capitalized and depreciated
over the expected useful lives of the related asset.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (g)
    
    Fixed assets (continued)The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds
and the carrying amount of the relevant asset, and is recognized in the consolidated statement
of operations on the date of disposal.During the year ended August 31, 2007, the Group changed the estimated useful lives of certain
telecommunications equipment. The effect of such change is set out in note 10(d).Under certain circumstances, the Group may have obligation to dismantle part of its network upon
request by concerned parties. Owing to the absence of such history, no reliable estimate can be
reasonably made in respect of such potential obligation.
 (h)
    
    Assets held under leases
 An arrangement, comprising a transaction or a series of transactions, is or contains a lease if
the Group determines that the arrangement conveys a right to use a specific asset or assets for
an agreed period of time in return for a payment or a series of payments. Such a determination
is made based on an evaluation of the substance of the arrangement and is regardless of whether
the arrangement takes the legal form of a lease.(i)
    
    Classification of leased assetsAssets held under leases which transfer to the Group substantially all the risks and rewards of
ownership are classified as being held under finance leases. Leases which do not transfer
substantially all the risks and rewards of ownership to the Group are classified as operating
leases.Land held for own use under an operating lease which its fair value cannot be measured
separately from the fair value of a building situated thereon at the inception of the lease, is
accounted for as being held under a finance lease, unless the building is also clearly held
under an operating lease (see note 2(h)(iii)).(ii)
    
    Finance leasesWhere the Group acquired the use of assets under finance leases, the amounts representing the
lower of the fair value of the leased asset, or the present value of the minimum lease payments
is recorded in fixed assets with the corresponding liability, net of finance charges, recorded
as obligations under finance leases. Depreciation and impairment losses are accounted for in
accordance with the accounting policy in note 2(g) and note 2(i). Finance charges implicit in
the lease payments are charged to the consolidated statement of operations over the period of
the leases so as to produce an approximate constant periodic rate of charge on the remaining
balance of the obligations.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)(h)
    
    Assets held under leases (continued)(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, are credited/ charged to the consolidated statement of
operations on a straight-line basis over the lease periods.(i)
    
    Impairment of assets(i)
    
    Impairment of investment securities and other 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.
 If any such evidence exists, any impairment loss is determined and recognized as follows:
 
    
    For unquoted equity securities and current and non-current receivables
that are carried at cost, the impairment loss is measured as the
difference between the carrying amount of the financial asset and the
estimated future cash flows, discounted at the current market rate of
return for a similar financial asset where the effect of discounting
is material. Impairment losses for current and non-current receivables
that are carried at cost are reversed if in a subsequent period the
amount of the impairment loss decreases. Impairment losses for equity
securities are not reversed.
    
    For financial assets carried at amortized cost, the impairment loss is
measured as the difference between the assets carrying amount and the
present value of estimated future cash flows, discounted at the
financial assets original effective interest rate (i.e. the effective
interest rate computed at initial recognition of these assets). This
assessment is made collectively where financial assets carried at
amortized cost share similar risk characteristics, such as similar
past due status, and have not been individually assessed as impaired.
Future cash flows for financial assets which are assessed for
impairment collectively are based on historical loss experience for
assets with credit risk characteristics similar to the collective
group.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)(i)
    
    Impairment of assets (continued)(i)
    
    Impairment of investment securities and other receivables (continued)
 If in a subsequent period the amount of an impairment loss decreases and the
decrease can be linked objectively to an event occurring after the impairment loss was
recognized, the impairment loss is reversed through the consolidated statement of
operations. A reversal of an impairment loss shall not result in the assets carrying
amount exceeding that which would have been determined had no impairment loss been
recognized in prior years.For available-for-sale securities, the cumulative loss that has been
recognized directly in equity is removed from equity and is recognized
in consolidated statement of operations. The amount of the cumulative
loss that is recognized in consolidated statement of operations is the
difference between the acquisition cost (net of any principal
repayment and amortization) and current fair value, less any
impairment loss on that asset previously recognized in consolidated
statement of operations.Impairment losses recognized in consolidated statement of operations in respect
of available-for-sale equity securities are not reversed through consolidated
statement of operations. Any subsequent increase in the fair value of such
assets is recognized directly in equity.Impairment losses in respect of available-for-sale debt securities are reversed if the
subsequent increase in fair value can be objectively related to an event occurring after the
impairment loss was recognised. Reversals of impairment losses in such circumstances are
recognised in profit or loss.Impairment losses are written off against the corresponding assets directly, except for
impairment losses recognised in respect of trade debtors, whose recovery is considered
doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded
using an allowance account. When the Group is satisfied that recovery is remote, the amount
considered irrecoverable is written off against trade debtors and any amounts held in the
allowance account relating to that debt are reversed. Subsequent recoveries of amounts
previously charged to the allowance account are reversed against the allowance account. Other
changes in the allowance account and subsequent recoveries of amounts previously written off
directly are recognised in profit or loss.
 (ii)
    
    Impairment of other 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 decrease:
 
    
    fixed assets;
    
    investment property; and
    
    goodwill.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)(ii)
    
    Impairment of other assets (continued)If any such indication exists, the assets recoverable amount is estimated. In addition, for
goodwill, the recoverable amount is estimated annually whether or not there is any indication
of impairment.
 
    
    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 consolidated statement of operations whenever the
carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its
recoverable amount. Impairment losses recognized in respect of cash-generating units are
allocated first to reduce the carrying amount of any goodwill allocated to the
cash-generating unit (or group of units) and then, to reduce the carrying amount of the
other assets in the unit (or group of units) on a pro rata basis, except that the
carrying value of an asset will not be reduced below its individual fair value less costs
to sell, or value in use, if determinable.
    
    Reversals of impairment lossesExcept in the case of goodwill, an impairment loss is reversed if there has been a
favorable change in the estimate used to determine the recoverable amount. An impairment
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 consolidated statement of operations in the year in
which the reversals are recognized.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 (j)
    
    Investment securitiesThe Groups accounting policy for investments securities is as follows:Financial assets at fair value through profit or loss comprise of financial assets held for
trading and those designated as of fair value through profit or loss at inception. They are
initially stated at fair value and are classified as current assets, if they are expected to
be realized within 12 months. At each balance sheet date the fair value is remeasured, with
any resultant gain or loss being recognized in the consolidated statement of operations. The
net gain or loss recognized in the consolidated statement of operations does not include any
interest earned on these investments as these are recognized in accordance with the policies
set out in notes 2(u)(v).Held-to-maturity securities are dated debt securities that the Group has the positive ability
and intention to hold to maturity. They are initially recognized in the balance sheet at fair
value plus transaction costs. Subsequently, they are stated in the balance sheet at amortized
cost less impairment losses (see note 2(i)(i)).Investment securities that are not classified as held for trading, financial assets at fair
value through profit or loss, or held-to-maturity securities, are classified as
available-for-sale securities. Available-for sale securities are initially recognized at fair
value plus transaction costs. At each balance sheet date the fair value is remeasured, with
any resultant gain or loss being recognized directly in equity, except for impairment losses
(see note 2(i)(i)) and, in the case of monetary items such as debt securities, foreign
exchange gains and losses that are recognized directly in the consolidated statement of
operations. Where these investments are interest-bearing, interest calculated using the
effective interest method is recognized in the consolidated statement of operations. When
these investments are derecognized, the cumulative gain or loss previously recognized directly
in equity is recognized in the consolidated statement of operations.Investments are recognized on the date the Group commits to purchase the investments.
Investments are derecognized when:
 (i)
    
    the contractual rights to the cash flows from the investment securities expire; or(ii)
    
    the Group transfers the contractual rights to receive the cash flows of the investment securities.
 (k)
    
    Derivative financial instrumentsDerivative financial instruments that are not designated as hedge are recognized initially at
fair value. At each balance sheet date the fair value is remeasured. The gain or loss on
remeasurement to fair value is charged immediately to the consolidated statement of
operations.(l)
    
    Deferred 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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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)(m)
    
    Accounts receivablesTrade and other receivables are initially recognized at fair value and thereafter stated at
amortized cost less impairment losses for doubtful debts (see note 2(i)(i)), except where the
receivables are interest-free loans made to related parties without any fixed repayment terms
or the effect of discounting would be immaterial. In such cases, the receivables are stated at
cost less impairment losses for bad and doubtful debts.(n)
    
    InventoriesInventories are carried at the lower of cost or net realizable value.Cost is determined using the first in, first out method and comprises all costs of purchase.Net realizable value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.When inventories are sold, the carrying amount of the inventory is recognized in the
consolidated statement of operations as cost of inventories sold in the period in which the
related revenue is recognized. The amount of any write-down of inventories to net realizable
value is recognized as an expense in the period the write-down occurs. The amount of any
reversal of any write-down of inventories, arising from an increase in net realizable value,
is recognized as a reduction of network costs in the period in which the reversal occurs.For the years ended August 31, 2006, 2007 and 2008, there was no write-down of inventories.(o)
    
    Cash, bank balances and pledged bank 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 consolidated balance sheet, and is not included in the cash and
bank balances total in the consolidated statements of cash flows. The pledged bank deposits
represent cash maintained at a bank as security for bank facility and bank guarantees issued
by the bank to third party suppliers and utility vendors (see note 16).
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (p)
    
    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.
 (q)
    
    Employee benefits
 (i)
    
    Employee leave entitlementsEmployee entitlements to annual leave and long service leave are recognized when they accrue to
employees. A provision is made for the estimated liability for annual leave and long-service
leave as services are rendered by employees. Employee entitlements to sick leave and maternity
or paternity leave are not recognized until the time of leave.(ii)
    
    Profit sharing and bonus 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 employees and a reliable estimate
of the obligation can be made.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (q)
    
    Employee benefits (continued)(iii)
    
    Retirement benefit costsThe Group contributes to defined contribution retirement schemes which are available to certain
employees. Contributions to the schemes by the Group are calculated as a percentage of
employees basic salaries and charged to the consolidated statement of operations. The Groups
contributions are reduced by contributions forfeited by those employees who leave the scheme
prior to being fully vested in the Groups contributions.The assets of the scheme are held in an independently administered fund that is separated from
the Groups assets.(iv)
    
    Share-based paymentsThe fair value of share options granted to employees is recognized as an employee cost with a
corresponding increase in a capital reserve within equity. The fair value is measured at grant
date using the Black-Scholes option pricing model or Monte Carlo model, taking into account the
terms and conditions upon which the options were granted. Where the employees have to meet
vesting conditions before becoming unconditionally entitled to the share options, the total
estimated fair value of the share options is spread over the vesting period, taking into account
the probability that the options will vest.During the vesting period, the number of share options that is expected to vest is reviewed. Any
adjustment to the cumulative fair value recognized in prior years is charged/credited to the
consolidated statement of operations in the year of the review, unless the original employee
cost qualified for recognition as an asset, with a corresponding adjustment to the capital
reserve. On vesting date, the amount recognized as an expense is adjusted to reflect the actual
number of share options that vest (with a corresponding adjustment to the capital reserve)
except where forfeiture is only due to not achieving vesting conditions that relate to the
market price of the Companys shares. The amount relating to share options expense is recorded
in the capital reserve until either the option is exercised or the option expires.
 (r)
    
    Deferred taxation
 Deferred tax assets and liabilities arise from deductible and taxable temporary differences
respectively, being the differences between the carrying amounts of assets and liabilities for
financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax
losses and unused tax credits.Deferred tax assets are recognized to the extent that it is probable that future taxable profit
will be available against which the temporary differences can be utilized.Deferred taxation is provided on temporary differences arising on investments in subsidiaries
except where the timing of the reversal of the temporary difference can be controlled and it is
probable that the temporary difference will not be reversed in the foreseeable future.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (s)
    
    Senior notesSenior notes are recognized initially at fair value less direct and incremental issuance costs.
Subsequent to initial recognition, the senior notes are stated at amortized cost. The difference
between the original issuance price and redemption price of the notes is recognized in the
consolidated statement of operations over the period of the notes using the effective interest
method.
 (t)
    
    Trade and other payables
 Trade and other payables are initially recognized at fair value and are subsequently stated at
amortized cost unless the effect of discounting would be immaterial, in which case they are
stated at cost.As at August 31, 2007 and 2008, the Groups trade
and other payables are stated at cost as the effect of discounting is
immaterial.
 (u)
    
    Revenue recognition
 (i)
    
    Revenue for the provision of international telecommunications and fixed
telecommunications network services is recognized, when an arrangement
exists, service is rendered, the fee is fixed or determinable, and
collectability is probable.(ii)
    
    Tariff-free period granted to subscribers of fixed telecommunications
network services are recognized in the consolidated statement of
operations ratably over the term of the service subscription
agreement. Unbilled revenue represents revenue recognized in
accordance with the requirements in 2(u)(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 services income, and subsequently recognized as revenue on a
straight-line basis over the related service period.(iv)
    
    Revenue from the sales of products is recognized upon the transfer of
risks and rewards of ownership to the customer, which generally
coincides with the time when the goods are delivered to the customer
and title has passed.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (u)
    
    Revenue recognition (continued)(v)
    
    Interest income is recognized as it accrues using the effective interest method.(vi)
    
    Rental income receivable under operating leases is recognized in the
consolidated statement of operations in equal installments over the
periods covered by the lease term. Lease incentives granted are
recognized in the consolidated statement of operations as an integral
part of the aggregate net lease payments receivable.
 (v)
    
    Borrowing costs
 Borrowing costs are expensed in the consolidated statement of operations in the period which
they are incurred, except to the extent that they are capitalized as being directly attributable
to the acquisition, construction or production of an asset.The capitalization of borrowing costs as part of the cost of a qualifying asset commences when
expenditure for the asset is being incurred, borrowing costs are being incurred and activities
that are necessary to prepare the asset for its intended use or sale are in progress.
Capitalization of borrowing costs is suspended or ceases when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are interrupted or
complete.No borrowing cost was capitalized for the years ended August 31, 2006, 2007 and 2008,
respectively.
 (w)
    
    Segment reporting
 In accordance with the Groups internal financial reporting, the Group has determined that
business segment is the primary reporting format and geographical is the secondary reporting
format.Segment assets consist primarily of goodwill, fixed assets, trade and other receivables and cash
and bank deposits. Segment liabilities comprise operating liabilities and exclude items such as
taxation and senior notes. Capital expenditure comprises purchases of fixed assets.In respect of geographical segment reporting, sales are reported based on the country in which
the customer is located. Total assets and capital expenditure are reported based on where the
assets are located.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 2
    
    Basis of preparation and principal accounting policies (continued)
 (x)
    
    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 consideration received or receivable adjusted by the amount of any cash or
cash equivalents transferred. When the fair value of the goods or services received cannot be
measured reliably, the revenue is measured at the fair value of the goods or services provided,
adjusted by the amount of any cash or cash equivalents transferred.
 (y)
    
    Related parties
 For the purposes of these financial statements, a party is considered to be related to the Group
if:
 (i)
    
    the party has the ability, directly or indirectly through one or more
intermediaries, to control the Group or exercise significant influence
over the Group in making financial and operating policy decisions, or
has joint control over the Group;(ii)
    
    the Group and the party are subject to common control;(iii)
    
    the party is an associate of the Group or a joint venture in which the Group is a venturer;(iv)
    
    the party is a member of key management personnel of the Group or the
Groups parent, or a close family member of such an individual, or is
an entity under the control, joint control or significant influence of
such individuals;(v)
    
    the party is a close family member of a party referred to in (i) or is
an entity under the control, joint control or significant influence of
such individuals; or(vi)
    
    the party is a post-employment benefit plan which is for the benefit
of employees of the Group or of any entity that is a related party of
the Group.
 Close family members of an individual are those family members who may be expected to influence,
or be influenced by, that individual in their dealings with the entity.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 3
    
    Changes in accounting policies
 The HKICPA has issued a number of new and revised HKFRSs and Interpretations that are effective
or available for early adoption for the current accounting period of the Group.There have been no significant changes to the accounting policies applied in these financial
statements for the years presented as a result of adoption of these new standards. However, as a
result of the adoption of HKFRS 7, Financial instruments: Disclosures and the amendment to HKAS
1, Presentation of financial statements: Capital disclosures, there have been some additional
disclosures provided as follows:As a result of the adoption of HKFRS 7 and as compared with the information previously required
to be disclosed by HKAS 32, Financial instruments: Disclosure and presentation, the financial
statements include expanded disclosure about the significance of the Groups financial
instruments and the nature and extent of risks arising from those instruments. These disclosures
are provided throughout these financial statements, in particular in note 27.The amendment to HKAS 1 introduces additional disclosure requirements to provide information
about the level of capital and the Groups objectives, policies and processes for managing
capital. These new disclosures are set out in note 19.Both HKFRS 7 and the amendment to HKAS 1 do not have any material impact on the classification,
recognition and measurement of the amounts recognized in the financial instruments.The Group has not applied any new standard or interpretation that is not yet effective for the
current accounting period (see note 30).
 4
    
    Network costs
 Network costs mainly include interconnection charges paid to local and overseas carriers, leased
line rentals, program fees, production costs for the pay-TV using Internet Protocol service and
costs of inventories sold, and exclude depreciation charge which is included in general and
administration expenses.Hong Kong Broadband Network Limited (HKBN), a wholly-owned subsidiary of the Group, as a Fixed
Telecommunications Network Services (FTNS) licensee, is obligated to contribute Universal
Services Contributions (USC) as compensation to PCCW-HKT Telephone Limited (PCCW-HKT) for
the cost of network development in remote areas in Hong Kong.The Group estimates the USC payable to PCCW-HKT based on the provisional rates announced by the
Telecommunications Authority (TA). The TA periodically reviews the actual costs incurred by
PCCW-HKT in the network development and revises the amounts owed to, or be refunded by, PCCW-HKT
to the respective USC contributing parties, including the HKBN (the Rate Revisions).
Accordingly, the estimate made by the HKBNs management is subject to change based on the Rate
Revisions identified during a financial year and up to the date prior to the release of the
financial statements of the Group. The Group adjusts such differences as an addition or
reduction of the corresponding costs of services in that particular reporting period.Any sum received in advance from PCCW-HKT as an estimated refund of the USC on a provisional
basis, which is subject to the final confirmation and determination of TA, is recorded in other
payables and accrued expenses in the Groups consolidated balance sheet.On November 13, 2006, TA issued a statement (the 2006 TA) on the USC and confirmed the actual
contribution level for calendar year 2004. In aggregate, an amount of HK$1,365,088 was recorded
as a reduction against the network costs of the Group for the year ended August 31, 2006.As of the date of issuance of the Groups financial statements for the year ended August 31,
2007 for Hong Kong statutory purposes, the actual contribution level for calendar year 2005,
2006 and 2007 had not yet been confirmed by the TA. For the year ended August 31, 2007, the
Group recorded USC charges based on the provisional rates set out in the 2006 TA. On December
28, 2007, TA issued a statement (the 2007 TA) on the USC and confirmed that the actual
contribution level for the period from January 1, 2005 to June 30, 2007. Based on the 2007 TA,
an amount of HK$7,617,000 was recovered as a reduction against the network cost of the Group for
the year ended August 31, 2008.The actual contribution level for the period subsequent to June 30, 2007 has not yet been
confirmed by the TA. Therefore, for the year ended August 31, 2008, the Group recorded USC
charges based on the provisional rates set out in the 2007 TA.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 5
    
    (Loss)/income before taxation
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000(Loss)/income before taxation is arrived at after charging:Amortization of deferred expenditure
    
    
    13,973
    
    
    
    15,580
    
    
    
    33,777Depreciation of purchased fixed assets
    
    
    275,538
    
    
    
    257,052
    
    
    
    209,464Depreciation of fixed assets held under finance leases
    
    
    926
    
    
    
    1,051
    
    
    
    587Impairment loss  investment property
    
    
    1,131
    
    
    
    
    
    
    
    Operating lease charges in respect of: Land and buildings
    
    
    17,556
    
    
    
    13,879
    
    
    
    13,296 Computer equipment
    
    
    840
    
    
    
    32
    
    
    
    50Research and development costs
    
    
    9,605
    
    
    
    4,977
    
    
    
    9,593Retirement benefit costs  defined contribution plans (note 24)
    
    
    27,956
    
    
    
    23,933
    
    
    
    29,738Interest expense comprises:Interest element of finance leases
    
    
    54
    
    
    
    62
    
    
    
    34Interest on senior notes
    
    
    85,235
    
    
    
    85,313
    
    
    
    70,010Amortization of debt issuance cost
    
    
    1,429
    
    
    
    2,129
    
    
    
    1,665Other borrowing costs
    
    
    1,919
    
    
    
    
    
    
    
    3,428Total interest expense
    
    
    88,637
    
    
    
    87,504
    
    
    
    75,137Other income net, comprises:Net exchange gain/(loss)
    
    
    1,044
    
    
    
    (114
    )
    
    
    1,923Gain on extinguishment of 10-year senior notes
    
    
    
    
    
    
    
    
    
    
    2,582Others
    
    
    3,421
    
    
    
    3,263
    
    
    
    4,8884,465
    
    
    
    3,149
    
    
    
    9,393
 F-27




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 6
    
    Income tax credit/(expense)(Loss)/income before taxation by geographical location is as follows:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Hong Kong (loss)/income
    
    
    (150,624
    )
    
    
    24,574
    
    
    
    100,514Overseas income
    
    
    1,318
    
    
    
    6,317
    
    
    
    7,858(Loss)/income before taxation
    
    
    (149,306
    )
    
    
    30,891
    
    
    
    108,372
 Income tax credit/(expense) consist of the following:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Hong Kong income tax current (note (a))
    
    
    (24
    )
    
    
    (121
    )
    
    
    (391
    ) under-provision of current tax in prior years
    
    
    (552
    )
    
    
    
    
    
    
     deferred (note 12)
    
    
    10,046
    
    
    
    47
    
    
    
    21,757Overseas taxation current (note (b))
    
    
    (2,367
    )
    
    
    (1,964
    )
    
    
    (1,929
    ) under-provision of current tax in prior years
    
    
    
    
    
    
    
    
    
    
    (2,552
    ) deferred (note 12)
    
    
    141
    
    
    
    12
    
    
    
    (67
    )7,244
    
    
    
    (2,026
    )
    
    
    16,818
 
 Notes:(a)
    
    The Company and its subsidiaries operating in Hong Kong are subject to
tax on an entity basis on income arising in or derived from Hong Kong.
The rate of taxation of subsidiaries operating in Hong Kong for the
years ended August 31, 2006 and 2007 was 17.5% and for the year ended
August 31, 2008 was 16.5%.(b)
    
    Taxation on overseas profits has been calculated on the estimated
assessable profit for the year at the rate of taxation prevailing in
the countries in which the foreign subsidiaries operate. F-28




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 6
    
    Income tax credit/(expense) (continued)The income tax credit/ (expense) for the years ended August 31, 2006, 2007 and 2008 differs
from the amounts determined by applying the applicable statutory rate in Hong Kong of 17.5%
(2008:16.5%) to income/ (loss) before taxation as a result of the following differences:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Computed expected income tax credit/(expense)
    
    
    26,129
    
    
    
    (5,406
    )
    
    
    (17,881
    )Difference in statutory tax rates of foreign subsidiaries
    
    
    (459
    )
    
    
    (1,006
    )
    
    
    (1,046
    )Effect of expenses not deductible for income taxes
    
    
    (883
    )
    
    
    (772
    )
    
    
    (6,243
    )Recognition of prior year unrecognized tax losses
    
    
    
    
    
    
    
    
    
    
    26,335Effect of bank interest income not subject to income taxes
    
    
    2,944
    
    
    
    3,533
    
    
    
    2,370Effect of other income not subject to income taxes
    
    
    548
    
    
    
    686
    
    
    
    1,508Under-provision for Hong Kong current income tax in prior years
    
    
    (552
    )
    
    
    
    
    
    
    Under provision for overseas current income tax in prior years
    
    
    
    
    
    
    
    
    
    
    (2,552
    )Adjustment
for changes in new tax laws on share based payment
    
    
    
    
    
    
    
    
    
    
    2,324Effect of prior year tax losses utilized
    
    
    2,416
    
    
    
    6,678
    
    
    
    12,013Effect of tax loss not recognized
    
    
    (20,597
    )
    
    
    (4,539
    )
    
    
    (74
    )Effect of share based payment not recognized
    
    
    (2,305
    )
    
    
    (1,125
    )
    
    
    (110
    )Others
    
    
    3
    
    
    
    (75
    )
    
    
    174Income tax credit/(expense)
    
    
    7,244
    
    
    
    (2,026
    )
    
    
    16,818
 F-29




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 7
    
    (Loss)/earnings per share
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Net (loss)/income
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190
 Number of shares in thousandsWeighted average number of shares in issue
    
    
    614,134
    
    
    
    614,840
    
    
    
    634,015Incremental shares from assumed exercise of share options
    
    
    
    
    
    
    16,479
    
    
    
    23,982Diluted weighted average number of shares
    
    
    614,134
    
    
    
    631,319
    
    
    
    657,997Basic (loss)/earnings per share
    
    HK(23.1) cents
    
    
    HK4.7 cents
    
    
    HK19.7 centsDiluted (loss)/earnings per share
    
    HK(23.1) cents
    
    
    HK4.6 cents
    
    
    HK19.0 cents
 Basic (loss)/earnings per share is calculated based on the weighted average number of issued
ordinary shares and the related (loss)/income amount. Diluted (loss)/earnings per share is
calculated based on the weighted average number of issued ordinary shares and the number of
incremental shares from assumed exercise of share options has been determined using the
treasury stock method and the related (loss)/income amount.For the years ended August 31, 2006, the number of shares used in the calculation of diluted
loss per share was equal to the number of shares used to calculate basic loss per share as the
incremental effect of share options was anti-dilutive in a loss-making year.
 F-30




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 8
    
    Receivables
 (a)
    
    Trade receivables, net
 August 31,2007
    
    2008HK$000
    
    HK$000Trade receivables
    
    
    192,943
    
    
    
    152,227Less: Allowance for doubtful debts
    
    
    (22,392
    )
    
    
    (11,944
    )170,551
    
    
    
    140,283
 The aging analysis of accounts receivable is as follows:
 August 31,2007
    
    2008HK$000
    
    HK$000Current - 30 days
    
    
    50,282
    
    
    
    45,46231 - 60 days
    
    
    15,619
    
    
    
    17,50761 - 90 days
    
    
    8,876
    
    
    
    7,249Over 90 days
    
    
    118,166
    
    
    
    82,009192,943
    
    
    
    152,227
 The majority of the Groups accounts receivable are due within 30 days from the date of
billings. Subscribers with receivable that are more than 3 months overdue are requested to
settle all outstanding balance before further credit is granted.
 (b)
    
    Impairment of trade receivables
 Impairment losses in respect of accounts receivable are recorded using an allowance account
unless the Group is satisfied that recovery of the amount is remote, in which case the
impairment loss is written off against accounts receivable directly.The movement in the allowance for doubtful debts during the year, including both specific and
collective loss components is as follows:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Balance at beginning of the year
    
    
    48,316
    
    
    
    55,745
    
    
    
    22,392Additions
    
    
    17,450
    
    
    
    15,973
    
    
    
    14,293Reversals
    
    
    
    
    
    
    (9,404
    )
    
    
    Write-off
    
    
    (10,021
    )
    
    
    (39,922
    )
    
    
    (24,741
    )Balance at the end of the year
    
    
    55,745
    
    
    
    22,392
    
    
    
    11,944
 Allowance for doubtful debts as of August 31, 2006 includes allowance for
mobile interconnection charges receivables of HK$20,809,000. Following TAs
2004 Determination issued in June 2007 (note 26(c)), the Group has reversed
HK$9,404,000 of the allowance for mobile interconnection charges to the
consolidated statement of operations (note 26(c)) and has written off the
remaining balance of the allowance of HK$11,405,000 against the related
accounts receivable.
 F-31




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 8
    
    Receivables (continued)(c)
    
    Trade receivables that are not impairedThe aging analysis of accounts receivable that are neither individually nor collectively
considered to be impaired are as follows:
 August 31,2007
    
    2008HK$000
    
    HK$000Neither past due nor impaired
    
    
    50,282
    
    
    
    45,4620-30 past due
    
    
    15,619
    
    
    
    17,50731-60 past due
    
    
    8,876
    
    
    
    7,249Over 60 past due
    
    
    95,774
    
    
    
    70,065170,551
    
    
    
    140,283
 Receivables that were neither past due nor impaired relate to a wide range of customers
for whom there was no recent history of default.Trade receivables over 60 days past due for the Group include receivable relating to
mobile interconnection charges of HK$64,407,000 as of August 31, 2008 (August 31, 2007:
HK$92,383,000) (See note 26(c)).Other accounts receivable that were past due but not impaired relate to a number of
independent customers that have a good track record with the Group. Based on past
experience, management believes that no impairment allowance is necessary in respect of
these balances as there has not been a significant change in credit quality and the
balances are still considered fully recoverable. The Group does not hold collateral over
these balances.
 (d)
    
    Other receivables, deposits and prepayments
 August 31,2007
    
    2008HK$000
    
    HK$000Deposits for purchase of fixed assets
    
    
    6,007
    
    
    
    9,094Deposits for lease of land and building
    
    
    7,256
    
    
    
    10,528Interest receivable
    
    
    1,344
    
    
    
    757Prepayments
    
    
    19,895
    
    
    
    30,635Unbilled revenue
    
    
    15,572
    
    
    
    23,293Others
    
    
    9,298
    
    
    
    8,41959,372
    
    
    
    82,726
 F-32




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 9
    
    Goodwill
 August 31,2007
    
    2008HK$000
    
    HK$000Cost and carrying amount:Beginning of the year/at the end of the year
    
    
    1,066
    
    
    
    1,066
 Goodwill has been allocated to the Groups fixed telecommunications network services
cash-generating unit (CGU) for purposes of the goodwill impairment test.Based on managements goodwill impairment test, the carrying amount of the fixed
telecommunications network services CGU was lower than its recoverable amount. The recoverable
amount was determined based on the value-in-use methodology. This methodology uses cash flow
projections based on financial budgets approved by management covering a three-year period.
Cash flows for the three-year period were estimated based on growth rates between 1% to 14%
and a pre-tax discount rate of 14%. Cash flows beyond the three year period were assumed to
remain constant. The estimated growth rates used were comparable to the growth rate for the
industry. The key assumption used in the value-in-use methodology was the annual growth of the
revenue of the fixed telecommunications network services CGU which is determined based on the
past performance and managements expectation for future performance. In assessing value in
use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects the current market assessment of the time value of money and the
risks specific to the fixed telecommunications services CGU. Any adverse change in the key
assumption could reduce the recoverable amount below carrying amount.
 F-33




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 10
    
    Fixed assets
 Furniture,
    
    Tele-Leasehold
    
    
    
    
    
    fixtures
    
    communications,Investment
    
    land and
    
    Leasehold
    
    and
    
    computer and
    
    Motorproperty
    
    buildings
    
    improvements
    
    fittings
    
    office equipment
    
    vehicles
    
    TotalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000(Note (a))
    
    (Note (a))Cost:At September 1, 2006
    
    
    5,197
    
    
    
    79,598
    
    
    
    78,241
    
    
    
    17,770
    
    
    
    2,352,253
    
    
    
    6,956
    
    
    
    2,540,015Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    773
    
    
    
    253
    
    
    
    2,560
    
    
    
    
    
    
    
    3,586Additions
    
    
    
    
    
    
    
    
    
    
    1,627
    
    
    
    496
    
    
    
    129,950
    
    
    
    177
    
    
    
    132,250Disposals
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (1,100
    )
    
    
    (8,988
    )
    
    
    (315
    )
    
    
    (10,406
    )At August 31, 2007
    
    
    5,197
    
    
    
    79,598
    
    
    
    80,638
    
    
    
    17,419
    
    
    
    2,475,775
    
    
    
    6,818
    
    
    
    2,665,445At September 1, 2007
    
    
    5,197
    
    
    
    79,598
    
    
    
    80,638
    
    
    
    17,419
    
    
    
    2,475,775
    
    
    
    6,818
    
    
    
    2,665,445Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    1,470
    
    
    
    445
    
    
    
    2,840
    
    
    
    
    
    
    
    4,755Additions
    
    
    
    
    
    
    4,646
    
    
    
    2,469
    
    
    
    2,189
    
    
    
    196,230
    
    
    
    6,150
    
    
    
    211,684Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (478
    )
    
    
    (30,564
    )
    
    
    (344
    )
    
    
    (31,386
    )At August 31, 2008
    
    
    5,197
    
    
    
    84,244
    
    
    
    84,577
    
    
    
    19,575
    
    
    
    2,644,281
    
    
    
    12,624
    
    
    
    2,850,498Accumulated
depreciation:At September 1, 2006
    
    
    1,997
    
    
    
    7,531
    
    
    
    40,428
    
    
    
    12,447
    
    
    
    1,104,864
    
    
    
    5,514
    
    
    
    1,172,781Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    612
    
    
    
    160
    
    
    
    1,874
    
    
    
    
    
    
    
    2,646Charge for the year
    
    
    104
    
    
    
    1,592
    
    
    
    9,269
    
    
    
    2,028
    
    
    
    244,581
    
    
    
    529
    
    
    
    258,103Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (683
    )
    
    
    (4,465
    )
    
    
    (160
    )
    
    
    (5,308
    )At August 31, 2007
    
    
    2,101
    
    
    
    9,123
    
    
    
    50,309
    
    
    
    13,952
    
    
    
    1,346,854
    
    
    
    5,883
    
    
    
    1,428,222At September 1, 2007
    
    
    2,101
    
    
    
    9,123
    
    
    
    50,309
    
    
    
    13,952
    
    
    
    1,346,854
    
    
    
    5,883
    
    
    
    1,428,222Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    1,334
    
    
    
    313
    
    
    
    2,077
    
    
    
    
    
    
    
    3,724Charge for the year
    
    
    104
    
    
    
    1,604
    
    
    
    9,626
    
    
    
    1,617
    
    
    
    196,198
    
    
    
    902
    
    
    
    210,051Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (286
    )
    
    
    (22,390
    )
    
    
    (222
    )
    
    
    (22,898
    )At August 31, 2008
    
    
    2,205
    
    
    
    10,727
    
    
    
    61,269
    
    
    
    15,596
    
    
    
    1,522,739
    
    
    
    6,563
    
    
    
    1,619,099Net book value:At August 31, 2008
    
    
    2,992
    
    
    
    73,517
    
    
    
    23,308
    
    
    
    3,979
    
    
    
    1,121,542
    
    
    
    6,061
    
    
    
    1,231,399At August 31, 2007
    
    
    3,096
    
    
    
    70,475
    
    
    
    30,329
    
    
    
    3,467
    
    
    
    1,128,921
    
    
    
    935
    
    
    
    1,237,223
 F-34




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 10
    
    Fixed assets (continued)
 
 Notes:(a)
    
    The interests in leasehold land and buildings and investment property
situated in Hong Kong at their net book values are analyzed as
follows: August 31,2007
    
    2008HK$000
    
    HK$000Leases of between 10 to 50 years
    
    
    73,571
    
    
    
    76,509
 
 Representing: August 31,2007
    
    2008HK$000
    
    HK$000Leasehold land and building carried at cost
    
    
    70,475
    
    
    
    73,517Investment property at cost less accumulated depreciation and impairment loss
    
    
    3,096
    
    
    
    2,99273,571
    
    
    
    76,509
 
 During the year ended August 31, 2006, a property which had been held for own use was
leased to a third party to earn rental income. Upon adoption of HKAS 40, the Group
assessed the open market value of the property and based on such assessment, wrote down
the carrying amount of the property by $1,131,000 (included in other operating
expenses). The estimate of open market value was made by reference to net rental income
allowing for reversionary income potential.The estimated fair value of the investment property held by the Group as of August 31,
2007 and 2008 amounted to HK$3,096,000 and HK$2,992,000, respectively.(b)
    
    The Groups total future aggregate lease income receivable under non-cancellable operating lease are receivable as follows: August 31,2007
    
    2008HK$000
    
    HK$000Lease in respect of investment property which are receivable: within 1 year
    
    
    228
    
    
    
    258 after 1 year but within 5 years
    
    
    
    
    
    
    258228
    
    
    
    516Leases in respect of telecommunications facilities and
computer equipment which are receivable: within 1 year
    
    
    1,065
    
    
    
    979 after 1 year but within 5 years
    
    
    214
    
    
    
    2921,279
    
    
    
    1,2711,507
    
    
    
    1,787
 F-35




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008
 10
    
    Fixed assets (continued)
 
 Notes: (continued)(c)
    
    The Group leases telecommunications, computer and office equipment for
terms ranging 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 and accordingly the lease arrangements have
been classified as finance leases. None of the leases included
contingent rental. The total cost of these assets and the related
accumulated depreciation are as follows: August 31,2007
    
    2008HK$000
    
    HK$000Cost
    
    
    4,236
    
    
    
    4,236Accumulated depreciation
    
    
    2,238
    
    
    
    2,8251,998
    
    
    
    1,411
 
 (d)
    
    Management reviews the estimated useful lives of fixed assets annually
and, if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the
estimate is changed to reflect the changed pattern. The depreciation
expense for future period is adjusted if there are significant changes
from previous estimates. Management determines the useful life of the
Groups fixed assets based on its historical experience with similar
assets, expected usage of the assets and anticipated technological
changes with respect to those assets. Estimates and assumptions used
in setting depreciable lives require both judgment and estimation.During the second half of fiscal 2007, taking into consideration of the current
conditions and expected usage of existing telecommunications equipment, management
engaged an external valuation firm to assist with its assessment of the estimated useful
lives of such asset. As a result of this assessment, management revised the estimated
useful lives of the fiber network and related peripherals from 4-15 years to 6-20 years.The change in the estimated useful lives is a change in accounting estimate that is
accounted for prospectively from June 1, 2007. As a result of such change, depreciation
expense decreased by HK$15,930,000, and both income before taxation and net income after
taxation decreased by HK$15,930,000 for the year ended August 31, 2007. The increase in
net income resulted in a HK2.6 cents increase in both the basic earnings per share and
diluted earnings per share. Such change also increased each of total assets, retained
profits and total shareholders equity at August 31, 2007 by HK$15,930,000. F-36




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 11
    
    Other payables and accrued charges
 August 31,2007
    
    2008HK$000
    
    HK$000Accrual for staff salaries and bonus
    
    
    33,833
    
    
    
    42,652Accrual for customer reward program
    
    
    6,567
    
    
    
    7,608Accrual for carrier fees and charges
    
    
    11,264
    
    
    
    7,495Accrual for international call forwarding service charges
    
    
    5,784
    
    
    
    6,305Payable for purchase of fixed assets
    
    
    34,749
    
    
    
    56,049Payable for advertising and promotional expenses
    
    
    15,972
    
    
    
    10,043Interest payable on senior notes
    
    
    7,164
    
    
    
    5,082Others accrual (note)
    
    
    29,934
    
    
    
    42,880145,267
    
    
    
    178,114
 
 Note:
    
    Amount of other accruals consisted of primarily accruals for utilities, rent and other
administrative charges. 12
    
    Deferred taxation
 The components of deferred tax (liabilities)/assets recognized in the consolidated balance
sheet and the movements of deferred tax assets/ (liabilities) are as follows:
 August 31,2007
    
    2008HK$000
    
    HK$000At the beginning of the year
    
    
    (353
    )
    
    
    (291
    )Exchange differences
    
    
    3
    
    
    
    (1
    )Deferred taxation credited/ (charged) to consolidated statement of operations relating to the origination and reversal of temporary differences
    
    
    59
    
    
    
    (4,645
    ) relating to the recognition of unrecognized tax losses in prior years
    
    
    
    
    
    
    26,335At the end of the year
    
    
    (291
    )
    
    
    21,398
 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 current 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-37




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 12
    
    Deferred taxation (continued)
 As of August 31, 2007 and 2008, the Group had accumulated tax losses amounting to
HK$1,037,141,000 and HK$905,341,000, respectively that can be carried forward to reduce future
taxable income derived in Hong Kong, Canada and the United States, as applicable. As of August
31, 2007 and 2008, the tax effect of the accumulated tax losses amounted to HK$182,739,000 and
HK$150,234,000, respectively. These tax losses expire in the following periods:
 August 31,2007
    
    2008HK$000
    
    HK$000Within one year
    
    
    737
    
    
    
    In the second year
    
    
    395
    
    
    
    In the third year
    
    
    
    
    
    
    In the fourth year
    
    
    
    
    
    
    After five years
    
    
    4,313
    
    
    
    3,967No expiry date
    
    
    1,031,696
    
    
    
    901,3741,037,141
    
    
    
    905,341
 The tax losses of the Company and its Hong Kong subsidiaries can be carried forward
indefinitely while tax loss carryforwards period of subsidiaries in Canada and the United
States range between 10 to 20 years under the respective tax laws.Deferred tax assets are recognized to the extent that realization of the related tax benefit
is probable. The Group has unrecognized tax losses carried forward from prior years of
HK$268,004,000 and HK$9,518,000 at August 31, 2007 and 2008 respectively which can offset
against future taxable income. Accumulated tax losses for which deferred tax assets were not
recognized expire in the following periods:
 August 31,2007
    
    2008HK$000
    
    HK$000Within one year
    
    
    737
    
    
    
    In the second year
    
    
    395
    
    
    
    In the third year
    
    
    
    
    
    
    In the fourth year
    
    
    
    
    
    
    After five years
    
    
    4,313
    
    
    
    3,810No expiry date
    
    
    262,559
    
    
    
    5,708268,004
    
    
    
    9,518
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 12
    
    Deferred taxation (continued)
 The movements in deferred tax assets and (liabilities) (prior to offsetting of balances within
the same taxation jurisdiction) during the years ended August 31, 2007 and 2008, are as
follows:
 Accelerateddepreciation allowances2007
    
    2008HK$000
    
    HK$000Deferred tax liabilitiesAt the beginning of the year
    
    
    (154,678
    )
    
    
    (134,910
    )Credited to consolidated statement of operations
    
    
    19,772
    
    
    
    8,463Exchange differences
    
    
    (4
    )
    
    
    At the end of the year
    
    
    (134,910
    )
    
    
    (126,447
    )
 Share-based payment
    
    Tax losses
    
    Total2007
    
    2008
    
    2007
    
    2008
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Deferred tax assets:At the beginning of the year
    
    
    123
    
    
    
    
    
    
    
    154,202
    
    
    
    134,619
    
    
    
    154,325
    
    
    
    134,619(Charged)/ credited to
consolidated statement of
operations
    
    
    (123
    )
    
    
    
    
    
    
    (19,590
    )
    
    
    13,227
    
    
    
    (19,713
    )
    
    
    13,227Exchange differences
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (1
    )
    
    
    7
    
    
    
    (1
    )At the end of the year
    
    
    
    
    
    
    
    
    
    
    134,619
    
    
    
    147,845
    
    
    
    134,619
    
    
    
    147,845
 Deferred income tax assets and liabilities are offset when there is a legally enforceable
right to set off current tax assets against current tax liabilities and when the deferred
income tax assets and liabilities relate to the same fiscal authority. The following amounts,
determined after appropriate offsetting, are reported in the consolidated balance sheet:
 August 31,2007
    
    2008HK$000
    
    HK$000Deferred tax assets
    
    
    
    
    
    
    26,335Deferred tax liabilities
    
    
    (291
    )
    
    
    (4,937
    )(291
    )
    
    
    21,398
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 13
    
    Deferred expenditure
 August 31,2007
    
    2008HK$000
    
    HK$000Balance at the beginning of the year
    
    
    12,445
    
    
    
    21,367Additions during the year
    
    
    24,502
    
    
    
    68,505Less: Amortization charge for the year (note 5)
    
    
    (15,580
    )
    
    
    (33,777
    )Balance at the end of the year
    
    
    21,367
    
    
    
    56,095Current portion
    
    
    (13,584
    )
    
    
    (40,704
    )7,783
    
    
    
    15,391
 14
    
    Long-term debt and obligations under finance leases, excluding current portion
 The Groups long-term debt and obligations under finance leases are repayable as follows:
 August 31,2007
    
    2008HK$000
    
    HK$0008.75% senior notes due 2015
    
    
    952,593
    
    
    
    683,242Obligation under finance leases Within one year
    
    
    835
    
    
    
    121 In the second year
    
    
    121
    
    
    
    129 In the third year
    
    
    254
    
    
    
    1261,210
    
    
    
    376Less: Current portion of obligation under finance leases
    
    
    (835
    )
    
    
    (121
    )375
    
    
    
    255952,968
    
    
    
    683,497
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 14
    
    Long-term debt and other liabilities (continued)
 On January 20, 2005, the Company issued unsecured 10-year senior fixed rates notes (the
10-year senior notes) with a principle amount of US$125 million at par value. The 10-year
senior notes mature on February 1, 2015 and bear interest at the fixed rate of 8.75% per annum
and is payable semi-annually on February 1 and August 1 of each year, commencing August 1,
2005.The 10-year senior notes are 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 net proceeds of 10-year senior notes were approximately US$121 million after issuance
costs and commission. The Group used the net proceeds, in part, to repay in full an existing
bank loan in the outstanding amount of HK$196.7 million. The remaining net proceeds is to be
used for capital expenditures, including expanding and upgrading the Groups Metro Ethernet
network in Hong Kong, and for additional working capital and general corporate purposes.The Company may redeem the 10-year senior notes, in whole or in part, on or after February 1,
2010, at the redemption price set forth in the indenture governing the 10-year senior notes.
In addition, prior to February 1, 2008, using the proceeds from one or more specified public
or private offerings of the Companys common stock, the Company may redeem up to a maximum of
35% of the original aggregate principal amount of the 10-year senior notes at a redemption
price equal to 108.75% of the principal amount of the 10-year senior notes. In all cases of
redemption, the Company will pay principal at the redemption price specified plus accrued and
unpaid interest through the date of redemption.The indenture governing the 10-year senior notes contains covenants that limit, among other
things, the Groups ability and the ability of certain of its existing and future subsidiaries
to:
 (i)
    
    pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments;(ii)
    
    incur additional indebtedness or issue certain equity interests;(iii)
    
    merge, consolidate or sell substantially all assets;(iv)
    
    issue or sell capital stock of certain subsidiaries;(v)
    
    sell or exchange assets or enter into new businesses;(vi)
    
    create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets;(vii)
    
    create liens on assets;(viii)
    
    enter into certain transactions with affiliates or relates persons; and(ix)
    
    enter into sale and lease back transactions.
 During the year ended August 31, 2008, the Group repurchased a portion of the 10-year senior
notes with a cumulative principal value of US$35,647,000 in the open market. The total
consideration paid was approximately US$35,352,000. The gain on extinguishment of the 10-year
senior notes was US$332,000 (equivalent to HK$2,582,000) which has been recorded as other
income in the consolidated income statement.As of August 31, 2008, the remaining principal amount of the 10-year senior notes remaining in
issued after the repurchase was US$89,353,000 (equivalent to HK$697,857,000).At August 31, 2007 and 2008, the 10-year senior notes were stated at the amortized cost of
US$122,127,000 (equivalent to HK$952,593,000) and US$87,483,000 (equivalent to HK$683,242,000)
respectively.
 F-41




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 15
    
    Commitments and contingencies
 (a)
    
    Capital commitments
 August 31,2007
    
    2008HK$000
    
    HK$000Purchases of telecommunications, computer and office equipment contracted but not provided for
    
    
    54,165
    
    
    
    143,888
 (b)
    
    Commitments under operating leases
 As of August 31, 2007 and 2008, the Group had future aggregate minimum lease
payments under non-cancellable operating leases as follows:
 August 31,2007
    
    2008HK$000
    
    HK$000Leases in respect of land and buildings: within one year
    
    
    12,562
    
    
    
    16,472 in the second year
    
    
    2,484
    
    
    
    11,493 in the third year
    
    
    
    
    
    
    15215,046
    
    
    
    28,117
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 15
    
    Commitments and contingencies (continued)
 (b)
    
    Commitments under operating leases (continued)At August 31, 2007 and 2008, the Group had future aggregate minimum lease
payments under non-cancellable operating leases as follows: (continued)
 August 31,2007
    
    2008HK$000
    
    HK$000Leases in respect of telecommunications and
computer equipment: within one year
    
    
    31,004
    
    
    
    38,623 in the second year
    
    
    6,258
    
    
    
    7,567 in the third year
    
    
    5,016
    
    
    
    1,865 in the fourth year
    
    
    4,946
    
    
    
    1,722 in the fifth year
    
    
    4,946
    
    
    
    1,722 within sixth year to twelve years
    
    
    16,384
    
    
    
    7,38468,554
    
    
    
    58,88383,600
    
    
    
    87,000
 (c)
    
    Program fee commitments
 The Group entered into several agreements with program content providers with respect to the
Groups IP-TV services. The amount of program fees payable by the Group is as follows:
 August 31,2007
    
    2008HK$000
    
    HK$000Program fee payable: within one year
    
    
    10,345
    
    
    
    6,583 in the second year
    
    
    3,633
    
    
    
    219 in the third year
    
    
    3
    
    
    
    6013,981
    
    
    
    6,862
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 15
    
    Commitments and contingencies (continued)
 (d)
    
    Contingent liabilities
 August 31,2007
    
    2008HK$000
    
    HK$000Bank guarantees provided to suppliers (note 16(i) and (ii))
    
    
    5,903
    
    
    
    24,671Bank guarantee in lieu of payment of utility deposits (note 16(iii))
    
    
    5,272
    
    
    
    5,27211,175
    
    
    
    29,943
 16
    
    Pledge of assets
 As of August 31, 2007 and 2008, the Group had pledged bank deposits of US$9,900,000
(equivalent to HK$77,220,000 and HK$77,319,000, respectively) and HK$10,000,000 as security
for the following banking facilities:
 (i)
    
    bank facility of US$9,000,000 (equivalent to HK$70,200,000) and
US$9,900,000 (equivalent to HK$77,319,000) respectively granted by the
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, 2007 and 2008, bank
guarantees of HK$1,603,000 and HK$20,371,000, respectively were issued
against this bank facility;(ii)
    
    bank guarantees of HK$4,300,000 issued by a bank to third party
suppliers of the Company and one of its subsidiaries as of August 31,
2007 and 2008 for payment of certain products and services procured
by the Company from these third party suppliers; and(iii)
    
    bank guarantees of HK$5,272,000 issued by a bank to certain utility
vendors of the Company as of August 31, 2007 and 2008 in lieu of
payment of utility deposits.
 F-44




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 17
    
    Investment securities
 August 31,2007
    
    2008HK$000
    
    HK$000Debt securities, at fair value and unlisted outside Hong Kong (note (a))
    
    
    28,577
    
    
    
    27,997Long term bank deposit, at amortized cost (note (b))
    
    
    14,415
    
    
    
    42,992
    
    
    
    27,997Less: Current portion
    
    
    (3,779
    )
    
    
    (27,997
    )39,213
    
    
    
    
 
 Notes:(a)
    
    The Group maintained an investment portfolio of HK$28,577,000 and
HK$27,997,000 as of August 31, 2007 and 2008, respectively, which
primarily consisted of equity-linked mutual fund securities.For the years ended August 31, 2006, 2007 and 2008 the net unrealized investment gains
were HK$698,000, HK1,887,000 and HK$3,163,000 respectively. No realized investment gains
or losses were recognized during the years ended August 31, 2006 and 2007. During the
year ended August 31, 2008, a debt security with principal amount of US$500,000
(equivalent to HK$3,900,000) matured with a realized gain of HK$121,000.(b)
    
    Represents a ten-year US$2 million (equivalent to HK$15,600,000 at
August 31, 2007) deposit placed with a bank for which the Group
receives a floating rate deposit interest. The deposit has a 10-year
term maturing on August 22, 2013. An interest rate of 10% per annum
has been guaranteed for the first year from the inception date on
August 22, 2003. The deposit will terminate or mature once the
cumulative interest reaches the predetermined accrued interest cap at
13% of the principal amount or an aggregate sum of US$260,000
(equivalent to HK$2,028,000 at August 31, 2007). During the year ended
August 31, 2008, the Group early redeemed the deposit and recognized a
gain of HK$1,185,000 in the consolidated statement of operations. 18
    
    Derivative financial instrument
 August 31,2007
    
    2008HK$000
    
    HK$000Non-current assetsInterest rate swap, at fair value through profit or loss
    
    
    1,039
    
    
    
    
 As of August 31, 2007, the Group has an outstanding interest rate swap contract with notional
principal amount of HK$46,666,667. Under this arrangement, the Group pays a fixed rate
interest of 2.675% per annum on the notional amount on a monthly basis, and receives a
floating interest rate based on HIBOR rate. The maturity date of the contract is December 1,
2009.During the year ended August 31, 2008, the Group early terminated the interest rate swap
contract and recognized a loss of HK$1,039,000 in the consolidated statement of operations.
 F-45




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 19
    
    Capital and reserves
 (a)
    
    Capital and reserves
 Issued and fully paid (ordinary shares of HK$0.10 each)Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totalshares
    
    Amount
    
    Share
    
    Capital
    
    Translation
    
    Retained
    
    shareholdersoutstanding
    
    outstanding
    
    premium
    
    reserve
    
    reserve
    
    profits
    
    equityHK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$(Amounts in thousands, except number of shares)Balance at September 1, 2005
    
    
    614,125,404
    
    
    
    61,412
    
    
    
    619,408
    
    
    
    7,052
    
    
    
    840
    
    
    
    338,351
    
    
    
    1,027,063Shares issued upon exercise
of share options (note (i))
    
    
    50,000
    
    
    
    5
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Equity settled share-based
compensation
    
    
    
    
    
    
    
    
    
    
    882
    
    
    
    5,941
    
    
    
    
    
    
    
    
    
    
    
    6,823Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142,062
    )
    
    
    (142,062
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183
    )
    
    
    
    
    
    
    (183
    )Balance at August 31, 2006
    
    
    614,175,404
    
    
    
    61,417
    
    
    
    620,298
    
    
    
    12,993
    
    
    
    657
    
    
    
    196,289
    
    
    
    891,654Dividend paid in respect of
previous year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,635
    )
    
    
    (24,635
    )Shares issued upon exercise
of share options (note (i))
    
    
    2,328,000
    
    
    
    233
    
    
    
    2,135
    
    
    
    (611
    )
    
    
    
    
    
    
    
    
    
    
    1,757Equity settled share-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,727
    
    
    
    
    
    
    
    
    
    
    
    5,727Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,865
    
    
    
    28,865Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    514
    
    
    
    
    
    
    
    514Balance at August 31, 2007
    
    
    616,503,404
    
    
    
    61,650
    
    
    
    622,433
    
    
    
    18,109
    
    
    
    1,171
    
    
    
    200,519
    
    
    
    903,882Dividend paid in respect of
previous year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,915
    )
    
    
    (5,915
    )Shares issued in respect of
scrip dividend of previous
year (note (ii))
    
    
    11,227,213
    
    
    
    1,123
    
    
    
    18,044
    
    
    
    
    
    
    
    
    
    
    
    (19,167
    )
    
    
    Dividend paid in respect of
current year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,371
    )
    
    
    (11,371
    )Shares issued in respect of
scrip dividend of current
year (note (iii))
    
    
    8,838,938
    
    
    
    884
    
    
    
    13,347
    
    
    
    
    
    
    
    
    
    
    
    (14,231
    )
    
    
    Shares issued upon exercise
of share options (note (i))
    
    
    14,052,268
    
    
    
    1,405
    
    
    
    16,893
    
    
    
    (3,300
    )
    
    
    
    
    
    
    
    
    
    
    14,998Equity settled share-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,204
    
    
    
    
    
    
    
    
    
    
    
    4,204Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,190
    
    
    
    125,190Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,619
    
    
    
    
    
    
    
    1,619Balance at August 31, 2008
    
    
    650,621,823
    
    
    
    65,062
    
    
    
    670,717
    
    
    
    19,013
    
    
    
    2,790
    
    
    
    275,025
    
    
    
    1,032,607
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 19
    
    Capital and reserves (continued)
 (a)
    
    Capital and reserves (continued)
 Authorized ordinary sharesof HK$0.10 eachNo. ofShares
    
    AmountHK$000At August 31, 2007 and August 31, 2008
    
    
    2,000,000,000
    
    
    
    200,000
 
 Notes:(i)
    
    During the years ended August 31, 2006, 2007 and 2008, 50,000,
2,328,000 and 14,052,268 ordinary shares were issued at a weighted
average price of HK$0.26 per share, HK$0.75 per share and HK$1.07 per
share respectively, to share option holders who had exercised their
subscription rights. These shares issued rank pari passu with the then
existing ordinary shares in issue.(ii)
    
    On 4 February 2008, the Company issued and allotted 11,227,213
ordinary shares to shareholders who elected to receive, the 2007 final
dividend in new shares pursuant to the scrip dividend scheme announced
by the Company on 4 January 2008 under which shareholders may elect to
receive the dividend in new shares in lieu of cash. These new shares
rank pari passu with the existing shares of the Company in all
respects.(iii)
    
    On 23 July 2008, the Company issued and allotted 8,838,938 ordinary
shares to shareholder, who elected to receive the 2008 interim
dividend in new shares pursuant to the scrip dividend scheme
announced by the Company on 19 June 2008 under which shareholders may
elect to receive the dividend in new shares in lieu of cash. These
new shares rank pari passu with the existing shares of the Company in
all respects.(iv)
    
    Details of the share option scheme of the Group, the share options
granted by the Group during the relevant years and options outstanding
at August 31, 2006, 2007 and 2008 are set out in note 25. (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 which comprises the fair value of the actual or
estimated number of unexercised share options granted to employees of
the Group was recognised in accordance with the accounting policy
adopted for share based payment in note 2(q).(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, 2007 and August 31, 2008, CTI Guangzhou
Customer Services Company Limited (CTIGZ), a wholly owned
subsidiary of the Group, made appropriation to the statutory reserve
of RMB379,000 and RMB324,000, respectively. The accumulated balance
of the statutory reserve maintained at the CTIGZ as of August 31,
2007 and August 31, 2008 were RMB581,000 and RMB905,000,
respectively. 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 2(d)(ii).
 F-47




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 19
    
    Capital and reserves (continued)
 (c)
    
    Capital managementThe Groups primary objectives when managing capital are to maintain a reasonable capital
structure and safeguard the Groups ability to continue as a going concern, in order 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 of August 31, 2007 and 2008 are as follows:
 August 31,2007
    
    2008HK$000
    
    HK$000Unsecured8.75% senior notes due 2015
    
    
    952,593
    
    
    
    683,242Obligation under finance lease
    
    
    1,210
    
    
    
    376Total loans
    
    
    953,803
    
    
    
    683,618Less: Cash at bank and in hand
    
    
    (532,894
    )
    
    
    (421,610
    )Less: Long-term bank loan
    
    
    (14,415
    )
    
    
    Net debt
    
    
    406,494
    
    
    
    262,008Net asset
    
    
    903,882
    
    
    
    1,032,607Net debt to net asset gearing ratio
    
    
    0.45
    
    
    
    0.25
 20
    
    Cash and bank balances
 August 31,2007
    
    2008HK$000
    
    HK$000Cash at bank and in hand
    
    
    50,164
    
    
    
    156,667Time deposits with banks and other financial institution (note (a))
    
    
    482,730
    
    
    
    264,943532,894
    
    
    
    421,610
 
 Notes:(a)
    
    Amounts represented time deposits with original maturities of less than three months. F-48




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 21
    
    Dividends
 (a)
    
    Dividends payable to equity shareholders of the Company attributable to the year
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Interim dividend, declared and paid, of HK4
cents (2007: HK4 cents, 2006: HK$Nil) per
ordinary share
    
    
    
    
    
    
    24,635
    
    
    
    25,602Final dividend proposed after the balance
sheet date of HK2 cents (2007: HK4 cents,
2006: HK$Nil) per ordinary shares
    
    
    
    
    
    
    24,660
    
    
    
    13,012
    
    
    
    49,295
    
    
    
    38,614
 During the year ended August 31, 2008, a scrip dividend option was offered to all
shareholders with registered addresses in Hong Kong that were entitled to the interim dividend
in respect of the six-month period ended February 29, 2008. 8,838,938 shares were issued during
the year ended August 31, 2008 to shareholders who had elected to receive all or part of their
entitlement to dividends in form of scrip.The final dividend proposed after the balance sheet date has not been recognized as a liability
at August 31, 2007 and August 31, 2008.
 (b)
    
    Dividends attributable to the previous financial year, approved and paid during the year
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Final dividend in respect of the financial
year ended August 31, 2007 approved and
paid, of HK4 cents per ordinary share
(2007: HK$Nil, 2006: HK$Nil)
    
    
    
    
    
    
    
    
    
    
    25,082
 During the year ended August 31, 2008, a scrip dividend option was offered to all
shareholders with registered addresses in Hong Kong that were entitled to the final
dividend in respect of the financial year ended August 31, 2007. 11,227,213 shares were
issued during the year ended August 31, 2008 to the shareholders who had elected to receive
all or part of their entitlement to dividends in the form of scrip.
 F-49




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 22
    
    Banking facilities
 The Groups banking facilities were denominated in Hong Kong dollars as follows:
 Terms of facilities asAmount available
    
    Amount utilized
    
    at August 31, 2008August 31,
    
    August 31,
    
    Interest rate2007
    
    2008
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000
    
    HK$000Bank overdrafts/ bank loans
    
    
    80,200
    
    
    
    87,319
    
    
    
    1,603
    
    
    
    29,943
    
    
    HIBOR or costof Funds + 0.8% per annum
 The amounts utilized as of August 31, 2007 and 2008 represented bank guarantees and letter of
credit issued against the banking facilities (see note 16) which the Group has not drawn upon.
The utilized banking facilities as of August 31, 2007 and 2008 were denominated in Hong Kong
dollar and Singaporean dollar.
 23
    
    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 Groups directors and
certain of the highest paid employees, is as follows:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Short-term employee benefits
    
    
    21,443
    
    
    
    26,791
    
    
    
    28,850Post-employment benefits
    
    
    1,916
    
    
    
    2,197
    
    
    
    2,425Equity compensation benefits
    
    
    4,571
    
    
    
    4,388
    
    
    
    3,66427,930
    
    
    
    33,376
    
    
    
    34,939
 F-50




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 24
    
    Retirement schemesThe Group contributes to an Occupational Retirement Scheme (the ORSO Scheme), a defined
contribution retirement scheme, which is available to some of its employees in Hong Kong. Under
the ORSO Scheme, the employees are required to contribute 5% of their monthly salaries, while
the Groups contributions are calculated at 10% and 5% of the monthly salaries of senior
management staff and all other staff respectively. The employees are entitled to 100% of the
employers contributions after 10 years of completed service, or at a reduced scale after
completion of 3 to 9 years service. Contributions to the ORSO Scheme are reduced by
contributions forfeited by those employees who leave the ORSO Scheme prior to vesting fully in
the Groups contributions.A mandatory provident fund scheme (the MPF Scheme) has been established under the Hong Kong
Mandatory Provident Fund Scheme Ordinance in December 2000. The then existing employees of the
Group in Hong Kong could elect to join the MPF Scheme, while all new employees joining the Group
in Hong Kong from then onwards are required to join the MPF Scheme. Both the Group and the
employees are required to contribute 5% of each individuals relevant income with a maximum
amount of HK$1,000 per month as a mandatory contribution. Employers mandatory contributions are
100% vested in the employees as soon as they are paid to the MPF Scheme. Senior employees may
also elect to join a Mutual Voluntary Plan (the Mutual Plan) in which both the Group and the
employee, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the
extent of contributions that would have been made under the ORSO Scheme.Pursuant to the relevant regulations in the Peoples Republic of China (the PRC), the Group
contributes to the defined contribution retirement scheme organised by the local social security
bureau for each employee of the subsidiary in the PRC at a rate of 20% of a standard salary base
as determined by the local social security bureau. The Group has no other obligation to make
payments in respect of retirement benefits of these employees.The retirement schemes for staff of the Group in other countries follow the local statutory
requirements of the respective countries.The aggregate employers contributions, net of forfeited contributions, which have been dealt
with in the consolidated statement of operations during the year are as follows:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Gross contributions
    
    
    28,912
    
    
    
    24,545
    
    
    
    29,738Less: Forfeited contributions utilized to offset the Groups
contributions during the year
    
    
    (956
    )
    
    
    (612
    )
    
    
    Net contributions charged to the consolidated statement of operations
    
    
    27,956
    
    
    
    23,933
    
    
    
    29,738
 At August 31, 2008, there is no forfeited contribution available to offset future contributions
by the Group to the ORSO scheme and the Mutual Plan.
 25
    
    Equity settled share-based transactions
 2002 Share Option SchemeThe Company operates a share option scheme (the 2002 Share Option Scheme) which was adopted by
the shareholders of the Company on December 23, 2002 and where the directors may, at their
discretion, invite eligible participants to take up options to subscribe for shares subject to
the terms and conditions stipulated therein.Under the 2002 Share Option Scheme, the Company may grant options to employees (including
executive, non-executive and independent non-executive directors), suppliers and professional
advisers to subscribe for shares of the Company. The maximum number of options authorized under
the 2002 Share Option Scheme may not, when aggregated with any shares subject to any other
executive and employee share option scheme, exceed 10% of the Companys issued share capital on
the date of adoption. The exercise price of the option is determined by the Companys board of
directors at a price not less than the highest of (a) the par value of a share; (b) the average
closing price of the Companys shares for five trading days preceding the grant date; and (c)
the closing price of the Companys shares on the date of grant. The 2002 Share Option Scheme is
valid and effective for a ten year period up to December 22, 2012 subject to earlier termination
by the Company by resolution in general meeting or by the board of directors. The period during
which the option may be exercised will be determined by the board of directors at its
discretion, save that no option may be exercised after more than ten years from the date of
grant. During the year ended August 31, 2008, options were granted under the 2002 Share Option
Scheme to eligible participants for the subscription of 18,300,000 shares (2007: 300,000 shares)
of the Company at a weighted average exercise price of HK$1.84 (2007: HK$1.16) each.
 F-51




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 25
    
    Equity settled share-based transactions (continued)
 1997 Share Option Scheme
 The Company also had a previous share option scheme (the 1997 Share Option Scheme) adopted by
shareholders on July 12, 1997 which was terminated on December 23, 2002 upon the adoption of the
2002 Share Option Scheme. Unexercised options granted under the 1997 Share Option Scheme lapsed
automatically on 12 July 2007.Each option issued under the 2002 Share Option Scheme or the 1997 Share Option Scheme entitles
the holder to subscribe for one ordinary share in the Company at a predetermined exercise price.Prior to September 1, 2005, under Hong Kong GAAP, no compensation cost was required to be
recognized in respect of the grant of share options. At the time of exercise of the options,
proceeds from issue of shares were credited to share capital and share premium account.Effective from September 1, 2005, upon the adoption of HKFRS 2 Share-based payment, the Group
recognizes the fair value of share options granted over the vesting period, or as an asset, if
the cost qualifies for recognition as an asset. The fair value of share option is measured at
the date of grant. The Group has taken advantage of the transitional provisions set out in
paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not been
applied to the following options:
 (i)
    
    share options granted under the 1997 Share Option Scheme since all
options were granted to employees before November 7, 2002; and(ii)
    
    share options granted under the 2002 Share Option Scheme and vested before September 1, 2005.
 Details of share options granted pursuant to the 2002 Share Option Scheme and 1997 Share Option
Scheme that were outstanding at August 31, 2006, 2007 and 2008, are as follows:
 1997 Share Option Scheme
 September 3,
    
    September 10,
    
    October 20,Date of grant
    
    1998
    
    1999
    
    2000Exercise price per share (HK$) at date of grant
    
    
    0.26
    
    
    
    2.10
    
    
    
    0.58Market price per share (HK$) at date of grant
    
    
    0.26
    
    
    
    2.10
    
    
    
    0.58Outstanding at August 31, 2005
    
    
    190,000
    
    
    
    60,000
    
    
    
    298,000Exercised
    
    
    (50,000
    )
    
    
    
    
    
    
    Lapsed upon resignation of employees
    
    
    
    
    
    
    (20,000
    )
    
    
    (20,000
    )Outstanding at August 31, 2006
    
    
    140,000
    
    
    
    40,000
    
    
    
    278,000Exercised
    
    
    (140,000
    )
    
    
    
    
    
    
    (278,000
    )Lapsed upon expiry of the options
    
    
    
    
    
    
    (40,000
    )
    
    
    Outstanding at August 31, 2007 and August 31, 2008
    
    
    
    
    
    
    
    
    
    
    
 F-52




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 25
    
    Equity settled share-based transactions (continued)
 2002 Share Option Scheme
 NovemberJune 3,
    
    October 21,
    
    January 5,
    
    October 3,
    
    May 22,
    
    July 3,
    
    August 3,
    
    22,
    
    May 23,
    
    December
    
    February 6,
    
    February
    
    February 15,
    
    March
    
    May 2,Date of grant
    
    2004
    
    2004
    
    2005
    
    2005
    
    2006
    
    2006
    
    2006
    
    2006
    
    2007
    
    12, 2007
    
    2008
    
    11, 2008
    
    2008
    
    11, 2008
    
    2008(note (a))
    
    (note (b))
    
    (note (c))
    
    (note (d))
    
    (note (e))
    
    (note (f))
    
    (note(g))
    
    (note(h))
    
    (note(i))
    
    (note (j))
    
    (note (k))
    
    (note(l))
    
    (note (m))
    
    (note (n))
    
    (note(o))Exercise price per
share (HK$) at date
of grant
    
    
    1.47
    
    
    
    1.54
    
    
    
    1.54
    
    
    
    0.81
    
    
    
    0.66
    
    
    
    0.68
    
    
    
    0.71
    
    
    
    0.73
    
    
    
    2.03
    
    
    
    2.45
    
    
    
    1.77
    
    
    
    1.88
    
    
    
    1.77
    
    
    
    1.83
    
    
    
    1.80Market price per
share (HK$) at date
of grant
    
    
    1.47
    
    
    
    1.49
    
    
    
    1.48
    
    
    
    0.81
    
    
    
    0.64
    
    
    
    0.68
    
    
    
    0.71
    
    
    
    0.73
    
    
    
    2.10
    
    
    
    2.40
    
    
    
    1.86
    
    
    
    1.76
    
    
    
    1.80
    
    
    
    1.70
    
    
    
    1.75Outstanding at
August 31, 2005
    
    
    6,000,000
    
    
    
    14,670,000
    
    
    
    16,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    32,210,000
    
    
    
    1,000,000
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lapsed upon
resignation of
employees
    
    
    
    
    
    
    (5,220,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at
August 31, 2006
    
    
    6,000,000
    
    
    
    9,450,000
    
    
    
    16,000,000
    
    
    
    1,000,000
    
    
    
    32,210,000
    
    
    
    1,000,000
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    (330,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,250,000
    )
    
    
    (300,000
    )
    
    
    (30,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lapsed upon
resignation of
employees
    
    
    
    
    
    
    (780,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,020,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at
August 31, 2007
    
    
    6,000,000
    
    
    
    8,340,000
    
    
    
    16,000,000
    
    
    
    1,000,000
    
    
    
    28,940,000
    
    
    
    700,000
    
    
    
    70,000
    
    
    
    200,000
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment to the
number of options
for 2007 Final
Dividend
(note p)
    
    
    
    
    
    
    32,397
    
    
    
    63,292
    
    
    
    
    
    
    
    101,301
    
    
    
    2,769
    
    
    
    277
    
    
    
    534
    
    
    
    396
    
    
    
    3,956
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment to the
number of options
for 2008 Interim
Dividend
(note q)
    
    
    
    
    
    
    21,002
    
    
    
    43,664
    
    
    
    
    
    
    
    65,221
    
    
    
    
    
    
    
    191
    
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    16,309
    
    
    
    16,309
    
    
    
    10,873
    
    
    
    816
    
    
    
    2,718Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    6,000,000
    
    
    
    6,000,000
    
    
    
    4,000,000
    
    
    
    300,000
    
    
    
    1,000,000Exercised
    
    
    (6,000,000
    )
    
    
    (821,344
    )
    
    
    
    
    
    
    (1,000,000
    )
    
    
    (6,135,805
    )
    
    
    
    
    
    
    (30,119
    )
    
    
    (65,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lapsed upon
resignation of
employees
    
    
    
    
    
    
    (473
    )
    
    
    
    
    
    
    
    
    
    
    (583,162
    )
    
    
    (702,769
    )
    
    
    
    
    
    
    
    
    
    
    (100,396
    )
    
    
    (1,003,956
    )
    
    
    
    
    
    
    
    
    
    
    (3,008,155
    )
    
    
    
    
    
    
    Outstanding at
August 31, 2008
    
    
    
    
    
    
    7,571,582
    
    
    
    16,106,956
    
    
    
    
    
    
    
    22,387,555
    
    
    
    
    
    
    
    40,349
    
    
    
    135,902
    
    
    
    
    
    
    
    
    
    
    
    6,016,309
    
    
    
    6,016,309
    
    
    
    1,002,718
    
    
    
    300,816
    
    
    
    1,002,718
 F-53




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 25
    
    Equity settled share-based transactions (continued)
 2002 Share Option Scheme
 
 Notes:(a)
    
    On June 3, 2004, an employee was granted options to subscribe for
6,000,000 shares at a price of HK$1.47 per share. The vesting period
for the options is June 3, 2004 to April 30, 2006.(b)
    
    On October 21, 2004, employees, including executive directors, were
granted options to subscribe for 14,670,000 shares at a price of
HK$1.54 per share. The vesting period for the options is October 21,
2004 to December 31, 2006.(c)
    
    On January 5, 2005, executive directors were granted options to
subscribe for 16,000,000 shares at a price of HK$1.54 per share. The
vesting period for the options is January 5, 2005 to December 31,
2006.(d)
    
    On October 3, 2005, an employee was granted options to subscribe for
1,000,000 shares at a price of HK$0.81 per share. The vesting period
for the options is October 3, 2005 to September 30, 2006.(e)
    
    On May 22, 2006, employees, including executive directors, were
granted options to subscribe for 32,210,000 shares at a price of
HK$0.66 per share. The vesting period for the options is May 22, 2006
to May 21, 2009.(f)
    
    On July 3, 2006, an employee was granted options to subscribe for
1,000,000 shares at a price of HK$0.68 per share. The vesting period
for the options is July 3, 2006 to July 2, 2009.(g)
    
    On August 3, 2006, an employee was granted options to subscribe for
100,000 shares at a price of HK$0.71 per share. The vesting period of
the option is August 3, 2006 to August 2, 2009.(h)
    
    On November 22, 2006, an employee was granted options to subscribe for
200,000 shares at a price of HK$0.73 per share. The vesting period of
the option is November 22, 2006 to November 14, 2009.(i)
    
    On May 23, 2007, an employee was granted options to subscribe for
100,000 shares at a price of HK$2.03 per share. The vesting period of
the option is May 23, 2007 to June 11, 2010.(j)
    
    On December 12, 2007, an employee was granted options to subscribe for
1,000,000 shares at a price of HK$2.45 per share. The vesting period
for the options is December 12, 2007 to December 11, 2010.(k)
    
    On February 6, 2008, an employee was granted options to subscribe for
6,000,000 shares at a price of HK$1.77 per share. Vesting of the
options is conditional upon the performance of the participants.
Options granted will be vested over a period of three to four years
from the date of fulfillment of the performance condition.(l)
    
    On February 11, 2008, an executive director was granted options to
subscribe for 6,000,000 shares at a price of HK$1.88 per share.
Vesting 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. Options granted will
be evenly vested immediately and over a period of three years from the
date of fulfillment of the performance condition.(m)
    
    On February 15, 2008, an employee was granted options to subscribe for
4,000,000 shares at a price of HK$1.77 per share. Vesting of the
options is conditional upon the performance of the participants.
Options granted will be vested over a period of three years from the
date of fulfillment of the performance condition.(n)
    
    On March 11, 2008, an employee was granted options to subscribe for
300,000 shares at a price of HK$1.83 per share. The vesting period for
the options is March 11, 2008 to March 10, 2011.(o)
    
    On May 2, 2008, an employee was granted options to subscribe for
1,000,000 shares at a price of HK$1.80 per share. Vesting of the
options is conditional upon the performance of the participants.
Options granted will be vested over a period of three years from the
date of fulfillment of the performance condition.(p)
    
    As a result of allotment of 11,227,213 new shares to shareholders of
the Company who elected to receive the 2007 Final Dividend in shares
on February 4, 2008, the exercise price of and the number of share
subject to the 51,805,000 options outstanding on December 21, 2007
(being the Record Date for determining the entitlement of 2007 Final
Dividend) were adjusted pursuant to the 2002 Share Option Scheme with
effect from February 4, 2008. The closing price per ordinary share
immediately before the date of the grant of the options was HK$1.70. F-54




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 25
    
    Equity settled share-based transactions (continued)
 2002 Share Option Scheme (continued)
 Notes: (continued)(q)
    
    As a result of allotment of 8,838,938 new shares to shareholders of
the Company who elected to receive the 2008 Interim Dividend in shares
on 23 July 2008, the exercise price of and the number of share subject
to the 65,296,047 options outstanding on 6 June 2008 (being the Record
Date for determining the entitlement of 2008 Interim Dividend) were
adjusted pursuant to the 2002 Share Option Scheme with effect from 23
July 2008. The closing price per ordinary share immediately before the
date of the grant of the options was HK$1.79.(r)
    
    The share options outstanding in respect of the 1997 Share Option
Scheme and 2002 Share Options Scheme as of August 31, 2006, 2007 and
2008 is summarized as follows:
 Weighted
    
    WeightedNumber of
    
    average
    
    averageshare
    
    exercise
    
    market priceoptions
    
    prices per
    
    at the dateoutstanding
    
    share
    
    of grant(thousands)
    
    HK$000
    
    HK$000Balance at August 31, 2005
    
    
    37,218
    
    
    
    1.51
    
    
    
    1.46Granted during the year
    
    
    34,310
    
    
    
    0.67
    
    
    
    0.74Exercised during the year
    
    
    (50
    )
    
    
    0.26
    
    
    
    N/ALapsed during the year
    
    
    (5,260
    )
    
    
    1.54
    
    
    
    N/ABalance at August 31, 2006
    
    
    66,218
    
    
    
    1.08
    
    
    
    1.04Granted during the year
    
    
    300
    
    
    
    1.16
    
    
    
    1.19Exercised during the year
    
    
    (2,328
    )
    
    
    0.76
    
    
    
    0.74Lapsed during the year
    
    
    (2,840
    )
    
    
    0.93
    
    
    
    0.89Balance at August 31, 2007
    
    
    61,350
    
    
    
    1.09
    
    
    
    1.06Adjustment to the number of options for 2007 Final Dividend
    
    
    205
    
    
    
    1.10
    
    
    
    1.07Adjustment to the number of options for 2008 Interim Dividend
    
    
    177
    
    
    
    1.28
    
    
    
    1.26Granted during the year
    
    
    18,300
    
    
    
    1.84
    
    
    
    1.83Exercised during the year
    
    
    (14,052
    )
    
    
    1.07
    
    
    
    1.06Lapsed during the year
    
    
    (5,399
    )
    
    
    1.63
    
    
    
    1.64Balance at August 31, 2008
    
    
    60,581
    
    
    
    1.27
    
    
    
    1.25
 F-55




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 25
    
    Equity settled share-based transactions (continued)
 2002 Share Option Scheme (continued)
 Notes: (continued)(s)
    
    The following table summarizes the information about share options outstanding at August 31, 2008:
 Exercise
    
    Number of
    
    
    
    
    
    Exercisableprice at
    
    outstanding
    
    
    
    
    
    options atAugust 31,
    
    at August 31,
    
    Remaining
    
    August 31,Date of grant
    
    2008
    
    2008
    
    life
    
    2008(thousands)
    
    (months)
    
    (thousands)October 21, 2004
    
    
    1.5297
    
    
    
    7,572
    
    
    
    74
    
    
    
    7,572January 5, 2005
    
    
    1.5297
    
    
    
    16,107
    
    
    
    74
    
    
    
    16,107May 22, 2006
    
    
    0.6554
    
    
    
    22,387
    
    
    
    93
    
    
    
    12,784August 3, 2006
    
    
    0.7052
    
    
    
    40
    
    
    
    95
    
    
    
    November 22, 2006
    
    
    0.7251
    
    
    
    136
    
    
    
    98
    
    
    
    February 6, 2008
    
    
    1.7652
    
    
    
    6,016
    
    
    
    52
    
    
    
    February 11, 2008
    
    
    1.8749
    
    
    
    6,016
    
    
    
    52
    
    
    
    February 15, 2008
    
    
    1.7652
    
    
    
    1,003
    
    
    
    52
    
    
    
    March 11, 2008
    
    
    1.8250
    
    
    
    301
    
    
    
    52
    
    
    
    May 2, 2008
    
    
    1.7951
    
    
    
    1,003
    
    
    
    52
    
    
    
    60,581
    
    
    
    
    
    
    
    36,463
 (t)
    
    Fair value of share options and assumptions:In determining the value of the share options granted during the year ended August 31,
2008, the Black-Scholes option pricing model (the Black-Scholes Model) has been used
except for the share options granted on February 11, 2008 which adopts the Monte Carlo
model. Both models are the most generally accepted methodologies used to calculate the
value of options. The variables of the models include expected life of the options,
risk-free interest rate, expected volatility and expected dividend yield of the shares of
the Company.
 F-56




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 25
    
    Equity settled share-based transactions (continued)
 2002 Share Option Scheme (continued)
 Notes: (continued)(t)
    
    Fair value of share options and assumptions: (continued)In determining the value of the share options granted during the year, the following
variables have been applied to the models:
 June 3,
    
    October 21,
    
    January 5,
    
    October 3,
    
    May 22,
    
    July 3,
    
    August 3,
    
    November 22,
    
    May 23,
    
    December 12,
    
    February 6,
    
    February 11,
    
    February 15,
    
    March 11,
    
    May 2,Measurement date
    
    2004
    
    2004
    
    2005
    
    2005
    
    2006
    
    2006
    
    2006
    
    2006
    
    2007
    
    2007
    
    2008
    
    2008
    
    2008
    
    2008
    
    2008Variables Expected life (i)
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    5 years
    
    
    Average4 years
    
    
    3 years
    
    
    5 years
    
    
    5 years Risk-free rate (ii)
    
    
    3.78
    %
    
    
    2.65
    %
    
    
    2.75
    %
    
    
    4.41
    %
    
    
    4.63
    %
    
    
    4.45
    %
    
    
    4.06
    %
    
    
    3.76
    %
    
    
    4.45
    %
    
    
    3.10
    %
    
    
    2.16
    %
    
    
    2.16
    %
    
    
    2.16
    %
    
    
    2.04
    %
    
    
    2.88
    % Expected volatility (iii)
    
    
    59.04
    %
    
    
    72.06
    %
    
    
    69.37
    %
    
    
    58.29
    %
    
    
    55.04
    %
    
    
    53.56
    %
    
    
    52.71
    %
    
    
    51.02
    %
    
    
    56.01
    %
    
    
    61.86
    %
    
    
    63.22
    %
    
    
    63.32
    %
    
    
    63.22
    %
    
    
    63.35
    %
    
    
    63.56
    % Expected dividend yield (iv)
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
 The above variables were determined as follows:
 (i)
    
    The expected life is estimated to be 3 to 5 years from the date of grant (the Measurement Date).(ii)
    
    The risk-free rate represents the yield of the Hong Kong Exchange
Fund Notes corresponding to the expected life of the options as of
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 five years.
 F-57




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 25
    
    Equity settled share-based transactions (continued)
 2002 Share Option Scheme (continued)
 Notes: (continued)(t)
    
    Fair value of share options and assumptions: (continued)The fair value of the options granted during the year is estimated as below:
 June 3,
    
    October 21,
    
    January 5,
    
    October 3,
    
    May 22,
    
    July 3,
    
    August 3
    
    November 22,
    
    May 23,
    
    December 12,
    
    February 6,
    
    February 11,
    
    February 15,
    
    March 11,
    
    May 2,Date of grant
    
    2004
    
    2004
    
    2005
    
    2005
    
    2006
    
    2006
    
    2006
    
    2006
    
    2007
    
    2007
    
    2008
    
    2008
    
    2008
    
    2008
    
    2008HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$Fair value per
share option
    
    
    0.70
    
    
    
    0.84
    
    
    
    0.80
    
    
    
    0.44
    
    
    
    0.33
    
    
    
    0.35
    
    
    
    0.36
    
    
    
    0.35
    
    
    
    1.13
    
    
    
    1.13
    
    
    
    0.90
    
    
    
    0.41
    
    
    
    0.72
    
    
    
    0.87
    
    
    
    0.83
  F-58




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 26
    
    Revenues and segmental information
 Revenue recognized during the year is as follows:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000RevenueInternational telecommunications services
    
    
    418,276
    
    
    
    324,470
    
    
    
    291,943Fixed telecommunications network services (note (c))
    
    
    716,600
    
    
    
    816,800
    
    
    
    1,011,0381,134,876
    
    
    
    1,141,270
    
    
    
    1,302,981Other incomeInterest income
    
    
    20,378
    
    
    
    22,671
    
    
    
    15,596Other income
    
    
    4,465
    
    
    
    3,149
    
    
    
    9,39324,843
    
    
    
    25,820
    
    
    
    24,989
 (a)
    
    Primary reporting format  business segments
 The Group is organized on a worldwide basis into two business segments:
 
    
    International telecommunications  provision of international long distance calls services.
    
    Fixed telecommunications network  provision of dial up and broadband
Internet access services, local voice-over-IP services and IP-TV
services.
 The Groups reportable segments are strategic business units that offer different type of
telecommunications services. Each of these business units are operated and managed separately.The Groups inter-segment transactions mainly consist of provision of leased lines services.
 F-59




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 26
    
    Revenues and segmental information (continued)(a)
    
    Primary reporting format  business segments (continued)Segment results are income/(loss) from operations excluding interest expense and interest
income, but includes other income, net. All segment measures are based on accounting policies
that are consistent with those used in the preparation of the consolidated financial
statements.
 Year ended August 31, 2006International
    
    Fixed tele-tele-
    
    communicationscommunications
    
    networkservices
    
    services
    
    Elimination
    
    GroupHK$000
    
    HK$000
    
    HK$000
    
    HK$000Revenue (note (c)) External sales
    
    
    418,276
    
    
    
    716,600
    
    
    
    
    
    
    
    1,134,876 Inter-segment sales
    
    
    5,670
    
    
    
    31,275
    
    
    
    (36,945
    )
    
    
    423,946
    
    
    
    747,875
    
    
    
    (36,945
    )
    
    
    1,134,876Segment results
    
    
    22,095
    
    
    
    (107,607
    )
    
    
    
    
    
    
    (85,512
    )Interest income
    
    
    17,728
    
    
    
    2,650
    
    
    
    
    
    
    
    20,378Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,637
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,465Loss before taxation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149,306
    )Segment assets
    
    
    626,480
    
    
    
    1,497,388
    
    
    
    
    
    
    
    2,123,868Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    347Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,124,215Segment liabilities
    
    
    114,847
    
    
    
    167,370
    
    
    
    
    
    
    
    282,217Unallocated liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    950,344Total liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,232,561Capital expenditure
    
    
    13,838
    
    
    
    309,097
    
    
    
    
    
    
    
    322,935Depreciation
    
    
    23,598
    
    
    
    252,866
    
    
    
    
    
    
    
    276,464
 F-60




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 26
    
    Revenues and segmental information (continued)
 (a)
    
    Primary reporting format  business segments (continued)
 Year ended August 31, 2007International
    
    Fixed tele-tele-
    
    communicationscommunications
    
    networkservices
    
    services
    
    Elimination
    
    GroupHK$000
    
    HK$000
    
    HK$000
    
    HK$000Revenue (note (c)) External sales
    
    
    324,470
    
    
    
    816,800
    
    
    
    
    
    
    
    1,141,270 Inter-segment sales
    
    
    5,699
    
    
    
    27,633
    
    
    
    (33,332
    )
    
    
    330,169
    
    
    
    844,433
    
    
    
    (33,332
    )
    
    
    1,141,270Segment results
    
    
    49,702
    
    
    
    42,873
    
    
    
    
    
    
    
    92,575Interest income
    
    
    15,032
    
    
    
    7,639
    
    
    
    
    
    
    
    22,671Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,504
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,149Profit before taxation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,891Segment assets
    
    
    541,502
    
    
    
    1,619,631
    
    
    
    
    
    
    
    2,161,133Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,161,133Segment liabilities
    
    
    101,148
    
    
    
    201,738
    
    
    
    
    
    
    
    302,886Unallocated liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    954,365Total liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,257,251Capital expenditure
    
    
    4,060
    
    
    
    128,190
    
    
    
    
    
    
    
    132,250Depreciation
    
    
    21,707
    
    
    
    236,396
    
    
    
    
    
    
    
    258,103
 F-61




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 26
    
    Revenues and segmental information (continued)
 (a)
    
    Primary reporting format  business segments (continued)
 Year ended August 31, 2008International
    
    Fixed tele-tele-
    
    communicationscommunications
    
    networkservices
    
    services
    
    Elimination
    
    GroupHK$000
    
    HK$000
    
    HK$000
    
    HK$000Revenue (note (c)) External sales
    
    
    291,943
    
    
    
    1,011,038
    
    
    
    
    
    
    
    1,302,981 Inter-segment sales
    
    
    5,692
    
    
    
    22,680
    
    
    
    (28,372
    )
    
    
    297,635
    
    
    
    1,033,718
    
    
    
    (28,372
    )
    
    
    1,302,981Segment results
    
    
    63,225
    
    
    
    95,295
    
    
    
    
    
    
    
    158,520Interest income
    
    
    8,590
    
    
    
    7,006
    
    
    
    
    
    
    
    15,596Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,137
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,393Profit before taxation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,372Segment assets
    
    
    426,781
    
    
    
    1,627,300
    
    
    
    
    
    
    
    2,054,081Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,335Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,080,416Segment liabilities
    
    
    80,756
    
    
    
    276,771
    
    
    
    
    
    
    
    357,527Unallocated liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690,282Total liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,047,809Capital expenditure
    
    
    4,293
    
    
    
    207,391
    
    
    
    
    
    
    
    211,684Depreciation
    
    
    19,587
    
    
    
    190,464
    
    
    
    
    
    
    
    210,051
 F-62




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 26
    
    Revenues and segmental information (continued)
 (b)
    
    Geographical segmentsAlthough the Groups two business segments are managed on a worldwide basis, they operate in
two main geographical areas:
 
    
    Hong Kong
    
    Canada
 In disclosing information on the basis of geographical segments, revenue and segment results
are disclosed based on the geographical location of customers. Total assets and capital
expenditure are disclosed based on the geographical location of the assets.There were no sales between the geographical segments.
 August 31, 2006Total
    
    Capital
    
    FixedRevenue
    
    assets
    
    expenditure
    
    assets, netHK$000
    
    HK$000
    
    HK$000
    
    HK$000Hong Kong
    
    
    1,114,452
    
    
    
    2,114,018
    
    
    
    321,708
    
    
    
    1,362,359Canada
    
    
    20,424
    
    
    
    9,850
    
    
    
    1,227
    
    
    
    4,8751,134,876
    
    
    
    2,123,868
    
    
    
    322,935
    
    
    
    1,367,234Unallocated assets
    
    
    
    
    
    
    3472,124,215
 August 31, 2007Total
    
    Capital
    
    FixedRevenue
    
    assets
    
    expenditure
    
    assets, netHK$000
    
    HK$000
    
    HK$000
    
    HK$000Hong Kong
    
    
    1,120,538
    
    
    
    2,149,728
    
    
    
    132,031
    
    
    
    1,233,100Canada
    
    
    20,732
    
    
    
    11,405
    
    
    
    219
    
    
    
    4,1231,141,270
    
    
    
    2,161,133
    
    
    
    132,250
    
    
    
    1,237,223Unallocated assets
    
    
    
    
    
    
    2,161,133
 F-63




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 26
    
    Revenues and segmental information (continued)
 (b)
    
    Geographical segments (continued)
 August 31, 2008Total
    
    Capital
    
    FixedRevenue
    
    assets
    
    expenditure
    
    assets, netHK$000
    
    HK$000
    
    HK$000
    
    HK$000Hong Kong
    
    
    1,281,069
    
    
    
    2,040,496
    
    
    
    211,482
    
    
    
    1,227,907Canada
    
    
    21,912
    
    
    
    13,585
    
    
    
    202
    
    
    
    3,4921,302,981
    
    
    
    2,054,081
    
    
    
    211,684
    
    
    
    1,231,399Unallocated assets
    
    
    
    
    
    
    26,3352,080,416
 (c)
    
    Hong Kong Broadband Network Limited (HKBN), a wholly-owned
subsidiary of the Group, as a FTNS licensee, provides interconnection
services to enable delivery of telecommunications service to customers
of different operators. Since the FTNS license was granted by the TA
and interconnection services have been provided, HKBN has been billing
mobile operators for the interconnection services provided to them and
recognizing revenue (mobile interconnection charges) based on
managements best estimate of the amounts it expected to collect. In
prior years, majority of the mobile operators, however, rejected
HKBNs demand for payment. As a result of non-payment by certain
mobile operators, in 2004, the Group asked TA to make a determination
(the 2004 Determination) on the level of mobile interconnection
charges
payable by one of the mobile operators to HKBN; and the effective date
of the determined mobile interconnection charges.In March 2006, TA issued a preliminary analysis (the 2006 PA) on the 2004 Determination with
respect to the rates of mobile interconnection charges payable by the mobile operator under
dispute. However, as of August 31, 2006, the final level of mobile interconnection charges was
still subject to the 2004 Determination to be issued by TA.For the year ended August 31, 2006, the Group recognized mobile interconnection charges of
HK$22,037,000 based on the 2006 PA.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 26
    
    Revenues and segmental information (continued)
 (c)
    
    (continued)In March 2007, TA issued a revised preliminary analysis (the 2007 PA) which superseded the
2006 PA. The 2007 PA set out the rates of mobile interconnection charges, which are different
from those rates stated in the 2006 PA.In June 2007, TA issued the 2004 Determination which set out the rates of mobile
interconnection charge payable by the mobile operator under dispute for interconnection
services provided by HKBN for the period from April 1, 2002 to August 31, 2004, which
superseded the rates stated in both the 2006 PA and 2007 PA issued by TA previously.For the year ended August 31, 2007, the Group recognized revenue related to mobile
interconnection charges of HK$40,877,000 based on the 2004 Determination which included
charges for the year ended August 31, 2007 and additional charges for the years ended August
31, 2005 and 2006 previously measured based on the 2006 PA. The Group has also written back
bad debt provision for mobile interconnection charges receivables of HK$9,404,000 to the
consolidated statement of operations based on the amount it expected to collect for billings
outstanding through that date.During the year ended August 31, 2008, HKBN entered into contractual agreements with
additional mobile operators which agreed to pay mobile interconnection charges based on the
2004 determination for period from April 1, 2002 to August 31, 2004 and for the subsequent
period at an interim rate stated in the agreements which will be adjusted based on further
determination to be issued by TA.In February 2008, HKBN requested TA to make a new determination with four mobile operators
(the 2008 Determination) on the rate of mobile interconnection charge and interest thereon.
In September 2008, TA indicated that it accepted HKBNs request for determination, which
covers the mobile interconnection charges payable by the mobile operators under the
determination, for the period from April 1, 2002 to April 26, 2009 (for those mobile operators
who have not reached the relevant contractual agreements with HKBN) or for the period from
September 1, 2004 to April 26, 2009 (for those mobile operators who have reached the relevant
contractual agreements with HKBN), and the interest rate thereon.For the year ended August 31, 2008, the Group recognized revenue related to mobile
interconnection charges of HK$29,568,000 representing the amount of mobile interconnection
charges management expects to collect.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 27
    
    Financial instrumentsExposure 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 trade and other receivables, and debt
investments. Management has a credit policy in place and the exposure to the credit risk is
monitored on an ongoing basis.In respect of trade and other receivables, credit evaluations are performed on all customers
requiring credit over a certain amount. These evaluations focus on the customers past
history of making payments when due and current ability to pay, and take into account
information specific to the customer as well as pertaining to the economic environment in
which the customer locates. These receivables are due within 30 days from the date of
billing. Subscribers with receivables that are more than 3 months overdue are requested to
settle all outstanding balances before any further credit is granted. The Group generally
does not obtain collateral from customers.The Groups exposure to credit risk is influenced mainly by individual characteristics of
each customer. The default risk of the country in which customer locates also has an
influence on credit risk but to a lesser extent. Concentrations of credit risk with respect
to accounts receivable are limited due to the Groups customer base being large and
unrelated. As such, management does not expect any significant losses of accounts receivable
that have not been provided for by way of allowances as disclosed in note 8.The maximum exposure to credit risk is represented by the carrying amount of each financial
asset after deducting any impairment allowance, in the balance sheet. Except for the
financial guarantee given by the Group as disclosed in note 15(d), the Group does not
provide any other guarantees which expose the Group to credit risk. The maximum exposure to
credit risk in respect of these financial guarantees at the balance sheet date is disclosed
in note 15 (d).Further quantitative disclosures in respect of the Groups exposure to credit risk arising
from accounts receivable are set out in note 8.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 27
    
    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.
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 27
    
    Financial instruments (continued)
 (b)
    
    Liquidity risk (continued)The following table details the remaining contractual maturities at the balance sheet date of the Groups financial liabilities, which are based on undiscounted cash flows (including interest) and the earliest date the Group are required to pay.
 2007
    
    
    2008Total
    
    
    
    
    
    
    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 liabilitiesAccounts payable
    
    
    76,019
    
    
    
    76,019
    
    
    
    76,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,324
    
    
    
    52,324
    
    
    
    52,324
    
    
    
    
    
    
    
    
    
    
    
    Other payables and
accrued charges
    
    
    145,267
    
    
    
    145,267
    
    
    
    145,267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178,114
    
    
    
    178,114
    
    
    
    178,114
    
    
    
    
    
    
    
    
    
    
    
    Deposits received
    
    
    16,188
    
    
    
    16,188
    
    
    
    16,188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,264
    
    
    
    16,264
    
    
    
    16,264
    
    
    
    
    
    
    
    
    
    
    
    Obligations under
finance leases
    
    
    835
    
    
    
    869
    
    
    
    869
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    142
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    Tax payable
    
    
    1,481
    
    
    
    1,481
    
    
    
    1,481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,103
    
    
    
    2,103
    
    
    
    2,103
    
    
    
    
    
    
    
    
    
    
    
    Non current liabilities8.75% senior notes
    
    
    952,593
    
    
    
    1,614,184
    
    
    
    85,278
    
    
    
    85,278
    
    
    
    255,834
    
    
    
    1,187,794
    
    
    
    683,242
    
    
    
    1,093,852
    
    
    
    61,012
    
    
    
    61,012
    
    
    
    183,036
    
    
    
    788,792Obligation under
finance leases
    
    
    375
    
    
    
    414
    
    
    
    
    
    
    
    142
    
    
    
    272
    
    
    
    
    
    
    
    255
    
    
    
    272
    
    
    
    
    
    
    
    142
    
    
    
    130
    
    
    
    1,192,758
    
    
    
    1,854,422
    
    
    
    325,102
    
    
    
    85,420
    
    
    
    256,106
    
    
    
    1,187,794
    
    
    
    932,423
    
    
    
    1,343,071
    
    
    
    309,959
    
    
    
    61,154
    
    
    
    183,166
    
    
    
    788,792
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 27
    
    Financial instruments (continued)
 (c)
    
    Interest rate riskThe Groups interest-rate risk arises mainly from its 10-year 8.75% senior notes which bear
interest at the fixed rate of 8.75% per annum. Borrowings issued at fixed rate expose the
Group to fair value interest-rate risk.
 (i)
    
    Interest rate profileThe following table details the interest rate profile of the Groups net borrowings at the
balance sheet date.
 August 31,2008
    
    2007Effective
    
    
    
    
    
    Effectiveinterest rate
    
    
    
    interest rate%
    
    HK$000
    
    %
    
    HK$000Fixed rate borrowings:8.75% senior notes
    
    
    9.2
    
    
    
    952,593
    
    
    
    9.2
    
    
    
    683,242Obligation under finance lease
    
    
    6.8
    
    
    
    1,210
    
    
    
    6.8
    
    
    
    376953,803
    
    
    
    
    
    
    
    683,618
 (ii)
    
    Sensitivity analysisManagement determines that the Groups exposure of interest rate risk was not significant
and hence no sensitivity analysis is prepared.
 (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
 (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.
 August 31,2007
    
    
    2008United
    
    
    
    
    
    
    
    
    
    
    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
    
    
    21,172
    
    
    
    2,218
    
    
    
    111
    
    
    
    22,330
    
    
    
    1,099
    
    
    
    176Accounts payable
    
    
    (4,781
    )
    
    
    
    
    
    
    
    
    
    
    (2,500
    )
    
    
    
    
    
    
    Other payables and accrued
charges
    
    
    (1,563
    )
    
    
    
    
    
    
    
    
    
    
    (3,390
    )
    
    
    
    
    
    
    8.75% senior notes
    
    
    (122,127
    )
    
    
    
    
    
    
    
    
    
    
    (87,483
    )
    
    
    
    
    
    
    Overall net exposure
    
    
    (107,299
    )
    
    
    2,218
    
    
    
    111
    
    
    
    (71,043
    )
    
    
    1,099
    
    
    
    176
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City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 27
    
    Financial instruments (continued)
 (d)
    
    Foreign currency risk (continued)
 (ii)
    
    Sensitivity analysisManagement determines that the Groups exposure of foreign currency risk was not
significant and hence no sensitivity analysis is prepared.
 (e)
    
    Fair valuesExcept for the following instruments, all financial instruments are carried at amounts not
materially different from their fair values as of August 31, 2007 and 2008:
 August 31,2007
    
    2008Carrying
    
    
    
    
    
    Carryingamount
    
    Fair value
    
    amount
    
    Fair valueHK$000
    
    HK$000
    
    HK$000
    
    HK$000Long-term bank deposit
    
    
    14,415
    
    
    
    14,277
    
    
    
    
    
    
    
    8.75% senior notes
    
    
    (952,593
    )
    
    
    (970,125
    )
    
    
    (683,242
    )
    
    
    (672,236
    )
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 27
    
    Financial instruments (continued)
 (e)
    
    Fair values (continued)Fair value of financial instruments is estimated as follows:
 (i)
    
    The fair value of financial instruments traded in active markets is
based on quoted market prices at the balance sheet date. The fair
value of the 8.75% senior notes is determined based on quoted market
price. The fair value of the long term bank deposits are determined
based on the issuers quoted price.(ii)
    
    The fair value of financial instruments that are not traded in an
active market (for example, over-the-counter derivatives) is
determined by using valuation techniques. The Group uses a variety
of methods and makes assumptions that are based on market conditions
existing at each balance sheet date.(iii)
    
    Trade receivables less impairment provision and account payables are assumed to approximate their fair values.
 28
    
    Barter transaction
 During the year ended August 31, 2004, Hong Kong Broadband Network (HKBN), a
subsidiary of the Company entered into two agreements with a third party (the
Contract Party 1). Pursuant to first agreement (First Agreement), the
Contract Party 1 agreed to sell to HKBN an telecommunications facility (the
Facility) for cash consideration of approximately HK$42.4 million (the
Facility Consideration), which was paid by HKBN during the year ended August
31, 2004. In conjunction with the First Agreement, HKBN also entered into an
operations and maintenance agreement with the Contract Party 1 for the
provision of ongoing operations and maintenance services for the Facility at a
fee of approximately HK$1 million per annum, commencing September 1, 2007
onwards.A second agreement (Second Agreement) was entered into on the same date by both parties
whereby HKBN agree to provide certain telecommunications services to the Contract Party 1 (the
Services) for an amount equal to the unit service charges specified in the Second Agreement.
The Contract Party 1 is required to pay to HKBN a guarantee minimum service fee of
approximately HK$42.4 million over a period of three years, commencing September 1, 2004. A
prepayment of the service charges of HK$36.5 million (the Prepaid Charges) was paid by the
Contract Party 1 to HKBN during the year ended August 31, 2004.The directors of the Group made an assessment of the fair values of the goods and services
exchanged and concluded that no fair values could be assigned to them. Accordingly, the
Facility was not recognized as an asset and no revenue or deferred revenue was recognized in
the consolidated financial statements as of and for any of the periods presented. The
difference between the Facility Consideration and the Prepaid Charges, amounting to
approximately HK$5.9 million, was included in long-term receivable balance, and other
receivables, deposits and prepayments as of August 31, 2006 and 2007 respectively. In
accordance with the terms of agreement, the unpaid portion of the HK$42.2 million guarantee
minimum service fee, amounting to approximately HK$5.9 million has been billed to the Contract
Party 1 upon the end of service period on September 1, 2007 and
subsequently settled.
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2007
 29
    
    Comparative figures
 Certain comparative figures have been reclassified to conform with the current year presentation.
 30
    
    Recent accounting pronouncements
 (a)
    
    HKFRSsUp to the date of issuance of the accompanying consolidated financial statements, the HKICPA
has issued a number of amendments, new standards and interpretations which are not yet
effective for the year ended August 31, 2008 and which have not been adopted in the
accompanying consolidated financial statements.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 it has concluded that the adoption of the following developments is unlikely to have
significant impact on the Groups results of operations and financial position:
 Effective foraccounting periodsbeginning on or afterHK(IFRIC) Interpretation 13
    
    Customer loyalty programmes
    
    July 1, 2008HKAS 1 (Revised)
    
    Presentation of financial statements
    
    January 1, 2009HKAS 23 (Revised)
    
    Borrowing costs
    
    January 1, 2009HKFRS 8
    
    Operating segments
    
    January 1, 2009
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City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 30
    
    Recent accounting pronouncements (continued)
 (b)
    
    U.S. GAAPStatement of Financial Accounting Standards No. 157 (SFAS 157)In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair
value, provides a framework for measuring fair value, and expands the disclosure required for
fair value measurement. SFAS 157 applies to other accounting pronouncements that require fair
value measurements and does not require any new fair value measurements. SFAS 157 is effective
for fiscal years beginning after November 15, 2007 and is effective for the Group on September
1, 2008. However, FASB Staff Position FAS 157-2 delayed the adoption date until January 1,
2009 for non-financial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. Management does not
expect the initial adoption of SFAS 157 to have a material impact on the Groups results of
operations and financial position.
 Statement of Financial Accounting Standards No. 159 (SFAS 159)
 In February 2007, the FASB issued SFAS 159, Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits companies to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains or losses on
items for which the fair value option has been elected be reported in earnings. Early adoption
of SFAS 159 is permitted provided that the entity also adopts SFAS No. 157. Effective from
September 1, 2008, management has elected not to adopt the fair value option for all the
financial assets and financial liabilities held at September 1, 2008.
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City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of significant differences between HKFRSs and U.S. GAAP
 The Groups consolidated financial statements are prepared in accordance with HKFRSs, which
differ in certain significant respects from U.S. GAAP. The following are significant
differences between HKFRSs and U.S. GAAP which pertain to the Group:
 Net income/(loss)
 Year ended 31 August,Note
    
    2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000As reported under HKFRSs and U.S. GAAP
    
    
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190Basic weighted average common shares issued and
outstanding (in 000s)
    
    
    
    
    614,134
    
    
    
    614,840
    
    
    
    634,015Incremental shares from assumed exercise of
share options (in 000s)
    
    
    
    
    
    
    
    
    16,479
    
    
    
    23,982Diluted weighted average common and potential
shares issued and outstanding (in 000s)
    
    
    
    
    614,134
    
    
    
    631,319
    
    
    
    657,997Earnings/(loss) per share under U.S. GAAP (note) Basic
    
    
    
    
    (23.1) cents
    
    
    
    4.7 cents
    
    
    
    19.7 cents Diluted
    
    
    
    
    (23.1) cents
    
    
    
    4.6 cents
    
    
    
    19.0 cents
 
 Note:
    
    The number of incremental shares from assumed exercise of stock
options is determined using the treasury stock method. At August 31,
2006, the number of shares used in the calculation of diluted loss
per share is equal to the basic weighted average common shares
issued and outstanding as the incremental effect of outstanding
share options would be anti-dilutive in a loss making year. Total shareholders equity
 Year ended August 31,Note
    
    2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Total shareholders equityAs reported under HKFRSs
    
    
    
    
    891,654
    
    
    
    903,882
    
    
    
    1,032,607U.S. GAAP adjustments: Goodwill
    
    (a)
    
    
    5,092
    
    
    
    5,092
    
    
    
    5,092 Accumulated amortization of goodwill
    
    (a)
    
    
    (3,735
    )
    
    
    (3,735
    )
    
    
    (3,735
    ) Reversal of amortization of goodwill
    
    (a)
    
    
    4,260
    
    
    
    4,260
    
    
    
    4,260Total shareholders equity under U.S. GAAP
    
    
    
    
    897,271
    
    
    
    909,499
    
    
    
    1,038,224
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of significant differences between HKFRSs and U.S. GAAP (continued)
 Condensed consolidated statements of operations under US GAAPUnder HKFRS, depreciation charges of network assets are included in general and administrative
expenses.Under US GAAP, however, depreciation charges of networks assets which are directly related to
the generation of revenue are included in network costs. As a result, under US GAAP, the
consolidated statements of operations would be reported as follows:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Revenue, net
    
    
    1,134,876
    
    
    
    1,141,270
    
    
    
    1,302,981Operating expenses: Network costs, net
    
    
    (554,136
    )
    
    
    (451,080
    )
    
    
    (368,278
    ) Salaries and related costs
    
    
    (256,721
    )
    
    
    (221,102
    )
    
    
    (247,460
    ) Sales and marketing expenses
    
    
    (204,952
    )
    
    
    (203,673
    )
    
    
    (307,743
    ) General and administrative expenses
    
    
    (187,129
    )
    
    
    (166,271
    )
    
    
    (206,687
    ) Provision for doubtful accounts
    
    
    (17,450
    )
    
    
    (6,569
    )
    
    
    (14,293
    )(Loss)/ income from operations
    
    
    (85,512
    )
    
    
    92,575
    
    
    
    158,520Interest income
    
    
    20,378
    
    
    
    22,671
    
    
    
    15,596Interest expense
    
    
    (88,637
    )
    
    
    (87,504
    )
    
    
    (75,137
    )Other income, net
    
    
    4,465
    
    
    
    3,149
    
    
    
    9,393(Loss)/ income before income taxes
    
    
    (149,306
    )
    
    
    30,891
    
    
    
    108,372Income tax credit/ (expense)
    
    
    7,244
    
    
    
    (2,026
    )
    
    
    16,818Net (loss)/ income
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of significant differences between HKFRSs and U.S. GAAP (continued)
 Statement of changes in shareholders equity under US GAAP
 Ordinary sharesAccumulatedNumber of
    
    
    
    
    
    Additional
    
    other
    
    
    
    
    
    
    
    
    
    Totalshares
    
    Amount
    
    paid-in
    
    comprehensive
    
    Capital
    
    Retained
    
    shareholdersoutstanding
    
    outstanding
    
    capital
    
    income
    
    reserve
    
    profits
    
    equityHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Balance at August 31, 2005
    
    
    614,125,404
    
    
    
    61,412
    
    
    
    619,408
    
    
    
    840
    
    
    
    27,815
    
    
    
    323,205
    
    
    
    1,032,680Shares issued upon exercise of
share options
    
    
    50,000
    
    
    
    5
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Compensation cost for share options
    
    
    
    
    
    
    
    
    
    
    251
    
    
    
    
    
    
    
    6,572
    
    
    
    
    
    
    
    6,823Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142,062
    )
    
    
    (142,062
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183
    )
    
    
    
    
    
    
    
    
    
    
    (183
    )Balance at August 31, 2006
    
    
    614,175,404
    
    
    
    61,417
    
    
    
    619,667
    
    
    
    657
    
    
    
    34,387
    
    
    
    181,143
    
    
    
    897,271Shares issued upon exercise of
share options
    
    
    2,328,000
    
    
    
    233
    
    
    
    2,135
    
    
    
    
    
    
    
    (611
    )
    
    
    
    
    
    
    1,757Compensation cost for share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,727
    
    
    
    
    
    
    
    5,727Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,865
    
    
    
    28,865Dividend paid in respect of
previous year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,635
    )
    
    
    (24,635
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    514
    
    
    
    
    
    
    
    
    
    
    
    514Balance at August 31, 2007
    
    
    616,503,404
    
    
    
    61,650
    
    
    
    621,802
    
    
    
    1,171
    
    
    
    39,503
    
    
    
    185,373
    
    
    
    909,499Shares issued upon exercise of
share options
    
    
    14,052,268
    
    
    
    1,405
    
    
    
    16,893
    
    
    
    
    
    
    
    (3,300
    )
    
    
    
    
    
    
    14,998Compensation cost for share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,204
    
    
    
    
    
    
    
    4,204Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,190
    
    
    
    125,190Dividend paid in respect of
previous year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,915
    )
    
    
    (5,915
    )Shares issued in respect of scrip
dividend of previous year
    
    
    11,227,213
    
    
    
    1,123
    
    
    
    18,044
    
    
    
    
    
    
    
    
    
    
    
    (19,167
    )
    
    
    Dividend paid in respect of
current year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,371
    )
    
    
    (11,371
    )Shares issued in respect of scrip
dividend of current year
    
    
    8,838,938
    
    
    
    884
    
    
    
    13,347
    
    
    
    
    
    
    
    
    
    
    
    (14,231
    )
    
    
    Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,619
    
    
    
    
    
    
    
    
    
    
    
    1,619650,621,823
    
    
    
    65,062
    
    
    
    670,086
    
    
    
    2,790
    
    
    
    40,407
    
    
    
    259,879
    
    
    
    1,038,224
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of significant differences between HKFRSs and U.S. GAAP (continued)
 Comprehensive (loss)/income under US GAAPThe comprehensive (loss)/income of the Group, determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 130 Reporting Comprehensive Income, is set out
as follows:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000(Loss)/Net income under U.S. GAAP
    
    
    (142,062
    )
    
    
    28,865
    
    
    
    125,190Foreign
currency translation adjustment (net of nil tax)
    
    
    (183
    )
    
    
    514
    
    
    
    1,619Comprehensive (loss)/income
    
    
    (142,245
    )
    
    
    29,379
    
    
    
    126,809
 Condensed consolidated statement of cash flows
 Under HKFRSs, in adopting HKAS 7, three categories of activities are reported: operating
activities; investing activities and financing activities, which is similar to U.S. GAAP.
However, under HKFRSs, the difference is that cash flows from interest income would be
included in investing activities whereas under U.S. GAAP it would be included in operating
activities.Summary cash flow information under U.S. GAAP is as follows:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Net cash provided by operating activities
    
    
    204,583
    
    
    
    406,732
    
    
    
    394,159Net cash (used in)/provided by investing activities
    
    
    (513,120
    )
    
    
    91,382
    
    
    
    (163,346
    )Net cash used in financing activities
    
    
    (86,486
    )
    
    
    (109,566
    )
    
    
    (342,550
    )Increase/(decrease) in cash and bank balances
    
    
    (395,023
    )
    
    
    388,548
    
    
    
    (111,737
    )Cash and bank balances at the beginning of year
    
    
    539,591
    
    
    
    144,917
    
    
    
    532,894Effect of foreign currency exchange rate changes on cash
    
    
    349
    
    
    
    (571
    )
    
    
    453Cash and bank balances at the end of year
    
    
    144,917
    
    
    
    532,894
    
    
    
    421,610
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of differences between HKFRSs and U.S. GAAP (continued)
 (a)
    
    GoodwillPrior to September 1, 2001, goodwill arising from a business combination was charged against
available reserves. In January 2001, HKICPA issued Statement of Standard Accounting Practice
(SSAP) No. 30 Business Combinations which applied to business combinations for which the
agreement date is on or after September 1, 2001. As a result of the adoption of this SSAP in
the fiscal year ended August 31, 2002 and up to September 1, 2005, goodwill on acquisitions
occurring on or after September 1, 2001 was shown separately on the consolidated balance sheet
and amortized using the straight-line method over its estimated useful life.On September 1, 2005, the Group adopted HKFRS 3 Business Combinations. Under HKFRS 3,
goodwill is recorded at cost less any accumulated impairment losses and is no longer
amortized. Goodwill is subject to an annual impairment test and when there is an indication of
impairment. An impairment loss is recognized when the carrying amount of the cash generating
unit to which the goodwill has been allocated exceeds its recoverable amounts. In accordance
with the transitional arrangements under HKFRS 3, goodwill which had previously been taken
directly to reserves (i.e. goodwill which arose before September 1, 2001) is not recognized in
the consolidated statement of operations on disposal or impairment of the acquired business,
or under any other circumstances. The adoption of HKFRS 3 did not result in any restatement in
the consolidated financial statements of prior years and therefore had no impact on U.S. GAAP
adjustments of prior years.Under U.S. GAAP, goodwill arising from a business combination is not amortized and is
required to be tested annually for impairment in accordance with SFAS No. 142 Goodwill and
Other Intangible Assets.As a result of the adoption of HKFRS 3, there were no U.S. GAAP adjustments to the net loss/
income pertaining to goodwill for the years ended August 31, 2006 ,2007 and 2008.
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of differences between HKFRSs and U.S. GAAP (continued)
 (b)
    
    Deferred taxesUnder HKFRSs, deferred taxes are provided in full, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their carrying amounts
in the financial statements.Deferred tax assets are recognized to the extent that it is probable that future taxable
profit will be available against which the temporary differences can be utilized.Under U.S. GAAP, the Group is required to recognize deferred tax assets and liabilities for
the expected future tax consequences of all events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the temporary differences between the financial reporting basis and tax
basis of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Future tax benefits in respect of tax loss carry forwards
are also required to be recognized in full. A valuation allowance is required to be
established for such assets if it is more likely than not that the Group will not be able to
realize such benefits in the future.Under HKFRS, deferred tax assets and liabilities shall be classified as noncurrent assets or
noncurrent liabilities. Under U.S. GAAP, deferred tax liabilities and assets shall be
classified as current or noncurrent based on the classification of the related asset or
liability for financial reporting. A deferred tax asset related to tax loss carryforwards, are
classified according to the expected reversal date of the temporary difference. The valuation
allowance for a particular tax jurisdiction shall be allocated between current and non-current
deferred tax assets for that tax jurisdiction on a pro rata basis.Except for the presentation differences, there were no differences in the amount of deferred
tax assets recognized under HKFRSs and U.S. GAAP. For the years ended August 31, 2006, 2007
and 2008, no adjustment was made for tax effects of U.S. GAAP adjustments because the U.S.
GAAP adjustments in those years had no tax consequences under Hong Kong tax laws.The following additional financial statements disclosures are required under U.S. GAAP and are
presented on a U.S. GAAP basis.
 August 31,2007
    
    2008HK$000
    
    HK$000Deferred tax assets:Tax loss carryforwards
    
    
    182,739
    
    
    
    150,234Total gross deferred tax assets
    
    
    182,739
    
    
    
    150,234Valuation allowance
    
    
    (48,120
    )
    
    
    (2,389
    )Net deferred tax assets
    
    
    134,619
    
    
    
    147,845Deferred tax liabilities:Accelerated depreciation allowance
    
    
    (134,910
    )
    
    
    (126,447
    )Total gross deferred tax liabilities
    
    
    (134,910
    )
    
    
    (126,447
    )Net deferred tax asset /(liability)
    
    
    (291
    )
    
    
    21,398Net current deferred tax assets
    
    
    
    
    
    
    11,399Net non-current deferred tax assets
    
    
    
    
    
    
    16,630Net non-current deferred tax liabilities
    
    
    (291
    )
    
    
    (6,631
    )Net deferred tax asset /(liability)
    
    
    (291
    )
    
    
    21,398
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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of differences between HKFRSs and U.S. GAAP (continued)
 (b)
    
    Deferred taxes (continued)The valuation allowance for deferred tax assets as August 31, 2006, 2007 and 2008 was
HK$52,404,000, HK$48,120,000 and HK$2,389,000 respectively. The valuation allowance as at
August 31, 2006, 2007 and 2008 was primarily related to tax loss carryforwards that, in the
judgement of management, are not more likely than not to be realized.In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets depends on the generation of future taxable income during
the periods in which those temporary difference are deductible. Management considers the
scheduled reversal of deferred tax liabilities (including the impact of available carryforward
periods) and projected taxable income in making this assessment. In order to fully realize the
deferred tax asset, the Company will need to generate future taxable income before the
expiration of the deferred tax assets governed by the tax rules. Based on the level of
historical taxable income and projections for future taxable income over the periods for which
the deferred tax assets are deductible, management believes that it is more likely than not
that the Company will realize the benefits of these deductible differences, net of existing
valuation allowance at August 31, 2008. The amount of the deferred tax asset considered
realizable; however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.Changes in the valuation allowance consist of:
 Year ended August 31,2006
    
    2007
    
    2008HK$000
    
    HK$000
    
    HK$000Balance at beginning of the year
    
    
    29,804
    
    
    
    52,404
    
    
    
    48,120Addition/(reduction) to income tax expense
    
    
    22,600
    
    
    
    (1,979
    )
    
    
    (37,834
    )Valuation allowance written off
    
    
    
    
    
    
    (2,305
    )
    
    
    (7,897
    )Balance at end of the year
    
    
    52,404
    
    
    
    48,120
    
    
    
    2,389
 The net change in the total valuation allowance for the year ended August 31, 2008 was a
decrease of HK$45,731,000 which primarily relates to the release of the valuation allowance of
HK$12,013,000 due to the utilization of tax loss carryforwards during the year ended August
31, 2008 and the release of valuation allowance of HK$26,335,000 due to the changes in
estimate of future taxable income of the Companys major operating subsidiary. As at August
31, 2008, considering the operating results of this major operating subsidiary during the year
ended August 31, 2008 and the previous years as well as the Companys forecast for future
years, management reassessed that it is more likely than not that this subsidiary will be able
to generate sufficient future taxable income to realize the tax benefit of its tax loss
carryforwards, which resulted in the release of the valuation allowance of HK$26,335,000. In
addition, the write-off of the valuation allowance in the amount of HK$7,897,000 during the
fiscal year ended August 31, 2008 was offset by a corresponding reduction in the gross deferred tax
asset relating to tax loss carryforwards since management assessed that certain tax positions
are not more likely than not sustainable upon examination by the relevant tax authority.
 F-80




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of differences between HKFRSs and U.S. GAAP (continued)
 (b)
    
    Deferred taxes (continued)Effective September 1, 2007, the Group adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. The Interpretation
prescribes a threshold for the financial statement recognition and measurement of a tax
position taken or expected to be taken within an income tax return. For each tax position, the
enterprise must determine whether it is more likely than not that the position will be
sustained upon examination based on the technical merits of the position, including resolution
of any related appeals or litigation. A tax position that meets the more likely than not
recognition threshold is then measured to determine the amount of benefit to recognize within
the financial statements. No benefits may be recognized for tax positions that do not meet the
more likely than not threshold. The benefit to be recognized is the largest amount that is
more likely than not to be realized upon settlement.The adoption of FIN 48 did not result in a change to the Groups retained earnings. The
aggregate changes in the balance of the Companys gross unrecognized tax benefits were as
follows:
 HK$000Balance at September 1, 2007
    
    
    7,897Additions based on tax positions related to the current year
    
    
    1,797Balance at August 31, 2008
    
    
    9,694
 All of these unrecognized tax benefits, if recognized, would affect the Groups effective tax
rate. As of August 31, 2008, the Group did not have any accrued interest and penalties related
to the unrecognized tax benefits. The Company will recognize interest and penalties, if any,
related to unrecognized tax benefits in financial expense and other operating expense,
respectively.The Group files income tax returns in Hong Kong, PRC, Canada and USA. The open tax years for
the Company and its subsidiaries range between fiscal 2002 and fiscal 2008. The provisions
made as a result of these open tax years are subject to the final agreement with the tax
authorities. However, management does not believe there will be any material changes in the
unrecognized tax benefits within the next 12 months.
 F-81




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 31
    
    Summary of differences between HKFRSs and U.S. GAAP (continued)
 (c)
    
    Investment securitiesThe Groups investment securities consist of equity-indexed mutual fund securities and
long-term bank deposits.Under HKFRSs, the equity-linked mutual fund securities have been designated as financial asset
at fair value through profit or loss as permitted under HKAS 39 Financial Instruments:
Recognition and Measurement.Under U.S. GAAP, the Group follows SFAS No. 133 Accounting for Derivative Instruments and
Hedging Activities which requires the embedded derivative in the equity-linked mutual fund
securities to be separated and accounted for as a derivative instrument, and the host contract
to be accounted for based on generally accepted accounting principles applicable to the
instruments of that type that do not contain derivative instruments. Accordingly, the host
contracts of the equity-linked mutual fund securities are classified as held-to-maturity
securities under SFAS No. 115 Accounting for Certain Investments in Debt and Equity
Securities and measured at amortized cost while the embedded derivatives are accounted for in
accordance with SFAS No. 133 and measured at fair value.For the periods presented, there were no differences between i) the fair value of the
equity-indexed debt securities; and ii) the aggregate of the amortized cost of the host
contracts and the fair value of the embedded derivative instruments.
 (d)
    
    Deposits for purchase of fixed assets and lease of land and buildingUnder HKFRSs, deposits for purchase of fixed assets and lease of land and buildings are
classified as current assets if the amounts are expected to be realized within twelve months
after the balance sheet date. Under U.S. GAAP, such deposits are classified as non-current
assets. As of August 31, 2007 and 2008, deposits for purchase of fixed assets and lease of
land and building were HK$13,263,000 and HK$19,622,000, respectively.
 (e)
    
    Debt issue costsUnder HKFRSs, debt issue costs are reported as a reduction against the related debt proceeds
and amortized over the life of the related debt using effective interest method. Under U.S.
GAAP, such costs are disclosed separately as non-current asset and are similarly amortized. As
of August 31, 2007 and 2008, the unamortized debt issue costs were HK$22,336,000 and
HK$14,605,000, respectively.
 F-82




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial informationThe senior notes described in note 13 are fully, irrevocably and unconditionally guaranteed,
jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom
(H.K.) Limited (collectively defined as Guarantor Subsidiaries), except CTI Guangzhou
Customer Services Co. Ltd. in the PRC (Non-guarantor Subsidiary).The condensed consolidated financial information is presented below and should be read in
connection with the consolidated financial statements of City Telecom (H.K.) Limited prepared
under HKFRSs. Separate financial statements of the Guarantor Subsidiaries are not presented
because the Guarantor Subsidiaries are wholly-owned and have fully and unconditionally
guaranteed the Notes on a joint and several basis. Reconciliations to U.S. GAAP are not
presented because the majority of the reconciling items relate to City Telecom (H.K.) Limited
and Guarantor Subsidiaries are already disclosed and explained in Note 29.The following condensed consolidated financial information presents the condensed consolidated
balance sheets as of August 31, 2007 and 2008 and the related condensed consolidated
statements of operations and statements of cash flows for the years ended August 31, 2006,
2007 and 2008 of (a) City Telecom (H.K.) Limited, the parent; (b) the Guarantor Subsidiaries
on a combined basis; (c) the Non-guarantor Subsidiary; (d) eliminating entries; and (e) the
total consolidated amounts.
 F-83




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##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)Condensed consolidated balance sheet as of August 31, 2008
 CityTelecom
    
    
    
    
    
    Non-(H.K.)
    
    Guarantor
    
    guarantor
    
    Eliminating
    
    ConsolidatedLimited
    
    subsidiaries
    
    subsidiary
    
    entries
    
    totalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Current assetsCash and bank balances
    
    
    90,386
    
    
    
    263,386
    
    
    
    67,838
    
    
    
    
    
    
    
    421,610Pledged bank deposits
    
    
    87,319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,319Trade receivables, net
    
    
    11,418
    
    
    
    128,865
    
    
    
    
    
    
    
    
    
    
    
    140,283Other receivables, deposits and prepayments
    
    
    3,378
    
    
    
    80,293
    
    
    
    2,759
    
    
    
    (3,704
    )
    
    
    82,726Investment securities
    
    
    27,997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,997Deferred expenditure
    
    
    
    
    
    
    40,704
    
    
    
    
    
    
    
    
    
    
    
    40,704Total current assets
    
    
    220,498
    
    
    
    513,248
    
    
    
    70,597
    
    
    
    
    
    
    
    800,639Fixed assets, net
    
    
    87,483
    
    
    
    1,135,394
    
    
    
    8,522
    
    
    
    
    
    
    
    1,231,399Investments in subsidiaries (note)
    
    
    1,499,437
    
    
    
    260,399
    
    
    
    
    
    
    
    (1,759,836
    )
    
    
    Other long-term assets
    
    
    
    
    
    
    61,499
    
    
    
    
    
    
    
    (13,121
    )
    
    
    48,378Total assets
    
    
    1,807,418
    
    
    
    1,970,540
    
    
    
    79,119
    
    
    
    
    
    
    
    2,080,416Current liabilitiesAmounts due to subsidiaries/ fellow subsidiaries
    
    
    10,830
    
    
    
    1,316,410
    
    
    
    51,059
    
    
    
    (1,378,299
    )
    
    
    Trade payables
    
    
    26,440
    
    
    
    25,884
    
    
    
    
    
    
    
    
    
    
    
    52,324Deposits received
    
    
    7,943
    
    
    
    8,321
    
    
    
    
    
    
    
    
    
    
    
    16,264Current portion of deferred service income
    
    
    11,172
    
    
    
    102,678
    
    
    
    
    
    
    
    (3,401
    )
    
    
    110,449Other payables and accrued charges
    
    
    17,831
    
    
    
    149,548
    
    
    
    10,735
    
    
    
    
    
    
    
    178,114Income tax payable
    
    
    356
    
    
    
    496
    
    
    
    1,251
    
    
    
    
    
    
    
    2,103Current portion of obligation under finance leases
    
    
    112
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    121Total current liabilities
    
    
    74,684
    
    
    
    1,603,346
    
    
    
    63,045
    
    
    
    
    
    
    
    359,375Long-term liabilities
    
    
    702,917
    
    
    
    17
    
    
    
    
    
    
    
    (14,500
    )
    
    
    688,434Total liabilities
    
    
    777,601
    
    
    
    1,603,363
    
    
    
    63,045
    
    
    
    
    
    
    
    1,047,809
 F-84




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)Condensed consolidated balance sheet as of August 31, 2008(continued)
 CityTelecom
    
    
    
    
    
    Non-(H.K.)
    
    Guarantor
    
    guarantor
    
    Eliminating
    
    ConsolidatedLimited
    
    subsidiaries
    
    subsidiary
    
    entries
    
    totalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Commitments and contingenciesShareholders equity Ordinary shares, par valueHK$0.1 per share 2,000,000,000 shares authorized 650,621,823 shares issued and
outstanding at August 31, 2008
    
    
    65,062
    
    
    
    15,485
    
    
    
    8,131
    
    
    
    (23,616
    )
    
    
    65,062Share premium
    
    
    670,717
    
    
    
    470,836
    
    
    
    
    
    
    
    (470,836
    )
    
    
    670,717Retained profits/(accumulated losses)
    
    
    275,025
    
    
    
    (118,907
    )
    
    
    5,006
    
    
    
    113,901
    
    
    
    275,025Other reserves
    
    
    19,013
    
    
    
    (237
    )
    
    
    2,937
    
    
    
    90
    
    
    
    21,803Total shareholders equity
    
    
    1,029,817
    
    
    
    367,177
    
    
    
    16,074
    
    
    
    
    
    
    
    1,032,607Total liabilities and shareholders equity
    
    
    1,807,418
    
    
    
    1,970,540
    
    
    
    79,119
    
    
    
    
    
    
    
    2,080,416
 
 Note:
    
    The amounts of investment in subsidiaries at City Telecom (H.K.)
Limited level have included the share of net assets of its
subsidiaries using the equity method of accounting. F-85




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated balance sheet as of August 31, 2007
 CityTelecom
    
    
    
    
    
    Non-(H.K.)
    
    Guarantor
    
    guarantor
    
    Eliminating
    
    ConsolidatedLimited
    
    subsidiaries
    
    subsidiary
    
    entries
    
    totalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Current assetsCash and bank balances
    
    
    220,531
    
    
    
    303,227
    
    
    
    9,136
    
    
    
    
    
    
    
    532,894Pledged bank deposits
    
    
    87,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,220Trade receivables, net
    
    
    12,105
    
    
    
    158,446
    
    
    
    
    
    
    
    
    
    
    
    170,551Other receivables, deposits and prepayments
    
    
    4,579
    
    
    
    56,290
    
    
    
    2,207
    
    
    
    (3,704
    )
    
    
    59,372Inventories
    
    
    477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477Investment securities
    
    
    
    
    
    
    3,779
    
    
    
    
    
    
    
    
    
    
    
    3,779Deferred expenditure
    
    
    
    
    
    
    13,584
    
    
    
    
    
    
    
    
    
    
    
    13,584Total current assets
    
    
    324,912
    
    
    
    535,326
    
    
    
    11,343
    
    
    
    
    
    
    
    867,877Fixed assets, net
    
    
    100,201
    
    
    
    1,126,870
    
    
    
    10,152
    
    
    
    
    
    
    
    1,237,223Investments in subsidiaries (note)
    
    
    1,495,935
    
    
    
    274,449
    
    
    
    
    
    
    
    (1,770,384
    )
    
    
    Investment securities
    
    
    39,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,213Other long-term assets
    
    
    
    
    
    
    33,645
    
    
    
    
    
    
    
    (16,825
    )
    
    
    16,820Total assets
    
    
    1,960,261
    
    
    
    1,970,290
    
    
    
    21,495
    
    
    
    
    
    
    
    2,161,133Current liabilitiesAmounts due to subsidiaries/ fellow subsidiaries
    
    
    10,830
    
    
    
    1,490,567
    
    
    
    (4,771
    )
    
    
    (1,496,626
    )
    
    
    Trade payables
    
    
    37,477
    
    
    
    38,542
    
    
    
    
    
    
    
    
    
    
    
    76,019Deposits received
    
    
    7,876
    
    
    
    8,312
    
    
    
    
    
    
    
    
    
    
    
    16,188Current portion of deferred service income
    
    
    11,380
    
    
    
    56,532
    
    
    
    
    
    
    
    (3,710
    )
    
    
    64,202Other payables and accrued charges
    
    
    18,694
    
    
    
    119,642
    
    
    
    6,931
    
    
    
    
    
    
    
    145,267Income tax payable
    
    
    356
    
    
    
    62
    
    
    
    1,063
    
    
    
    
    
    
    
    1,481Current portion of obligation under finance leases
    
    
    104
    
    
    
    731
    
    
    
    
    
    
    
    
    
    
    
    835Total current liabilities
    
    
    86,717
    
    
    
    1,714,388
    
    
    
    3,223
    
    
    
    
    
    
    
    303,992Long-term liabilities
    
    
    970,833
    
    
    
    386
    
    
    
    (70
    )
    
    
    (17,890
    )
    
    
    953,259Total liabilities
    
    
    1,057,550
    
    
    
    1,714,774
    
    
    
    3,153
    
    
    
    
    
    
    
    1,257,251
 F-86




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated balance sheet as of August 31, 2007(continued)
 CityTelecom
    
    
    
    
    
    Non-(H.K.)
    
    Guarantor
    
    guarantor
    
    Eliminating
    
    ConsolidatedLimited
    
    subsidiaries
    
    subsidiary
    
    entries
    
    totalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Commitments and contingenciesShareholders equity Ordinary shares, par valueHK$0.1 per share 2,000,000,000 shares authorized 616,503,404 shares issued and
outstanding at August 31, 2007
    
    
    61,650
    
    
    
    15,485
    
    
    
    8,131
    
    
    
    (23,616
    )
    
    
    61,650Share premium
    
    
    622,433
    
    
    
    470,836
    
    
    
    
    
    
    
    (470,836
    )
    
    
    622,433Retained profits/(accumulated losses)
    
    
    200,519
    
    
    
    (230,666
    )
    
    
    9,033
    
    
    
    221,633
    
    
    
    200,519Other reserves
    
    
    18,109
    
    
    
    (139
    )
    
    
    1,178
    
    
    
    132
    
    
    
    19,280Total shareholders equity
    
    
    902,711
    
    
    
    255,516
    
    
    
    18,342
    
    
    
    
    
    
    
    903,882Total liabilities and shareholders equity
    
    
    1,960,261
    
    
    
    1,970,290
    
    
    
    21,495
    
    
    
    
    
    
    
    2,161,133
 
 Note:
    
    The amounts of investment in subsidiaries at City Telecom (H.K.)
Limited level have included the share of net assets of its
subsidiaries using the equity method of accounting. F-87




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated statement of operations 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
    )Operating expenses: Salaries and related costs
    
    
    (35,057
    )
    
    
    (231,196
    )
    
    
    (102,067
    )
    
    
    120,860
    
    
    
    (247,460
    ) Sales and marketing expenses
    
    
    (5,743
    )
    
    
    (403,425
    )
    
    
    
    
    
    
    101,425
    
    
    
    (307,743
    ) General and administrative expenses
    
    
    (45,797
    )
    
    
    (331,030
    )
    
    
    (28,414
    )
    
    
    8,643
    
    
    
    (396,598
    ) Provision for doubtful accounts
    
    
    (954
    )
    
    
    (13,339
    )
    
    
    
    
    
    
    
    
    
    
    (14,293
    )Income from operations
    
    
    181
    
    
    
    119,455
    
    
    
    4,893
    
    
    
    
    
    
    
    158,520Interest income
    
    
    6,817
    
    
    
    7,518
    
    
    
    1,261
    
    
    
    
    
    
    
    15,596Interest expense
    
    
    (71,702
    )
    
    
    (71,753
    )
    
    
    
    
    
    
    68,318
    
    
    
    (75,137
    )Other income, net
    
    
    86,677
    
    
    
    30,234
    
    
    
    75
    
    
    
    (107,593
    )
    
    
    9,393Share of net income from subsidiaries (note)
    
    
    108,154
    
    
    
    
    
    
    
    
    
    
    
    (108,154
    )
    
    
    Income before taxation
    
    
    130,127
    
    
    
    85,454
    
    
    
    6,229
    
    
    
    
    
    
    
    108,372Income tax (expense)/credit
    
    
    (4,937
    )
    
    
    26,306
    
    
    
    (4,551
    )
    
    
    
    
    
    
    16,818Net income
    
    
    125,190
    
    
    
    111,760
    
    
    
    1,678
    
    
    
    
    
    
    
    125,190
 
 Note:
    
    The net income amounts at City Telecom (H.K.) Limited level have
included the share of net income/(losses) of its subsidiaries using
the equity method of accounting. F-88




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated statement of operations for the year ended August 31, 2007
 CityTelecom
    
    
    
    
    
    Non-(H.K.)
    
    Guarantor
    
    guarantor
    
    Eliminating
    
    ConsolidatedLimited
    
    subsidiaries
    
    subsidiary
    
    entries
    
    TotalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Revenue
    
    
    124,017
    
    
    
    1,186,356
    
    
    
    108,692
    
    
    
    (277,795
    )
    
    
    1,141,270Network costs
    
    
    (50,522
    )
    
    
    (203,506
    )
    
    
    
    
    
    
    39,437
    
    
    
    (214,591
    )Operating expenses: Salaries and related costs
    
    
    (30,475
    )
    
    
    (209,065
    )
    
    
    (77,594
    )
    
    
    96,032
    
    
    
    (221,102
    ) Sales and marketing expenses
    
    
    (12,601
    )
    
    
    (362,975
    )
    
    
    
    
    
    
    171,903
    
    
    
    (203,673
    ) General and administrative expenses
    
    
    (43,149
    )
    
    
    (344,162
    )
    
    
    (26,050
    )
    
    
    10,601
    
    
    
    (402,760
    ) Provision for doubtful accounts
    
    
    (796
    )
    
    
    (5,773
    )
    
    
    
    
    
    
    
    
    
    
    (6,569
    )Income/(loss) from operations
    
    
    (13,526
    )
    
    
    60,875
    
    
    
    5,048
    
    
    
    
    
    
    
    92,575Interest income
    
    
    13,390
    
    
    
    8,606
    
    
    
    675
    
    
    
    
    
    
    
    22,671Interest expense
    
    
    (87,474
    )
    
    
    (68,161
    )
    
    
    
    
    
    
    68,131
    
    
    
    (87,504
    )Other income, net
    
    
    50,031
    
    
    
    59,200
    
    
    
    43
    
    
    
    (106,125
    )
    
    
    3,149Share of net losses from subsidiaries (note)
    
    
    66,444
    
    
    
    
    
    
    
    
    
    
    
    (66,444
    )
    
    
    Income before taxation
    
    
    28,865
    
    
    
    60,520
    
    
    
    5,766
    
    
    
    
    
    
    
    30,891Income tax credit
    
    
    
    
    
    
    (75
    )
    
    
    (1,951
    )
    
    
    
    
    
    
    (2,026
    )Net income
    
    
    28,865
    
    
    
    60,445
    
    
    
    3,815
    
    
    
    
    
    
    
    28,865
 
 Note:
    
    The net income amounts at City Telecom (H.K.) Limited level have
included the share of net income/(losses) of its subsidiaries using
the equity method of accounting. F-89




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated statement of operations for the year ended August 31, 2006
 CityTelecom
    
    
    
    
    
    Non-(H.K.)
    
    Guarantor
    
    guarantor
    
    Eliminating
    
    ConsolidatedLimited
    
    subsidiaries
    
    subsidiary
    
    entries
    
    totalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Revenue
    
    
    174,113
    
    
    
    1,110,256
    
    
    
    116,355
    
    
    
    (265,848
    )
    
    
    1,134,876Network costs
    
    
    (87,849
    )
    
    
    (254,740
    )
    
    
    
    
    
    
    41,996
    
    
    
    (300,593
    )Operating expenses: Salaries and related costs
    
    
    (44,254
    )
    
    
    (233,105
    )
    
    
    (81,887
    )
    
    
    102,525
    
    
    
    (256,721
    ) Sales and marketing expenses
    
    
    (20,567
    )
    
    
    (336,985
    )
    
    
    
    
    
    
    152,600
    
    
    
    (204,952
    ) General and administrative expenses
    
    
    (56,366
    )
    
    
    (366,635
    )
    
    
    (30,353
    )
    
    
    12,682
    
    
    
    (440,672
    ) Provision for doubtful accounts
    
    
    (1,090
    )
    
    
    (16,360
    )
    
    
    
    
    
    
    
    
    
    
    (17,450
    )(Loss)/income from operations
    
    
    (36,013
    )
    
    
    (97,569
    )
    
    
    4,115
    
    
    
    
    
    
    
    (85,512
    )Interest income
    
    
    16,594
    
    
    
    2,946
    
    
    
    838
    
    
    
    
    
    
    
    20,378Interest expense
    
    
    (88,584
    )
    
    
    (60,454
    )
    
    
    
    
    
    
    60,401
    
    
    
    (88,637
    )Other income, net
    
    
    67,672
    
    
    
    39,201
    
    
    
    2,245
    
    
    
    (104,653
    )
    
    
    4,465Share of net losses from subsidiaries (note)
    
    
    (111,171
    )
    
    
    
    
    
    
    
    
    
    
    111,171
    
    
    
    (Loss)/income before taxation
    
    
    (151,502
    )
    
    
    (115,876
    )
    
    
    7,198
    
    
    
    
    
    
    
    (149,306
    )Income tax expense/(credit)
    
    
    9,440
    
    
    
    11
    
    
    
    (2,207
    )
    
    
    
    
    
    
    7,244Net (loss)/income
    
    
    (142,062
    )
    
    
    (115,865
    )
    
    
    4,991
    
    
    
    
    
    
    
    (142,062
    )
 
 Note:
    
    The net loss amounts at City Telecom (H.K.) Limited level have
included the share of net income/(losses) of its subsidiaries using
the equity method of accounting. F-90




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated statement of cash flows 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 provided by operating activities
    
    
    193,001
    
    
    
    125,504
    
    
    
    59,866
    
    
    
    158
    
    
    
    378,529Net cash generated from/ (used in)
investing activities
    
    
    18,775
    
    
    
    (164,222
    )
    
    
    (2,303
    )
    
    
    
    
    
    
    (147,750
    )Net cash used in financing activities
    
    
    (341,786
    )
    
    
    (730
    )
    
    
    
    
    
    
    
    
    
    
    (342,516
    )Net (decrease)/increase in cash and bank
balances
    
    
    (130,010
    )
    
    
    (39,448
    )
    
    
    57,563
    
    
    
    
    
    
    
    (111,737
    )Cash and bank balances at beginning of year
    
    
    220,531
    
    
    
    303,227
    
    
    
    9,136
    
    
    
    
    
    
    
    532,894Effects of foreign exchange rates changes
    
    
    (135
    )
    
    
    (393
    )
    
    
    1,139
    
    
    
    (158
    )
    
    
    453Cash and bank balances at end of year
    
    
    90,386
    
    
    
    263,386
    
    
    
    67,838
    
    
    
    
    
    
    
    421,610
 Condensed consolidated statement of cash flows for the year ended August 31, 2007
 CityTelecom
    
    
    
    
    
    Non-(H.K.)
    
    Guarantor
    
    guarantor
    
    Eliminating
    
    ConsolidatedLimited
    
    subsidiaries
    
    subsidiary
    
    entries
    
    totalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Net cash provided/(used in) by operating
activities
    
    
    110,190
    
    
    
    342,627
    
    
    
    (69,035
    )
    
    
    217
    
    
    
    383,999Net cash generated from/ (used in)
investing activities
    
    
    132,039
    
    
    
    (69,197
    )
    
    
    51,211
    
    
    
    
    
    
    
    114,053Net cash used in financing activities
    
    
    (108,277
    )
    
    
    (1,227
    )
    
    
    
    
    
    
    
    
    
    
    (109,504
    )Net increase/(decrease) in cash and bank
balances
    
    
    133,952
    
    
    
    272,203
    
    
    
    (17,824
    )
    
    
    
    
    
    
    388,548Cash and bank balances at beginning of year
    
    
    86,670
    
    
    
    31,349
    
    
    
    26,898
    
    
    
    
    
    
    
    144,917Effects of foreign exchange rates changes
    
    
    (91
    )
    
    
    (325
    )
    
    
    62
    
    
    
    (217
    )
    
    
    (571
    )Cash and bank balances at end of year
    
    
    220,531
    
    
    
    303,227
    
    
    
    9,136
    
    
    
    
    
    
    
    532,894
 F-91




---



##### Table of Contents



City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008
 32
    
    Supplemental guarantors consolidated financial information (continued)
 Condensed consolidated statement of cash flows for the year ended August 31, 2006
 CityTelecom
    
    
    
    
    
    Non-(H.K.)
    
    Guarantor
    
    guarantor
    
    Eliminating
    
    ConsolidatedLimited
    
    subsidiaries
    
    subsidiary
    
    entries
    
    totalHK$000
    
    HK$000
    
    HK$000
    
    HK$000
    
    HK$000Net cash (used in)/provided by operating
activities
    
    
    (278,174
    )
    
    
    403,086
    
    
    
    58,994
    
    
    
    245
    
    
    
    184,151Net cash used in investing activities
    
    
    (12,087
    )
    
    
    (425,348
    )
    
    
    (55,307
    )
    
    
    
    
    
    
    (492,742
    )Net cash provided by financing activities
    
    
    (85,238
    )
    
    
    (1,248
    )
    
    
    
    
    
    
    54
    
    
    
    (86,432
    )Net (decrease)/increase in cash and bank
balances
    
    
    (375,499
    )
    
    
    (23,510
    )
    
    
    3,687
    
    
    
    
    
    
    
    (395,023
    )Cash and bank balances at beginning of year
    
    
    461,001
    
    
    
    55,309
    
    
    
    23,281
    
    
    
    
    
    
    
    539,591Effects of foreign exchange rates changes
    
    
    1,168
    
    
    
    (450
    )
    
    
    (70
    )
    
    
    (299
    )
    
    
    349Cash and bank balances at end of year
    
    
    86,670
    
    
    
    31,349
    
    
    
    26,898
    
    
    
    
    
    
    
    144,917
 F-92




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##### Table of Contents



SIGNATURE
  CITY TELECOM (H.K.) LIMITEDBy:
    
    /s/ Lai Ni QuiaqueName:
    
    Lai Ni QuiaqueTitle:
    
    Chief Financial Officer