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As filed with the U.S. Securities and Exchange Commission on June 30, 2004   SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 20-F x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2003
 Commission file number [ ] SUNDAY Communications Limited  Cayman Islands  13/F Warwick House
TaiKoo Place
979 Kings Road, Quarry Bay
Special Administrative Region of Hong Kong
The Peoples Republic of China
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None. Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares, par value of HK$0.10 per share. Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None. Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report: Number outstanding as ofClass
    
    December 31, 2003Ordinary Shares, par value HK$0.10 per share
    
    
    2,990,000,000
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X]      No [    ] Indicate by check mark which financial statement item the registrant has
elected to follow: Item 17 [    ]    Item 18 [X]




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TABLE OF CONTENTS GENERAL INFORMATION
    
    
    iiiFORWARD-LOOKING STATEMENTS
    
    
    iiiPART I
    
    
    1Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1Item 3. KEY INFORMATION
    
    
    13.A SELECTED FINANCIAL DATA
    
    
    13.B CAPITALIZATION AND INDEBTEDNESS
    
    
    43.C REASONS FOR THE OFFER AND USE OF PROCEEDS
    
    
    43.D RISK FACTORS
    
    
    4Item 4. INFORMATION ON THE COMPANY
    
    
    114.A HISTORY AND DEVELOPMENT
    
    
    114.B BUSINESS OVERVIEW
    
    
    134.C ORGANIZATIONAL STRUCTURE
    
    
    214.D PROPERTY, PLANTS AND EQUIPMENT
    
    
    22Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    225.A OPERATING RESULTS
    
    
    235.B LIQUIDITY AND CAPITAL RESOURCES
    
    
    285.C RESEARCH AND DEVELOPMENT
    
    
    325.D TREND INFORMATION
    
    
    335.E OFF-BALANCE SHEET ARRANGEMENTS
    
    
    335.F CONTRACTUAL OBLIGATIONS
    
    
    33Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    336.A DIRECTORS AND SENIOR MANAGEMENT
    
    
    336.B COMPENSATION
    
    
    376.C BOARD PRACTICES
    
    
    376.D EMPLOYEES
    
    
    386.E SHARE OWNERSHIP
    
    
    39Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    417.A MAJOR SHAREHOLDERS
    
    
    417.B RELATED PARTY TRANSACTIONS
    
    
    427.C INTERESTS OF EXPERTS AND COUNSEL
    
    
    43Item 8. FINANCIAL INFORMATION
    
    
    438.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
    
    
    438.B SIGNIFICANT CHANGES
    
    
    43Item 9. THE OFFER AND LISTING
    
    
    43Item 10. ADDITIONAL INFORMATION
    
    
    4410.A SHARE CAPITAL
    
    
    4410.B MEMORANDUM AND ARTICLES OF ASSOCIATION
    
    
    4410.C MATERIAL CONTRACTS
    
    
    5010.D EXCHANGE CONTROLS AND OTHER LIMITATIONS
    
    
    5010.E TAXATION
    
    
    5110.F DIVIDENDS AND PAYING AGENTS
    
    
    5510.G STATEMENT BY EXPERTS
    
    
    5510.H DOCUMENTS ON DISPLAY
    
    
    55Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
    
    
    55Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    56PART II
    
    
    56Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    56Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
    
    
    56Item 15. CONTROLS AND PROCEDURES
    
    
    56Item 16. [Reserved]
    
    
    56
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Item 16A AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    56Item 16B CODE OF ETHICS
    
    
    56Item 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    57Item 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    57Item 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    57PART III
    
    
    58Item 17. FINANCIAL STATEMENTS
    
    
    58Item 18. FINANCIAL STATEMENTS
    
    
    58Item 19. EXHIBITS
    
    
    58SIGNATURE
    
    
    59INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1APPENDIX A  GLOSSARY OF TECHNICAL TERMS
    
    
    A-1EXHIBIT INDEX
    
    
    E-1EX-1.1 ARTICLES OF ASSOCIATIONEX-4.5 TURN KEY CONTRACTEX-4.6 FACILITY AGREEMENTEX-4.7 SUBCONTRACT AGREEMENTEX-8.1 PRINCIPAL SUBSIDIARIES OF THE REGISTRANTEX-12.1 CERT OF GROUP MANAGING DIRECTOREX-12.2 CERT OF GROUP DIRECTOR-FINANCEEX-13.1 CERT OF GROUP MANAGING DIRECTOR TO SEC1350EX-13.2 CERT OF GROUP DIRECTOR-FINANCE TO SEC1350
  ii




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GENERAL INFORMATION Except as otherwise required by the context, references in this Annual
Report to SUNDAY, Company, registrant, us or we refer to SUNDAY
Communications Limited. The term you refers to holders of ordinary shares and
American depositary shares, or ADSs, representing the ordinary shares. The
terms Hong Kong and the Government refer to Hong Kong Special
Administrative Region of The Peoples Republic of China and its government,
respectively. See Appendix A  Glossary of Technical Terms for definitions of
technical terms used in this Annual Report. We publish our financial statements in Hong Kong dollars. In this Annual
Report, references to Hong Kong dollars or HK$ are to the currency of Hong
Kong, and references to U.S. dollars or US$ are to the currency of the
United States of America. This Annual Report contains translations of Hong Kong
dollar amounts into U.S. dollar amounts, solely for your convenience. Unless
otherwise indicated, the translations have been made at HK$7.7640 = US$1.00,
which was the noon buying rate in The City of New York for cable transfers in
Hong Kong dollars as certified for customs purposes by the Federal Reserve Bank
of New York on December 31, 2003. See Item 3. Key Information  Selected
Financial Data  Exchange Rate Information for historical information
regarding this noon buying rate. You should not construe these translations as
representations that the Hong Kong dollars actually represent such U.S. dollar
amounts or could have been or could be converted into U.S. dollars at the rate
indicated or at any other rates. 
 FORWARD-LOOKING STATEMENTS Some statements made in this Annual Report are forward-looking statements,
which are subject to various risks and uncertainties. These include statements
with respect to us, our corporate plans, strategies and beliefs and other
statements that are not historical facts. These statements can be identified by
the use of forward-looking terminology such as may, will, expect,
anticipate, intend, estimate, continue, plan or other similar words.
The statements are based on our managements assumptions and beliefs in light
of the information currently available to us. These assumptions involve risks and uncertainties which may cause the
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, without
limitation:  
    
    the lack of substantial revenue from some of our businesses;
    
    the pace of change of the wireless communications and data marketplace in Hong Kong;
    
    the stagnant or decreasing demand for, and increased competition in,
wireless communications and data services in Hong Kong and other
relevant markets;
    
    our ability to maintain growth and successfully introduce new products and services;
    
    our churn rate, liquidity and capital resources and expenditure;
    
    our ability to obtain requisite licenses, technologies and funding on
timely and acceptable terms for our existing, new and future businesses;
    
    our ability to realize usage and subscription fees from our services;
and
    
    the continued development, convergence and stability of technology
infrastructure we use to provide our wireless communications and data
services. For a further discussion of such risks and uncertainties, see Item 3. Key
Information  Risk Factors. You should consider these factors carefully in
evaluating any forward-looking statements and should not place any undue
reliance on any forward-looking statements. You should keep in mind that any
forward-looking statement made by us in this Annual Report or elsewhere speaks
only as of the date on which we made it. New risks and uncertainties come up
from time to time, and it is impossible for us to predict these events or how
they may affect us. We are under no obligation to, and do not intend, to update or revise our
forward-looking statements made herein to reflect actual results or changes in
assumptions or other factors that could affect those statements. iii




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PART I 
 Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 Item 3. KEY INFORMATION 
 3.A SELECTED FINANCIAL DATA The selected financial data as of and for each of the three years ended
December 31, 2001, 2002 and 2003 are derived from and should be read with our
audited consolidated financial statements, including the notes to the audited
consolidated financial statements, included in this Annual Report beginning on
page F-1. We derived the selected financial data as of and for each of the two
years ended December 31, 1999 and 2000 from our audited consolidated financial
statements, which are not included in this Annual Report. Our consolidated financial statements are prepared and presented in
accordance with generally accepted accounting principles in Hong Kong, or HK
GAAP, which differ in some material respects from generally accepted accounting
principles in the United States of America, or US GAAP. For a discussion of
relevant differences between HK GAAP and US GAAP, see note 27 to our audited
consolidated financial statements. Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(1)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions, except for number of shares and ADS, per share and per ADS data)Consolidated income statement data:HK GAAP:Operating revenues:Mobile services
    
    
    825.5
    
    
    
    988.7
    
    
    
    1,165.4
    
    
    
    1,217.7
    
    
    
    1,149.9
    
    
    
    148.1Sales of mobile phones and accessories
    
    
    190.7
    
    
    
    404.4
    
    
    
    242.9
    
    
    
    115.3
    
    
    
    109.4
    
    
    
    14.1Other services(2)
    
    
    9.2
    
    
    
    57.2
    
    
    
    14.1
    
    
    
    9.7
    
    
    
    0.7
    
    
    
    0.1Total operating revenues
    
    
    1,025.4
    
    
    
    1,450.3
    
    
    
    1,422.4
    
    
    
    1,342.7
    
    
    
    1,260.0
    
    
    
    162.3Costs of sales and services:Cost of services(2)(3)
    
    
    (181.2
    )
    
    
    (235.5
    )
    
    
    (224.2
    )
    
    
    (221.1
    )
    
    
    (196.7
    )
    
    
    (25.3
    )Cost of sales of mobile phones and accessories
    
    
    (507.6
    )
    
    
    (424.5
    )
    
    
    (245.0
    )
    
    
    (113.4
    )
    
    
    (133.3
    )
    
    
    (17.2
    )Gross profit
    
    
    336.6
    
    
    
    790.3
    
    
    
    953.2
    
    
    
    1,008.2
    
    
    
    930.0
    
    
    
    119.8Other revenues
    
    
    
    
    
    
    8.7
    
    
    
    2.6
    
    
    
    1.9
    
    
    
    4.6
    
    
    
    0.6Operating expenses(4)
    
    
    (1,084.5
    )
    
    
    (1,179.7
    )
    
    
    (1,119.0
    )
    
    
    (1,052.8
    )
    
    
    (852.7
    )
    
    
    (109.9
    )(Loss)/profit from operations
    
    
    (747.9
    )
    
    
    (380.7
    )
    
    
    (163.2
    )
    
    
    (42.7
    )
    
    
    81.9
    
    
    
    10.5Interest income
    
    
    2.2
    
    
    
    51.1
    
    
    
    21.6
    
    
    
    3.5
    
    
    
    2.5
    
    
    
    0.3Finance costs
    
    
    (178.2
    )
    
    
    (136.9
    )
    
    
    (70.1
    )
    
    
    (59.5
    )
    
    
    (52.8
    )
    
    
    (6.8
    )Share of losses of joint ventures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.6
    )
    
    
    (4.4
    )
    
    
    (0.5
    )Net (loss)/profit
    
    
    (923.9
    )
    
    
    (466.5
    )
    
    
    (211.7
    )
    
    
    (117.3
    )
    
    
    27.2
    
    
    
    3.5Number of shares used to calculate (loss)/earnings
per share (in thousands)
    
    
    2,300,000
    
    
    
    2,850,492
    
    
    
    2,990,000
    
    
    
    2,990,000
    
    
    
    2,990,000
    
    
    
    2,990,000Basic (loss)/earnings per share (in cents)(5)
    
    
    (40.2
    )
    
    
    (16.4
    )
    
    
    (7.1
    )
    
    
    (3.9
    )
    
    
    0.9
    
    
    
    0.1US GAAP:Operating revenues:Mobile services
    
    
    825.5
    
    
    
    988.7
    
    
    
    1,155.0
    
    
    
    1,215.8
    
    
    
    1,160.0
    
    
    
    149.4Sales of mobile phones and accessories
    
    
    190.7
    
    
    
    404.4
    
    
    
    242.9
    
    
    
    115.3
    
    
    
    109.4
    
    
    
    14.1Other services(2)
    
    
    9.2
    
    
    
    57.2
    
    
    
    14.1
    
    
    
    9.7
    
    
    
    0.7
    
    
    
    0.1Total operating revenues
    
    
    1,025.4
    
    
    
    1,450.3
    
    
    
    1,412.0
    
    
    
    1,340.8
    
    
    
    1,270.1
    
    
    
    163.6Costs of sales and services:Cost of services(2)(3)
    
    
    (460.4
    )
    
    
    (577.7
    )
    
    
    (548.3
    )
    
    
    (547.7
    )
    
    
    (465.3
    )
    
    
    (59.9
    )Cost of sales of mobile phones and accessories
    
    
    (507.6
    )
    
    
    (424.5
    )
    
    
    (245.0
    )
    
    
    (113.4
    )
    
    
    (133.3
    )
    
    
    (17.2
    )Gross profit
    
    
    57.4
    
    
    
    448.1
    
    
    
    618.7
    
    
    
    679.7
    
    
    
    671.5
    
    
    
    86.5Other revenues
    
    
    
    
    
    
    8.7
    
    
    
    2.6
    
    
    
    1.9
    
    
    
    4.6
    
    
    
    0.6Operating expenses(4)
    
    
    (805.3
    )
    
    
    (841.3
    )
    
    
    (798.7
    )
    
    
    (726.0
    )
    
    
    (582.9
    )
    
    
    (75.1
    )(Loss)/profit from operations
    
    
    (747.9
    )
    
    
    (384.5
    )
    
    
    (177.4
    )
    
    
    (44.4
    )
    
    
    93.2
    
    
    
    12.0Interest income
    
    
    2.2
    
    
    
    51.1
    
    
    
    21.6
    
    
    
    3.5
    
    
    
    2.5
    
    
    
    0.3Finance costs
    
    
    (178.2
    )
    
    
    (136.9
    )
    
    
    (70.1
    )
    
    
    (59.5
    )
    
    
    (52.8
    )
    
    
    (6.8
    )Share of losses of joint ventures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.6
    )
    
    
    (4.4
    )
    
    
    (0.5
    )Deferred tax credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss)/profit
    
    
    (923.9
    )
    
    
    (470.3
    )
    
    
    (225.9
    )
    
    
    (119.0
    )
    
    
    38.5
    
    
    
    5.0Number of shares used to calculate (loss)/earnings
per share (in thousands)
    
    
    2,300,000
    
    
    
    2,850,492
    
    
    
    2,990,000
    
    
    
    2,990,000
    
    
    
    2,990,000
    
    
    
    2,990,000Number of ADSs used to calculate (loss)/earnings
per ADS (in thousands)(5)
    
    
    23,000
    
    
    
    28,505
    
    
    
    29,900
    
    
    
    29,900
    
    
    
    29,900
    
    
    
    29,900Basic (loss)/earnings per share (in cents)(5)
    
    
    (40.2
    )
    
    
    (16.5
    )
    
    
    (7.6
    )
    
    
    (4.0
    )
    
    
    1.3
    
    
    
    0.2Basic (loss)/earnings per ADS (in dollars)(5)
    
    
    (40.2
    )
    
    
    (16.5
    )
    
    
    (7.6
    )
    
    
    (4.0
    )
    
    
    1.3
    
    
    
    0.2Cash dividends declared per ordinary share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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As of December 31,1999
    
    2000
    
    2001(6)
    
    2002
    
    2003
    
    2003(1)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions)Consolidated balance sheet data:HK GAAP:Total assets
    
    
    1,704.2
    
    
    
    2,375.2
    
    
    
    1,936.2
    
    
    
    1,810.9
    
    
    
    1,732.7
    
    
    
    223.2Long-term debt
    
    
    1,224.7
    
    
    
    753.7
    
    
    
    556.7
    
    
    
    546.9
    
    
    
    425.0
    
    
    
    54.7Total liabilities
    
    
    2,661.3
    
    
    
    1,375.5
    
    
    
    1,148.2
    
    
    
    1,140.2
    
    
    
    1,034.8
    
    
    
    133.3Shareholders (deficit)/equity
    
    
    (957.1
    )
    
    
    999.7
    
    
    
    788.0
    
    
    
    670.7
    
    
    
    697.9
    
    
    
    89.9US GAAP:Total assets
    
    
    1,841.0
    
    
    
    2,512.8
    
    
    
    2,049.4
    
    
    
    1,810.9
    
    
    
    1,732.7
    
    
    
    223.2Shareholders (deficit)/equity
    
    
    (957.1
    )
    
    
    999.7
    
    
    
    777.6
    
    
    
    658.5
    
    
    
    695.8
    
    
    
    89.6
 Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(1)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions, except for operating data)Cash flows data:HK GAAP:Net cash (outflow)/inflow from:Operating activities
    
    
    (417.1
    )
    
    
    (324.4
    )
    
    
    (88.3
    )
    
    
    129.3
    
    
    
    241.9
    
    
    
    31.2Investing activities
    
    
    (99.5
    )
    
    
    (203.4
    )
    
    
    (441.0
    )
    
    
    (109.5
    )
    
    
    (127.2
    )
    
    
    (16.4
    )Financing activities
    
    
    526.5
    
    
    
    1,065.0
    
    
    
    (49.5
    )
    
    
    (17.6
    )
    
    
    (61.9
    )
    
    
    (8.0
    )Other financial data:EBITDA (HK GAAP)(7)
    
    
    (520.6
    )
    
    
    (119.4
    )
    
    
    101.9
    
    
    
    213.7
    
    
    
    315.2
    
    
    
    40.6Operating data for mobile communications business:Number of subscribers
    
    
    287,000
    
    
    
    410,000
    
    
    
    551,000
    
    
    
    603,000
    
    
    
    660,000Average monthly ARPU (HK$)(8)
    
    
    292
    
    
    
    272
    
    
    
    219
    
    
    
    209
    
    
    
    201Average monthly minutes of usage per subscriber
    
    
    329
    
    
    
    353
    
    
    
    415
    
    
    
    476
    
    
    
    522Average monthly churn rate(9)
    
    
    5.8
    %
    
    
    6.1
    %
    
    
    8.3
    %
    
    
    5.4
    %
    
    
    5.0
    %
   (1)
    
    Our financial statements are maintained in Hong Kong dollars. For
convenience, the U.S. dollar information as of and for the year ended
December 31, 2003 has been translated into U.S. dollars at the exchange
rate of HK$7.7640 = US$1.00, the noon buying rate on December 31, 2003.
You should not construe these translations as representations that the
Hong Kong dollars actually represent such U.S. dollar amounts or could
have been converted into U.S. dollars at the rate indicated or at any
other rates.(2)
    
    Other services include our SUNDAY 1622 retail international long
distance calling service business, which was launched in September 1999
and for which we outsourced the sales, service and billing functions in
August 2000. The outsourcing arrangement was terminated in September 2001.(3)
    
    Cost of services consists of cost of mobile services and cost of other
services, including the SUNDAY 1622 services.(4)
    
    Operating expenses consist of network costs, depreciation, rent and
related costs, salaries and related costs, advertising, promotion and
other selling costs, and other operating expenses.(5)
    
    Basic loss per share amount for the year ended December 31, 1999 has been
calculated as if there were 2,300,000,000 ordinary shares in issue
(comprising (a) 8,000 ordinary shares which were issued and outstanding
following our reorganization in February 2000 and (b) 2,299,992,000
ordinary shares issued to our five shareholders in the bonus issue made as
part of the restructuring of our capital upon the completion of our global
offering). Basic (loss)/earnings per share amount for the year ended
December 31, 2000 has been calculated as if the 2,300,000,000 ordinary
shares were in issue on January 1, 2000 and on the basis that the
690,000,000 ordinary shares were issued on March 15, 2000 pursuant to the
global offering. Basic (loss)/earnings per share amounts for each of the
three years ended December 31, 2001, 2002 and 2003 have been calculated
based on the 2,990,000,000 ordinary shares in issue during the year. The
ADS to share ratio was changed from 1:30 to 1:100 in July 2002. The
comparative basic loss per ADS amounts for each of the three years ended
December 31, 1999, 2000 and 2001 had been restated based on the new ADS to
share ratio to conform with the 2002 presentation.(6)
    
    For the year ended December 31, 2002, we changed the method of accounting
on the 3G license acquired in October 2001 and the consolidated balance
sheet as of December 31, 2001 had been restated to reflect the
adjustments.(7)
    
    EBITDA represents (loss)/profit before interest income and finance costs,
income tax expense/(benefit), depreciation, amortization and share of
losses from joint ventures. EBITDA is presented because we believe it is
an accepted financial indicator of a companys ability to meet its future
debt service, capital expenditure and working capital requirements. Since
the telecommunications business is capital intensive, capital expenditure
and level of debt and interest expenses may have a significant impact on
net profit for companies with similar operating results. Therefore, for a
telecommunications company such as ourselves, we believe that EBITDA
provides a useful reflection of our operating results. However, EBITDA
should not be considered in isolation or as an alternative to net
profit/(loss) as determined under HK GAAP or US GAAP as an indicator of
operating performance or as an alternative to cash flow as determined
under HK GAAP or US GAAP as a measure of liquidity. In addition, our
EBITDA, which is not a measure under HK GAAP or US GAAP, is not comparable
to that of other companies, which may determine EBITDA differently. 2




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As a measure of our operating performance, we believe that the most directly
comparable HK GAAP and US GAAP measure to EBITDA is net profit. The following
table reconciles our net (loss)/profit under HK GAAP to our definition of
EBITDA on a consolidated basis for each of the five years ended December 31,
1999, 2000, 2001, 2002 and 2003. Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(1)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions)EBITDA
    
    
    (520.6
    )
    
    
    (119.4
    )
    
    
    101.9
    
    
    
    213.7
    
    
    
    315.2
    
    
    
    40.6Add/(less):Depreciation
    
    
    (227.3
    )
    
    
    (261.3
    )
    
    
    (265.1
    )
    
    
    (256.4
    )
    
    
    (233.3
    )
    
    
    (30.1
    )Interest income
    
    
    2.2
    
    
    
    51.1
    
    
    
    21.6
    
    
    
    3.5
    
    
    
    2.5
    
    
    
    0.3Finance costs
    
    
    (178.2
    )
    
    
    (136.9
    )
    
    
    (70.1
    )
    
    
    (59.5
    )
    
    
    (52.8
    )
    
    
    (6.8
    )Share of losses from joint ventures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.6
    )
    
    
    (4.4
    )
    
    
    (0.5
    )Net (loss)/profit
    
    
    (923.9
    )
    
    
    (466.5
    )
    
    
    (211.7
    )
    
    
    (117.3
    )
    
    
    27.2
    
    
    
    3.5
 The following table reconciles our net (loss)/profit under US GAAP to our
definition of EBITDA on a consolidated basis for each of the five years ended
December 31, 1999, 2000, 2001, 2002 and 2003. Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(1)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions)EBITDA
    
    
    (520.6
    )
    
    
    (123.2
    )
    
    
    87.7
    
    
    
    212.0
    
    
    
    326.5
    
    
    
    42.1Add/(less):Depreciation
    
    
    (227.3
    )
    
    
    (261.3
    )
    
    
    (265.1
    )
    
    
    (256.4
    )
    
    
    (233.3
    )
    
    
    (30.1
    )Interest income
    
    
    2.2
    
    
    
    51.1
    
    
    
    21.6
    
    
    
    3.5
    
    
    
    2.5
    
    
    
    0.3Finance costs
    
    
    (178.2
    )
    
    
    (136.9
    )
    
    
    (70.1
    )
    
    
    (59.5
    )
    
    
    (52.8
    )
    
    
    (6.8
    )Share of losses from joint ventures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.6
    )
    
    
    (4.4
    )
    
    
    (0.5
    )Deferred tax credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss)/profit
    
    
    (923.9
    )
    
    
    (470.3
    )
    
    
    (225.9
    )
    
    
    (119.0
    )
    
    
    38.5
    
    
    
    5.0
   (8)
    
    Monthly average revenue per user, or ARPU, or the monthly average revenue
from mobile services per post-paid subscriber, is computed by dividing
total revenues from mobile services for the month (including airtime
revenues, value-added and enhanced services revenues, revenues from
airtime for roaming and international long distance calls that terminate
at our subscribers mobile phone numbers, as well as from airtime revenues
arising from foreign subscribers roaming on our mobile network, but
excluding subscription fees paid in advance, deposit payments and revenues
from sales of mobile phones and accessories and prepaid SIM cards) by the
daily weighted average number of mobile services subscribers for the
month. Average monthly ARPU is the sum of ARPU for each month in the
period divided by the number of months in the period.(9)
    
    The monthly churn rate is calculated by expressing the net number of
post-paid subscriber deactivations or disconnections for the month as a
percentage of the number of post-paid subscribers at the beginning of such
month. The average monthly churn rate is the sum of the monthly churn
rates in the period divided by the number of months in the period. Exchange Rate Information The Hong Kong dollar is freely convertible into other currencies
(including the U.S. dollar). Since 1983, the Hong Kong dollar has effectively
been officially linked to the U.S. dollar at the rate of approximately HK$7.80
= US$1.00. However, the market exchange rate of the Hong Kong dollar against
the U.S. dollar continues to be influenced by the forces of supply and demand
in the foreign exchange market. Exchange rates between the Hong Kong dollar and
other currencies are influenced by the rate between the U.S. dollar and the
Hong Kong dollar. The Basic Law of Hong Kong provides that the Hong Kong dollar is to remain
the legal tender in Hong Kong after July 1, 1997 when Hong Kong became a
Special Administrative Region of The Peoples Republic of China, or the PRC.
The Basic Law also provides that no foreign exchange control policies will be
applied in Hong Kong and that the Hong Kong dollar is to be freely convertible.
During the Asian regional economic crisis in 1998, however, the Hong Kong
government intervened on several occasions in the foreign exchange market by
purchasing the Hong Kong dollar and selling the U.S. dollar to support the
value of the Hong Kong dollar. The following table sets forth the average, high, low and period-end noon
buying rate between the Hong Kong dollar and the U.S. dollar (in Hong Kong
dollars per U.S. dollar) for the periods indicated. On June 25, 2004, the noon buying rate for the Hong Kong dollar was
HK$7.7976 = US$1.00. 3




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Hong Kong dollar/U.S. dollarNoon Buying RateAverage(1)
    
    High
    
    Low
    
    Period-EndHK$
    
    HK$
    
    HK$
    
    HK$1999
    
    
    7.7599
    (1)
    
    
    7.7814
    
    
    
    7.7210
    
    
    
    7.77402000
    
    
    7.7936
    (1)
    
    
    7.8008
    
    
    
    7.7765
    
    
    
    7.79992001
    
    
    7.7996
    (1)
    
    
    7.8004
    
    
    
    7.7970
    
    
    
    7.79802002
    
    
    7.7996
    (1)
    
    
    7.8095
    
    
    
    7.7970
    
    
    
    7.79882003
    
    
    7.7875
    (1)
    
    
    7.8001
    
    
    
    7.7085
    
    
    
    7.7640December
    
    
    7.7645
    
    
    
    7.7670
    
    
    
    7.7628
    
    
    
    7.76402004January
    
    
    7.7663
    
    
    
    7.7775
    
    
    
    7.7632
    
    
    
    7.7775February
    
    
    7.7748
    
    
    
    7.7845
    
    
    
    7.7686
    
    
    
    7.7845March
    
    
    7.7930
    
    
    
    7.7980
    
    
    
    7.7842
    
    
    
    7.7930April
    
    
    7.7970
    
    
    
    7.8000
    
    
    
    7.7870
    
    
    
    7.7998May
    
    
    7.7971
    
    
    
    7.8010
    
    
    
    7.7895
    
    
    
    7.7941
   Source: Bloomberg(1)
    
    The average of the noon buying rates on the last business day of each
month during the relevant period. 
 3.B CAPITALIZATION AND INDEBTEDNESS Not applicable. 
 3.C REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. 
 3.D RISK FACTORS Risks Relating to Our Businesses and Operations Current profitability is a recent development. We generated positive cash flow from our operating activities since 2002,
and in January 2003 we started earning net profit on a month-to-month basis.
The year 2003 was the first year since we commenced commercial operations in
September 1997 that we have been profitable and have had positive operating
cash flow. Our accumulated losses decreased for the first time from
HK$3,006.7 million as of December 31, 2002 to HK$2,979.5 million as of December
31, 2003. We cannot be certain as to whether our profitability is sustainable. We
may incur net losses and negative operating cash flows again as we expand our
business, such as by enhancing our wireless network to accommodate increased
usage and new technologies, developing our wireless data services, and
incurring increased sales and marketing costs associated with our new
businesses and services. To achieve sustained profitability, we will need in
particular to continue to expand our mobile subscriber base, attract users and
subscribers to our new services and increase the average revenue per user of
our services. Whether we will continue to be profitable will also depend on our
ability to develop new services successfully. The level of our operating
expenses is based largely on anticipated organizational growth and revenue
trends and a high percentage of these operational expenses are, and will
continue to be, fixed. As a result, any delays in generating revenue could
result in substantial operating losses. If we do not stay profitable and cash
flow positive, our business and financial condition would be materially
adversely affected. Our ability to service our debt could be also materially
adversely affected. We cannot assure you that when we introduce the third generation, or 3G,
wireless services, we will be successful in developing the 3G services as
currently required by our 3G license or the quality and levels of 3G services
currently planned. We were awarded one of Hong Kongs four 3G licenses in October 2001. We
expect that we will begin to invest significantly in the construction and
implementation of our 3G network and services in 2004. Our 3G license currently
requires that our 3G network and services will cover at least 50% of the
population of Hong Kong by the end of 2006. Other wireless operators worldwide are facing critical issues in 3G, such
as the availability of mobile phones and international roaming capabilities. As
is common with undertakings of this scale and complexity, we may experience
various difficulties, including software, network, mobile phones and other
technical problems, and we cannot be certain that we will be able to fully
resolve the 3G related problems currently experienced by other wireless
operators or that we will not encounter new problems. For example, we cannot be
certain that: 4




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##### Table of Contents




    
    when completed, our 3G network and services will deliver the quality
and levels of services that our customers demand or prefer;
    
    we will be able to provide all planned 3G services, or that we will
be able to provide such services on schedule, or that developing and
providing such services will not be more costly than expected;
    
    manufacturers and content providers will create and offer products,
including mobile phones for our 3G system and contents for our 3G
services, on a timely basis;
    
    there will be sufficient demand for 3G services to offer these services profitably; or
    
    our competitors will not offer similar services at lower prices. If we experience substantial problems with the rollout of our 3G network
or our 3G services in the future, it may adversely affect the range of our
wireless voice and data services offered to our subscribers and may hinder our
business growth. Our wireless data services present us with unique risks and challenges and we
can give no assurance that we will succeed. Our dominant source of revenues from mobile services is still voice
communications. While we have observed a trend of increased usage in wireless
data services, such as short messaging services, or SMS, during the past two
years, the revenue from wireless data devices still has not accounted for a
significant share of our total service revenue. There is no current proven
business model for the provision of wireless data services in Hong Kong. The
success of our data services will depend on the application of new
technologies, the development of new and innovative service plans and products
as well as the successful introduction of mobile devices which can provide fast
and easy access to the internet. We cannot be certain that our strategy in this
area will succeed or that we will be able to compete and achieve market
acceptance for our products and services. We may require additional funds. Our business requires significant capital expenditure, as well as
marketing, development and other operating expenditures. We will need to
continually expend capital to maintain and upgrade our network, develop new
business lines, and market existing and new services. On October 22, 2001, we
were awarded a 3G license from the Hong Kong Telecommunications Authority, or
the HKTA, of which the minimum annual fees aggregate to approximately
HK$1,306.8 million, payable over its 15-year license period. We are also
required to provide a rolling performance bond to the HKTA covering the next
five years minimum annual fees. Details of such requirements are set out in
Item 4. Information on the Company  Business Overview  Regulation. We
expect that the impact of capital expenditure and other operating expenses
relating to the rollout of the 3G network, which will start in 2004, will be
significant. In May 2004, our main operating subsidiary, Mandarin Communications
Limited, or Mandarin, signed the facility agreement for the provision of
long-term financing in connection with the establishment and supply of the 3G
mobile communications network, or the Facility Agreement, with Huawei Tech.
Investment Co., Limited, or HTIC. See the summary of the Facility Agreement in
Item 10. Additional Information  Material Contracts. However, certain
capital expenditure may not be covered by the
Facility Agreement. Also, our expenditure plans and financing needs may
grow faster than expected. If we are unable to maintain adequate financing, we
will be unable to fund our capital expenditure, expand our business lines or
meet our debt service obligations. We have pledged substantially all of our assets to secure financing. Under the Facility Agreement and the related share charge, subordination
deed and other security documents, or collectively the Security Arrangements,
substantially all our assets, including the 3G license, were pledged to HTIC to
secure the facilities. Such Security Arrangements, together with certain
restrictive covenants in the Facility Agreement, will limit our ability to
obtain new financing. See Item 5.  Operating and Financial Review and
Prospects  Liquidity and Capital Resources  Certain Indebtedness. If we
default on the repayment of such debts, HTIC could enforce its security
interests by seizing our assets or forcing us to sell our assets to repay the
debt. In the event of a liquidation of our company, HTIC will have priority
over our unsecured creditors and our ordinary share and ADS holders. We have, and expect to continue to have, substantial debt, which will require
us to improve our cash flow to satisfy the related debt service obligations,
increases our vulnerability to adverse developments and creates other risks. We signed the Facility Agreement with HTIC in May 2004 comprising of
HK$859 million equipment supply facility, a HK$500 million general facility and
a 3G performance bond facility. See Item 5.  Operating and Financial Review
and Prospects  Liquidity and Capital Resources  Certain Indebtedness. The
equipment supply facility would be drawn down against invoices issued under the
turn key contract signed between Mandarin and HTIC in May 2004 for the supply
and installation of a mobile communications network and associated services, or
the Supply Contract, and is repayable by eight semi-annual instalments
commencing four years from the date of the Facility Agreement. The general
facility is a term loan facility repayable in five progressively increasing
semi-annual instalments. 5




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Therefore, our debt repayment obligations are, and will continue to be,
substantial and will require us to dedicate a substantial portion of our cash
flow to pay interest and principal. Our cash flow is, in large part, generated
from operations. We cannot give you any assurance that our operating cash flow
will improve sufficiently. Furthermore, if our operating cash flow does not
grow as expected, we will need to raise additional financing, which may not be
available on attractive terms or at all. Our debt service requirements will consume cash that might otherwise be
available to maintain and expand our business. Furthermore, our leverage and
the covenants imposed under the Facility Agreement increase our vulnerability
to adverse developments in our company, the industry, market interest rates and
the general economy, limit our ability to take advantage of or react to new
trends and challenges in our business, and place us at a competitive
disadvantage relative to competitors with less debt. We are subject to covenants in our financing agreements that restrict our
financial and operating flexibility. Our financing arrangements with HTIC under the Facility Agreement subject
us to a number of covenants that restrict our financial and operating
flexibility and include certain financial and operating targets that we must
satisfy to avoid default, which include:  
    
    operation of Mandarins business in accordance with the approved
business plans except for variations that would not have a material
adverse effect on Mandarins financial condition, its operations or its
ability to repay the debt;
    
    certain financial and performance targets which Mandarin is required to comply with;
    
    a minimum level of cash for debt service in a reserve account;
    
    application of all or part of its excess cash flow to the repayment of debt; and
    
    without the consent from our lenders, no new debt except for certain permitted indebtedness. Failure to comply with these covenants would entitle the lenders to
accelerate the maturity of Mandarins outstanding debt and exercise their
security rights over substantially all of our assets. See Item 5. Operating
and Financial Review and Prospects  Liquidity and Capital Resources  Certain
Indebtedness for a more complete summary of the terms of the Facility
Agreement. Our limited resources may cause delays in implementing our plan of aggressive
growth and expansion. The launch of our new products and services is critical to the success of
our business plan. The implementation of this plan will impose a greater burden
on our systems and may strain our administrative, operational and financial
resources. We will have to cope with managing the simultaneous implementation
of our infrastructure development and marketing plans, while expanding our
internal management, technical, information and accounting systems. We face the
risk of unforeseen complications in the deployment of new technologies, such as
3G. Our failure to achieve these objectives in a timely manner and on a cost
effective basis could delay the implementation of new services, reduce the
quality and functionality of the services, increase our operational costs,
reduce our actual and potential market share, hinder us from realizing our
revenue streams and otherwise materially adversely affect our results of
operations, prospects and financial condition. We are dependent on key personnel and our business and growth will suffer if we
were unable to hire or retain them. We depend upon the continued contributions of our directors, senior
management and other key personnel, many of whom would be difficult to replace.
We have entered into service contracts with all of our executive directors
which are terminable within one year without payment of compensation, other
than statutory compensation. We have also entered into employment contracts
with other senior officers and key personnel, most of which are terminable on
three months notice. In addition, competition for qualified personnel in the
communications industry is intense. We may not be able to attract, retain or
adequately motivate qualified technical and management executives and other key
personnel. Our business development strategies, business and prospects would be
adversely affected if we were not able to recruit and retain such personnel. We may not be able to deliver our services if we experience system failures or
shutdown in communications networks. Our mobile communications, international long distance calling, and data
and internet services are currently carried through our mobile network, the
circuits of local fixed-line network operators, international private lease
circuits, our own switching systems, other fixed international long distance
operators and the switching systems of international long distance operators
and other network-related infrastructure. The provision of our services and
products depends on the stability of this integrated network. This network may
be vulnerable to damage or interruptions in operation due to earthquake, fire,
power loss, telecommunications failures, network software flaws, transmission
cable cuts, or similar events. Any failure of this integrated network, our
servers, or any link in the delivery chain that results in an interruption in
our operations or our provision of any service, whether from operational
disruption, natural disaster or otherwise, could lead to significant negative
publicity, reduce our ability to attract and retain subscribers and adversely
affect our results of operations and financial condition. 6




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We rely on third-party vendors and delays in lead times or problems with supply
may adversely affect our operations. We rely on third-party vendors with respect to many aspects of the supply,
development and operation of our mobile network. The principal suppliers of our
2G and 3G radio and switching infrastructure and equipment are Nortel and
Huawei Technologies Co., Ltd., or Huawei, respectively. The principal suppliers
of our mobile phones and accessories are Nokia, Sony Ericsson, Samsung, Siemens
and Motorola, which collectively accounted for 91% of the mobile phones
supplied to us in 2003. We expect that this trend will continue in 2004.
Failure by any of these or other suppliers to provide equipment, software and
services in accordance with specifications and in a timely manner could
materially adversely affect our operations and business prospects and increase
our costs. We rely on sophisticated billing and credit control systems. Sophisticated billing and credit control systems are critical to our
ability to increase revenue streams, avoid revenue loss, monitor costs and
potential credit problems, and bill customers properly and in a timely manner.
If adequate billing and credit control systems and software programs are
unavailable or if upgrades are delayed or not introduced in a timely manner or
if we are unable to integrate such systems and software programs into our
billing and credit systems, we may be unable to offer services to certain
customers. In addition, we may experience delayed billing which may negatively
affect our cash flow and other aspects of our operations. We may need to expand and adapt our billing and credit control systems to
capture revenue streams as our businesses continue to grow. Our failure to do
so could adversely affect our business, prospects, financial condition and
results of operations. We expect new technologies and applications arising in
particular from the convergence of our communications and data businesses to
create increasing demands on our billing and credit control systems. We may
decide to launch certain services and products even though we do not have the
ability to capture revenue in full at the time of launch. We may have conflicts of interest with Distacom, our controlling shareholder. As the controlling shareholder, the Distacom group of companies is likely
to be able to elect a majority of its representatives to our board of directors
and to control the outcome of any action requiring shareholders approval. Because the Distacom group of companies has interests in other providers
of communications service and internet related service, it is possible that it
may direct suitable business opportunities to other companies under its
control. We have entered into a non-competition agreement with Distacom
Communications Limited, or Distacom, in which Distacom has agreed that, subject
to certain conditions, neither Distacom nor any of its subsidiaries will be
interested or engaged in any Hong Kong mobile or fixed line telecommunications
business or in any Hong Kong-focused internet-related business. No assurance
can be given that such agreement will be adequate to protect our interests. If
members of the Distacom group enter into any of the businesses in which we are
currently involved or enter into any future businesses into which we may wish
to enter, our revenue, financial condition and results of operations may be
adversely affected. See Item 7. Major Shareholders and Related Party
Transactions  Related Party Transactions  Transactions with Major
Shareholders and Their Affiliates  Shareholder Non-Competition Agreement. Our shareholders may face difficulties in protecting their interests under the
laws of the Cayman Islands or Hong Kong. Our corporate affairs are governed by our Memorandum and Articles of
Association and by the Companies Law (Revised) of the Cayman Islands. The laws
of the Cayman Islands relating to the protection of the interests of minority
shareholders and to the fiduciary responsibilities of directors may differ from
the laws in certain jurisdictions in the United States and the corresponding
remedies available to such shareholders may differ accordingly. A summary of
the laws of the Cayman Islands relating to protection of minority shareholders
is set out in Item 10. Additional Information  Memorandum and Articles of
Association. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands and Hong Kong law may
not be as clearly established as under statutes or judicial precedent in
existence in certain jurisdictions in the United States. Therefore, our public
shareholders may have more difficulty in protecting their interests in the face
of actions by our directors, management or controlling shareholders than would
shareholders of a corporation incorporated in certain jurisdictions in the
United States. All of our directors and senior officers and our major shareholders live
outside the United States. Also, all or most of our assets are located outside
the United States. As a result, you may not be able to:  
    
    effect service of process upon us or these persons within the United
States; or
    
    enforce against us or these persons, judgments obtained in the United
States courts. These judgments include judgments relating to the federal
securities laws of the United States. There is doubt as to whether Hong Kong courts or Cayman Islands courts
will enforce judgments of United States courts, based only upon the civil
liability provisions of the federal securities laws of the United States or the
securities laws of any state of the United States. 7




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Industry Risks If we are unable to stay ahead of technology trends and evolving industry
standards, our services and products may become obsolete. Our mobile communications and wireless data businesses are characterized
by rapidly changing technology and industry standards, subscriber needs and new
products and services. The emerging nature of these products and services,
their rapid evolution and increasingly shorter life cycles require us to
continually improve our performance, products, services, network and our
ability to respond to offerings by competitors. We cannot be certain that we can continue to be successful in responding
in a timely and cost-effective way to keep up with these developments.
Furthermore, changing our services in response to market demand may require the
adoption of new technologies that could render many of the technologies that we
are currently implementing less competitive or obsolete. To respond
successfully to technological advances and emerging industry standards, we may
require substantial capital expenditure and access to related or enabling
technologies in order to integrate the new technology with our existing
technology. We may not be successful in modifying our network infrastructure in
a timely and cost-effective manner to facilitate such integration, which could
adversely affect our quality of services, our results of operations and our
business and prospects. Our success depends on increased wireless data usage. Our future success depends on more people and businesses in Hong Kong
using wireless data services, such as 3G. Commercial use of wireless data
services is still developing and subject to many uncertainties. The data
transmission speed for accessing to the internet through mobile telephones or
other wireless devices is still low. Critical issues such as cost, security,
reliability, ease of deployment, administration, availability of access
devices, data transmission speed and quality of service may affect the adoption
of wireless data applications and the internet to solve business needs in such
markets. Our profitability could depend greatly on a sustained growth of
wireless data applications in such markets. We operate in a competitive environment in Hong Kong in the mobile
communications industry. The Hong Kong mobile communications industry is highly competitive,
particularly since the March 1, 1999 introduction of mobile number portability,
or MNP, which enables mobile subscribers in Hong Kong to retain their telephone
numbers when they switch to different service providers. Also, the market is
one of the most mature in the world with mobile penetration rate of over 95% as
of December 31, 2003. We believe that currently the three largest operators
collectively have a market share of approximately 60% of the subscribers in the
mobile communications market in Hong Kong. Their pricing policies have
affected and could in the future significantly affect our tariff pricing and
our ability to generate sufficient revenue. There have been periods of extreme
price competition or price wars among Hong Kong wireless communications
providers, which have generally been initiated by our competitors. If our
competitors adopt further tariff lowering strategies, such as providing
substantial handset subsidies and free airtime, our subscriber churn rates may
increase and our tariff revenue will be adversely affected. Many of our competitors have longer operating histories, larger customer
bases, more comprehensive usage databases and significantly greater financial,
technical, marketing, human and other resources than us. These competitors may
also offer products and services that provide significant performance, price,
creative, integrated or other advantages over those that we offer or plan to
offer. Accordingly, our competitors may be better positioned than us to absorb
operating losses and launch competitive products and services. Hutchison, which is one of the four 3G licensees in Hong Kong, has
launched its 3G services since January 2004 and has offered very substantial
handset subsidies and attractive service tariff plans to attract new customers
and to migrate existing 2G customers to 3G customers. We expect that the other
3G licensees may also launch their 3G services in 2004 or early 2005. As a
result, we expect that market competition may further intensify among the 2G
and 3G operators during the initial stages of the launch of such 3G services. Therefore, we expect that competition will continue to be intense as a
result of possible entry of new competitors, consolidation of market leaders
and the rapid development of new technologies, products and services. Our
ability to compete successfully will depend on our ability to anticipate and
respond to various competitive factors affecting the industry, including new
services that may be introduced, changes in consumer preferences, economic
conditions and discount pricing strategies by competitors. Future business
combinations and alliances in the telecommunications industry may create
significant new competitors and could harm our business and results of
operations. 8




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Health risk concerns about mobile phones could adversely affect our business. Allegations that serious health risks have resulted from the use of mobile
phones have adversely affected share prices of certain mobile communications
companies in the United States in the past. The actual or perceived risk of
using mobile phones or any related litigation could adversely affect us through
reduced subscriber growth or a reduction in the number of subscribers or usage
per subscriber. In addition, we could be subject to liability or incur
significant costs defending lawsuits brought by our subscribers or other
parties who claim to have been harmed by or as a result of our services. Data security concerns could limit our ability to generate revenues from our
wireless data businesses and subject us to legal liability. Our infrastructure is potentially vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our subscribers. Computer
viruses, break-ins or other problems could lead to the following problems:  
    
    interruption, delay or cessation in service to our customers;
    
    compromised security of confidential information of our customers; and
    
    costly litigation. It is critical that our wireless data services maintain secure, high
quality data transmission with minimal service disruptions or interference. Our
failure to maintain a consistent level of secure, high quality service could
harm our reputation and have a material adverse effect on our ability to
realize revenue from our wireless data businesses and in turn adversely affect
our operating results, financial condition, business and prospects. Until more comprehensive security technologies are developed, the security
and privacy concerns of existing and potential customers may inhibit the growth
of such businesses in general and our subscriber base and revenues from
wireless data services in particular. We also may be required to spend
substantial resources or discontinue certain services or content offerings,
which could adversely affect our operating results, financial condition,
business or prospects. Our exposure to such security concerns is heightened as Hong Kong and PRC
law relating to liability under such circumstances is relatively new and
untested. In addition, we do not carry errors and omissions or other
insurance covering losses or liability caused by computer viruses or security
breaches, which under certain circumstances could mitigate damages that we may
suffer. If we incur any such losses or liability, our operating results,
financial condition, business and prospects also may be adversely affected. We may be held liable for information retrieved from or sent through our
internet web site. Because our mobile communications and data services can be used to
download and distribute information to others, there is a risk that we may face
claims for defamation, negligence, copyright or trademark infringement or other
claims based on the nature and content of such material. Our insurance may not
cover potential claims of this type, or may not be adequate to indemnify us for
all liability that may be imposed. Any imposition of liability that is not
covered by our insurance or is in excess of our insurance coverage could have a
material adverse effect on our business, results of operations and financial
condition. Regulatory, Economic and Political Risks We are in a highly regulated business and we require licenses from the HKTA,
without which we would be unable to operate. We are subject to the rules and regulations of the HKTA, which regulates
the telecommunications industry in Hong Kong and the Office of
Telecommunications Authority, or OFTA, which assists the HKTA in enforcing and
administering the Telecommunications Ordinance. The HKTAs authority includes
regulating and licensing telecommunications facilities and managing the radio
frequency spectrum. If the HKTA determines that we have violated Hong Kongs
telecommunications laws or regulations or the conditions of our licenses, the
HKTA has the power to suspend or cancel our licenses or take other action
against us. We are also subject to various other rules, laws and ordinances
applicable to companies operating in Hong Kong, including, for example, laws
relating to obscenity and privacy. If we are found to be in violation of these
laws, we may face judgments or penalties. In addition, our licenses have fixed
duration, and we may not be granted renewals. The Chief Executive in Council
may also cancel or suspend licenses if he considers it in the public interest
to do so. Furthermore, if the HKTA changes its existing telecommunications
regulations or policies such as those governing interconnection or competition,
our results of operations, our financial condition, business and prospects
could be adversely affected. If we are found to be in violation of our license conditions or any
applicable laws or regulations enacted in the future, our business may be
severely affected. See Item 4. Information on the Company  Business Overview
 Regulation. 9




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There may be political risks associated with doing business in Hong Kong. Our primary facilities and operations are located in Hong Kong. Hong Kong
is a Special Administrative Region of the PRC with independent executive,
judicial and legislative branches of government. While Hong Kong should enjoy a
high degree of autonomy from the PRC under the principle of one country, two
systems, the erosion in Hong Kongs autonomy and developments in the PRC have
in the past adversely affected and may in the future adversely affect the
political and economic environment in Hong Kong. The state of Hong Kongs economy may affect our performance and financial
condition. The Hong Kong economy has experienced considerable volatility since the
second half of 1997. Hong Kongs primary economic sectors, such as real estate,
retail and finance, have generally declined. We generate substantially all of our revenue from operations in Hong Kong.
Our future performance will depend in large part on Hong Kongs future economic
growth. Adverse developments in Hong Kongs economy or in political or social
conditions in Hong Kong may have an adverse effect on our number of
subscribers, usage per subscriber and results of operations. In addition, a
deterioration of economic, political or social conditions in Hong Kong could
have an adverse effect on the prices of our ordinary shares and the ADSs. The economy of Hong Kong is significantly affected by developments in the
PRC and elsewhere in the Asia-Pacific region and the United States. The PRC
economy may experience adverse economic developments and other regional or
local economies may deteriorate further and this would have an adverse impact
on Hong Kongs economy. In addition, as the economy in Hong Kong continues to evolve, the Hong
Kong government may increase the currently prevailing tax rates or the types of
taxes imposed or change the tax structure. If any of these occur, they may
adversely affect our sales and revenue, as well as our results of operations,
business and prospects, including our ability to operate profitably. Fluctuations in currency exchange rates could increase our costs relative to
revenues. Substantially all of our operating revenues, expenses and liabilities are
denominated in Hong Kong dollars. However, we may also incur significant
expenses and liabilities in U.S. dollars, mainly in connection with financing
our capital expenditure and purchases of mobile phones. As a result, we could
be exposed to adverse effects of exchange rate fluctuations, particularly
against the U.S. dollar. Significant fluctuations in the U.S. dollar to Hong
Kong dollar exchange rate would likely have an adverse effect on our operating
results and financial condition. The Basic Law of Hong Kong provides that the Hong Kong dollar is to remain
the legal tender in Hong Kong after July 1, 1997. The Basic Law also provides
that no foreign exchange control policies will be applied in Hong Kong and that
the Hong Kong dollar is to be freely convertible. During the Asian regional
economic crisis in 1998, however, the Hong Kong government intervened on
several occasions in the foreign exchange market by purchasing Hong Kong
dollars and selling U.S. dollars to support the value of the Hong Kong dollar. While the Hong Kong government has continued to support a pegged value at
approximately HK$7.80 = US$1.00 and the PRC government has not devalued the
Renminbi, or RMB, since January 1, 1994, we cannot assure you that these
policies will not change. As of December 31, 2003, the exchange rate between
Hong Kong dollars and Renminbi was approximately HK$1 = RMB1.06. The unpredictability of our periodic results may adversely affect the trading
price of our securities. Our revenues and operating results may vary significantly from period to
period due to a number of factors, some of which are outside of our control.
Some of these factors include:  
    
    fluctuation in demand for our services;
    
    introduction of new technologies and services by our competitors;
    
    changes in our pricing policies, particularly in response to aggressive pricing by our competitors;
    
    our ability to introduce, develop and deliver our products and services that meet customer requirements in a timely manner;
    
    abnormally high marketing expenses associated with new services; and
    
    general economic conditions in Hong Kong and elsewhere in Asia. 10




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Due to the foregoing factors, we believe that period-to-period comparisons
of our operating results are not a good indication of our future performance
and should not be relied upon. It is possible that our operating results in
some periods will be below the expectations of public market analysts and
investors. In this event, the prices of our ordinary shares and ADSs may
decline, perhaps significantly more in percentage terms than the decline in
operating results. Risks Relating to the Ordinary Shares and the ADSs Like other companies in the telecommunications industries, our stock price may
be volatile. The price of our ordinary shares or ADSs may fluctuate as a result of
variations in our operating results. If the trading volume of our ordinary
shares or the ADSs is low, the price fluctuations may be exacerbated. Since our
viability is intricately linked with technology and our businesses are to a
great extent driven by technology, the price of our ordinary shares or ADSs may
rise and fall in tandem with announcements of technological or competitive
developments, acquisitions or strategic alliances by us, our competitors or our
suppliers. The prices of our ordinary shares or ADSs, as are typical of those
of companies in the high technology and telecommunications sectors, are also
prone to news regarding the gain or loss of a significant customer, key
personnel or sales orders as well as changes in securities analysts estimates
of our financial results or recommendations. The sale or the possible sale of a substantial number of our ordinary shares or
ADSs in the public market could adversely affect the prices of our ordinary
shares and ADSs. Currently, we have 2,990 million ordinary shares outstanding (including
those represented by ADSs). A substantial amount of our ordinary shares are
held by shareholders who may be considered to be our affiliates pursuant to
Rule 144 of the U.S. Securities Act of 1933, as amended, or the Securities Act.
The ordinary shares held by the shareholders other than by the affiliates are
freely tradeable. The ordinary shares held by our controlling shareholders may
also be sold in the United States subject to the restrictions of Rule 144 under
the Securities Act or outside the United States. If any shareholder sells or is
perceived as intending to sell a substantial amount of their ordinary shares,
the market prices for our ordinary shares and ADSs could be adversely affected. All of our shareholders may sell their ordinary shares on The Stock
Exchange of Hong Kong Limited, or the Stock Exchange of Hong Kong, without
restriction. We do not have any intention of paying dividends on the ordinary shares for the
foreseeable future. Our loan agreements have covenants that restrict the ability of Mandarin
to pay dividends or make other distributions, which may in turn restrict our
ability to pay dividends or make other distributions. In any event, we do not
anticipate paying any cash dividends in the near future. 
 Item 4. INFORMATION ON THE COMPANY 
 4.A HISTORY AND DEVELOPMENT SUNDAY Communications Limited was incorporated in the Cayman Islands on
November 24, 1999 as a company with limited liability under the Companies Laws
(Revised) of the Cayman Islands. Our principal executive office is located at
13/F Warwick House, TaiKoo Place, 979 Kings Road, Quarry Bay, Special
Administrative Region of Hong Kong, the PRC. Pursuant to a group reorganization, or the Reorganization, completed on
February 24, 2000 to rationalize the group structure in preparation for the
dual listing of SUNDAYs ordinary shares on the Stock Exchange of Hong Kong and
The Nasdaq National Market, SUNDAY became the holding company of the SUNDAY
group. Mandarin Communications Limited was incorporated in Hong Kong as a company
with limited liability in November 1994. Mandarin holds a public
radiocommunication service license for personal communications service, or PCS,
and is engaged in the provision of wireless communications, data services and
the sales of mobile phones and accessories in Hong Kong. Mandarin is the main
operating entity in the group. Mandarin is wholly owned by SUNDAY Holdings (Hong Kong) Corporation which
itself is a wholly-owned subsidiary of SUNDAY. SUNDAY Holdings (Hong Kong) was
incorporated in the British Virgin Islands in August 1997 and was formerly
known as SUNDAY Holdings Corporation. SUNDAY 3G (Hong Kong) Limited, or SUNDAY 3G, is wholly owned by Mandarin
and was incorporated in Hong Kong on July 16, 1997. SUNDAY 3G holds a 3G
license in Hong Kong, which was issued by the HKTA on October 22, 2001. SUNDAY
3G was formerly known as SUNDAY Telecommunications (Hong Kong) Limited. 11




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SUNDAY Investment Limited is a wholly-owned subsidiary of Mandarin, which
was incorporated as a limited liability company in the Cayman Islands in
November 1999 for the sole purpose of the issuance of convertible notes of
HK$700 million in December 1999. It became a dormant company after all
convertible notes had been either converted into our ordinary shares upon the
completion of the global offering or repaid in cash in March 2000. SUNDAY Communications Services (Shenzhen) Limited, or SUNDAY Shenzhen, is
wholly-owned by SUNDAY Holdings (China) Corporation which itself is a
wholly-owned subsidiary of SUNDAY incorporated in the British Virgin Islands.
SUNDAY Shenzhen was established in Shenzhen, China in December 2001 for
providing various support services to SUNDAY group companies. We are an innovative developer and provider of wireless communications and
data services in Hong Kong. We were granted a license in July 1996 to construct
and operate a digital PCS network, and began commercial operations in September
1997 when we introduced our GSM 1800 mobile telephone services. We offer our
services under the brand name SUNDAY, a highly recognized brand name in Hong
Kong. Since early 2000, we have started launching various wireless data
services through which our subscribers could enjoy ringtone or logo downloads,
quiz games, message dedication or participate in mobile community chat by the
use of short messaging services or media messaging services. We were also
granted a mobile carrier license in Hong Kong in October 2001 to construct and
operate a 3G network. On March 15, 2000, we successfully completed a global offering of our
shares, raising net proceeds of approximately HK$2.1 billion, which were net of
related expenses and the conversion of the convertible notes. Our ADSs and
ordinary shares were listed on The Nasdaq National Market, or Nasdaq, in the
U.S. on March 15, 2000, and the Stock Exchange of Hong Kong on March 16, 2000,
respectively. Business Development We expect that the mobile service market in Hong Kong will offer less
opportunity for expansion by subscriber numbers. Future revenue growth will
increasingly depend on developing and delivering tailor-made services that more
directly meet customer needs and desires. We are committed to a strategy of
differentiating our products and services through market segmentation. We
believe that market segmentation brings value to customers by providing
tailor-made services to meet their specific lifestyle needs. During 2003, we
have reorganized our operations according to distinct customer segments,
namely, youth, ethnic, corporate and the mass market. Each is run as a
sub-business, responsible for products, pricing, promotion and place of
business, with separate targets for subscribers, ARPU, churn rate and other
measures of performance. We believe that this reorganization of our operations
will expand possibilities to develop and direct personalized and targeted
services to specific market segments. To support these segments, we continue as a leader in innovative data
services. We introduced a broad range of new wireless data applications and
services based on the general packet radio service, or GPRS, technology in the
fourth quarter of 2002. In 2003, we expanded our proprietary Location Based
Services, or LBS. In the corporate segment, we made good progress as the
market leader in enterprise LBS applications for logistics and field service
dispatch. In the mass market, we launched Family Watch and SARS updates,
applications which attracted considerable attention. In the youth segment, we
launched interactive LBS games. We also launched other innovative services such
as wireless LAN roaming services for business customers, which allows customers
to access the internet via GPRS or wireless LAN. In May 2004, we introduced the BOBO mobile lifestyle service which is
designed specifically to appeal to the urban elites in Hong Kong. This new
target segment comprises people with certain demographics, targeting customers
between the age of 25 to 44 who lead active, unconventional and trendy
lifestyles, pursue professional careers and follow unique purchasing
behaviours. Although our data and market segmentation initiatives are still in their
early stages, they are already beginning to contribute to overall customer
acquisition and retention. As a result of our expanded service offering, data
services revenue grew by 55% in 2003. We believe that the introduction of these wireless data services is an
important precursor to our 3G services as such services prepare the consumer
market for the specialized multi-media mobile services products to be delivered
through 3G, thus ensuring acceptance by consumers of our 3G product offerings. We have moved quickly to capitalize on the rapid changes in the industry
that have seen powerful new entrants emerge in recent years. In December 2003,
we entered into certain heads of agreement with Huawei to provide us with a
turnkey solution for our 3G business. Huawei is one of the leading
telecommunications equipment manufacturers, and is based in Shenzhen, China.
Our partnership with Huawei has strengths in areas that will be critical to
success in the 3G arena, such as the IP core network platform, 3G service
creation as well as an end-to-end solution. The proximity of Huaweis base in
Shenzhen to Hong Kong gives us a significant advantage over our competitors in
developing tailor-made services and launching them quickly. 12




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We believe that the future of Hong Kongs mobile communications industry,
as with most industries in Hong Kong, will be closely linked to mainland China,
the worlds largest market. As such we expect to leverage our Huawei
partnership to gain access to the China mobile communications market, drive
cost efficiencies and create a foundation to capitalize upon opportunities that
will develop as mainland Chinas telecommunications industry opens. We also pay close attention to the possibilities for investment, expansion
and efficiency gains offered by our proximity to mainland China. China is now
the largest mobile phone market in the world, with a continuing high rate of
growth. In addition, China offers the opportunity to source certain support
aspects of our operations in Hong Kong at lower cost than in Hong Kong. In
2002, we set up SUNDAY Shenzhen to run an operations center in Shenzhen, a city
adjoining Hong Kong in mainland China, to provide various support services to
SUNDAY and to better position SUNDAY for future opportunities to provide
services in China. We have relocated a number of functions to this center and
realized significant cost savings in 2003, as outlined in Item 5. Operating
and Financial Review and Prospects  Operating Results  Results of
Operations. As a group operating in Hong Kong, we believe SUNDAY will be in an
advantageous position to exploit opportunities in the China market, which is
steadily liberalizing following the countrys accession to the World Trade
Organization. We may also benefit from the increasingly close economic links
between Hong Kong and mainland China. For example, the PRC government and the
Hong Kong government have concluded a Closer Economic Partnership Arrangement,
or CEPA, in June 2003 with the aim of fostering increased economic links
between the two regions. Capital Expenditure Our digital GSM 1800 mobile network is complete and is GPRS-enabled. While
we will continue to allocate capital expenditures to further develop and
maintain our existing mobile network, we expect total capital expenditure for
such traditional mobile network purposes to decline relative to the total
amounts spent since our inception. We incurred capital expenditure of
approximately HK$339 million in 2000, HK$119 million in 2001, HK$168 million in
2002, and HK$122 million in 2003. Such capital expenditure was mainly funded by
cash flows generated from operating activities and proceeds from the global
offering in 2000. Following the investments already made to expand coverage and provide
capacity for GPRS services, we expect that capital expenditure in 2004 will
increase due to the commencement of the 3G network rollout. Under the Supply
Contract, the 3G network is to be supplied and installed over a maximum period
of three years. HTIC has given us the flexibility to change the equipment
supplied and scope of devices developed as well as the timing of delivery of
equipment and services if so required, without any amendment to the contract
price. Such capital expenditure for the 3G network and services will be mainly
funded by cash flows generated from operating activities and the loan
facilities provided by HTIC pursuant to the Facility Agreement. See Item 5.
Operating and Financial Review and Prospects  Liquidity and Capital Resources
 Certain Indebtedness  Loan Facilities for details. 
 4.B BUSINESS OVERVIEW We operate mainly in the mobile communications business (including the
sales of mobile phones and wireless data services) in Hong Kong. Mobile Communications Business We are an innovative wireless service provider in Hong Kong, having
commenced commercial operations in mobile communications in September 1997. We
operate a GSM 1800 network which is also GPRS ready, and offer a broad range of
wireless communications and data services targeted to specific market segments
in Hong Kong. We have established a strong and unique identity for our SUNDAY
brand and received numerous awards for our marketing and advertising efforts. Subscribers For the years ended December 31, 2001, 2002 and 2003, our total
subscribers grew at rates of 34%, 9% and 9%, respectively. Our subscriber
growth has significantly slowed since 2002 because the mobile communications
market in Hong Kong during the past two years has shifted from a high-growth
mass market to one characterized by saturation of penetration. The following table sets out selected information regarding our mobile
subscriber base for the years ended December 31, 2001, 2002 and 2003: 13




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Year Ended December 31,2001
    
    2002
    
    2003Average monthly churn rate(%)(1)
    
    
    8.3
    %
    
    
    5.4
    %
    
    
    5.0
    %Total number of prepaid and post-paid subscribers.
    
    
    551,000
    
    
    
    603,000
    
    
    
    660,000Year on year subscriber growth rate (%)
    
    
    34
    %
    
    
    9
    %
    
    
    9
    %Total number of mobile subscribers in Hong Kong(2)
    
    
    5,252,000
    
    
    
    5,714,000
    
    
    
    6,532,000Market share(%)(3)
    
    
    10.5
    %
    
    
    10.6
    %
    
    
    10.1
    %Hong Kong market penetration(%)(4)
    
    
    77.7
    %
    
    
    84.2
    %
    
    
    95.9
    %Average monthly ARPU (HK$)(5)
    
    
    219
    
    
    
    209
    
    
    
    201
   (1)
    
    The monthly churn rate is calculated by expressing the net number of
post-paid subscriber deactivations or disconnections for the month as a
percentage of the number of post-paid subscribers at the beginning of such
month. The average monthly churn rate is the sum of the monthly churn
rates in the period divided by the number of months in the period.(2)
    
    Source: OFTA.(3)
    
    Total number of our mobile subscribers divided by the total number of
mobile subscribers in Hong Kong.(4)
    
    Total number of mobile subscribers in Hong Kong divided by the estimated
population of Hong Kong.(5)
    
    Monthly average revenue per user, or ARPU, or the monthly average revenue
from mobile services per post-paid subscriber, is computed by dividing
total revenue from mobile services for the month (including airtime
revenue, value-added and enhanced services revenue, revenue from airtime
for roaming and international long distance calls that terminate at our
subscribers mobile phone numbers, as well as from airtime revenue arising
from foreign subscribers roaming on our mobile network, but excluding
subscription fees paid in advance, deposit payments and revenue from sales
of mobile phones and accessories and prepaid SIM cards) by the daily
weighted average number of mobile services post-paid subscribers for the
month. Average monthly ARPU is the sum of ARPU for each month in the
period divided by the number of months in the period. Services and Products We offer our mobile subscribers basic airtime services, value-added
services, enhanced services, short messaging services, wireless data services,
roaming services and international long distance calling services. We also sell
mobile phones and accessories. Basic Services Our basic services include connecting a subscribers mobile phone to our
network and providing airtime for incoming and outgoing voice and data
transmissions whenever the subscriber makes or receives a call on the mobile
phone. We charge customers for these basic services and other services through
our tariff plans and prepaid cards. Tariff Plans We bill our subscribers on a monthly basis for the basic fee in advance
and for any additional airtime used in arrears. Subscribers pay for both
incoming and outgoing calls. We provide a number of tariff plans based on
usage, which provides our subscribers with a greater variety of choices to find
one tailored to their needs. Since February 2001, we have charged each post-paid subscriber a monthly
fee of HK$10 to cover part of the MTR/tunnels/mobile service license fees
payable to the relevant third parties. We launch promotional plans to new subscribers at our retail shops and
dealers from time to time to keep our rates competitive and attractive. We also
offer promotional plans to some of our existing customers. Such promotional
plans may offer additional airtime, free value-added services for a specified
period and/or waiver of certain charges. We expect that we may adjust our
tariffs more frequently and continue to launch promotional plans from time to
time based on market conditions and other factors. As of December 31, 2003, the basic tariff plans offered to new subscribers
(excluding the $10 monthly fee for MTR/tunnels/mobile service license fees) are
set out below: 14




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Free AirtimePlan
    
    Normal Airtime
    
    Intra-network Airtime(minutes)
    
    (minutes)HK$50
    
    
    250
    
    
    
    HK$88
    
    
    700
    
    
    
    HK$108
    
    
    900
    
    
    
    700HK$138
    
    
    1,100
    
    
    
    900HK$198
    
    
    1,700
    
    
    
    1,000HK$258
    
    
    2,600
    
    
    
    1,100HK$388
    
    
    3,600
    
    
    
    1,300HK$488
    
    
    4,700
    
    
    
    1,700
 Prepaid Cards In April 2000, we launched rechargeable prepaid SUNDAY SIM cards so that
users are able to access our wireless services, including international long
distance calling services, through any mobile phone. A SIM card, or subscriber
identity module card, is a smart card that carries subscriber identity and
authentication information and is used by inserting it into a mobile phone.
Users are able to purchase prepaid SUNDAY SIM cards and refill cards as and
when they require them at our retail shops and participating supermarkets and
convenience stores. As of December 31, 2003, 243,000 subscribers among our
660,000 subscribers used the rechargeable prepaid SIM cards, as compared with
189,000 subscribers as of December 31, 2002. Value-added Services In addition to the basic airtime tariff plans, subscribers may pay an
additional monthly fee to subscribe to certain value-added services, including
voicemail, call forwarding, call waiting, call holding, caller ID, call
barring, conference calls, and secretarial services. Certain value-added
services may be free to new subscribers during the first 12 months. Roaming and International Long Distance Calling Services We were the first GSM 1800 operator in Hong Kong to provide roaming
facilities in China. We offer roaming on over 180 networks in more than 130
countries and territories. Our roaming services are automatic in all these
regions except for Japan and South Korea. We rent mobile phones to our
subscribers for use in Japan and South Korea. We sell tri-band mobile phones
that provide automatic GSM 1900 roaming in Canada and the United States in
addition to GSM 900 and 1800 access. We may require a refundable deposit for
mobile international long distance calling services and for roaming
capabilities for China. Wireless Data Services With the advent of new technologies, we believe that demand for wireless
data services will continue to grow as data transmission speed and ease of use
improve. We have seen an increase in both the awareness and the usage of data
services since the launch of inter-operator SMS among the wireless operators
in Hong Kong in December 2001. We launched a series of new wireless data applications and services based
on the GPRS technology, commonly known as 2.5G technology, in the fourth
quarter of 2002:  
    
    My Albumis a one-stop shop for personalized MMS photos, with music,
voice and text to MMS-enabled mobile phones, as well as e-mail and with
made-to-order printouts available at over 450 Hong Kong locations.
    
    Location Based Services, or LBS,enable corporate customers to
monitor effectively their fleets of vehicles, field staff or valuable
parcels on a real time basis.
    
    SUNDAY Look!Hear!features MMS entertainment through popular content
downloads of celebrity photos, cartoon and comic characters and e-cards.
    
    SUNDAY Gamesbring a real life game store experience to mobile
phones through new collections of Java games.
    
    Handy Workstationis a complete mobile e-mail and personal
information management solution enabling mobile users to access
corporate e-mail accounts and up to 10 POP3/IMAP4 internet e-mail
accounts.
    
    ICQ for SMSallows users to stay in touch with ICQ friends 24 hours a
day through the mobile phone with a short messaging function.
    
    MSN Mobile Messengerallows users to send, receive and reply to
instant messages from their online contacts who are using MSN Messenger
on a computer or a mobile phone. 15




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In 2003, we remain a leader in the introduction of innovative data
services. To support our segmentation strategy, we expanded the application of
our propriety LBS. We made very good progress in the corporate segment as
market leader in enterprise LBS applications for logistics and field services
management. In the mass market, we launched the Family Watch service that
allows family users to locate each other, and SARS updates which enabled
callers to identify affected buildings in their calling areas. We are also the
first operator in Hong Kong to offer an unlimited GPRS package and wireless LAN
roaming services. All of these services follow the principles laid down in our four core
values of simplicity, creativity, quality and value-for-money. They should be
readily usable and understandable by the customers, of high quality as regards
to both the products or services as well as any support services, and offered
at an attractive and reasonable price. More mobile phones supporting MMS and other data services based on GPRS
technology were introduced to the market in 2003, which enabled both the usage
and the revenue of wireless data services to grow at faster rates in 2003.
Revenue of wireless data services grew by over 55% during 2003. We believe that introducing a broad range of wireless data services is an
important development in providing specialized products and services to
individual consumer segments, and is a vital step in ensuring a successful
launch of 3G service. We believe that the data services we have introduced to
date are an important precursor to our future 3G services, since 3G technology
is expected to move more consumers further away from commoditized mass market
of mobile voice communications towards even more tailored multi-media mobile
services. Services Offered Through Our Web Site Since 2000, we have provided services through the internet under the brand
name sunday.com as an extension of our strategy to serve consumers lifestyle
needs through innovative commercial applications of wireless communications
technology and to capitalize on the convergence of mobile communications and
data technologies. In 2001, we launched the SUNDAY eShop on our web site, through which
customers could subscribe our mobile services and/or purchase mobile phones or
prepaid SIM cards online by credit card payments. We also face-lifted our web
site and introduced a number of new services for our subscribers to subscribe
online. We have partnered with a number of content providers to allow our
subscribers to download various ringtones, logos or games to their mobile
phones or other mobile devices (such as PDAs). We also launched a range of
short messaging services that offer our subscribers the latest news and
information, such as weather and news, share prices, flight schedules, horse
racing, new movies and music releases. Each of our subscribers can access his
or her service subscription profile and make changes any time through the
internet. Sales of Mobile Phones Through our direct sales force, our retail shops and our independent
dealers, we sell mobile phones equipped with a SUNDAY GSM 1800 SIM card, a
smart card with personalized subscriber information. We also sell mobile phones
(without service subscription) through our retail shops and direct sales force,
generally at a higher price. We buy substantially all of our mobile phones from
Nokia, Motorola, Sony Ericsson, Siemens and Samsung. We believe that
we are not dependent on any single mobile phone supplier. In 2003, in dollar
terms, we purchased approximately 49% of our mobile phones from our largest
mobile phone supplier, and the top five mobile phone suppliers in aggregate
accounted for approximately 91% of our mobile phone purchases. Historically, we have resisted offering routine handset subsidies but
would offer subsidy programs from time to time to respond to handset rebate
programs introduced by our competitors for new consumer acquisition and for
retention. For a discussion of our handset subsidies, see Item 5. Operating
and Financial Review and Prospects  Operating Results  Operating Revenues 
Sales of mobile phones and accessories. Network We operate an intelligent mobile network on the GSM 1800 MHz frequency
with over 1,100 cell sites located throughout Hong Kong. Nortel is our
principal network infrastructure equipment supplier for our 2G/2.5G network and
to date has accounted for approximately 70% of the total costs of our
infrastructure and equipment. The network is designed to provide ubiquitous
network coverage in Hong Kong and extensive roaming coverage worldwide. With
the infrastructure provided by Nortel, together with our applications, we are
able to pinpoint the location of a wireless communication device within a
fairly precise geographic range. The cell site is mainly connected via a leased
fixed transmission link to a base station controller, which provides
connection to a number of cell sites. We currently have 22 base station
controllers and five mobile switches located in two switching centers. The Hong Kong government initially granted us 2 x 5 MHz of frequency
spectrum in the 1800 MHz waveband for our network, and increased the spectrum
by 2 x 2.5 MHz in February 1998. In March 1999, we were allocated a further 2 x
2.5 MHz, increasing the total spectrum allocation to 2 x 10 MHz. The Hong Kong
government granted us the additional spectrum in recognition of our efficient
use of previously allocated spectrum. In March 2002, additional spectrum of 2 x
1.6 MHz was allocated to us. 16




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Our network covers approximately 99% of the populated areas in Hong Kong,
including Hong Kong Island, Kowloon and the New Territories. The focus of our
network rollout has been on providing quality coverage of high usage areas. Our
network also provides coverage in all major vehicular tunnels in Hong Kong and
in the KCRC, MTR and Airport Express mass rail transport systems. To improve our network coverage, we established a dedicated task force to
monitor enhancement of our network performance. We increased the number of cell
sites by over 20% during the past three years. Although we have increased the
number of cell sites by over 20%, our network operating costs over the past
three years decreased. This and other initiatives have given us among the best
coverage of all operators in the industry, according to a study on voice
message performance amongst the mobile operators by the Chinese University of
Hong Kong conducted in 2003. The high quality of our network also enabled us to
be named the Official Mobile Network Operator at the ITU Telecom Asia 2002, a
major international telecommunications event. Part of the strategy for our mobile communications business involves our
selective investment in and incorporation of technologies. Technologies we have
incorporated into our 2G and 2.5G businesses include:  
    
    IN platform We believe we have been a leader in using intelligent
network technology that permits us to offer a number of lifestyle
services, including some real-time location-specific services.
    
    EFR We were one of the first GSM 1800 operators in the world to
adopt this Enhanced Full Rate technology to provide good and stable
voice quality in our network in September 1997.
    
    SIM Toolkit We were one of the first operators in Hong Kong to adopt this 16 Kb SIM card technology in 1998.
    
    Java SIM Card We adopted this 32 Kb Java SIM Card technology in December 1999.
    
    WAP We integrated Wireless Application Protocol-related software
and WAP-related applications into our network and servers and started
offering our SO WAP data services in January 2000.
    
    GPRS Our network has been GPRS ready since 2000 and we launched
commercial services in October 2002. We will start the rollout of the 3G network in 2004 in accordance with the
Supply Contract with HTIC. The term of the Supply Contract is for three years
from the date it comes into effect. HTIC was selected after a rigorous
selection process that focused on the suppliers technical capabilities,
pricing and financing proposals. Competition We compete with five other digital mobile operators who are licensed to
provide 2G mobile communications services in Hong Kong. Of these, the largest
operators are Hutchison Telecommunications (Hong Kong) Limited (which operates
under the consolidated brand name of 3 for all mobile services, including 2G
and 3G services), Hong Kong CSL Limited (which operates under the brands 1010
and One2free) and SmarTone Telecommunications Holdings Limited (which
operates under the brand SmarTone). Both Hong Kong CSL and SmarTone were
unsuccessful in obtaining PCS licenses in 1996 but later acquired two companies
which were successful in doing so. We believe that currently these three
operators collectively have a market share of approximately 60%. The eight
networks of these three operators utilize different technologies and frequency
bands, namely GSM 900, GSM 1800, TDMA and CDMA, and these companies have merged
some of their networks to allow subscribers with dual band and tri-band mobile
phones to roam seamlessly between such networks. As operators of the older GSM
900 networks, these three operators commenced operating mobile services between
four and 12 years earlier than us. The three remaining operators are SUNDAY, Peoples and New World. These
operators all operate the GSM 1800 networks, which were licensed by OFTA in
1996, and all commenced commercial operations during 1997. In October 2001, the HKTA granted four 3G licenses to SUNDAY 3G, Hong Kong
CSL Limited, Hutchison 3G HK Limited and SmarTone 3G Limited for the
construction of the 3G network and provision for 3G services and applications
in Hong Kong. So far, only Hutchison has launched its 3G services in Hong Kong,
which were launched in January 2004. We expect that the other 3G licensees may
also launch their 3G services in the second half year of 2004 or early 2005. The 3G tariff plans launched by Hutchison currently include large bundles
of data products like video, text messages, multimedia video news and wireless
data downloads. To attract subscribers, Hutchison has competitively priced the
3G data and voice service packages on a comparable basis with 2G and 2.5G
pricing. 3G handsets were initially in short supply, however, since Hutchisons
launch, more models have become available in the second quarter of 2004 with
longer battery time and more features. As of May 31, 2004, the 3G subscribers
acquired by Hutchison were reported to be around 84,000. 17




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Retail International Long Distance Calling Services Business Starting September 1999, we provided retail international long distance
calling services using the name SUNDAY 1622. Any wireline or non-SUNDAY
mobile user who has registered for our SUNDAY 1622 service can access our
international long distance calling services by dialing 1622 followed by the
number they wish to reach. In addition, international calls from Hong Kong
originating from our mobile subscribers have been routed automatically through
our international switching facilities since July 1999. Since 1999, we have a
prepaid card service that enables purchasers of the card, denominated in stored
values of HK$50 or HK$100, to use our SUNDAY 1622 service on a prepaid basis
without the need to register as a subscriber. Marketing, Sales and Distribution Marketing Since inception, we have pursued a strategy of producing a single, strong
and highly visible brand name. We have marketed SUNDAY as a provider of
wireless communications and data services suitable for a highly active and
mobile way of living. We use original, bright, unconventional and humorous
advertising by direct mailing and via various media, including billboards,
television, magazines and newspapers. Since we launched our commercial operations in late 1997, the SUNDAY
brand name has become and continues to be one of the most well-recognized in
Hong Kong. We continue to receive many awards from the advertising industry in
recognition of our brand. In 2001, we were awarded the well recognized Kam Fan
Award for our strategic brand building campaign by the Association of
Accredited Advertising Agents of Hong Kong. We were awarded the Gold Prize and
Citation for Outstanding TV Campaign in the Hong Kong Management
Association/TVB Awards for Marketing Excellence 2000. In an annual survey
reported in Media,we also ranked second (after McDonalds) in Hong Kong in
television advertisement recall for 2000 and won Medias Asian Advertising
Campaign of the Year in 2000. Sales and Distribution We sell our mobile services and handsets and provide after-sales service
to customers primarily through our retail outlets and the customer service
center. In 2000, we began directing our successful marketing and brand strategy
to focus on expanding distribution and sales channels, and we were aggressive
in expanding our distributions network coverage and broadening the use of
different distribution channels during 2000 and 2001. As of December 31, 2003,
we had 21 retail shops located at high-traffic locations as compared with 12
at the start of 2000. We also sell mobile services and handsets to our
corporate and individual customers through our own direct sales force. We have entered into agreements with various independent dealers in Hong
Kong to sell our mobile services and handsets on a non-exclusive basis. Dealer
commission rates are based on quality and quantity targets. We defer commission
payments and pay our dealers in instalments, provided that the relevant
subscriber account is still active at the time the commission payment is due. Our rechargeable stored value SIM cards were carried in over 1,000 retail
outlets, including dealers shops, convenience stores and chain stores, as of
December 31, 2003. Our retail shops generated approximately 58% of our new mobile subscribers
in 2003. For the same period, our direct sales team generated approximately 27%
of our new subscribers, and independent dealers generated approximately 15% of
our new subscribers. We provide training, quality assurance and incentive programs (including a
commission scheme) for our sales force. We also provide marketing support for
independent dealers through advertising product demonstrations and our mystery
shopper evaluation program, which monitors customer and sales service in our
retail stores on a sampling basis. Customer Service We aim to provide good quality customer service. We provide user-friendly
and easy-to-access customer service through our 24-hour hotline and our retail
outlets. Inquiries regarding account balances, billing and service information
and usage are handled by an integrated voice response system and customer
service operators. We also provide limited repair services of certain mobile
telephones at our repair center. We established an operations center in Shenzhen, China in 2002 to provide
various support services, including the customer service hotline and
administration functions. This new center helps reduce operating costs as well
as improve the productivity and service quality of our customer service
function by leveraging the lower labor costs in mainland China. 18




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Billing and Subscriber Management We have a billing and customer management system that handles our mobile
and wireless data services from a common, convergent platform. The billing
system is designed by LHS GmbH, a specialized software and maintenance provider
whose systems are widely used by mobile service providers in Asia, Europe and
elsewhere around the world. In addition to enhancing our customer service
levels, our integrated billing system also permits us to analyze the effect of
tariff packages, promotional and advertising campaigns and subscriber usage
patterns thereby assisting in the development of new services and marketing
strategies. We bill our mobile subscribers on a monthly basis in arrears for excess
airtime and enhanced services, and in advance for fixed monthly charges,
including value-added services. All of our billings are in Hong Kong dollars
and may be settled in cash, or by credit card, auto payment, check, electronic
payment system or payment by phone. In 2001, we launched e-bills whereby
instead of mailing the monthly statements of account to our customers, we send
short messages to our subscribers or e-mails to the registered e-mail addresses
of most of our customers informing them the outstanding amounts payable. Our
customers may also inquire their usage and outstanding balances by calling our
hotline, or accessing the sunday.com web site through the internet, or by
fax-on-demand. In 2002, we further introduced new billing tools, achieving greater
efficiency and cost savings in billing management and providing better response
to billing related inquiries from subscribers. As a result, we received
Outstanding Billing Implementation  Telecoms award in Tarificas Billing
Magazine Globe Awards 2002. We anticipate that the user needs and requirements for the billing system
would be very different in respect of 3G services and applications. As such,
we plan to implement a new billing system and are now evaluating various
solutions proposed by different billing system vendors. We generally terminate services for subscribers who have accounts that are
more than 45 days overdue. Accounts are reinstated only if the subscriber pays
all due amounts and a reconnection fee. If a subscribers account is terminated
before its handset subsidy balance is fully rebated, the balance of the amounts
to be rebated will be forfeited. We have credit control procedures to minimize bad debts. Such procedures
include requiring up-front deposits for roaming and international long distance
calling services, requiring the provision of credit card details upon
registration of retail international long distance services, and encouraging
subscribers to use auto-deduct or direct debit for paying their bills. When
payments for an account are overdue, we send short messages to the mobile
phones of such delinquent customers and reminder calls and invoices,
accompanied by monitoring and service cut-off for customers with unreliable
payment track records. We also engage debt collection agencies to pursue
invoiced amounts after internal collection efforts are exhausted. We have also established internal controls to manage our cash sales. Sales
receipts recorded in our cash register systems are reconciled on a daily basis
with actual bank receipts, and discrepancies are investigated. Our provision for bad debts for 2001, 2002 and 2003 were HK$19.6 million
(approximately 1.7% of service revenues), HK$31.0 million (approximately 2.5%
of service revenue) and HK$30.2 million (approximately 2.6% of service
revenues), respectively. The increase in bad debt provision in 2002 and 2003
was mainly caused by prolonged poor economic conditions in Hong Kong and much
higher bad debts from wireless data services. For a discussion of our bad debt
experience and what measures we have taken, see Item 5. Operating and
Financial Review and Prospects. Intellectual Property We rely on a combination of trade marks, service marks and domain name
registrations, copyright protection and contractual restrictions to establish
and protect our technologies, brand name and logos, marketing designs and
internet domain names. We have registered and applied to register certain trade
marks and service marks with the Hong Kong Trade Marks Registry in connection
with our mobile communications and international long distance businesses. We
also have registered and applied to register certain trade marks and/or service
marks with the relevant trade marks registration bodies in Canada, China,
Macau, Malaysia, Singapore, South Korea, Taiwan and Thailand. Our registered
trade marks and service marks include our brand name, logos and certain
advertising features. In relation to domain names, we have registered the
sunday.com domain name with Network Solutions, which is a principal domain
name registration operator for the internet. Our copyrights are principally in
the area of computer software for service applications developed in connection
with our wireless and wireline communications network platform. We have
copyrights to certain designs and materials used in marketing and advertising
our mobile communications and enhanced services in Hong Kong. Regulation HKTA is the telecommunications regulator in Hong Kong and is responsible
for administering the Telecommunication Ordinance. 19




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OFTA was established in 1993 under the Telecommunication Ordinance to
assist the HKTA in administering and enforcing the provisions of the
Telecommunication Ordinance. OFTAs responsibility and functions also include
regulating and licensing telecommunication network services and regulating the
telecommunications markets in Hong Kong. Our indirectly wholly-owned subsidiary, Mandarin Communications Limited,
was one of six successful applicants to which the Hong Kong government awarded
Public Radiocommunication Service, or PRS, licenses in 1996. This license
permits us, among other things, to:  
    
    provide a public mobile radiocommunication service using mobile
communication technology in accordance with the GSM 1800 standard;
    
    establish and maintain a GSM 1800 network; and
    
    sell mobile telephone and other equipment to subscribers. Each PRS license has a duration of ten years and will expire in 2006,
although it may be extended for an additional period of up to three years under
the Telecommunication Ordinance. A PRS license is non-exclusive, and the
licensee must operate in a manner satisfactory to the HKTA in accordance with
the specifications contained in the license. Under the terms of the PRS
license, we may only operate our PRS network on the radio frequencies assigned
to us. The Telecommunication (Amendment) Ordinance 2000, or the TAO 2000, came
into operation on June 16, 2000. The TAO 2000 brought significant amendments to
the Telecommunications Ordinance in certain areas. In particular, the TAO 2000
seeks to enhance competition safeguards in the telecommunications sector, which
will be administered and enforced by the HKTA, and, unusually for Hong Kong
legislation, embraces antitrust law principles. The competitive safeguards
include provisions dealing with anti-competitive practices, abuse of a dominant
position, misleading and deceptive conduct and discrimination. The amendment
made to the Telecommunication Ordinance also significantly increases penalties
for breach of license conditions and legislation. The TAO 2000 also aims to
improve interconnection and access arrangements to telecommunications services,
streamline licensing procedures and provide the HKTA with powers over 3G
spectrum auction and certain telecommunications services and technical areas,
such as radio spectrum management. The TAO 2000 also makes amendments which are
important for mobile operators, strengthening existing rights to access
suitable sites for radio communications installations, provided that an
operator fulfills certain criteria, such as public interest requirements, and
the HKTA grants authorization. The HKTA will have increased powers to intervene
in disputes between operators and those having a legal interest in the
potential installation sites, in order to determine the interim fees payable
for site access. The Hong Kong government announced in February 2001 that the licensing
framework for 3G mobile services consisting of four mobile carrier licenses for
building a 3G network and providing 3G services, or 3G licenses, would be
issued by auction. As there were only four applicants, including SUNDAY 3G, no
auction took place and each applicant was granted a 3G license on October 22,
2001. Each licensee was allocated a block of paired band spectrum of 2 x 14.8
MHz plus one 5 Hz block of unpaired band spectrum. Pursuant to the Special
Conditions of the 3G license, SUNDAY 3G is required to install, maintain and
use equipment for the purposes of the network and the services to be provided
under the 3G license such that by no later than December 31, 2006 (and for all
dates thereafter during the term of the 3G license), the 3G network and
services will cover at least 50% of the population of Hong Kong. Further, all
base stations to be installed must be capable of supporting services at a
minimum of 144 kbits per second. In addition, the licensees must open up at
least 30% of their 3G network capacity for use by non-affiliated companies to
operate as a mobile virtual network operator, or MVNO, and/or content
providers. The 3G license is valid for 15 years from the date of grant, expiring in
2016. Pursuant to the 3G license, each licensee is required to pay the minimum
guaranteed annual fees in arrears. For each of the first five years, the
minimum annual fee is HK$50 million. In each of the remaining 10 years, the
annual fee would be the higher of 5% of the licensees turnover attributable to
the provision of 3G services or the minimum annual fee amounts indicated below: (HK$'000)6th year
    
    
    60,1247th year
    
    
    70,2498th year
    
    
    80,3739th year
    
    
    90,49710th year
    
    
    100,62211th year
    
    
    110,74612th year
    
    
    120,87013th year
    
    
    130,99514th year
    
    
    141,11915th year
    
    
    151,243
 20




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On the grant of the 3G license, the licensee was required to provide the
HKTA with a performance bond covering the next five years minimum annual fees
or the minimum annual fees for the remaining life of the 3G license, whichever
is higher. SUNDAY 3G paid HK$250 million in cash upon the grant of the 3G
license in lieu of the performance bond for the first five years minimum
annual fees. In accordance with the 3G license, we were required to provide a
performance bond, equivalent to the 6th years minimum annual fee, on October
22, 2002. On October 11, 2002, OFTA granted a one-year waiver to us and the
other three 3G licensees on the submission of such performance bond. In August
2003, OFTA granted another one-year waiver to us and the other three 3G
licensees on the submission of the performance bond in an amount equivalent to
the 6th and 7th years minimum annual fees as required by the terms of the 3G
license on October 22, 2003. In early May 2002, the Secretary of the Information Technology and
Broadcasting Bureau proposed the Telecommunications (Amendment) Bill 2002, or
the Bill, to provide a legislative framework for the regulation of merger and
acquisition activities in the Hong Kong telecommunications industry. The Bill
was subsequently passed in July 2003 becoming the Telecommunications
(Amendment) Ordinance 2003, or the TAO 2003. Under the TAO 2003, the HKTA may
direct a telecom carrier licensee to take such actions as the HKTA considers
necessary to eliminate any anti-competitive effect where the HKTA determines

that a change in ownership or control over a telecom carrier licensee has, or
is likely to have, the effect of substantially lessening the competition in the
telecommunications market. The key features of the TAO 2003 are as follows:  
    
    Where the HKTA is of the opinion that a change in ownership or
control over a carrier licensee (which includes, among other things, a
person becoming the beneficial owner of the voting shares in the carrier licensee in excess of the thresholds set out in the TAO 2003, or a person becoming a voting controller
of the voting shares in the carrier licensee in excess of the thresholds set out in the TAO 2003) had, or
is likely to have, the effect of substantially lessening the competition
in the telecommunications market, the carrier licensee will take such
actions as the HKTA considers necessary (including directing the carrier
licensee to procure modifications to its ownership or control) to
eliminate any such anti-competitive effect.
    
    Failure to take such action would constitute a breach of the relevant
provisions of the Telecommunications Ordinance and sanctions available
under the Telecommunication Ordinance could then be imposed upon the
carrier licensee (including suspension or cancellation of the license).
    
    Alternatively, prior to a proposed change in ownership or control, a
carrier licensee may on a voluntary basis seek the consent of the HKTA
to the proposed change. The carrier licensees would have a choice as to
whether it will seek prior consent or not, taking into account the risk
of being penalized subsequently if the activity is found to be
anti-competitive. The relevant sections of the TAO 2003 dealing with mergers and
acquisitions will come into effect in July 2004. In May 2004, OFTA issued
guidelines relating to the handling of mergers and acquisitions by HKTA under
the new legislation. The Hong Kong government liberalized the telecommunications market by
introducing more competition to various sectors of the communications industry
including the public mobile radio services in the 1980s, the provision and
operation of local fixed wireline network services in 1995 and more recently in
the real time voice international long distance services. Our international long distance business, operated under our SUNDAY 1622
brand, is carried out under a PNETS (ETS) license. OFTA does not restrict the
number of PNETS (ETS) licenses that it will issue. As of May 31, 2004, OFTA had
issued around 220 such licenses. A PNETS license is issued for a term of 12
months upon submission of an application to OFTA and the payment of the
prescribed fee. It is renewable annually upon payment of a small licensing fee.
The HKTA may cancel a PNETS license, including ours, at any time or suspend it
for up to 12 months, if a licensee contravenes any provision of the
Telecommunication Ordinance or any condition of the license. Generally, companies using web sites or the internet to sell products must
comply with applicable Hong Kong consumer protection laws (for example, the
Sale of Goods Ordinance (Chapter 26 of the Laws of Hong Kong)). The Electronic Transactions Ordinance (Chapter 553 of the Laws of Hong
Kong) came into effect in January 2000. This ordinance is intended to recognize
the legal status and effect of certain electronic records and signatures and to
govern the certification authorities established in Hong Kong. 
 4.C ORGANIZATIONAL STRUCTURE SUNDAY has the following principal wholly-owned subsidiaries as of
December 31, 2003: 21




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Place of
    
    Issued and FullyName
    
    Incorporation
    
    Paid Up Capital
    
    Principal ActivitiesShares held directlySUNDAY HOLDINGS (HONG KONG) CORPORATION
    
    British Virgin
Islands
    
    100 ordinary shares of
US$1 each
    
    Investment holdingSUNDAY HOLDINGS (CHINA) CORPORATION
    
    British Virgin
Islands
    
    1 ordinary share of US$1
    
    Investment holdingSUNDAY IP HOLDINGS CORPORATION
    
    British Virgin
Islands
    
    1 ordinary share of US$1
    
    Investment holdingShares held indirectlyMANDARIN COMMUNICATIONS LIMITED
    
    Hong Kong
    
    100 ordinary shares of
HK$1 each and
1,254,000,000
non-voting deferred
shares of HK$1 each
    
    Provision of mobile
and other services,
and sales of mobile
phones and
accessoriesSUNDAY 3G HOLDINGS (HONG KONG)
CORPORATION
    
    British Virgin
Islands
    
    1 ordinary share of US$1
    
    Investment holdingSUNDAY 3G (HONG KONG) LIMITED
    
    Hong Kong
    
    2 ordinary shares of
HK$1 each
    
    Licensee of Hong Kong
3G licenseSUNDAY IP LIMITED
    
    British Virgin
Islands
    
    1 ordinary share of US$1
    
    Holding our
intellectual
property rights and
trade marksSUNDAY COMMUNICATIONS SERVICES
(SHENZHEN) LIMITED, or SCSSL(1)
    
    The PRC
    
    US$1,500,000
    
    Provision of back
office support
services to the
SUNDAY group
   (1)
    
    SCSSL is registered as a wholly foreign-owned enterprise in the PRC. The
registered capital of SCSSL has been fully paid up. Our principal activities, except for SCSSL which is operated in the PRC,
are undertaken in one geographic area, Hong Kong. 
 4.D PROPERTY, PLANT AND EQUIPMENT We lease and occupy around 30 properties in Hong Kong and the PRC, which
we use as offices, retail shops, switching centers, customer service center and
warehouse. We also lease and operate over 1,100 cell sites in Hong Kong. Our fixed assets have been pledged to HTIC as security for the Facility
Agreement in June 2004. We have completed the rollout of our GSM 1800 mobile network. In 2004, we
will start the rollout of the 3G network. 
 Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion, together with our audited
consolidated financial statements and the related notes, beginning on page F-1.
Our audited consolidated financial statements have been prepared in accordance
with HK GAAP, which differs in certain significant respects from US GAAP. Note
27 to our audited consolidated financial statements provides a description of
the significant differences between HK GAAP and US GAAP as they relate to us.
Note 27 also provides a reconciliation to US GAAP of consolidated net
(loss)/profit and consolidated shareholders equity. You should also read the
information under Forward-looking Statements for special information about
our forward-looking information. Introduction We are an innovative developer and provider of wireless communications and
wireless data services in Hong Kong. Since our formation in 1994, we have
pursued a vision that wireless communications would become increasingly
pervasive and integrated into consumers lives. We were one of the first mobile
operators in Hong Kong to develop personalized wireless-based services designed
for a highly active and mobile way of living. We have used these services to
differentiate ourselves from our competitors and attract new subscribers who
tend to be responsive to lifestyle marketing and quick to adopt technological
innovation. We began commercial operation in September 1997 with the introduction of
our digital GSM 1800 mobile telephone services under the SUNDAY brand name. We
have invested significant resources to build our SUNDAY brand name and have
succeeded in making it one of the most well-known brand names in Hong Kong. Our
marketing strategy assisted us in building a mobile subscriber base of 660,000
subscribers as of December 31, 2003. The Hong Kong mobile communications industry is highly competitive. We
believe that currently the three largest operators collectively have a market
share of approximately 60%. There have been periods of intense price
competition or price wars among Hong Kongs wireless communications and other
telecommunications service providers. These activities have generally been
initiated by our competitors. Many of our competitors have greater resources
than we do and may be better positioned than us to launch competitive products
and services and to absorb operating losses. 22




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We experienced net losses since we commenced operations until January
2003, when we started earning net profit on a month to month basis. Our
accumulated losses decreased for the first time from HK$3,006.7 million as of
December 31, 2002 to HK$2,979.5 million as of December 31, 2003. To maintain
profitability, we will need to continue to grow our subscriber base, increase
ARPU of our services, improve customer retention, enhance productivity and
control costs, and develop and introduce new services. The successful dual listing of our ADSs and ordinary shares on The Nasdaq
National Market and the Stock Exchange of Hong Kong, respectively, in March
2000 raised HK$2.6 billion new share capital and helped to substantially
strengthen our financial position to cater for our network expansion and
enhancement, and the development and introduction of new services and
applications based on new technologies. We have completed installation of the GPRS network infrastructure and we
have dedicated resources to develop and launch wireless data services and
applications using the GPRS platform. We have launched a broad range of new
wireless data services since 2002 and expect to continue to launch more data
services in the future. Winning a 3G license in Hong Kong in October 2001 was another important
milestone for us. Acquiring the 3G license is an integral part of our long-term
strategy to offer an enhanced range of wireless services under the SUNDAY
brand. We will start the rollout of the 3G network in 2004. In addition to the
3G license, we were allocated 2 x 1.6 MHz of additional 2G spectrum in the 1800
MHz range in March 2002. This has increased our network capacity and has
allowed us to further expand our subscriber base and enhance our service
quality. While revenues from wireless voice services are still the dominant source
of revenue, we expect that wireless data services will play a more important
role in the near future. Revenues from wireless data services grew by over 55%
in 2003 as compared with 2002. 
 5.A OPERATING RESULTS Critical Accounting Policies The discussion and analysis of our financial conditions and results of
operations are based upon our audited consolidated financial statements which
have been prepared in accordance with HK GAAP. Our principal accounting
policies are set out in note 2 to our audited consolidated financial
statements. The preparation of the consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses as well as the disclosure of contingent assets
and liabilities. We continually evaluate our estimates and judgments including those
related to revenue recognition, provisions for doubtful debts, useful lives of
plant and equipment and intangible assets, deferred tax and contingencies. We
base our estimates and judgments on historical experience and other factors
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions and conditions. We
believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of the consolidated
financial statements. The 3G license granted to us during 2001 requires the payments of certain
prescribed minimum annual fees over its 15-year license period. In 2001, the
discounted value of the minimum annual fees of the 3G license was recorded both
as an intangible asset and as a long-term liability in our consolidated
financial statements. During 2002, our directors re-evaluated the existing
accounting policy for the 3G license and believed that it was not an
appropriate treatment, as it did not reflect fully the underlying legal and
financial obligations and therefore our commercial position given the
provisions of the 3G license. Accordingly, the license fees payable prior to
the launch of commercial services are regarded as integral to the development
and construction of the 3G network and are deferred and included within fixed
assets. Depreciation of the fixed assets will be provided from the commencement
of the 3G services over the shorter of the remaining life of the 3G license or
the estimated useful life of the fixed assets. The plant and equipment used in our network is long-lived but may be
subject to technical obsolescence. The annual depreciation charge is sensitive
to the estimated economic useful lives we allocate to each type of fixed
assets. We perform annual reviews to assess the appropriateness of their
estimated economic useful lives. For the three years ended December 31, 2001,
2002 and 2003, there was no change in the useful lives of the fixed assets.
Such reviews take into account the technological changes, prospective economic
utilization and physical condition of the assets concerned. We also regularly
review whether there are any indications of impairment. We will recognize an
impairment loss if the carrying amount of an asset is lower than its
recoverable amount which is the greater of its net selling price or its value
in use. In determining the value in use, we assess the present value of the
estimated future cash flows expected to arise from the continuing use of the
asset and from its disposal at the end of its useful life. We use estimates and
judgment in determining these future cash flows and the discount rate. We
estimate the future cash flows based on certain assumptions, such as the market
competition and development and the expected growth in subscribers and APRU. We engage dealers for selling mobile services to new subscribers and pay
commissions to the dealers based on the number of subscribers who remain active
after a prescribed period of time. Therefore, the amount of commission payable
would depend on the churn rate of such subscribers. We estimate the average
churn rate of such subscribers periodically based on past experience and market
conditions and accrue dealer commissions accordingly. If the actual churn rate
is lower than our estimate, additional accrual of the dealer commissions may be
required. 23




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We provide services to our subscribers mainly on credit terms. We know
that certain debts due to us will not be paid through the default of a small
number of our customers. We perform regular reviews to estimate, based on our
write-off historical experience, the aging of our accounts receivable and the
general economic conditions and industry trends, the level of debts that we
believe will not be collected. Under both HK GAAP and US GAAP, we are 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 recognized for future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities, and their respective tax
bases and tax credit carryforwards using enacted tax rates in effect for the
year in which differences are expected to be recovered or settled. Under HK
GAAP, a deferred tax asset is recognized to the extent that it is probable that
future taxable profit will be available against which the temporary differences
can be utilized. Under US GAAP, a valuation allowance is recorded to reduce the
carrying amount of deferred tax asset unless it is more likely than not that
such asset will be realized. As of December 31, 2003, no deferred tax assets
are recognized under HK GAAP, while a valuation allowance is set against the
deferred tax assets under US GAAP, the net effect of which causes no impact to
our consolidated financial statements presented under US GAAP. Overview Operating Revenues Our operating revenues in 2003 declined by 6% as compared with 2002,
mainly due to the generally weak economy, the outbreak of severe acute
respiratory syndrome, or SARS, and aggressive price promotions in response to
our competitors price promotions. Revenues from mobile services and the sales
of mobile phones and accessories accounted for 91% and 9%, respectively, of the
operating revenues in 2003. We have achieved sustained subscriber growth although revenues from mobile
services decreased by 6% in 2003 as compared with 2002. We experienced
subscriber growth rates of 34%, 9% and 9% for the years ended December 31,
2001, 2002 and 2003, respectively. The number of subscribers grew from
approximately 603,000 subscribers as of December 31, 2002 to 660,000
subscribers as of December 31, 2003. Market competition has remained intense through aggressive price
promotions and heavy handset subsidies since the introduction of mobile number
portability, or MNP, in March 1999, which allows mobile telephone subscribers
in Hong Kong to change their mobile telephone operator and still keep their
mobile telephone number. As a result, the ARPU of the industry, including ours,
continued to decrease while the churn rate increased during the past few years. Mobile Services We recognize revenues from mobile services when the services are rendered.
A substantial majority of the revenues from mobile services has consisted of
revenues from local airtime. Subscribers pay local airtime charges for both
incoming and outgoing calls. Revenues from mobile services also include
revenues from international long distance calls made over our subscribers
mobile telephones, inbound and outbound roaming, value-added services, enhanced
services and data services. We calculate ARPU by dividing revenues from post-paid mobile services for
the month by the daily weighted average number of post-paid mobile service
subscribers for the month. The ARPU for the years ended December 31, 2001, 2002
and 2003 were HK$219, HK$209 and HK$201, respectively. This decrease in ARPU
was in line with the industry as a whole. The rechargeable stored value prepaid SIM cards continued to record
significant growth since its launch in April 2000. The number of subscribers
using such prepaid SIM cards grew from 132,000 in 2001 to 189,000 by December
31, 2002, and further to 243,000 by December 31, 2003. The ARPU of these
prepaid subscribers, however, decreased to HK$60 as compared with HK$92 in 2002
due to aggressive price promotions initiated by some competitors. Our mobile communications business can be significantly affected by churn,
which represents net subscriber deactivation or disconnection, whether
voluntary or not, during a period. Our average monthly churn rate for our
mobile subscribers is the total of the monthly churn rates for the period,
which is calculated as a percentage of opening subscribers, divided by the
number of months in such period. Along with other mobile telephone operators in
Hong Kong, we have experienced relatively high churn rates since MNP became
available, which increased subscribers willingness to switch among operators.
Our average monthly churn rates of post-paid subscribers for the years ended
December 31, 2001, 2002 and 2003 were 8.3%, 5.4% and 5.0%, respectively,
reflecting an improvement in churn rate between 2002 and 2003. Since 2002, we
have made churn a priority and considerable efforts were put into retention
programs based on market research which allowed us to gain greater insight into
the reasons behind customers changing service. The churn rate had reduced to
3.5% by December 2002. The relatively high average churn rate for 2003 was
mainly attributable to adverse market conditions in Hong Kong in the first
three quarters in 2003, but the churn rate has significantly decreased since
the fourth quarter of 2003, which was back down to 3.6% in December 2003. We
will continue to make customer retention a priority. 24




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##### Table of Contents



Sales of Mobile Phones and Accessories We recognize revenues from the sales of mobile phones and accessories at
the time of sale. In response to subsidies offered by our competitors that in
some cases effectively give away the handsets for free, we also offer subsidies
on our mobile phones for subscriber acquisition and retention. Typically, our
subsidy arrangements involved selling mobile phones at discounts of up to the
full cost of the handsets in exchange for subscribers making an upfront
prepayment for credit against future monthly airtime charges. We rebate the
upfront prepayment in equal instalments over an agreed period. The upfront
prepayment amount is not transferable and any amount outstanding is forfeited
by the subscriber if the account is closed. We currently only offer heavy
discounts for retention programs and sales of older models of mobile phones or
mobile phones in the low to medium price range. We account for subsidized handset sales by recognizing the purchase price
paid by the subscriber, excluding any upfront prepayment amount. We
simultaneously recognize our full cost of the mobile phone, which sometimes
substantially exceeds our sales revenue. The upfront prepayment amount is
recorded as deferred revenue and included in the balance sheet as a liability.
The monthly rebate is recognized as revenue from mobile services in the month
when access to our network and facilities is provided to the subscriber and is
deducted from subscriptions received in advance. The amount of our total
deferred revenue in connection with handset sales was HK$16.2 million as of
December 31, 2003, which was included in the balance sheet as part of the
subscriptions received in advance which amounted to HK$89.0 million. The amount
of our deferred revenue in connection with handset sales was HK$17.6 million as
of December 31, 2002 and was included as part of the subscriptions received in
advance which amounted to HK$127.0 million. The decrease in deferred revenue in
2003 as compared with 2002 was due to less handset subsidies offered to our
subscribers. Other Services Revenues of other services mainly consisted of revenues from our retail
international long distance calling services for 2001. The retail international
telecommunications services revenues consist of revenues from international
calls by non-SUNDAY mobile service users and revenues from international calls
by registered fixed line subscribers using our SUNDAY 1622 services. Revenues
from our mobile service subscribers making international long distance calls
from their mobile phones are excluded from the retail international
telecommunications services revenues but are included in revenues from mobile
services as described above. Revenues of other services of HK$9.7 million in 2002 were mainly generated
through the provision of certain consultancy services, which were not of a
recurring nature. Revenues of other services further decreased to HK$0.7
million in 2003. Cost of Sales and Services Our cost of sales and services consists of costs directly associated with
generating revenues. Cost of sales consists almost entirely of mobile phones
and accessories costs and related collection charges. Cost of services relates
to the cost of mobile services and the costs of other services, which consists
primarily of a variety of interconnection charges, including PNETS charges
(interconnection charges for local calls payable to an FTNS operator); dipping
charges (payable to a FTNS operator under certain MNP arrangements); outbound
roaming charges; revenue-sharing payments made to Mass Transit Railway
Corporation, or MTR, for calls made by our mobile subscribers in MTRs
facilities; billing related costs; collection charges; provision for bad debts;
and cost of prepaid cards. Cost of mobile services accounted for 19%, 18% and
17% of revenue from mobile services in 2001, 2002 and 2003, respectively. Our provision for bad debts is mainly based on the aging of the
receivables from the billing cutoff date. Our provision for bad debts was 1.7%,
2.5% and 2.6% of service revenue in 2001, 2002 and 2003, respectively. The
provision for bad debts increased in 2002 and 2003 due to the prolonged poor
economic conditions in Hong Kong during such years and an increase in bad debts
from wireless data services. Operating Expenses Our operating expenses consist primarily of network costs which include
rental for leased lines (between cell sites and our two switching centers,
between our switching centers, and for interconnection to FTNS operators and to
international carriers), cell sites acquisition and rental and maintenance
costs, depreciation, advertising, promotion and other selling costs, salaries
and related costs, and other operating costs. Advertising, promotion and other
selling costs consist primarily of advertising costs and dealer and salesperson
commissions. Total operating expenses for the three years ended December 31, 2001, 2002
and 2003 amounted to HK$1,119.0 million, HK$1,052.8 million and HK$852.7
million, respectively. The operating expenses in 2002 included a one-time
restructuring cost of HK$26.6 million in relation to an operations
restructuring implemented in December 2002. Since 2002, we have started moving
certain back office support functions to our Shenzhen office which can operate
with a lower cost base and provide better quality service. The total operating
expenses showed a decreasing trend during the three years from 2001 to 2003 due
to our continued focus on cost controls. 25




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##### Table of Contents



Income Taxes We have not paid Hong Kong profits tax since inception because we have
sufficient tax losses brought forward to set off against the net profit for
2003. See note 5 to our audited consolidated financial statements for more
detailed calculations. Foreign Exchange Exposure Substantially all our income, expenses, assets and liabilities are
denominated in Hong Kong dollars except for the vendor loan facility provided
by Nortel, which was fully repaid in January 2004. The international roaming
payables and receivables are netted and settled on a monthly basis in Special
Drawing Rights, or SDRs. As of December 31, 2003, the net SDR-denominated
payables were insignificant. We have not experienced significant foreign
exchange movements and do not anticipate significant foreign exchange losses as
long as the Hong Kong governments policy to link the Hong Kong dollar to the
U.S. dollar remains in effect. To date, we have not hedged our foreign exchange
exposure and will continue to monitor the foreign exchange exposure and market
conditions to determine if any hedging is required. Results of Operations The following table summarizes our results of operations for the three
years ended December 31, 2001, 2002 and 2003. Year Ended December 31,2001
    
    2002
    
    2003HK$ million
    
    %(1)
    
    HK$ million
    
    %(1)
    
    HK$ million
    
    %(1)Operating revenues:Mobile services
    
    
    1,165.4
    
    
    
    81.9
    
    
    
    1,217.7
    
    
    
    90.7
    
    
    
    1,149.9
    
    
    
    91.3Sales of mobile phones and accessories
    
    
    242.9
    
    
    
    17.1
    
    
    
    115.3
    
    
    
    8.6
    
    
    
    109.4
    
    
    
    8.6Other services
    
    
    14.1
    
    
    
    1.0
    
    
    
    9.7
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.1Total operating revenues
    
    
    1,422.4
    
    
    
    100.0
    
    
    
    1,342.7
    
    
    
    100.0
    
    
    
    1,260.0
    
    
    
    100.0Total operating revenues growth
    
    
    (1.9
    )%
    
    
    
    
    
    
    (5.6
    )%
    
    
    
    
    
    
    (6.2
    )%Costs of sales and services:Mobile services
    
    
    (216.9
    )
    
    
    (15.3
    )
    
    
    (220.5
    )
    
    
    (16.4
    )
    
    
    (196.5
    )
    
    
    (15.6
    )Sales of mobile phones and accessories
    
    
    (245.0
    )
    
    
    (17.2
    )
    
    
    (113.4
    )
    
    
    (8.4
    )
    
    
    (133.3
    )
    
    
    (10.6
    )Other services
    
    
    (7.3
    )
    
    
    (0.5
    )
    
    
    (0.6
    )
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    Total costs of sales and services
    
    
    (469.2
    )
    
    
    (33.0
    )
    
    
    (334.5
    )
    
    
    (24.9
    )
    
    
    (330.0
    )
    
    
    (26.2
    )Total costs of sales and services growth
    
    
    (28.9
    )%
    
    
    
    
    
    
    (28.7
    )%
    
    
    
    
    
    
    (1.3
    )%Gross profit
    
    
    953.2
    
    
    
    67.0
    
    
    
    1,008.2
    
    
    
    75.1
    
    
    
    930.0
    
    
    
    73.8Gross profit growth
    
    
    20.6
    %
    
    
    
    
    
    
    5.8
    %
    
    
    
    
    
    
    (7.8
    )%Other revenues
    
    
    2.6
    
    
    
    0.2
    
    
    
    1.9
    
    
    
    0.1
    
    
    
    4.6
    
    
    
    0.4Operating expenses:Network costs
    
    
    (301.7
    )
    
    
    
    
    
    
    (303.6
    )
    
    
    
    
    
    
    (270.1
    )Depreciation
    
    
    (265.1
    )
    
    
    
    
    
    
    (256.4
    )
    
    
    
    
    
    
    (233.3
    )Rent and related costs
    
    
    (58.5
    )
    
    
    
    
    
    
    (61.1
    )
    
    
    
    
    
    
    (46.3
    )Salaries and related costs
    
    
    (233.2
    )
    
    
    
    
    
    
    (243.9
    )
    
    
    
    
    
    
    (152.0
    )Advertising, promotion and other
selling costs
    
    
    (180.4
    )
    
    
    
    
    
    
    (127.8
    )
    
    
    
    
    
    
    (106.0
    )Other operating costs
    
    
    (80.1
    )
    
    
    
    
    
    
    (60.0
    )
    
    
    
    
    
    
    (45.0
    )Total operating expenses
    
    
    (1,119.0
    )
    
    
    (78.7
    )
    
    
    (1,052.8
    )
    
    
    (78.4
    )
    
    
    (852.7
    )
    
    
    (67.7
    )Total operating expenses growth
    
    
    (5.1
    )%
    
    
    
    
    
    
    (5.9
    )%
    
    
    
    
    
    
    (19
    )%(Loss)/profit from operations
    
    
    (163.2
    )
    
    
    (11.5
    )
    
    
    (42.7
    )
    
    
    (3.2
    )
    
    
    81.9
    
    
    
    6.5Interest income
    
    
    21.6
    
    
    
    1.5
    
    
    
    3.5
    
    
    
    0.3
    
    
    
    2.5
    
    
    
    0.2Finance costs
    
    
    (70.1
    )
    
    
    (4.9
    )
    
    
    (59.5
    )
    
    
    (4.4
    )
    
    
    (52.8
    )
    
    
    (4.2
    )Share of losses of joint ventures
    
    
    
    
    
    
    
    
    
    
    (18.6
    )
    
    
    (1.4
    )
    
    
    (4.4
    )
    
    
    (0.3
    )Net (loss)/profit
    
    
    (211.7
    )
    
    
    (14.9
    )
    
    
    (117.3
    )
    
    
    (8.7
    )
    
    
    27.2
    
    
    
    2.2
   (1)
    
    Percentage of total operating revenues for the year. 2003 Compared with 2002 We recorded a net profit of HK$27.2 million in 2003 as compared with a net
loss of HK$117.3 million in 2002. Total operating revenues for 2003 declined 6% to HK$1,260.0 million as
compared with HK$1,342.7 million in 2002, mainly attributable to the generally
weak economy, the outbreak of SARS and aggressive price promotions. Revenues
from mobile services and sales of mobile phones and accessories accounted for
91% and 9%, respectively, of total operating revenues in 2003, compared to 91%
and 8% in 2002. Revenue from mobile services decreased by 6% from HK$1,217.7 million to
HK$1,149.9 million in 2003 although our subscriber base continued to grow by 9%
to 660,000 in 2003 as compared with 603,000 in 2002. The year 2003 was full of
challenges, such as the adverse effect of the outbreak of SARS and the weak
economy in general. Also, some competitors launched aggressive price promotions
to secure short-term gains. To respond such challenges, we invested in the
quality of our service delivery and continued our focused approach on market
segmentation and service innovation. This strategy coincided with a shift in
consumer attitudes as customers began to increasingly value innovation and
service quality, which enabled us to maintain our consumer growth. 26




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We continued to make customer retention a priority and maintain tight
control over churn rate. The average monthly churn rate, calculated as a
percentage of opening subscribers, improved to 5.0% in 2003 as compared with
5.4% in 2002. The relatively high churn rate was mainly attributable to adverse
market conditions in Hong Kong in the first three quarters in 2003, but the
churn rate has significantly decreased since the fourth quarter of 2003. The
churn rate in December 2003 was 3.6%. Despite the difficult market conditions, our high service quality and
segmentation strategy enabled us to grow our subscriber base by 9% in 2003.
Monthly ARPU for postpaid subscribers for 2003 fell a modest 4% to HK$201 from
HK$209 in 2002. We remain a leader in the introduction of innovative data services and was
the first operator in Hong Kong to offer wireless LAN roaming services and
unlimited GPRS package. Such initiatives helped our data service revenue grew
by 55% in 2003. The use of prepaid SIM cards has continued to grow. Prepaid subscriber
number increased by 54,000, or 29%, to 243,000 in 2003 over 2002. However, ARPU
for such prepaid subscribers decreased to HK$60 in 2003 from HK$92 in 2002 due
to aggressive price promotions initiated by some competitors. Revenues from the sales of mobile phones and accessories decreased by 5%
as compared with 2002. The business made a gross loss of HK$23.9 million as
compared with a gross profit of HK$1.9 million in 2002. The gross loss was
mainly attributable to an extremely competitive market environment in 2003
where more handsets were sold at subsidized prices to help upgrade existing
customers for ongoing retention programs and to acquire new customers. Because of the increase in handset subsidies, while total operating
revenue decreased by 6%, cost of sales and services decreased by only 1% from
HK$334.5 million in 2002 to HK$330.0 million in 2003. Due to the factors mentioned above, gross profit decreased by HK$78.2
million, or 7.8%, from HK$1,008.2 million in 2002 to HK$930.0 million in 2003.
Gross profit as a percentage of total operating revenues also decreased from
75% in 2002 to 74% in 2003 due to the increase in handset subsidies. The gross
profit margin of mobile services increased slightly from 82% in 2002 to 83% in
2003. Operating expenses decreased by HK$200.1 million, or 19%, from HK$1,052.8
million in 2002 to HK$852.7 million in 2003. The decrease was primarily due to
a reduction in salaries and related costs and a general decrease in all other
operating costs. The reduction in salaries and related costs in 2003 largely
reflected the full year effect of the restructuring of our organization and the
setting up of an operations center in Shenzhen, China in 2002. Also, as a
result of the organizational restructuring, we incurred one-time restructuring
costs in 2002, comprised mainly of severance pay and payments in lieu of notice
to redundant or terminated employees, of HK$26.6 million. The decrease in other operating expenses was a direct result of stringent
cost controls and continued improvements in operating efficiencies that came
with an expanded subscriber base and lowering marginal costs. As a percentage
of operating revenues, operating expenses declined from 78% in 2002 to 68% in
2003. Share of losses from a joint venture of HK$4.4 million in 2003 was mainly
attributable to the full provision of our investment in and advances to a joint
venture in Hong Kong in respect of development of applications for wireless
communication. We write down the carrying value of these assets as we
regularly assess the expected recoverability of such investment. Interest income and finance costs decreased by HK$1.0 million and HK$6.7
million, respectively, in 2003. The decrease in interest income was mainly
attributable to a decrease in average cash balance and the drop in average
interest rate. The decrease in finance costs was mainly attributable to a
reduction in interest expenses due to a drop in market interest rate in
general. 2002 Compared with 2001 Total operating revenues for 2002 declined 6% to HK$1,342.7 million as
compared with HK$1,422.4 million in 2001, mainly due to a 53% decrease in
revenues from the sales of mobile phones and accessories. Because sales of
mobile phones have not been profitable historically, the decline in revenues
from sales of mobile phones and accessories is favorable to us as less handset
subsidies are required. Revenues from mobile services continued to grow in
2002. Revenues from mobile services and sales of mobile phones and accessories
accounted for 91% and 8%, respectively, of total operating revenues in 2002,
compared to 82% and 17% in 2001. Revenue from mobile services increased by 5% from HK$1,165.4 million to
HK$1,217.7 million in 2002. The growth was mainly attributable to a sustained
increase in our subscriber base. Our subscriber base grew 9% to 603,000 in 2002
as compared with 551,000 in 2001. During 2002, we implemented various
initiatives to improve further our service to subscribers, such as enhancing
the network quality and coverage, improving customer service and strengthening
our sales and marketing functions. We also made churn a priority in 2002 and
reduced the monthly churn rate to 3.5% in December 2002 from 7.8% in December
2001, with the implementation of effective retention programs, including the
Superstar Club. While the churn may increase modestly in response to market
conditions, we have made customer retention a priority and maintained a tight
control over churn. 27




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In addition to continued subscriber growth and significantly improved
churn, monthly ARPU during 2002 has shown a modest rising trend following
increasing revenue from wireless data and an easing of market conditions in
2002. Monthly APRU for postpaid subscribers for December 2002 was HK$207 as
compared with HK$205 in December 2001. Average ARPU for 2002 was HK$209 as
compared with HK$219 in 2001. Revenues of wireless data services accounted for
approximately 5% of mobile services revenue by December 2002. The prepaid SIM cards have continued to record significant growth in 2002.
The subscriber number grew by 57,000, or 43%, to 189,000 in 2002 over 2001.
ARPU for prepaid subscribers was HK$92 in 2002, comparable to that of 2001. Revenues from the sales of mobile phones and accessories continued to
decrease, mainly owing to a reduction in sales volume as the handset subsidy
level has been significantly reduced since 2000. As a result, while such
revenues decreased by 53% to HK$115.3 million in 2002, we earned a gross profit
of HK$1.9 million as compared with a gross loss of HK$2.1 million in 2001. Cost of sales and services decreased by HK$134.7 million, or 29%, from
HK$469.2 million in 2001 to HK$334.5 million in 2002. The decrease was mainly
attributable to a reduction in the cost of sales of mobile phones and
accessories. Due to the factors mentioned above, despite a lower operating revenue, the
gross profit improved by HK$55.0 million, or 6%, from HK$953.2 million in 2001
to HK$1,008.2 million in 2002. Gross profit as a percentage to total operating
revenues also increased from 67% in 2001 to 75% in 2002 due to the steady
growth in subscribers and reduction in handset subsidies. Operating expenses decreased by HK$66.2 million, or 6%, from HK$1,119.0
million in 2001 to HK$1,052.8 million in 2002. The decrease was primarily due
to a reduction in advertising, promotion and other selling costs and other
operating costs. As a percentage to operating revenues, operating expenses
declined from 79% in 2001 to 78% in 2002. The decrease was a direct result of
stringent cost controls and continued improvements in operating efficiencies
that come with an expanded subscriber base and lowering marginal costs. In December 2002, we restructured our operations to revamp our
organizational structure and reprioritize functions and responsibilities. Total
restructuring costs, mainly severance pay and payments in lieu of notice to
redundant or terminated employees, amounted to HK$26.6 million and were
included in total operating expenses. If such restructuring costs were
excluded, the total reduction in total operating expenses in 2002 would have
been HK$93.1 million. We also established an operations center in Shenzhen in mainland China in
2002 to provide various support services. The new center helps reduce operating
costs as well as provide higher productivity and better service quality by
leveraging the lower labor costs in China. Share of losses from joint ventures of HK$18.6 million in 2002 was mainly
attributable to the closure of the joint venture with the Shell group. In
January 2002, we formed a 50:50 joint venture with the Shell group to operate
as a MVNO on a pilot basis. The joint venture ceased operations in September
2002 as the operating results of this pilot project indicated that MVNOs had
limited potential. Our investment in this joint venture of HK$16.7 million had
been fully written off and included in the share of losses from joint ventures. Interest income and finance costs decreased by HK$18.1 million and HK$10.3
million, respectively, in 2002. The decrease in interest income was mainly
attributable to a decrease in average cash balance and the drop in average
interest rate. The decrease in finance costs was mainly attributable to a
reduction in interest expenses due to a drop in market interest rate in
general. Net loss for the year was reduced by 45% from HK$211.7 million in 2001 to
HK$117.3 million in 2002. Before restructuring costs, our net loss for the year
amounted to HK$90.7 million for 2002. 
 5.B LIQUIDITY AND CAPITAL RESOURCES The wireless communications and data businesses are capital intensive.
Development of mobile, international long distance calling and data networks
and service applications requires significant capital expenditures as well as
considerable marketing, administrative and other expenditures that give rise to
negative operating cash flow in the initial years of operation. We started
generating positive cash flows from operations since 2002. Cash Flow from Operating Activities We recorded positive cash flow from operating activities of HK$241.9
million in 2003 as compared with a cash inflow of HK$129.3 million in 2002 and
a cash outflow of HK$88.3 million in 2001. The improvement in cash flow from
operating activities primarily resulted from the improved overall operating
performance, including effective cost reductions and improved operational
efficiency. 28




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The increase in net cash inflow of HK$112.6 million in 2003 over 2002 was
mainly attributable to an increase in operating profit before working capital
changes of HK$101.2 million. The increase of HK$217.6 million in net cash flow generated from operating
activities in 2002 over 2001 was mainly attributable to both an increase in
operating profit before depreciation of HK$111.8 million and a smaller increase
in working capital of HK$113.4 million mainly due to smaller decreases in trade
payables, other payables and accrued charges and an increase in inventories. Cash Flow from Investing Activities Net cash outflow from investing activities for the years ended December
31, 2001, 2002 and 2003 were HK$441.0 million, HK$109.5 million and HK$127.2
million, respectively. The increase in cash outflow of HK$17.7 million in 2003
over 2002 was mainly due to an increase in restricted cash deposits to cover
loan and interest repayable within six months. The decrease in cash outflow of HK$331.5 million in 2002 as compared with
2001 was mainly due to smaller capital expenditure, partly attributable to a
direct non-cash drawdown of HK$49.5 million from the revolving loan facility
from Nortel for equipment purchases, and the fact that in 2001, there was an
one-time HK$250 million 3G license payment. Cash Flow from Financing Activities The amount of bank loans, vendor loans and the capital element of finance
leases repaid in 2003 amounted to HK$314.7 million. During the year, HK$252.8
million was drawn down from the revolving loan facilities from Nortel. As a
result, the net cash used in financing activities in 2003 was HK$61.9 million,
an increase over the 2002 amount of HK$17.6 million which was used to repay the
bank loans, vendor loans and the capital element of finance leases. The amount of bank loans, vendor loans and the capital element of finance
leases repaid in 2002 amounted to HK$197 million. During the year, the
outstanding balance of the revolving loan facility from Nortel of HK$179.4
million was fully drawn down. As a result, the net cash outflow from financing
activities in 2002 was HK$17.6 million, less than the 2001 amount of HK$49.5
million which was used to repay the bank loans, vendor loans and the capital
element of finance leases. Funding Arrangements In 2001, we funded our capital expenditures, working capital requirements
and negative cash flow with long-term bank debt, vendor financing and proceeds
from the global offering in 2000. Starting from 2002, we recorded positive cash
flow from operating activities, which partly covered our capital expenditure
and loan repayments. The loan facilities from UOB and Nortel had both been fully utilized in
2000. On July 30, 2002, we entered into various documents to amend the bank
loans and vendor loans facilities in order to accommodate changes to our group
structure, as well as to vary certain financial covenants. The maturity date of
the loans, amounts lent and interest provisions were not altered. As of
December 31, 2003, the outstanding balances for the bank loan from UOB and
vendor loan from Nortel amounted to HK$481.4 million and HK$240 million,
respectively. Such bank and vendor loans were repayable in three quarterly
instalments and were secured by a charge over all the assets, revenues and
shares of Mandarin, our main operating subsidiary. The revolving facility from
Nortel had been fully drawn down during 2003. As of December 31, 2003, we had total bank and vendor loans of HK$721
million and a cash reserve of HK$314 million. Our net debt (total bank loans
and vendor loans less cash reserves) amounted to HK$407 million and the net
debt to equity ratio was 58% as of December 31, 2003. Thereafter, the bank loan from UOB and vendor loan from Nortel were fully
repaid in January 2004 through our operating cash flows and a term loan of
HK$500 million, or the New Loan Facility, extended by HTIC in January 2004.
The New Loan Facility is refinanced by the general facility tranche under
Facility Agreement signed on May 13, 2004, and the indebtedness owed under the
New Loan Facility is deemed to have been fully repaid by the deemed
disbursement under the general facility tranche. See Item 5. Operating and
Financial Review and Prospects  Liquidity and Capital Resources  Certain
Indebtedness  Loan Facilities for details. Certain Indebtedness Loan Facilities Our long-term debt (other than our obligations under finance leases) was
secured by charges on most of our assets, which included our bank accounts,
revenues and receivables, plant and equipment, intellectual property rights,
rights under our telecommunications licenses (including our 3G license) and
goodwill. 29




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As of December 31, 2003, we had the following vendor loan and bank loan
facilities which were entered into in 1998:  
    
    Nortel facility: a US$155 million (approximately HK$1,209 million)
term loan facility issued in favor of Mandarin by Nortel as arranger and
principal lender; and
    
    UOB facility: a HK$600 million term loan facility issued in favor of
Mandarin by UOB as arranger and principal lender. The facilities were fully utilized in 2000. We then temporarily repaid an
aggregate of US$130 million (approximately HK$1,012.7 million) of the Nortel
facility in 2000 with proceeds from the global offering, and at the same time,
Nortel granted a revolving facility of the same amount, which would expire on
September 11, 2004. This revolving facility from Nortel was fully utilized by
September 2003 and became part of the vendor loans from Nortel. The interest rates applicable to the Nortel facility ranged from LIBOR
plus 4.0% to LIBOR plus 5.5%. The interest rates applicable to the UOB facility
ranged from the higher of HIBOR or the cost of funds plus 4.0% to the higher of
HIBOR or the cost of funds plus 5.5%. Each facility matures in September 2004
with repayments of principal due in quarterly instalments commencing in March
2001. As of December 31, 2003, the outstanding loan balances comprised HK$240.0
million under the UOB facility and US$62.0 million (approximately HK$481.4
million) under the Nortel facility. On July 30, 2002, we entered into various agreements to effect certain
amendments to the Nortel and UOB facilities in order to accommodate changes to
our group structure for business development and/or cost saving measures,
including the provision of a corporate guarantee by SUNDAY to secure all the
obligations and liabilities of its wholly-owned subsidiaries, as well as to
vary the required targets for subscribers, earnings, tangible net worth and
debt service ratio. The maturity of the loans, amounts lent and interest
provisions were not altered. Both facilities contained a number of covenants that restricted our
ability to take certain actions without the prior approval of the lenders,
which included maintenance of certain performance targets, such as number of
subscribers, earnings level, tangible net worth and debt service ratios, and
operation of the business in accordance with the approved business plans. In December 2003, our main operating subsidiary, Mandarin, signed heads of
agreement with Huawei, a company incorporated in Shenzhen, Peoples Republic of
China, in respect of the supply and installation, on a turnkey basis, of our 3G
network and the provisioning of the related long-term financing, including the
provision of a New Loan Facility, or the Supply Heads of Agreement and Facility
Heads of Agreement, respectively. On December 30, 2003, we gave notice to the
lenders of the UOB and Nortel facilities of our intention to make full
repayment of all the outstanding loan principal and accrued interest of the
bank loans and vendor loans of HK$721.4 million. On January 12, 2004, all the
outstanding bank and vendor loans under the Nortel and UOB facilities were
fully repaid through our operating cash flows and the New Loan Facility of
HK$500.0 million extended by HTIC, pursuant to the Facility Heads of Agreement
and Supply Heads of Agreement. The New Loan Facility from HTIC is unsecured and repayable in five
progressively increasing semi-annual instalments after drawdown and carries a
floating interest rate tied to HIBOR. HK$75 million of the New Loan Facility
from HTIC is payable in July 2004 while the remaining balance is payable from
January 2005 to July 2006. As a result, HK$425 million of the New Loan Facility
has been classified as non-current liabilities as of December 31, 2003. The table below sets out the repayment schedule for our borrowings
(excluding our obligations under our finance leases) as of December 31, 2003: HK$ millionsBalance due in:Year 2004
    
    
    75.0Year 2005
    
    
    175.0Year 2006
    
    
    250.0500.0
 The Facility Agreement is between HTIC, Mandarin and SUNDAY and comprises:  
    
    a HK$859 million equipment supply facility;
    
    a HK$500 million general facility; and
    
    a 3G performance bond facility. 30




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The equipment supply facility is a term loan facility with a term of 7.5
years from the date the Facility Agreement comes into effect following
satisfaction of the conditions precedent referred to below, for an aggregate
amount equal to the amounts payable by Mandarin under the Supply Contract. The
equipment supply facility will be drawn down against invoices issued under the
Supply Contract and repayable by eight semi-annual instalments commencing four
years from the date of the Facility Agreement. The general facility is a term loan facility in an amount of HK$500
million which will replace the New Loan Facility provided by HTIC in January
2004. The term of the general facility is 2.5 years from the date of original
drawdown of the New Loan Facility. The 3G performance bond facility is a facility for the issuance of the
performance bonds required by OFTA under the terms of the 3G Licence to be
issued to OFTA in the years 2004 to 2010 inclusive in an amount equal to the
following five years spectrum utilization fees (as defined in the 3G license)
payable to OFTA under the 3G license after deducting payments already made by
us. As security for the provision of loans and issuance of performance bonds
under the Facility Agreement, HTIC has been granted a security package, the
principal elements of which include:  
    
    a charge over all the assets, revenues and shares of eight principal
wholly-owned subsidiaries of SUNDAY, including Mandarin;
    
    to the extent permitted by OFTA, a charge over the 2G license and 3G
license issued by OFTA to Mandarin and SUNDAY 3G;
    
    assignment of Mandarins rights under the Supply Contract; and
    
    a guarantee by SUNDAY of the performance by Mandarin of its obligations under the Facility Agreement. HTIC also benefits from representations, financial covenants and general
covenants, customary to transactions of this nature. HTIC may require
repayment of the facilities at any time on the occurrence of events of default
which are standard for similar project financing arrangements, and which
include as an event of default a change in executive management at any time
during the term of the facility resulting from two or more of Richard Siemens,
Kuldeep Saran, Bruce Hicks and Edward Cheng ceasing to be directors and
involved in the management other than in certain agreed circumstances. We are
in discussions with these executive directors collectively to put in place
appropriate arrangements to ensure that they continue as directors and are
involved in the management during the term of the facility to prevent the
occurrence of such an event of default. The Facility Agreement is conditional upon, and shall not become effective
until the following conditions have been satisfied:  
    
    the Supply Contract has been duly executed and is effective; and
    
    a resolution of the shareholders of SUNDAY has been duly passed
approving the entering into of the Supply Contract and the Facility
Agreement. An extraordinary general meeting of shareholders was convened on June 24,
2004 during which the Supply Contract and the Facility Agreement were approved,
and the Security Arrangements have been executed in June 2004. Guarantees and Pledges Mandarin has pledged a fixed deposit to UOB to obtain a guarantee of
HK$1.7 million to the Hong Kong Airport Authority in relation to our network
facilities installed at the Chek Lap Kok airport. The guarantee will expire in
March 2007. Future Funding Requirements Our ability to meet our future debt service obligations will in large part
depend on our improving cash from operations and utilizing existing financing
facilities. We cannot give any assurance that we can generate sufficient
operating cash flow, or that we will be able to satisfy the required conditions
in order to obtain funds or comply with the covenants to avoid acceleration of
the amounts outstanding under our existing financing facilities. The actual amount of our financing requirements will depend on our future
performance, market conditions and other factors, many of which are beyond our
control and cannot be predicted with certainty. We may need to raise additional
funds, however, to finance more rapid expansion, unanticipated operating
losses, and new investments for the development of new or enhanced services and
technologies. We would expect to seek such additional funds, if necessary,
through new issuance of shares and debt financing from banks, vendors or
private placements. If we do not have access to adequate capital on terms
favorable to us or at all in a timely manner, our ability to service our debt,
our business, financial condition and prospects could be severely adversely
affected. 31




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Our high debt level could also have important adverse consequences,
including reducing our ability to obtain additional financing for working
capital, capital expenditures, debt service and other purposes, requiring us to
divert a substantial portion of our operating cash flow to debt service,
limiting our flexibility in reacting and taking advantage of developments and
opportunities in the industry and our business, and placing us at a competitive
disadvantage to our competitors that have less debt. Inflation We have not experienced any significant inflationary pressure in Hong Kong
during the three years ended December 31, 2003. We expect that inflation would
not have a material impact on our business, financial condition or results of
operations in 2004. However, if Hong Kong experiences significant inflation in
the future, we may not be able to fully offset the related higher costs through
tariff increases. Our inability or failure to do so could adversely affect our
business, financial condition and results of operations. US GAAP Reconciliation We prepare our consolidated financial statements in accordance with HK
GAAP which differs in certain material respects from US GAAP. Note 27 to our
audited consolidated financial statements provides a description of the
significant differences between HK GAAP and US GAAP. The differences between HK GAAP and US GAAP include significant
differences in the presentation of our results of operations. Under HK GAAP,
consolidated statements of operations are reported by nature whereby network
costs are presented separately under operating expenses and bad debt expenses
are presented under cost of services. Under US GAAP, however, statements of
operations are reported by function and the network costs and salaries and
related costs, excluding depreciation, which are directly related to the
generation of revenue are included in cost of services. Rental, salaries and
related costs and bad debt expenses are presented under selling, general and
administrative expenses. Other differences between HK GAAP and US GAAP include accounting for and
disclosure of deferred taxation and compensation costs in respect of grant of
share options to employees, the accounting treatment of connection fee of
mobile services and the 3G license. A reconciliation of net loss/profit and total shareholders equity as of
and for the years ended December 31, 2001, 2002 and 2003 under HK GAAP to the
comparable amounts determined under US GAAP is also provided in note 27 to our
audited consolidated financial statements. 
 5.C RESEARCH AND DEVELOPMENT We believe that our success depends on our ability to improve applications
in anticipation of emerging technologies. We will introduce new services and
products through:  
    
    internal R&D efforts;
    
    market research; and
    
    incorporation of new technologies and applications from third parties. Since our inception, we have envisaged the convergence of mobile
communications and data technologies and in anticipation of such convergence,
we have, in conjunction with Nortel, improved and installed onto our 2G mobile
network a number of enhanced and location based services and products, such as
Mobile Cupid, Jetso and Mobile Concierge, which were not previously available
elsewhere in Southeast Asia when we launched our services. Our product development, principally relating to improvement of
commercially available service applications, is undertaken primarily by a
dedicated team which worked closely with both devices and software vendors to
develop innovative and user friendly wireless data and applications and
services to our subscribers based on existing and the GPRS technologies to our
subscribers. We will start rolling out the 3G network in 2004 and have established a
close working relationship with Huawei on technology development and production
innovation regarding 3G applications and services. We believe the proximity of
Huaweis base in Shenzhen to Hong Kong gives us a significant advantage over
our competitors in developing tailor-made services and bringing them to market
quickly. Huawei has one of the largest research and development establishments
of any network equipment manufacturer in the world, including 3,500 engineers
working specifically on 3G. It has strengths in areas that will be critical to
our success in 3G applications and services, such as its IP platform and 3G
service creation, as well as the formulation of an end-to-end solution. 32




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5.D TREND INFORMATION The wireless communications industry in Hong Kong is highly volatile and
intensely competitive, and has shifted from being a high-growth mass market to
one characterized by saturation of penetration. We expect that we will continue
to encounter aggressive pricing practices by competitors, fast changing
customer demand patterns and rapid technological developments in the mobile
communications industry. We expect to rollout our 3G network and services from 2004 onwards. So
far, only one of the four 3G licensees in Hong Kong, Hutchison, has launched 3G
services. We expect the other 3G licensees in Hong Kong to launch their 3G
services in second half year of 2004 or early 2005. Previously, the slower than
expected 3G take-up rates in other markets such as Europe had mainly been
attributed to the lack of handsets; however there are now more 3G handsets
available with longer battery life and more features. In order to attract new
3G customers and to migrate existing 2G customers to use 3G services, Hutchison
has provided substantial handset subsidies and offered attractive pricing plans
for 3G that includes large bundles of data services, and these pricing plans
are also comparable with tariff plans for 2G and 2.5G services. Given the importance and size of the mainland Chinese market, we expect
that the future of Hong Kongs mobile communications industry will be closely
linked to that of mainland China. CEPA may provide an early entry to the
Chinese mobile communications market for Hong Kong mobile operators such as
ourselves. We will continue to use our Shenzhen operations center to drive cost
efficiencies and create the foundation to capitalize upon opportunities that
will develop as mainland China telecommunications industry opens. 
 5.E. OFF-BALANCE SHEET ARRANGEMENTS As of December 31, 2003, we did not have any off-balance sheet arrangements or any written options on non-financial assets. 
 5.F CONTRACTUAL OBLIGATIONS The following table sets forth certain information regarding our
contractual obligations to make future payments as of December 31, 2003: Payment Due by Period (HK$ million)Less Than
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    YearsTrade payables
    
    
    71.6
    
    
    
    71.6
    
    
    
    
    
    
    
    
    
    
    
    Other payables and accrued charges
    
    
    152.8
    
    
    
    152.8
    
    
    
    
    
    
    
    
    
    
    
    Short-term debts
    
    
    383.9
    
    
    
    383.9
    
    
    
    
    
    
    
    
    
    
    
    Long-term debts
    
    
    426.5
    
    
    
    
    
    
    
    426.5
    
    
    
    
    
    
    
    Total
    
    
    1,034.8
    
    
    
    608.3
    
    
    
    426.5
    
    
    
    
    
    
    
    
 The following table sets forth certain information regarding our other
commercial commitments as of December 31, 2003: Amount of CommitmentsExpiration per Period (HK$ million)Less Than
    
    
    
    
    
    
    
    
    
    After 5Commercial Commitments
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    YearsOperating lease commitments
    
    
    221.8
    
    
    
    149.0
    
    
    
    71.4
    
    
    
    1.4
    
    
    
    Capital commitments
    
    
    41.0
    
    
    
    41.0
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    262.8
    
    
    
    190.0
    
    
    
    71.4
    
    
    
    1.4
    
    
    
    
 The actual schedule of payments in respect of our capital commitments will
be dependent on the rate of rollout of our 3G network, which will depend on the
demand for such 3G services in the telecommunications market in Hong Kong over
the upcoming months. 
 Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 
 6.A DIRECTORS AND SENIOR MANAGEMENT 33




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Directors Our directors are as follows: Name
    
    Age(1)
    
    Position
    
    Position Held SinceRichard John Siemens
    
    
    59
    
    
    Co-Chairman and Executive Director
    
    November 24, 1999Edward Wai Sun Cheng
    
    
    48
    
    
    Co-Chairman and Executive Director
    
    November 24, 1999William Bruce Hicks
    
    
    42
    
    
    Group Managing Director
    
    January 1, 2002(2)Kuldeep Saran
    
    
    52
    
    
    Executive Director
    
    November 24, 1999Andrew Chun Keung Leung
    
    
    47
    
    
    Executive Director
    
    November 24, 1999John William Crawford
    
    
    61
    
    
    Non-executive Director
    
    November 10, 2003Kenneth Michael Katz
    
    
    35
    
    
    Non-executive Director
    
    January 16, 2004Henry Michael Pearson Miles
    
    
    67
    
    
    Non-executive Director
    
    January 27, 2000Simon Murray
    
    
    64
    
    
    Non-executive Director
    
    January 27, 2000Robert John Richard Owen
    
    
    64
    
    
    Non-executive Director
    
    January 27, 2000Hongqing Zheng
    
    
    56
    
    
    Non-executive Director
    
    November 24, 1999
   (1)
    
    Ages as of April 1, 2004(2)
    
    William Bruce Hicks has been an Executive Director since November 24,
1999 and was appointed as the Group Managing Director on January 1, 2002. Mr. Richard John Siemens,Co-Chairman and Executive Director, has been
with the SUNDAY group since 1995. Mr. Siemens is chairman and a founding member
of Distacom Communications Limited and co-chairman and a founding member of
Mandarin Communications Limited. He is also the chairman of e-Kong Group
Limited. Born and raised in Canada, Mr. Siemens was trained as a Chartered
Accountant and came to Hong Kong in 1979. In 1984, he formed Hutchison
Telephone Company Limited in partnership with Hutchison Whampoa and Motorola.
Mr. Siemens, as group managing director of Hutchison Telecommunications
Limited, was instrumental in the establishment of other well-known companies
including AsiaSat, STAR TV and Metro Radio and Hutchisons move into the
European wireless business with Orange. Mr. Edward Wai Sun Cheng,Co-Chairman and Executive Director, is a
founding member of Mandarin Communications Limited and has been with the SUNDAY
group since 1995. Mr. Cheng is also currently the chief executive of USI
Holdings Limited. USI, a publicly listed company on the Stock Exchange of Hong
Kong, is a member of the Wing Tai Asia group. Mr. Cheng is a member of the Hong
Kong SAR Governments Steering Committee on Innovation and Technology, the
Advisory Committee on Corruption of the Independent Commission Against
Corruption, the Council of City University of Hong Kong, the Executive
Committee of the Hong Kong Housing Society, and the Securities and Futures
Commissions Takeovers and Mergers Panel and the Takeovers Appeal Committee. Mr. William Bruce Hicks,Group Managing Director, has been with SUNDAY
since the Companys inception in 1995 when he led the team which successfully
acquired SUNDAYs PCS licence. He has been a partner and director of Distacom
Communications Limited of Hong Kong since 1994. Prior to joining Distacom, Mr.
Hicks was at Hutchison Telecom, where he was responsible for technical
operations in Hong Kong and actively involved in new business development in
Asia and Europe. Mr. Hicks, a Canadian, began his career with Motorola Inc. in
the United States. He received his B.S.E.E. degree from Michigan Technological
University in 1983 and an M.B.A. from the International Management Institute in
Geneva, Switzerland in 1987. Mr. Kuldeep Saran,Executive Director, has been a director of Mandarin
Communications Limited since 1998 and is an executive director of Distacom
Communications Limited. He is also deputy chairman of e-Kong Group Limited. Mr.
Saran joined Distacom from Deutsche Bank where he was the head of the Asia
Pacific telecoms group. Prior to that Mr. Saran was director of planning at
Hutchison Telecommunications responsible for the development and execution of
new businesses in Europe and Asia. Before moving to Hong Kong in 1992, Mr.
Saran was the country head of Motorola for India. He holds a Bachelors degree
in engineering and an M.B.A. Mr. Andrew Chun Keung Leung,Executive Director, has been a director of
Mandarin Communications Limited since 1997. He graduated from the University of
Hong Kong with an Honours Bachelors degree in Laws and a Post Graduate
Certificate in Laws. Between 1980 and 1987, Mr. Leung practiced corporate
finance law in Hong Kong and Sydney, Australia. Thereafter, until 1990, Mr.
Leung served as a banker in the Asian investment banking divisions of two major
international investment banks. Between 1990 and 1993, Mr. Leung initiated and
structured a number of key infrastructure projects in Thailands communications
and mass transit sectors. From 1993 to 1997, he was the executive director of
World-Wide (Holdings) Limited, a company specializing in direct investment
activities for the Worldwide Investment Group, which was founded by Sir Y.K.
Pao. Mr. Leung is responsible for overseeing USIs communications and
technology investments, including its interests in the SUNDAY group. 34




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Mr. John William Crawford JP,Non-executive Director, joined the Board of
the Company in November 2003. He was a founding partner of Ernst & Young, Hong
Kong and vice chairman of the firm until he retired in 1997. During his 25
years in public accounting, he was also the chairman of the audit division of
Ernst & Young and was active in a number of large private and public company
takeover and/or restructuring exercises. He has continued such
consultancy/advisory work in a private capacity through Crawford Consultants
Limited since his retirement. Mr. Crawford has been active in various
community service areas such as being a founding member of UNICEF Hong Kong
Committee and the Hong Kong Institute of Directors. In 1997, Mr. Crawford was
appointed a Justice of the Peace in Hong Kong. He is a member and was a
governor for many years of the Canadian International School of Hong Kong. Mr.
Crawford is an independent director and is a member of the Companys audit
committee. Mr. Kenneth Michael Katz,Non-executive Director, joined the Board of the
Company in January 2004. Mr. Katz has 12 years experience in project finance,
direct investment and private equity fund management. Since early 2003, Mr.
Katz has formed his own private equity advisory business Westlank Advisors Pte.
Ltd. and is currently managing director of the firm. Prior to that, he was a
director of Emerging Markets Partnership, a private equity fund management
company, responsible for managing an emerging markets Asia investment fund.
Previously, Mr. Katz was the head of Edison Capital in Asia Pacific overseeing
the firms direct investment efforts. Mr. Katz graduated with a Bachelor of
Arts degree in economics from the University of California, Santa Barbara and
also holds an M.B.A. from the University of Michigan. Mr. Henry Michael Pearson Miles OBE,Non-executive Director, has been with
the Company since January 2000. He is currently chairman of Johnson Matthey plc
and Schroders plc, and a non-executive director of BP; all companies registered
in the United Kingdom. Between 1984 and 1988, he was chairman of Swire Pacific
Limited and Cathay Pacific Airways Ltd. He was also a non-executive director of
Hong Kong Bank 1984/88. Between 1976 and 1999, he was a director of John Swire
and Sons (Hong Kong) Limited. Between 1988 and 1999, he was an executive
director of John Swire & Sons Limited, to which he is now an advisor. Mr. Miles
was a vice president of the China-British Trade Group from 1990 to 1999 and is
a committee member of the Hong Kong Association. Mr. Miles is an independent
director and is a member of the Companys audit committee. Mr. Simon Murray CBE,Non-executive Director, has been with the Company
since January 2000. Mr. Murray is a co-founder and shareholder of Distacom
International Limited. Mr. Murray was the executive chairman in Asia Pacific of
Deutsche Bank group until early 1998 when he established his own business. He
is the chairman of GEMS Ltd. (General Enterprise Management Services Limited),
a private equity fund management company sponsored by Simon Murray and
Associates. He is also a director of a number of public companies including
Hutchison Whampoa Limited, Cheung Kong Holdings Limited, Hermes International
and Sino-Forest Corporation. Mr. Murray is a member of the Former Directors
Committee of The Community Chest and is involved in a number of other
charitable organizations, including The China Coast Community Association. In
1994, Mr. Murray, who is British, was awarded the CBE by HM The Queen of
England for his contribution to the Hong Kong community. Mr. Murray is a member
of the Companys audit committee. Mr. Robert John Richard Owen,Non-executive Director, has been with the
Company since January 2000. From 1979 to 1987, Mr. Owen held various positions
with Lloyds Bank, including chairman of Lloyds Merchant Bank and director of
Investment Banking of the Lloyds Bank group. In 1988, Mr. Owen was recruited by
the Hong Kong Government as advisor on securities markets to lead the
implementation of extensive reforms to the regulation and operation of Hong
Kongs securities and futures markets. From 1989 to 1992, he served as the
first chairman of the Securities and Futures Commission. Since 1992, Mr. Owen
has held a number of concurrent positions which include chairman of TechPacific
Capital Limited (from 1999), chairman of Crosby Limited (from 2001), director
of Nomura International (Hong Kong) Limited (from 1994), member of the
Regulatory Council of the Dubai International Financial Centre (since 2002),
council member, Lloyds of London (1993-1996), chairman of the International
Securities Consultancy Ltd. (from 2000) and director of various other companies
and investment funds. Mr. Owen is an independent director and is the chairman
of the Companys audit committee. Mr. Hongqing Zheng,Non-executive Director, has been with the SUNDAY group
since 1996 when he was appointed a director of Mandarin Communications Limited.
He graduated from the planning and statistics department of the Peoples
University of China and holds a Masters degree in economics. Mr. Zheng has
over 24 years experience in economic development work and is a qualified senior
economist. Prior to joining the SUNDAY group, Mr. Zheng was a committee member
of the State Commission for Restructuring Economic System and director of the
Comprehensive Planning Department and general manager of the China Container
Corporation. Mr. Zheng is also a director and deputy general manager of China
Travel Service (Holdings) Hong Kong Limited and holds chairmanships and
directorships in various subsidiaries of China Travel Service (Holdings) Hong
Kong Limited. The following persons resigned/retired as directors during the year ended
December 31, 2003: Name
    
    Position
    
    Resignation/Retirement DateCraig Edward Ehrlich
    
    Non-executive Director
    
    May 22, 2003Peter Kin Ngok Lam
    
    Non-executive Director
    
    May 22, 2003Tak Sing Yip
    
    Non-executive Director
    
    March 28, 2003
 35




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Senior Management Our senior management is as follows: Name
    
    Position
    
    With SUNDAY SinceJanet Ching Man Fung
    
    Group Director  Finance and Company Secretary
    
    1997Agnes Pik Yee Tang Mak.
    
    Group Director  Information Technology
    
    2003Frankie Chun Keung Wong
    
    Group Director  Network Operations
    
    1996Henry Kam Heng Wong
    
    Group Director  New Technologies
    
    1996Sam Chin To Chan
    
    Director  Sales
    
    2003Wai Lok Cheung
    
    Director  Legal & Regulatory
    
    2000Irene Kar Ling Ho
    
    Director  Marketing & Communications
    
    2003Frienty Wai Fong Ko
    
    Director  Customer Care
    
    2003Pauline Poh Gaik Ooi
    
    Director  Internal Audit
    
    2001
 Ms. Janet Ching Man Fung,Group Director  Finance and Company Secretary,
has extensive experience in public accounting, financial consultancy and
management in Hong Kong and the PRC. Ms. Fung was the finance director of the
Far East operations of Liz Claiborne group before joining the SUNDAY group in
1997. She holds a first class honor degree in management studies from the
University of Hong Kong and is a fellow member of the Association of Chartered
Certified Accountants (UK), the Hong Kong Society of Accountants, and a member
of CPA Australia. Ms. Agnes Pik Yee Tang Mak JP,Group Director  Information Technology,
joined the SUNDAY group in February 2003. Ms. Mak has over 20 years of
experience in information technology. Prior to joining the SUNDAY group, she
was head of information technology of Mandatory Provident Fund Schemes
Authority, head of IT of Asia Pacific North of British American Tobacco China
and the director of MIS of The Gap (Far East) Ltd. Ms. Mak is a fellow and past
president of Hong Kong Computer Society. She is a council member of Hong Kong
Productivity Council, member of the Finance Committee of Hong Kong Housing
Authority, and the IT Projects Vetting Committee and General Support Program
Vetting Committee of the Innovation and Technology Fund. Mr. Frankie Chun Keung Wong,Group Director  Network Operations, joined
the SUNDAY group in 1996. He has over 15 years experience in planning,
development, engineering and operations in mobile and fixed networks. Prior to
joining the SUNDAY group, Mr. Wong worked for Hutchison Telecom (Hong Kong) and
was responsible for building the GSM and CDMA networks. Earlier, he was
involved in a number of projects with Cable & Wireless HKT in switching,
Intelligent Network, transmission and network management areas. He holds a
first class honors degree in electrical & electronic engineering from the City
University (London), and he is a Chartered Engineer, member of Institute of
Electrical Engineers (UK) and The Hong Kong Institution of Engineers. Dr. Henry Kam Heng Wong,Group Director  New Technologies, joined the
SUNDAY group in 1996 following seven years at Hutchison Telecom (Hong Kong)
Ltd, where he was senior manager in the Radio Systems Engineering Department of
Hutchison Telephone Company Ltd. He was involved in the building of network,
the first CDMA commercial system in the world. His academic qualifications
include a B.Sc. (Hons) in computer engineering (University of Manchester), a
Ph.D in mobile radio telecommunications (University of Southampton) and an
M.B.A. (University of Hull). Mr. Sam Chin To Chan,Director  Sales, has over 15 years experience in
sales, marketing, business planning and development. Prior to joining SUNDAY in
2003, he worked for American Express International Inc. as vice president, area
market head for East Asia and head of merchant acquisition for Japan, Asia
Pacific and ASEAN. Prior to that, he held a number of key positions in many
sizeable organizations, including sales director at Johnson & Johnson Hong Kong
Limited, division manager at Swire Resources Limited and marketing & sales
manager at Philips Hong Kong Limited. Mr. Chan holds a bachelor degree in
engineering from the University of Melbourne and he is a member of the Hong
Kong Institute of Marketing. Mr. Wai Lok Cheung,Director  Legal & Regulatory, joined the SUNDAY group
in 2000. Prior to joining SUNDAY, he was the general manager, legal,
administration and procurement at Peoples Telephone Company. His academic
qualifications include an LL.B. and an LL.M. from the University of
Wolverhampton, UK, an M.B.A. degree from Leicester University and an Honors
Diploma in Company Secretaryship and Administration from Lingnan University.
Mr. Cheung is an associate of The Institute of Chartered Secretaries and
Administrators UK and the Hong Kong Institute of Company Secretaries. Ms. Irene Kar Ling Ho,Director  Marketing and Communications, joined the
SUNDAY group in 2003, and brought with her over 12 years experience in areas
of public relations and marketing program design. Prior to joining the SUNDAY
group, she worked for PCCW as assistant vice president, corporate
communications, where she took the role of identifying promotional
opportunities for the PCCW group and overseeing the implementation of public
relations programs for a wide spectrum of telecom products. Ms. Ho is also
experienced in event marketing both in the telecom and the quasi-government
sectors including Hong Kong Trade Development Council and Hong Kong Tourist
Association (now renamed as Hong Kong Tourism Board), where she managed a range
of large-scale promotional events and trade fairs, both in Hong Kong and
overseas. 36




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Ms. Frienty Wai Fong Ko,Director  Customer Care, joined the SUNDAY group
in 2003. She is responsible for leading all functions of customer services,
including customer retention, credit control, and SUNDAYs loyalty programmes.
Ms. Ko has over 17 years experience in sales, marketing and customer service in
the banking services and telecoms industries. Prior to joining SUNDAY, she
worked for PCCW as general manager, business development  banking where she
managed new business opportunities in mainland China. She has also served as
the head of direct banking at Citibank (HK) and was a branch manager for
Standard Chartered Bank (HK). Ms. Ko graduated from Simmons College in Boston
with a Bachelor degree in business administration. Ms. Pauline Poh Gaik Ooi,Director  Internal Audit, joined the SUNDAY
group in 2001. She has over 15 years of experience in audit and business
development in the Asia/Pacific region. Prior to joining SUNDAY, she was a
manager of the internal audit team at PCCW (previously Hong Kong Telecom)
responsible for a wide variety of audit related assignments, fraud & ad hoc
investigations and special review projects. Ms. Ooi started her early career in
the major accounting firms in the Asia/Pacific region, Deloittes Touche
Tohmatsu and PricewaterhouseCoopers. She holds a Bachelor degree, majoring in
Accounting & Information System, from the University of New South Wales in
Australia and is a member of CPA Australia and the Hong Kong Society of
Accountants. 
 6.B COMPENSATION Remuneration of the Group Managing Director and the Executive Directors is
prudently designed to attract, motivate and retain them to formulate strategies
and to oversee operational matters and to reward them for enhancing value to
the shareholders. The Group Managing Director is also entitled to a
discretionary bonus which is assessed based on both individual and group
performance. For the years ended December 31, 2001, 2002 and 2003, the aggregate
amounts of compensation incurred for all of our senior officers and directors
were approximately HK$39.0 million, HK$44.7 million and HK$19.4 million,
respectively. The 2002 compensation amount included termination benefits
(mainly severance pay and payments in lieu of notice) of HK$6.0 million, which
were for certain senior officers whose employment were terminated during the
restructuring in December 2002. For the years ended December 31, 2001, 2002 and 2003, the aggregate amount
of pension retirement or similar benefits for our directors and senior officers
incurred was approximately HK$0.7 million, HK$0.4 million and HK$0.8 million,
respectively. None of our directors have been granted retirement or severance
benefits. We paid each of our independent Non-executive Directors an annual director
fee of HK$200,000, HK$200,000 and HK$200,000 for the years ended December 31,
2001, 2002 and 2003, respectively, as compensation for acting in such capacity.
We will review the amount of compensation annually. 
 6.C BOARD PRACTICES As of May 31, 2004, our board consisted of eleven members. There are six
Non-executive Directors, four of whom are independent Non-executive Directors.
Pursuant to our Articles of Association, at each general meeting one-third of
our directors shall retire from office by rotation. If the number of directors
on the board is not a multiple of three, the number of directors to retire
shall be decreased to the number nearest to but not greater than one-third. The
chairman of our board and/or our managing director shall not, while holding
such office, be subject to retirement by rotation or be taken into account in
determining the number of directors to retire in each year. A retiring director
shall be eligible for re-election. None of the directors has entered into or is
proposing to enter into a service contract with the Company or its
subsidiaries, which is not determinable by the employer within one year without
payment of compensation (other than statutory compensation). There are no
provisions relating to retirement of directors upon reaching any age limit. Our board has determined that our independent Non-executive Directors do
not have a relationship with the Company that would impair their independence
and that they satisfy the director independence requirements under the Nasdaq
corporate governance rules. The independent Non-executive Directors and their
immediate family receive no payments from the Company or its subsidiaries
(except for director fees). No family member of any independent Non-executive
Directors is employed as an executive officer of the Company or its
subsidiaries, or has been so in the past three years. The independent
Non-executive Directors are subject to retirement by rotation and re-election
at the annual general meeting in accordance with our Articles of Association. Our board is scheduled to meet at least three times a year to determine
overall strategic direction and objectives and approve interim and annual
results, budgets and other significant matters. All directors are able to take
independent professional advice at the Companys expense in furtherance of
their duties if necessary. The roles of the Co-Chairmen and the Group Managing
Director are distinct and segregated with a clear division of responsibility.
The role of Non-executive Directors is to enhance independence and objectivity
of the Boards deliberations and decisions. During the year ended December 31,
2003, three board meetings were held with an average attendance rate of 80%. 37




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The board appointed an executive management committee which consists of
our Executive Directors. The principal functions of this committee include
formulating strategies and overseeing our operational matters under the direct
authority of the board. The committee meets regularly each month and on an ad
hoc basis as required with senior management, and engages in frequent informal
discussions. Apart from the regular meetings held monthly, the committee held
five formal meetings on an ad hoc basis in 2003. Our board also appointed an audit committee, with written terms of
reference that set out the authorities and duties of the committee, which
consists of the four independent Non-executive Directors. Its principal duties
include selecting and engaging on our behalf independent public accountants to
audit our financial statements, reviewing and approving the nature and scope of
both the statutory and internal audits, considering and approving our interim
and annual financial statements, and reviewing the adequacy and effectiveness
of our accounting and financial controls. The audit committee re-assesses the
Audit Committee Charter on an annual basis. The audit committee meets at lease
twice a year and also meets regularly with the external auditors and our
internal audit personnel and follows up with management regularly regarding
management actions arising from the audits. The members of the audit committee are Mr. Robert Owen, Mr. John William
Crawford, Mr. Michael Miles and Mr. Simon Murray. During the year ended
December 31, 2003, four committee meetings were held and the attendance by the
members is set out as follows: Audit Committee Members
    
    Meetings Attended/HeldJohn William Crawford
    
    
    1/1Henry Michael Pearson Miles
    
    
    3/4Simon Murray
    
    
    1/4Robert John Richard Owen
    
    
    3/4
 The board has also appointed a remuneration committee which consists of
three members, namely Mr. Richard Siemens, Mr. Edward Cheng and Mr. Michael
Miles, to review matters relating to compensation of the directors and officers
and such other matters relating to remuneration as directed by the board from
time to time. None of the members of the remuneration committee has any
conflict of interest arising from the day-to-day involvement in the running of
the business. No director plays a part in any discussion regarding his own
remuneration. In 2000, the board appointed a share option scheme committee which
currently comprises Mr. Richard Siemens and Mr. Edward Cheng to deal with the
granting of share options under the share option scheme approved by the
shareholders. Two independent Non-executive Directors, Mr. Michael Miles and
Mr. Robert Owen, had been delegated with full powers of the board to deal with
granting of share options to our two Co-Chairmen before the amendment of
Chapter 17 of the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited, or the Listing Rules, in September 2001. In
accordance with the amended Chapter 17 of the Listing Rules, the granting of
share options to our directors, the chief executive, and substantial
shareholders requires approval by the independent Non-executive Directors. INTERNAL AUDIT An internal audit function was established in May 2001 with an Internal
Audit Charter approved and adopted by the audit committee. The internal audit
function is an independent unit which provides to the board of directors an
independent appraisal of our system of internal controls by means of conducting
reviews to evaluate the adequacy and effectiveness of the controls established
to safeguard shareholders investments and our assets. The head of the internal
audit function has a direct reporting line to the Audit Committee. 
 6.D EMPLOYEES We had a total of 726 employees as of December 31, 2003, of which 502
employees were in Hong Kong and 224 employees were in Shenzhen, China. We offer
comprehensive remuneration and benefits packages to all employees. Remuneration
of employees is maintained at competitive levels, and promotion and salary
increments are assessed based on individual and Group performance. Other staff
benefits include Mandatory Provident Fund schemes, subsidized medical care and
subsidies for external educational and training programs. We adopted an employee share option scheme on March 1, 2000, or the Old
Scheme, and have since issued share options to most of our permanent employees.
On May 22, 2002, our shareholders approved the adoption of a new share option
scheme, or the New Scheme, and the termination of the operation of the Old
Scheme. Upon termination of the Old Scheme, no further options will be offered
under the Old Scheme but the provisions of the Old Scheme will remain in full
force and effect in respect of the existing options granted. 38




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6.E SHARE OWNERSHIP The following table shows the number and class of voting securities of the
Company owned by the directors and senior management who had interests as of
May 31, 2004. Percentage of Total
    
    SpecialName
    
    Position
    
    Shares Outstanding
    
    Voting RightsRichard John Siemens
    
    Co-Chairman and Executive Director
    
    Less than 1%*
    
    NoneEdward Wai Sun Cheng
    
    Co-Chairman and Executive Director
    
    Less than 1%*
    
    NoneWilliam Bruce Hicks
    
    Group Managing Director
    
    Less than 1%*
    
    NoneKuldeep Saran
    
    Executive Director
    
    Less than 1%*
    
    NoneKenneth Michael Katz
    
    Non-executive Director
    
    Less than 1%*
    
    NoneSimon Murray
    
    Non-executive Director
    
    Less than 1%*
    
    NoneHongqing Zheng
    
    Non-executive Director
    
    Less than 1%**
    
    NoneJanet Ching Man Fung
    
    Group Director  Finance
    
    Less than 1%
    
    NoneFrankie Chun Keung Wong
    
    Group Director  Network Operations
    
    Less than 1%
    
    NoneHenry Kam Heng Wong
    
    Group Director  New Technologies
    
    Less than 1%
    
    None
   *
    
    Each of Mr. Richard John Siemens, Mr. William Bruce Hicks, Mr. Kuldeep
Saran and Mr. Simon Murray may be deemed to beneficially own all the
shares owned by Distacom due to their status as directors, senior officers
or controlling persons of Distacom. Mr. Edward Wai Sun Cheng may be deemed
to beneficially own all the shares owned by USI due to his status as
director, senior officer or controlling person of USI. See Item 7. Major
Shareholders and Related Party Transactions  Major Shareholders.**
    
    Mr. Hongqing Zheng may be deemed to beneficially own all the shares owned
by China Travel Service (Holdings) Hong Kong Limited, one of the
shareholders prior to our global offering, due to his status as director,
senior officer or controlling person of China Travel Service (Holdings)
Hong Kong Limited. Statements as to securities beneficially owned by directors and senior
management, or as to securities over which they exercise control or direction,
are based upon information obtained from such directors and senior management
and from records available to us. Share Option Scheme Share Option Scheme Adopted on March 1, 2000 We adopted an employee share option scheme on March 1, 2000. Under the
terms of the scheme, our board of directors may, in its discretion from time to
time, and subject to such conditions as it may determine, within 10 years
beginning on the adoption date, offer to grant qualifying employees and
directors of our company or our subsidiaries options to subscribe for our
ordinary shares. Upon accepting an option, a grantee must pay HK$1.00 to us as
consideration for the grant. The maximum number of ordinary shares over which options may be granted
under this scheme may not, when aggregated with any shares subject to any other
executive and employee share option scheme involving the issue or grant of
options over our shares and other securities, exceed 10% of our issued share
capital from time to time (excluding for this purpose from the issued share
capital any shares which have been issued on the exercise of any option granted
under this scheme). The number of shares over which an option may be granted to
any one person at any time is limited such that no person may be granted an
option, which, if exercised in full, would result in such person becoming
entitled to subscribe for shares which, when aggregated with the total number
of shares subscribed under options previously granted to that employee, would
exceed 25% of the aggregate number of shares over which all options may be
granted under the scheme. Our board of directors may determine, in its discretion, the consideration
for a share payable by a participant upon the exercise of any option granted
under the share option scheme, save such price will not be less than the higher
of: (1) the nominal value of a share; or (2) 80% of the average of the closing
prices of our shares on the Stock Exchange of Hong Kong on the five trading
days immediately preceding the date of grant of the option on which there were
dealings in our shares on the Stock Exchange of Hong Kong. Our board of directors has absolute discretion to determine the exercise
period of any option, except that no option may be exercised more than 10 years
after its grant. Where there is any change in our capital structure, such corresponding
alterations shall be made in the number of shares subject to any option, the
subscription price, the method of exercise of any option and/or the maximum
number of shares available for subscription under the scheme as independent
auditors shall certify in their opinion to be fair and reasonable. No change in
our capital structure is permitted where it will cause shares to be issued
below their nominal value. 39




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Our board of directors may in certain circumstances alter our share option
scheme by resolution, except that any material alterations to the terms are
subject to prior approval by the Stock Exchange of Hong Kong. No alteration is
permitted to certain provisions to the extent such alteration adversely affects
any options granted or agreed to be granted before the date of such alteration,
save with the consent of the holders of not less than two-thirds of the shares
to be issued on exercise of the relevant options. On March 23, 2000, we granted 39,586,616 share options to all employees
hired on or before March 22, 2000 for a total consideration of HK$630. The
share options are exercisable at HK$3.05 per share. On May 31, 2000, we granted
146,483,120 share options to all employees and Executive Directors for a total
consideration of HK$682, exercisable at HK$1.01 per share, and 3,108,961 share
options to employees hired after March 22, 2000 for a total consideration of
HK$93, exercisable at HK$3.05 per share. On January 19, 2001, we granted
4,213,147 share options to employees hired after May 30, 2000 for a total
consideration of HK$178, exercisable at HK$1.01 per share. Of the options
granted, generally, 40% become exercisable after one year from the grant date
and 30% per annum during the following two years. During the year ended December 31, 2002, no options were exercised and
options over 35.4 million shares were forfeited upon termination of employment
of certain employees. No compensation cost to employees is required to be
recognized in 2002 in respect of the grant of the share options under HK GAAP.
Under US GAAP, there was a write-back of compensation cost of HK$111,000. The
US GAAP accounting treatment and the basis of amortization are set out in note
27(a)(iii) to our audited consolidated financial statements. In March 2003, options over 75 million shares of the five Executive
Directors were cancelled at a total consideration of HK$5. As of May 31, 2004,
no options were held by our directors. The table below sets out the share
options granted to senior management to purchase our ordinary shares, which are
outstanding as of May 31, 2004. Securities
    
    Number of SecuritiesCalled for
    
    Underlying Options
    
    Exercise Price
    
    Expiration DateSenior officers
    
    Ordinary Shares
    
    
    7,472,998
    
    
    $
    3.05
    
    
    March 23, 2010Ordinary Shares
    
    
    
    
    
    $
    3.05
    
    
    May 31, 2010Ordinary Shares
    
    
    7,472,998
    
    
    $
    1.01
    
    
    May 31, 2010Ordinary Shares
    
    
    362,919
    
    
    $
    1.01
    
    
    January 19, 2011
 Share Option Scheme Adopted on May 22, 2002 Chapter 17 of the Listing Rules, which governs the operation of share
option schemes of companies listed in Hong Kong, was amended in September 2001.
In response to such changes, on May 22, 2002, our shareholders at an
extraordinary general meeting approved the adoption of the New Scheme which
complies with the amended Chapter 17 and termination of the operation of the
share option scheme adopted on March 1, 2000, or the Old Scheme. Upon the
termination of the Old Scheme, no further options will be offered under the Old
Scheme but the provisions of the Old Scheme will remain in full force and
effect in respect of existing options granted. Under the New Scheme, our board of directors may, at its discretion,
within ten years commencing on the date of adoption of the New Scheme, grant
options to the eligible participants that include (i) any director, employee,
consultant, customer, supplier, agent, partner or adviser of or contractor to
the SUNDAY group or a company in which the SUNDAY group holds an interest or a
subsidiary of such company, or an affiliate; or (ii) the trustee of any trust
the beneficiary of which or any discretionary trust the discretionary objects
of which include any director, employee, consultant, customer, supplier, agent,
partner or adviser of or contractor to the SUNDAY group or an Affiliate; or
(iii) a company beneficially owned by any director, employee, consultant,
customer, supplier, agent, partner, adviser of or contractor to the SUNDAY
group or an affiliate. Each grant of options to a director, chief executive or
substantial shareholder or any of their respective associates must be approved
in accordance with the requirements of the Listing Rules. Upon accepting an
option, a grantee must pay HK$1.00 to us as consideration for the grant. The maximum number of ordinary shares which may be issued upon exercise of
all outstanding options granted and yet to be exercised under the New Scheme
and any other schemes must not, in aggregate, exceed 30% of our ordinary shares
in issue from time to time. No options may be granted under any share option
scheme (including the New Scheme) if this will result in the said 30% limit
being exceeded. The total number of ordinary shares available for issue pursuant to
options which may be granted under the New Scheme and any other share option
schemes must not, in aggregate, exceed 10% of our issued share capital as at
the date of approval of the New Scheme by our shareholders, or the Scheme
Mandate Limit, unless shareholders approval is obtained to refresh the Scheme
Mandate Limit, provided that the Scheme Mandate Limit so refreshed must not
exceed 10% of our issued share capital on the date of the shareholders
approval. Upon any such refreshment, all options granted under the New Scheme
and any other share option schemes (including those outstanding, cancelled, or
lapsed in accordance with the New Scheme or any other share option scheme and
exercised options) prior to the approval of such refreshment will not be
counted for the purpose of calculating whether the refreshed Scheme Mandate
Limit has been exceeded. Our board may also seek separate shareholders
approval in general meeting to grant options beyond the Scheme Mandate Limit
(whether or not refreshed) provided that the options in excess of the Scheme
Mandate Limit are granted only to the eligible participants specified by us
before such approval is sought. 40




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No option may be granted to any eligible participant which, if exercised
in full, would result in the total number of ordinary shares issued and to be
issued upon exercise of the share options already granted or to be granted to
such eligible participant under the New Scheme (including exercised, cancelled
and outstanding share options) in the 12-month period up to and including the
new option grant date to exceed one per cent. of our issued share capital as of
the new option grant date. Any grant of further share options above this limit
shall be subject to certain requirements provided under the Listing Rules. The exercise price for any ordinary share under the New Scheme will be
determined by our board of directors and notified to each grantee and will be
not less than the highest of (i) the closing price of our ordinary share as
stated on the Stock Exchange of Hong Kongs daily quotations sheet on the date
of grant of the relevant option, which must be a business day, (ii) an amount
equivalent to the average closing price of a share for the five business days
immediately preceding the option grant date and (iii) the nominal value of a
share. As of May 31, 2004, no options had been granted under the New Scheme. 
 Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 
 7.A MAJOR SHAREHOLDERS The following table contains information concerning the ownership of our
ordinary shares by each person whom we know beneficially owns 5% or more of our
ordinary shares as of May 31, 2004. Percentage of OrdinaryNumber of Ordinary Shares
    
    SharesName of Beneficial Owner
    
    Beneficially Owned
    
    Beneficially OwnedDistacom Communications Limited(1)
    
    
    1,380,000,000
    
    
    
    46.2
    %USI Holdings Limited(2)
    
    
    410,134,000
    
    
    
    13.7
    %Huawei Technologies Co., Ltd.(3)
    
    
    239,784,000
    
    
    
    8.0
    %
   (1)
    
    Held through its wholly-owned subsidiary, Distacom Hong Kong Limited.
Each of Mr. Richard John Siemens, Mr. William Bruce Hicks, Mr. Kuldeep
Saran, Mr. Kenneth Michael Katz and Mr. Simon Murray may be deemed to
beneficially own all the shares owned by Distacom due to their status as
directors, senior officers or controlling persons of Distacom.(2)
    
    Held through its wholly-owned subsidiary, Townhill Enterprises Limited.
Mr. Edward Wai Sun Cheng may be deemed to beneficially own all the shares
owned by USI due to his status as director, senior officer or controlling
person of USI.(3)
    
    Held through its subsidiary, Huawei Tech. Investment Co., Limited. As of May 31, 2004, there were approximately 399,685 ADSs (representing
39,968,500 ordinary shares) in issue, which were held by approximately 1,000 beneficial
holders in the U.S. Our five shareholders prior to the global offering together owned
1,254,000,000 non-voting deferred shares, par value HK$1.00 per share, of
Mandarin, which is our principal operating subsidiary. If Mandarin is wound up,
after distribution of the first HK$100,000 trillion in value of the return on
Mandarins assets to the holders of ordinary shares of Mandarin, the holders of
the non-voting deferred shares of Mandarins assets to the holders of ordinary
shares of Mandarin, the holders of the non-voting deferred shares of Mandarin
are entitled to share in 1% of the balance of the remaining such assets.
Non-voting deferred shares of Mandarin are not entitled to share in any other
distributions or returns of assets or capital, or to participate in any share
of income or assets. As of March 2004, Mandarins authorized share capital
consisted of 2,000,000,000 shares of par value HK$1.00 per share, divided into
1,254,000,000 non-voting deferred shares and 746,000,000 ordinary shares. All
issued ordinary shares of Mandarin are held by SUNDAY Holdings (Hong Kong),
which is our wholly-owned subsidiary incorporated in the British Virgin
Islands, or its nominee. Distacom is a private holding company with interests in multiple wireless
investments. The Distacom group currently has holdings in Hong Kong, India and
Madagascar. In addition to its shareholding in our company, the Distacom group
is also the major shareholder (holding a 42% interest) and operating partner of
Spice Communications Limited, a GSM 900 operator in the Indian States of
Karnataka and Punjab. Distacom also holds 20% interest in Hutchison Max Telecom
Limited, a GSM operator in Bombay, India. Huawei started acquiring our shares in the open market from January 2004.
By February 5, 2004, Huawei had acquired a total of 163,848,000 shares, or
approximately 5.5% of our total shares in issue. As of March 18, 2004, Huaweis
interest in SUNDAY increased to 187,496,000 shares, or approximately 6.3% of
total shares in issue. Huaweis interest in SUNDAY further increased to
212,488,000 shares, or approximately 7.1%, on May 11, 2004. As of May 24, 2004,
Huaweis interest in SUNDAY was 239,784,000 shares, or approximately 8.0% of
our total shares in issue. 41




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For a description of these agreements and arrangements between our major
shareholders and us, see Item 7. Related Party Transactions  Transactions
with Major Shareholders and Their Affiliates. 
 7.B RELATED PARTY TRANSACTIONS We have entered into a number of transactions with our major shareholders,
beneficial shareholders, and their respective affiliates. We believe that such
transactions have generally been as favorable to us as similar transactions
with third parties would have been. Set forth below is a summary of such
transactions. Transactions with Major Shareholders and Their Affiliates Agreements with Huawei and its Affiliates The following agreements were entered into with HTIC pursuant to the
Supply Heads of Agreement and Facility Heads of Agreement signed in December
2003, which set out the principal terms for the supply of equipment and
services and the provision of financing by HTIC to assist with the rollout by
Mandarin of the 3G mobile communications network. These agreements have
superseded the Supply Heads of Agreement and Facility Heads of Agreement. Supply Contract On May 13, 2004, Mandarin and HTIC entered into the Supply Contract for
the supply and installation of a mobile communications network and associated
services on a turnkey basis. HTIC, as the contractor, is obligated to design,
manufacture, install the 3G network, and will be responsible for the
integration and ensuring the full operability between the existing network and
the 3G network. HTIC is further obligated to provide maintenance services for
specified warranty periods, and ensuring that the 3G network and associated
systems will perform to certain agreed minimum performance criteria. The
contract price for the Supply Contract is HK$859 million. Facility Agreement On May 13, 2004, HTIC, Mandarin and SUNDAY Communications Limited entered
into the Facility Agreement for the provision of long-term financing in
relation to the 3G mobile communications network. The Facility Agreement
comprises a HK$859 million equipment supply facility, a HK$500 million general
facility and a 3G performance bond facility. Subcontract Agreement On May 13, 2004, Mandarin and HTIC entered into a Subcontract Agreement,
pursuant to which Mandarin, as a subcontractor to HTIC under the Supply
Contract, agrees to perform certain civil works and equipment installation on
designated cell sites in respect of the installation of certain equipment for
the 3G mobile communications network. Shareholder Non-competition Agreement In 2000, we entered into a non-competition agreement with Distacom
pursuant to which Distacom agreed that neither Distacom nor its subsidiaries
will compete with our businesses in Hong Kong in mobile or fixed line
telecommunications or in any internet-related businesses. The agreement allows
Distacom, among other things, to acquire or hold up to 15% of the securities of
a competing company that is listed on a recognized exchange. The parties are
entitled to amend any material provision of the agreement only with a
resolution of our shareholders other than Distacom and certain related parties. The agreement will terminate on the first date on which the Distacom group
is no longer our substantial shareholder (as defined in accordance with the
Listing Rules of Hong Kong). Transactions with Related Companies We lease various premises for our warehouses, switching centers and repair
center and have obtained property license rights for certain cell sites from
affiliates of our shareholders and companies controlled by the father of Peter
Kin Ngok Lam who was one of our directors up to May 22, 2003. For the years
ended December 31, 2001, 2002 and 2003, we made lease payments to such
affiliates amounting to HK$4.9 million, HK$4.3 million and HK$1.3 million,
respectively. During the period from January 1, 2004 to May 31, 2004, we made
lease payments to such affiliates of our shareholders amounting to approximately
HK$52,500. We entered into certain agreements based on normal commercial terms with
Lifetree Convergence Limited, or Lifetree, during the years ended December 31,
2001 and 2002. Lifetree provided various software development and consulting
services to us, for which we paid approximately HK$0.8 million and HK$1.6
million to Lifetree in 2001 and 2002, respectively. Messrs. Richard John
Siemens, Edward Wai Sun Cheng, William Bruce Hicks and Kuldeep Saran are
directors of both SUNDAY and Lifetree. 42




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We outsourced our SUNDAY 1622 retail international calling services to a
wholly-owned subsidiary of e-Kong Group Limited, a related party, for a
referral revenue in 2000. The arrangement was terminated effective September
2001 pursuant to a revised agreement entered on the same date. The revenues
from retail international calling services for the year ended December 31, 2001
were approximately HK$6.5 million. Mr. Richard John Siemens, Mr. William Bruce
Hicks and Mr. Kuldeep Saran are directors of both SUNDAY and e-Kong. 
 7.C INTERESTS OF EXPERTS AND COUNSEL Not applicable 
 Item 8. FINANCIAL INFORMATION 
 8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See Item 18. Financial Statements. Legal Proceedings We are not a party to, nor are we aware of, any threatened or pending
litigation, legal or arbitration proceedings which we believe would,
individually or taken as a whole, have a material adverse effect on our
business, financial condition or results of operation. 
 8.B SIGNIFICANT CHANGES In January 2004, we repaid the outstanding loan principal of the UOB
facility and the Nortel facility in full through our operating cash flow and
the New Loan Facility extended by HTIC. See Item 5. Operating and Financial
Review and Prospects  Liquidity and Capital Resources  Certain Indebtedness -
Loan Facilities for details. In May 2004, we entered into the Supply Contract and the Facility
Agreement with HTIC in respect of the supply, on a turnkey basis, of our 3G
network and the provision of the required long-term financing. See Item 10.
Additional Information  Material Contracts for details. Pursuant to the
Supply Contract and Facility Agreement, we commenced the rollout and
establishment of our 3G network in Hong Kong. 
 Item 9. THE OFFER AND LISTING MARKETS Market Price Information  Ordinary Shares Our ordinary shares have been listed and traded on the main board of the
Stock Exchange of Hong Kong under the stock code 866 since March 16, 2000.
The following table shows, for the period indicated, the high and low closing
prices for the ordinary shares as quoted on the main board of the Stock
Exchange of Hong Kong. High
    
    Low(HK$)Year 2001
    
    
    0.700
    
    
    
    0.275Year 2002
    
    
    0.330
    
    
    
    0.084First quarter.
    
    
    0.330
    
    
    
    0.270Second quarter
    
    
    0.265
    
    
    
    0.190Third quarter.
    
    
    0.184
    
    
    
    0.092Fourth quarter
    
    
    0.140
    
    
    
    0.084Year 2003
    
    
    0.405
    
    
    
    0.122First quarter.
    
    
    0.196
    
    
    
    0.131Second quarter
    
    
    0.180
    
    
    
    0.122Third quarter.
    
    
    0.405
    
    
    
    0.163Fourth quarter
    
    
    0.380
    
    
    
    0.295December
    
    
    0.320
    
    
    
    0.295Months 2004January
    
    
    0.600
    
    
    
    0.320February
    
    
    0.740
    
    
    
    0.550March
    
    
    0.720
    
    
    
    0.560April
    
    
    0.560
    
    
    
    0.380May
    
    
    0.550
    
    
    
    0.370
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Market Price Information  American Depositary Shares (ADSs) Our ADSs have been listed and traded on The Nasdaq National Market under
the symbol SDAY since March 15, 2000. The Bank of New York acts as the
depositary of our ADSs. Prior to July 25, 2002, each ADS represents ownership
interests in 30 ordinary shares (or the right to receive 30 ordinary shares).
On July 25, 2002, our ADS to share ratio was changed from 1:30 to 1:100. The following table shows, for the period indicated, the high and low
closing prices for the ADSs. High
    
    Low(US$)Year 2001(1)
    
    
    8.9583
    
    
    
    3.3333Year 2002(1)
    
    
    4.2000
    
    
    
    1.0000First quarter(1).
    
    
    4.2000
    
    
    
    3.4333Second quarter(1)
    
    
    3.7667
    
    
    
    2.2667Third quarter(1).
    
    
    2.1667
    
    
    
    1.0000Fourth quarter
    
    
    1.4800
    
    
    
    1.0000Year 2003
    
    
    4.9000
    
    
    
    1.2500First quarter
    
    
    2.6400
    
    
    
    1.2500Second quarter
    
    
    2.6700
    
    
    
    1.4100Third quarter
    
    
    4.8000
    
    
    
    1.9200Fourth quarter
    
    
    4.9000
    
    
    
    3.5800December
    
    
    4.1000
    
    
    
    3.5800Months 2004January
    
    
    8.1900
    
    
    
    4.1000February
    
    
    9.4200
    
    
    
    7.0600March
    
    
    9.2200
    
    
    
    7.1500April
    
    
    7.1100
    
    
    
    4.7000May
    
    
    6.6500
    
    
    
    4.7000
   (1)
    
    The prices quoted on The Nasdaq National Market prior to July 25, 2002,
had been adjusted based on the new ADS to share ratio of 1:100. 
 Item 10. ADDITIONAL INFORMATION 
 10.A SHARE CAPITAL Not applicable. 
 10.B MEMORANDUM AND ARTICLES OF ASSOCIATION We amended the Articles of Association to comply with certain changes in
requirement by the Hong Kong Securities and Futures Ordinance and the Listing
Rules. Such amendments were approved by the shareholders at our 2004 annual
general meeting held in May 2004. See Exhibit 1.1 for the revised Articles of
Association. Set forth below is the purpose of the Company, a summary of the material
provisions of our Memorandum and Articles of Association and of the material
applicable laws of the Cayman Islands. Purpose We are an investment holding company with limited liability incorporated
in the Cayman Islands. Summary of Memorandum and Articles of Association and Material Applicable Laws
of the Cayman Islands Meetings An annual general meeting and any extraordinary general meeting called for
the passing of a special resolution shall be called by not less than 21 clear
days notice and any other extraordinary general meeting shall be called by not
less than 14 clear days notice. Notice of every general meeting shall be given
to all our members other than such as, under the provisions of the Articles of
Association or the terms of issue of the shares they hold, are not entitled to
receive such notices from us, and also to our auditors for the time being. 44




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Notwithstanding that a meeting is called by shorter notice than that
mentioned above, it shall be deemed to have been duly called, if it is so
agreed (i) in the case of a meeting called as an annual general meeting by all
our members entitled to attend and vote at the meeting; and (ii) in the case of
any other meeting, by a majority in number of the members having a right to
attend and vote at the meeting, being a majority together holding not less than
95% in nominal value of the issued shares giving that right. No business other than the appointment of a chairman shall be transacted
at any general meeting unless a quorum is present at the commencement of
business. Two of our members present in person or by proxy or (in case of a member
being a corporation) by its duly authorized corporate representative
representing not less than one third in nominal value of the total issued
voting shares throughout the meeting shall be a quorum. A corporation being a member shall be deemed for the purpose of the
Articles of Association to be present in person if represented by its duly
authorized representative being the person appointed by resolution of the
directors or other governing body of such corporation to act as its
representative at the relevant general meeting or at any relevant general
meeting of any class of our members. Such duly authorized representative shall
be entitled to exercise the same powers on behalf of the corporation which he
represents as that corporation could exercise if it were our individual member. The quorum for a separate general meeting of the holders of a separate
class of our ordinary shares is described in Modification of Rights below. Voting Rights Attaching to the Ordinary Shares Subject to any special rights or restrictions as to voting for the time
being attached to any shares, at any general meeting every member who is
present in person or by proxy (or, in the case of a member being a corporation,
by its duly authorized representative) shall have one vote, and on a poll every
member present in person or by proxy (or, in the case of a member being a
corporation, by its duly appointed representative) shall have one vote for each
share which such member is the holder. Notwithstanding anything contained in
the Articles of Association, where more than one proxy is appointed by a member
which is a recognized clearing house or its nominee, each such proxy shall have
one vote on a show of hands. No member shall be entitled to vote or be reckoned in a quorum, in respect
of any share unless such member is registered as our shareholder at the
applicable record date for that meeting and all calls or other sums due by such
member to us have been paid. Where any member is, under the rules of the designated stock exchange,
required to abstain from voting on any particular resolution or restricted to
voting only for or only against any particular resolution, any votes cast by or
on behalf of such member in contravention of such requirement or restriction
shall not be counted. If a recognized clearing house or its nominee is our member, it may
authorize such person or persons as it thinks fit to act as its representative
or representatives at any meeting or at any meeting of any class of our members
provided that the authorization shall specify the number and class of shares in
respect of which each such person is so authorized. A person authorized
pursuant to this provision shall be entitled to exercise the same powers on
behalf of the recognized clearing house (or its nominee) which he represents as
that clearing house (or its nominee) could exercise if it were our individual
shareholder. Protection of Minorities The Grand Court of the Cayman Islands may, on the application of members
holding not less than one fifth of our shares in issue, appoint an inspector to
examine into our affairs and to report thereon in a manner as the Grand Court
shall direct. Any shareholder may petition the Grand Court of the Cayman Islands which
may make a winding up order, if the court is of the opinion that it is just and
equitable that we should be wound up. Claims against us by our shareholders must, as a general rule, be based on
the general laws of contract or tort applicable in the Cayman Islands or their
individual rights as shareholders as established by our memorandum and articles
of association. The Cayman Islands courts ordinarily would be expected to follow English
case law precedents including the exceptions to the rule in Foss v. Harbottle
which permit a minority shareholder to commence a class action against, or
derivative actions in our name to challenge (i) an act which is ultra viresor
illegal, (ii) an act which constitutes a fraud against the minority and the
wrongdoers are themselves in control of us, and (iii) an irregularity in the
passing of a resolution which requires a qualified (or special) majority. 45




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Pre-emption Rights There are no pre-emption rights applicable to the issue of new shares
under either Cayman Islands law or our Memorandum and Articles of Association. Liquidation Rights Subject to any special rights, privileges or restrictions as to the
distribution of available surplus assets on liquidation for the time being
attached to any class or classes of shares (i) if we are wound up and the
assets available for distribution among our members shall be more than
sufficient to repay the whole of the capital paid up at the commencement of the
winding up, the excess shall be distributed pari passuamongst those members in
proportion to the amount paid up at the commencement of the winding up on the
shares held by them, respectively and (ii) if we are wound up and the assets
available for distribution among the members as such shall be insufficient to
repay the whole of the paid-up capital, these assets shall be distributed so
that, as nearly as may be, the losses shall be borne by the members in
proportion to the capital paid up at the commencement of the winding up on the
shares held by them, respectively. If we are wound up, the liquidator may with the sanction of our special
resolution and any other sanction required by the Companies Law, divide among
our members in specie or kind the whole or any part of our assets (whether they
shall consist of property of the same kind or not) and may, for such purpose,
set such value as he deems fair upon any property to be divided as aforesaid
and may determine how such division shall be carried out as between the members
or different classes of members. The liquidator may, with the like sanction,
vest the whole or any part of such assets in trustees upon such trusts for the
benefit of the members as the liquidator, with the like sanction, shall think
fit, but so that no member shall be compelled to accept any assets, shares or
other securities upon which there is a liability. Modification of Rights Except with respect to share capital (as described below) and the location
of the registered office, alterations to our Memorandum and Articles of
Association may only be made by special resolution. Subject to the Companies Law of the Cayman Islands, all or any of the
special rights attached to shares or any class (unless otherwise provided for
by the terms of issue of the shares of that class) may, be varied, modified or
abrogated either with the consent in writing of the holders of not less than
three-fourths in nominal value of the issued shares of that class or with the
sanction of a special resolution passed at a separate general meeting of the
holders of the shares of that class. The provisions of the Articles of
Association relating to general meetings shall apply mutatis mutandisto every
such separate general meeting, but so that the quorum for the purposes of any
such separate general meeting other than an adjourned meeting shall be a person
or persons together holding (or represented by proxy) on the date of the
relevant meeting not less than one-third in nominal value of the issued shares
of that class, every holder of shares of the class shall be entitled on a poll
to one vote for every such share held by such holder and that any holder of
shares of that class present in person or by proxy may demand a poll. At an
adjourned meeting of such holders, two holders present in person or by proxy
(whatever the number of shares held by them) shall be a quorum. The special rights conferred upon the holders of any class of shares shall
not, unless otherwise expressly provided in the rights attaching to or the
terms of issue of such shares, be deemed to be varied by the creation or issue
of further shares ranking pari passutherewith. Alteration of Capital We may from time to time by ordinary resolution:  
    
    increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;
    
    consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;
    
    divide shares into several classes and without prejudice to any
special rights previously conferred on the holders of existing shares,
attach to the shares respectively as preferential, deferred, qualified
or special rights, privileges, conditions or such restrictions which in
the absence of any such determination in general meeting may be
determined by the directors;
    
    sub-divide our shares or any of them into shares of smaller amount
than is fixed by the Memorandum of Association, subject nevertheless to
the Companies Law, and so that the resolution whereby any share is
sub-divided may determine that, as between the holders of the share
resulting from such sub-division, one or more of the shares may have any
such preferred or other special rights, over, or may have such deferred
rights or be subject to any such restrictions as compared with the
others as we have power to attach to unissued or new shares; and 46




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
    
    cancel any shares which at the date of the passing of the resolution
have not been taken or agreed to be taken by any person, and diminish
the amount of its share capital by the amount of the shares so canceled
subject to the provisions of the Companies Law. We may, by special resolution, subject to any confirmation or consent
required by the Companies Law, reduce our share capital, share premium account
or any capital redemption reserve in any manner authorized by law. Transfer of Shares Subject to such of the restrictions of the Articles of Association as may
be applicable, any of our members may transfer all or any of his or her shares
by an instrument of transfer in the usual or common form or in any other form
which the directors may approve. Our directors may decline to register any transfer of any share which is
not paid up or any share issued under any share incentive scheme for employees
upon which there is a restriction and they may also refuse to register any
transfer of any share to more than four joint holders or on which we have a
lien. Our directors may also decline to register any transfer of any share
unless:  (a)
    
    the instrument of transfer is lodged with us accompanied by the
certificate for the shares to which it relates and such other evidence
as the directors may reasonably require to show the right of the
transferor to make the transfer;(b)
    
    the instrument of transfer is in respect of only one class of share;(c)
    
    the instrument of transfer is properly stamped (in circumstances
where stamping is required);(d)
    
    a fee of such maximum sum as the Stock Exchange of Hong Kong may
determine to be payable or such lesser sum as the directors may from
time to time require is paid to us in respect thereof. If the directors refuse to register a transfer they shall, within two
months after the date on which the instrument of transfer was lodged, send to
each of the transferor and the transferee notice of such refusal. The registration of transfers may, on notice being given by advertisement
in one or more newspapers designated by the Stock Exchange of Hong Kong, be
suspended and the register closed at such times and for such periods as the
directors may from time to time determine, provided, however, that the
registration of transfers shall not be suspended nor the register closed for
more than 30 days in any year as our directors may determine. Share Repurchase We are empowered by the Companies Law and the Articles of Association to
purchase our own shares subject to certain restrictions. Our directors may only
exercise this power on our behalf, subject to the Companies Law, our Memorandum
and Articles of Association and to any applicable requirements imposed from
time to time by the Stock Exchange of Hong Kong, the Securities and Futures
Commission of Hong Kong, the United States Securities and Exchange Commission,
or the U.S. SEC, or by any other recognized stock exchange. Dividends Subject to the Companies Law, in a general meeting we may declare
dividends in any currency but no dividends shall exceed the amount recommended
by our directors. Dividends may be declared and paid out of our profits,
realized or unrealized, or from any reserve set aside from profits which our
directors determine is no longer needed. With the sanction of an ordinary
resolution, dividends may also be declared out of the share premium account or
any other fund or account which can be authorized for this purpose in
accordance with the Companies Law. Except in so far as the rights attaching to or the terms of issue of, any
share otherwise provide (i) all dividends shall be declared and paid according
to the amounts paid up on the shares in respect of which the dividend is paid,
but no amount paid up on a share in advance of calls shall be treated for this
purpose as paid up on that share; and (ii) all dividends shall be apportioned
and paid pro rata according to the amounts paid upon the shares during any
portion or portions of the period in respect of which the dividend is paid. Our directors may also pay interim dividends, whenever our position, in
the opinion of the directors, justifies such payment. Our directors may deduct from any dividend or bonus payable to any member
all sums of money (if any) presently payable by him to us on account of calls,
installments or otherwise. No dividend or other monies payable by us on or in respect of any share
shall bear interest against us. 47




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In respect of any dividend proposed to be paid or declared on our share
capital, our directors may resolve and direct that; (i) such dividend be
satisfied wholly or in part in the form of an allotment of shares credited as
fully paid up, provided that our members entitled thereto will be entitled to
elect to receive such dividend (or part thereof if our directors so determine)
in cash in lieu of such allotment; or (ii) that the members entitled to such
dividend will be entitled to elect to receive an allotment of shares credited
as fully paid up in lieu of the whole or such part of the dividend as the
directors may think fit. The directors may also, with the sanction or by an
ordinary resolution of our members in general meeting, resolve in respect of
any particular dividend that, notwithstanding the foregoing, it may be
satisfied wholly in the form of an allotment of shares credited as fully paid
up without offering any right of members to elect to receive such dividend in
cash in lieu of such allotment. Any dividend, interest or other sum payable in cash to the holder of
shares may be paid by check or warrant sent by mail addressed to the holder or,
in the case of joint holders, addressed to the holder whose name stands first
in the register, at such holders registered address, or addressed to such
person and at such addresses as the holder may direct. Every such check or
warrant shall, unless the holder or joint holders otherwise direct, be made
payable to the order of the holder or, in the case of joint holders, to the
order of the holder whose name stands first on the register in respect of such
shares, and shall be sent at his or their risk and payment of the check or
warrant by the bank on which it is drawn shall constitute a good discharge to
us. Any dividend unclaimed after a period of six years from the date of
declaration of such dividend may be forfeited by our board of directors and, if
so forfeited, shall revert to us. Whenever our directors or the members in general meeting have resolved
that a dividend be paid or declared, the directors may further resolve that
such dividend be satisfied by direct payment or satisfaction wholly or in part
by the distribution of specific assets of any kind, and in particular of paid
up shares, debentures or warrants to subscribe for our securities or securities
of any other company, and where any difficulty arises with regard to such
distribution, the directors may settle it as they think expedient, and in
particular may issue fractional certificates, disregard fractional entitlements
or round the same up or down, and may fix the value for distribution purposes
of any such specific assets and may determine that cash payments shall be made
to any of our members upon the footing of the value so fixed in order to adjust
the rights of the parties and may vest any such specific assets in trustees as
may seem expedient to the directors. Untraceable Shareholders We are entitled to sell any share of a member who is untraceable, provided
that:  (i)
    
    all checks or warrants, not being less than three in number, for any
sums payable in cash to the holder of such shares have remained uncashed
for a period of 12 years and the three-month period referred to in
paragraph (iv) below has expired;(ii)
    
    we have not during that time or before the expiry of the three-month
period referred to in paragraph (iv) below received any indication of
the whereabouts or existence of the member or person entitled to such shares by death, bankruptcy or operation of law;(iii)
    
    upon expiry of the 12-year period and three-month period referred to
in paragraph (iv) at least three dividends in respect of the shares in
question have become payable and no dividend during that period has been
claimed by the member; and(iv)
    
    upon expiry of the 12-year period, we have caused an advertisement to
be published in newspapers in the manner stipulated by our Articles of
Association, giving notice of its intention to sell these shares, and a
period of three months has elapsed since such advertisement and the
Stock Exchange of Hong Kong has been notified of such intention. The net proceeds of any such sale shall belong to us and when we receive
these net proceeds we shall become indebted to the former member for an amount
equal to such net proceeds. Board of Directors We are managed by a board of directors which, unless otherwise determined
by us in general meeting, must consist of not less than two members. As of May
31, 2004, our board of directors consisted of 11 members. Other than the
chairman of our board and our managing director who are not required to retire,
one-third of the rest of our directors are subject to retirement from office by
rotation at each general meeting. Retiring directors are eligible for
re-election. Meetings of the board of directors may be convened at any time deemed
necessary by any members of the board of directors. Advance notice of a meeting
is not required if all the directors are present or represented at the meeting
concerned and consent to the holding of such meeting. 48




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A meeting of the board of directors shall be competent to make lawful and
binding decisions if any two members of the board of directors are present or
represented. At any meeting of the directors, each director, be it by his
presence or by his alternate, is entitled to one vote. Questions arising at a meeting of the board of directors are required to
be decided by simple majority votes of the members of the board of directors
present or represented at the meeting. In the case of a tie vote, the chairman
of the meeting shall have a second or deciding vote. Our board of directors may
also pass resolutions without a meeting by unanimous written consent. Directors Interests Any of our directors may hold any other office or place of profit with us
(except that of the auditor of) in conjunction with his or her office of
director for such period and, subject to the Articles of Association, upon such
terms as the board may determine, and may be paid such extra remuneration
therefor (whether by way of salary, commission, participation in profits or
otherwise) in addition to any remuneration provided for by or pursuant to any
other Articles of Association. A director may be or become a director or other
officer of, or otherwise interested in, any company promoted by us or any other
company in which we may be interested, and shall not be liable to account to us
or the members for any remuneration, profits or other benefits received by him
or her as a director, officer or member of, or from his or her interest in,
such other company. Subject as otherwise provided by the Articles of
Association, the board may also cause the voting power conferred by the shares
in any other company held or owned by us to be exercised in such manner in all
respects as it thinks fit, including the exercise thereof in favor of any
resolution appointing our board or any of them to be directors or officers of
such other company, or voting or providing for the payment of remuneration to
the directors or officers of such other company. Subject to the Companies Law and our Articles of Association, no director
or proposed or intended director shall be disqualified by his or her office
from contracting with us, either with regard to his or her tenure of any office
or place of profit or as vendor, purchaser or in any other manner whatsoever,
nor shall any such contract or any other contract or arrangement in which any
director is in any way interested be liable to be avoided, nor shall any
director so contracting or being so interested be liable to account to us or
the members for any remuneration, profit or other benefits realized by any such
contract or arrangement by reason of such director holding that office or the
fiduciary relationship thereby established. A director who to his or her
knowledge is in any way, whether directly or indirectly, interested in a
contract or arrangement or proposed contract or arrangement with us shall
declare the nature of his or her interest at the meeting of the board at which
the question of entering into the contract or arrangement is first taken into
consideration, if such director knows his or her interest then exists, or in
any other case, at the first meeting of the board after such director knows
that he or she is or has become so interested. A director shall not vote (nor be counted in the quorum) on any resolution
of the board approving any contract or arrangement or any other proposal in
which he or any of his associates is materially interested, but this
prohibition shall not apply to any of the following matters namely:  (a)
    
    any contract or arrangement for the giving to such director or his
associate(s) any security or indemnity in respect of money lent by him
or any of his associates or obligations incurred or undertaken by him or
any of his associates at the request of or for the benefit of the
Company or any of its subsidiaries;(b)
    
    any contract or arrangement for 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 the director or his
associate(s) has himself/themselves assumed responsibility in whole or
in part whether alone or jointly under a guarantee or indemnity or by
the giving of security;(c)
    
    any contract or arrangement concerning an offer of shares or
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, where the director or his associate(s) is/are, or is/are to be
interested as a participant in, the underwriting or sub-underwriting of
the offer;(d)
    
    any contract or arrangement in which the director or his associate(s)
is/are interested in the same manner as other holders of shares or
debentures or other securities of the Company or any of its subsidiaries
by virtue only of his/their interest in shares or debentures or other
securities of the Company;(e)
    
    any contract or arrangement concerning any other company in which the
director or his associate(s) is/are interested only, whether directly or
indirectly, as an officer or executive or a shareholder other than a
company in which the director and/or his associate(s) is/are
beneficially interested in five (5) per cent or more of the issued shares or of the voting rights of any class of shares of such company
(or any third company through which his interest or that of any of his
associates is derived); or 49




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(f)
    
    any proposal concerning the adoption, modification or operation of a
share option scheme, a pension fund or retirement, death or disability
benefits scheme or other arrangement which relates both to directors,
his associates and employees of the Company or of any of its
subsidiaries and does not provide in respect of any director, or his
associate(s), as such any privilege or advantage not accorded to the
employees to which such scheme or fund relates. Directors Fees and Expenses The ordinary remuneration of our directors shall from time to time be
determined by our shareholders in general meeting, such sum (unless otherwise
directed by the resolution on which it is voted) to be divided amongst our
board in such proportions and in such manner as the board may agree or, failing
agreement, equally, except that any director holding office for part only of
the period in respect of which the remuneration is payable shall only rank in
such division in proportion to the time during such period for which such
director held office. Our board members shall also be entitled to be prepaid or
repaid all travelling, hotel and incidental expenses reasonably expected to be
incurred or incurred by them in attending any board meetings, committee
meetings or general meetings or separate meetings of any class of shares or of
debentures of our company or otherwise in connection with the discharge of
their duties as directors. Any director who, by request, goes or resides abroad
for any purpose of our company or who performs services which in the opinion of
the board go beyond the ordinary duties of a director may be paid such extra
remuneration (whether by way of salary, commission, participation in profits or
otherwise) as the board may determine and such extra remuneration shall be in
addition to or in substitution for any ordinary remuneration as a director. An
executive director appointed to be a managing director, joint managing
director, deputy managing director or other executive officer shall receive
such remuneration (whether by way of salary, commission or participation in
profits or otherwise or by all or any of those modes) and such other benefits
(including pension and/or gratuity and/or other benefits on retirement) and
allowances as the board may from time to time decide. Such remuneration may be
either in addition to or in lieu of his or her remuneration as a director. General Powers of the Directors Our board may establish or concur or join with other companies (being
subsidiary companies of our company or companies with which it is associated in
business) in establishing and making contributions out of our companys monies
to any schemes or funds for providing pensions, sickness or compassionate
allowances, life assurance or other benefits for employees (which expression as
used in this and the following paragraph shall include any director or
ex-director who may hold or have held any executive office or any office of
profit with our company or any of our subsidiaries) and ex-employees of our
company and their dependents or any class or classes of such persons. The board may pay, enter into agreements to pay or make grants which may
be revocable or irrevocable, and either subject or not subject to any terms or
conditions, pensions or other benefits to employees and ex-employees and their
dependents, or to any of such persons, including pensions or benefits
additional to those, if any, to which such employees or ex-employees or their
dependents are or may become entitled under any such scheme or fund as is
mentioned in the previous paragraph. Any such pension or benefit may, as the
board considers desirable, be granted to an employee either before and in
anticipation of, or upon or at any time after, his actual retirement. The board may exercise all the powers of our company to raise or borrow
money, to mortgage or charge all or any part of the undertaking, property and
assets (present and future) and uncalled capital of our company and, subject to
the Companies Law, to issue debentures, bonds and other securities of our
company, whether outright or as collateral security for any debt, liability or
obligation of our company or of any third party. 
 10.C MATERIAL CONTRACTS Supply Contract between Mandarin and HTIC dated May 13, 2004 for the
supply and installation of a 3G mobile communications network and associated
services on a turnkey basis, and a sub-contract under such Supply Contract for
Mandarin to undertake certain civil works and equipment installation on
designated cell sites. Facility Agreement between HTIC, Mandarin and SUNDAY dated May 13, 2004
for the provision of long term financing in connection with the 3G mobile
communications network. 
 10.D EXCHANGE CONTROLS AND OTHER LIMITATIONS The laws of the Cayman Islands where the Company is incorporated and those
of Hong Kong where the Company operates its businesses and the Memorandum and
Articles of Association of the Company do not impose exchange control or
restrictions on the remittance of dividends or other payments to nonresident
holders of the ordinary shares and American depositary shares. For a discussion on exchange rate information relating to Hong Kong
dollars, see Item 3. Key Information  Selected Financial Data  Exchange Rate
Information in this Annual Report. 50




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10.E TAXATION The following summary of the material United States federal income, Hong
Kong and the Cayman Islands tax consequences of beneficial ownership of the
ordinary shares or ADSs is based upon laws, regulations, rulings, income tax
conventions (treaties), administrative practice and judicial decisions in
effect on the date of this Annual Report. Subsequent legislative, judicial or
administrative changes or interpretations may be retroactive and could affect
these tax consequences. Your tax treatment as a holder of ordinary shares or ADSs may vary
depending upon your particular situation, and you may be subject to special
rules not discussed below. State, local and foreign (other than Hong Kong and
the Cayman Islands) tax consequences of ownership and disposition of the
ordinary shares or ADSs are not discussed. You should consult your own tax advisors about the particular tax
consequences of the ownership and disposition of ordinary shares or ADSs,
including the applicability and effect of any state, local or foreign tax laws. United States Federal Income Taxation The following is a discussion under present law of the material United
States federal income tax consequences of the purchase, ownership and
disposition of ADSs or ordinary shares by a U.S. Holder (as defined below). The
discussion deals only with ADSs or ordinary shares held by a U.S. Holder as
capital assets as defined in the Internal Revenue Code of 1986, as amended, and
does not address all of the tax consequences that may be relevant to
prospective purchasers of ADSs or ordinary shares in light of their particular
circumstances or to persons subject to special tax rules, such as insurance
companies, financial institutions, dealers in securities or foreign currencies,
tax-exempt investors, foreign persons, persons holding ADSs or ordinary shares
as a position in a straddle, as a part of a short-sale, or as part of a
hedging or conversion transaction, persons owning, directly, indirectly or
constructively, 10% or more of our voting stock or persons whose functional
currency is not the United States dollar. Prospective purchasers of ADSs or
ordinary shares should consult with their tax advisors regarding the
application of the United States federal income tax laws to their particular
situations as well as to any additional tax consequences of purchasing, holding
or disposing of ADSs or ordinary shares, including the applicability and effect
of the tax laws of any state, local or foreign jurisdiction. For purposes of this summary, a U.S. Holder is any beneficial owner of
ADSs or ordinary shares that is:  
    
    a citizen or resident of the United States,
    
    a corporation, partnership or other entity organized under the laws of the United States or any state thereof,
    
    an estate the income of which is subject to United States federal income tax without regard to its source, or
    
    a trust (a) subject to the primary supervision of a United States court and the control of one or more United States
persons or (b) that has elected to be treated as a United States person under applicable Treasury regulations. In general, for United States federal income tax purposes, U.S. Holders of
ADSs will be treated as the owners of the ordinary shares represented by the
ADSs. Accordingly, no gain or loss will be recognized upon the exchange of ADSs
for the holders proportionate interest in the ordinary shares represented by
such ADSs. A U.S. Holders tax basis in the withdrawn shares will be the same
as its tax basis in the ADSs surrendered therefor, and the holding period in
the withdrawn shares will include the period during which the holder held the
ADSs. Distributions on ADSs or Ordinary Shares Subject to a holders satisfaction of certain holding period requirements,
dividends included in income by a noncorporate U.S. Holder for taxable years
ending after December 31, 2002 and before January 1, 2009 are subject to tax at a
maximum rate of 15% if the dividends are paid by a domestic corporation or
qualified foreign corporation. A qualified foreign corporation generally
includes a foreign corporation if (i) its shares (or ADSs) are readily tradable
on an established securities market in the U.S. or (ii) it is eligible for
benefits under a comprehensive U.S. income tax treaty, provided that the
corporation is not a passive foreign investment company, foreign person holding
company or foreign investment company. We believe that we should be treated as
a qualified foreign corporation with respect to dividend payments to our ADSs
holders and, therefore, dividends paid to an individual U.S. Holder of ADSs
should be taxed at a maximum rate of 15%. However, you should be aware that
the requirements to be treated as a qualified foreign corporation are not
entirely clear and further guidance from the Internal Revenue Service may be
forthcoming that could affect this conclusion. U.S. Holders of ordinary shares
directly, rather than through ADSs, should consult their own tax advisor about
whether the 15% maximum rate applies to dividends they receive. 51




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To the extent that the amount of any distribution on ADSs or ordinary
shares exceeds our current and accumulated earnings and profits, as determined
for United States federal income tax purposes, a U.S. Holders pro rata share
of such excess amount would be treated:  
    
    as a non-taxable return of capital that would be applied against and
would reduce the U.S. Holders tax basis in its ADSs or ordinary shares until this basis is equal to zero; and  
    
    to the extent excess distributions remain, as capital gain. Subject to certain conditions and limitations, including certain minimum
holding period requirements, the United States dollar value of the foreign
income taxes, if any, withheld from a distribution to a U.S. Holder on ADSs or
ordinary shares may be claimed as a credit against the U.S. Holders United
States federal income tax liability. Alternatively, a U.S. Holder may claim a
deduction for such amount of foreign income taxes withheld in a taxable year,
but only if such U.S. Holder does not elect to claim a foreign tax credit in
respect of any foreign taxes paid by it in the taxable year. Dividends on ADSs
or ordinary shares generally will constitute passive income or, in the case
of certain U.S. Holders, financial services income for United States foreign
tax credit purposes. A U.S. Holder will be entitled to a foreign tax credit for withholding
taxes that are imposed, subject to generally applicable limitations and
restrictions. In the case of U.S. individuals for whom the reduced rate of
U.S. tax on dividends applies, limitations and restrictions on claiming foreign
tax credits will appropriately take into account the rate differential under
rules similar to section 904(b)(2)(B) of the Internal Revenue Code. The rules
governing foreign tax credits are complex and U.S. Holders should consult their
tax advisors regarding their application to the particular circumstances of
such holder. The amount of any distribution paid in Hong Kong dollars will be the
United States dollar value of the payment made, determined at the spot Hong
Kong dollar/United States dollar rate on the date such payment is includible in
the income of the U.S. Holder, regardless of whether the payment is in fact
converted into United States dollars. Any gain or loss resulting from currency
exchange fluctuations during the period from the date the dividend payment is
includible in income to the date such payment is converted into United States
dollars will be treated as United States source ordinary income or loss. A corporate U.S. Holder will not be entitled to a dividends received
deduction with respect to distributions on ADSs or ordinary shares. Sale, Exchange of Other Disposition A U.S. Holder generally will recognize gain or loss upon a sale or other
taxable disposition of ADSs or ordinary shares in an amount equal to the
difference between the United States dollar value of the amount realized on the
sale or other taxable disposition and the U.S. Holders adjusted tax basis in
the ADSs or ordinary shares, as applicable. Subject to the passive foreign
investment company discussion below, such gain or loss will generally be
capital gain or loss and, in the case of certain non-corporate U.S. Holders,
may be subject to United States federal income tax at a preferential rate where
the U.S. Holders holding period exceeds one year. With respect to sales
occurring on or after May 6, 2003, but before January 1, 2009, the long-term
capital gain tax rate for an individual U.S. Holder is 15%. For sales
occurring before May 6, 2003, or after December 31, 2008, under current law the
long-term capital gain rate for an individual U.S. Holder is 20%. Any gain or
loss recognized by a U.S. Holder on a sale or other taxable disposition of ADSs
or ordinary shares will generally be treated as United States source gain or
loss for foreign tax credit purposes. A U.S. Holders ability to deduct capital
losses in respect of ADSs or ordinary shares is subject to limitations. Passive Foreign Investment Company In general, a foreign corporation is a passive foreign investment company
for any taxable year in which (i) 75% or more of its gross income consists of
passive income (such as dividends, interest, rents and royalties) or (ii) 50%
or more of the average quarterly value of its assets consists of assets that
produce, or are held for the production of, passive income. We believe that we
will not be treated as a passive foreign investment company under either of
these tests in the current or subsequent taxable years. In reaching this
conclusion, we have assumed that our available cash will be expended in
accordance with a projected capital expenditure budget. However, the actual
expenditure of these amounts will depend on business exigencies and may differ
from the projected expenditures. If we were to retain more cash than we have
projected, this could cause us to be a passive foreign investment company.
Because the passive foreign investment company determination is made annually
on the basis of facts and circumstances that may be beyond our control, we
cannot assure you that we will not become a passive foreign investment company. 52




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If we were a passive foreign investment company for any taxable year, a
U.S. Holder that held ADSs or ordinary shares in that taxable year would
generally be subject to special rules with respect to certain distributions
made by us on the ADSs or ordinary shares and with respect to gains from
dispositions of ADSs or ordinary shares. In general, such a U.S. Holder would
be required to allocate such distributions or gains, as the case may be,
ratably over its holding period for such ADSs or ordinary shares. That portion
of any such distributions or gains allocated to a prior taxable year, other
than a year prior to the first year in which we were a passive foreign
investment company, would effectively be taxed at the highest United States
federal income tax rate in effect for such year with respect to ordinary
income. In addition, the U.S. Holder would be subject to an interest charge on
the resulting tax liability determined as if such tax liability had been due
with respect to the particular taxable year. The portion, if any, of such
distributions or gains not so allocated to a prior taxable year of the U.S.
Holder in which we were a passive foreign investment company would be included
in the U.S. Holders income for the taxable year of the particular distribution
or disposition and taxed as ordinary income. The foregoing rules with respect to distributions and dispositions may be
avoided if a U.S. Holder is eligible for and timely makes either a valid
qualifying electing fund election, in which case the U.S. Holder generally
would be required to include in income on a current basis its pro rata share of
our ordinary income and net capital gains, or a valid mark-to-market
election. We do not currently intend to complete the actions necessary for U.S.
Holders to make a qualifying electing fund election in the event that we were
to be considered a passive foreign investment company for any taxable year. If
a mark-to-market election is made, the U.S. Holder will include in ordinary
income each year the excess, if any, of the fair market value over the adjusted
tax basis of its ADSs or ordinary shares. The U.S. Holder also will be allowed
an ordinary loss each year of the excess, if any, of the adjusted tax basis
over the fair market value of its ADSs or ordinary shares, but only to the
extent of the net amount of previously included income as a result of the
mark-to-market election. The U.S. Holders tax basis in the ADSs or ordinary
shares will be adjusted to reflect any such income or loss amounts. Assuming
the ordinary shares are regularly traded on a qualified exchange or other
market for purposes of the passive foreign investment company rules, the
mark-to-market election would be available with respect to the ADSs and the
ordinary shares. Prospective purchasers are urged to consult their tax advisors
regarding the consequences of an investment in a passive foreign investment
company. Backup Withholding and Information Reporting Backup withholding and information reporting requirements may apply to
payments made within the United States of dividends on ADSs or ordinary shares
and to certain payments of proceeds of a sale or redemption of ADSs or ordinary
shares paid to a U.S. Holder. We, our agent, a broker or any paying agent, as
the case may be, may be required to withhold tax from any payment that is
subject to backup withholding at a rate of 28% of such payment if the U.S.
Holder fails to furnish the U.S. Holders taxpayer identification number, to
certify that such U.S. Holder is not subject to backup withholding, or to
otherwise comply with the applicable requirements of the backup withholding
rules. Certain U.S. Holders, including, among others, corporations, are not
subject to the backup withholding and information reporting requirements. Any
amounts withheld under the backup withholding rules from a payment to a U.S.
Holder may generally be claimed as a credit against such U.S. Holders United
States federal income tax liability provided that the required information is
furnished to the United States Internal Revenue Service. Hong Kong Taxation The following provides a general outline of the material tax
considerations that may be relevant to a decision to purchase, own or dispose
of the ADSs or ordinary shares but does not purport to deal with the tax
consequences applicable to all categories of investors. Prospective investors
should consult their own professional advisers on the Hong Kong and overall tax
implications of investing, holding or disposing the ADSs or ordinary shares
under the laws of the countries in which they are liable to taxation. The
discussion below is applicable to both U.S. and non-U.S. citizens as an
investor. Tax on Dividends Under the Hong Kong Inland Revenue Ordinance, no tax is payable in Hong
Kong by withholding or otherwise in respect of dividends paid by us. Profits Tax No tax is imposed in Hong Kong in respect of gains from the sale of
property, including shares and ADSs, unless all the following three factors are
present:  (i)
    
    such gain is derived from or arises in Hong Kong;(ii)
    
    such gain is attributable to a trade, profession or business carried
on in Hong Kong; and(iii)
    
    the property in question such as shares and ADSs is not a capital
asset of that trade, profession or business. 53




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Taxable gains will be subject to Hong Kong profits tax which is currently
imposed on corporations at a rate of 17.5% and on individuals or unincorporated
business at a rate of 15.5%. Gains from sales of shares listed on the Stock Exchange of Hong Kong will
be considered to be derived from or to arise in Hong Kong. Liability to Hong
Kong profits tax in respect of such gains would arise if the shares were not
held as capital assets and the gains are attributable to a business, trade or
profession carried out in Hong Kong. Gains from sales of ADSs will be considered to be derived from or to arise
in Hong Kong if the relevant purchase or sales contracts are negotiated and
concluded in Hong Kong, and such gains will be subject to Hong Kong profits tax
in the case of those persons dealing or trading in the ADSs as part of their
business being carried out in Hong Kong. Stamp Duty A sale or purchase of shares is subject to Hong Kong stamp duty if the
transfer of such shares is required to be registered in Hong Kong. The ordinary
shares will be registered in our Hong Kong branch register of members and,
therefore, will constitute Hong Kong stock for the purposes of Hong Kong
stamp duty. For such purposes any person who effects a sale or purchase of Hong
Kong stock such as the ordinary shares registered on our Hong Kong register of
members, whether as principal or agent, is required to execute a contract note
evidencing such sale or purchase and to have that note stamped. Contract notes
attract stamp duty, payable by the seller and the purchaser in equal shares, at
the aggregate rate of HK$2.00 per HK$1,000 by reference to the value of the
consideration paid or the market value of the shares on the Stock Exchange of
Hong Kong, whichever is greater, on the date the contract note is executed. If,
in the case of a sale or purchase of the shares by a person who is not resident
in Hong Kong, the stamp duty on either or both of the contract notes is not
paid, the transferee will be liable to pay stamp duty on the instrument of
transfer in an amount equal to the unpaid duty. If the stamp duty is not paid
on or before the due date, a penalty of up to ten times the duty payable may be
imposed. In addition, a fixed duty of HK$5.00 is currently payable on any
instrument of transfer of shares. Upon the exchange of any ADRs evidencing ADSs for certificates
representing shares, or exchange of shares for ADRs evidencing ADSs, stamp duty
aggregating HK$2.00 per HK$1,000 or part thereof is payable in addition to the
depositarys charges, if any, unless the exchange does not result in any change
in the beneficial ownership of the shares under Hong Kong law. Investors are
not liable for stamp duty on the issuance of the ADSs upon the initial deposit
of shares issued directly to the depositary or for the account of the
depositary. No Hong Kong stamp duty is payable upon the transfer of ADRs
evidencing ADSs if such ADRs are not maintained on a register in Hong Kong. Estate Duty The ordinary shares, being registered on our branch register of members in
Hong Kong, are property in relation to which Hong Kong estate duty will be
chargeable on the death of the owner of such shares regardless of the place of
the owners residence, citizenship or domicile, unless there is an applicable
exemption under the Estate Duty Ordinance (Ch. 111 of the Laws of Hong Kong).
We cannot assure you that the Hong Kong Inland Revenue Department will not
treat the ADSs as Hong Kong property that may be subject to estate duty on the
death of the beneficial owner of the ADSs even if the ADSs are located outside
Hong Kong at the date of such death. Hong Kong estate duty is imposed on a
progressive scale from 5% to 15%. The rate of and the threshold for estate duty
has, in the past, been adjusted on a fairly regular basis. No estate duty is
payable when the aggregate value of the dutiable estate does not exceed HK$7.5
million, and the maximum rate of duty of 15% applies when the aggregate value
of the dutiable estate exceeds HK$10.5 million. Where shares registered on the Hong Kong branch register, and possibly
ADSs, are owned by a controlled company which is defined under the Estate Duty
Ordinance as a company under the control of not more than five persons (certain
classes of persons being treated as a single person for this purpose), the
death of a person who made at any time a transfer of property to such company
and who received or could have received benefits from that company in the three
years ending with that persons death may expose the company to an estate duty
liability. Cayman Islands Taxation Pursuant to section 6 of the Tax Concessions Law (1999 Revision) of the
Cayman Islands, we have obtained an undertaking from the Governor-in-Council:  
    
    that no law enacted in the Cayman Islands imposing any tax to be
levied on profits or income or gains or appreciation shall apply to us
or our operations; and  
    
    that such tax or any tax in the nature of estate duty or inheritance
tax shall not be payable on our shares, debentures or other obligations. 54




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Our undertaking is effective for a period of 20 years from December 7,
1999. The Cayman Islands currently levies no taxes applicable to us or our
nominees based upon profits, income, gains or appreciation and there is no
taxation in the nature of inheritance tax or estate duty payable by us or our
members with respect to the ordinary shares. There are no other taxes likely to
be material to us levied by the Cayman Islands government except for stamp
duties which may be applicable on instruments executed in, or after execution
brought within the jurisdiction of, the Cayman Islands. The Cayman Islands are
not party to any double tax treaties. There are no exchange control regulations
or currency restrictions in the Cayman Islands applicable to us. 
 10.F DIVIDENDS AND PAYING AGENTS Not applicable. 
 10.G STATEMENT BY EXPERTS Not applicable. 
 10.H DOCUMENTS ON DISPLAY We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. Accordingly, we will file reports and other
information with the U.S. SEC. You may inspect and copy the reports and other
information we file at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, and at
the regional offices of the Commission located in Chicago and New York. You may
also obtain copies of such material by mail from the Public Reference Branch of
the Commission at 450 Fifth Street, N.W., Washington, DC 20549, at prescribed
rates. The Commission also maintains a web site at http://www.sec.gov that
contains reports, proxy statements and other information regarding registrants
that file electronically with the Commission. Our annual reports and some of
the other information submitted by us to the Commission may be accessed through
this web site. 
 Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Our market risk is related to changes in foreign exchange rates and
interest rates. The foreign exchange risk results primarily from movements of the Hong
Kong dollar against the U.S. dollar. Our revenues are generated in Hong Kong
dollars while a significant proportion of all our network equipment costs are
denominated in U.S. dollars. As of December 31, 2003, substantially all the
assets and liabilities are denominated in Hong Kong dollars; except for the
outstanding vendor loan of US$62 million, which had been repaid in January
2004. We have not experienced significant foreign exchange movements primarily
because the Hong Kong dollar has remained stable against the U.S. dollar, which
is officially linked at HK$7.80 = US$1.00 by the Hong Kong government. We will
continue to monitor our foreign exchange exposure and market conditions and
determine if any hedging is required. Substantially all of our outstanding debts bore interest at floating rates
based on the Hong Kong interbank offer rate, or HIBOR, and the London interbank
offer rate, or LIBOR, in 2003 and were subject to interest rate exposure
resulting from changes in interest rates in the Hong Kong dollar and the U.S.
dollar markets. Depending on the outlook on interest rates, we may hedge our
interest rate-related transactions to manage such exposure. The table below provides information about our debt obligations that are
sensitive to changes in interest rates. The table represents principal cash
flows and related weighted average interest rates by expected maturity dates.
The information is presented in the Hong Kong dollar equivalents, which is our
reporting currency. The debts actual cash flows are denominated in both U.S.
dollars and Hong Kong dollars as indicated in parentheses. As of December 31, 20032004
    
    2005
    
    Total
    
    Fair ValueHK$
    
    HK$
    
    HK$
    
    HK$(in thousands)Liabilities:Long-term debtVariable rate (US$)
    
    
    481,368
    
    
    Not applicable
    
    
    481,368
    
    
    
    481,368Average interest rate
    
    LIBOR+5.5%Variable rate (HK$)
    
    
    240,000
    
    
    Not applicable
    
    
    240,000
    
    
    
    240,000Average interest rate
    
    HIBOR+5.5%
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The outstanding principal and accrued interest of the UOB facility and the
Nortel facility had been fully repaid in January 2004 through our operating
cash flow and the New Loan Facility of HK$500 million extended by HTIC. The New
Loan Facility was unsecured and was repayable in five progressively increasing
semi-annual instalments after drawdown and carries a floating interest rate
tied to HIBOR. The New Loan Facility would be replaced by the general facility
of the Facility Agreement. See Item 5. Operating and Financial Review and
Prospects  Liquidity and Capital Resources  Certain Indebtedness  Loan
Facilities for details. 
 Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 
 PART II 
 Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS None. 
 Item 15. CONTROLS AND PROCEDURES Our Group Managing Director and our Group Director  Finance have
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the United States Securities
Exchange Act of 1934, as amended) as of December 31, 2003. Based on the
evaluation, they have concluded that these disclosure controls and procedures
and internal control over financial reporting are effective. There were no
significant changes in our internal control over financial reporting (as
defined in Rules 13a  15(f) and 15d  15(f) of the United States Securities
Exchange Act of 1934 as amended) that occurred during the fiscal year ended
December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 
 Item 16. [Reserved] 
 Item 16A AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Mr. John William Crawford,
being a former vice chairman of Ernst & Young Hong Kong and the chairman of the
audit division of Ernst & Young Hong Kong, has appropriate professional
qualifications and is sufficiently experienced and skilled in the area of
financial management, application of accounting principles and internal control
procedures to qualify as a financial expert as defined under the applicable
rules of the U.S. SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act
of 2002. 
 Item 16B CODE OF ETHICS Code of Ethics In September 2003, we adopted a Code of Ethics that applies to our
principal executive officer and senior financial officers. The code emphasizes
the role of the principal executive officer and senior financial officers in
the conduct and practice of financial management and lays down the key
principles that they shall follow and advocate, which include:  
    
    honest and ethical conduct;
    
    full, fair, accurate, timely and understandable disclosure;
    
    compliance with governmental laws and regulations and applicable stock exchange rules and regulations;
    
    prompt internal reporting; and
    
    accountability for adherence to the code. Our Code of Ethics has been posted on the Companys web site. Related Party Transaction Policy We have formulated a policy on the review and approval of the related
party transactions since March 2003. Related party transactions are
periodically reviewed and approved by the Audit Committee. Significant related
party transactions undertaken by us during the year are set out in note 21 to
our audited consolidated financial statements. All such related party
transactions were undertaken in our ordinary course of business, on normal
commercial terms, and complied with this policy. 56




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Whistleblower Policy In September 2003, a Whistleblower Policy was established to facilitate
the reporting of improper activities relating to fraud against shareholders, or
questionable accounting, internal accounting controls or auditing matters. Any
whistleblower complaints can be reported to the head of the Internal Audit
function or the Audit Committee Chairman on a confidential and anonymous basis
via the means set out in the policy. The Audit Committee will investigate each
matter so reported and take corrective and disciplinary actions, if
appropriate. Securities Dealing Code In March 2004, we revised our existing Securities Dealing Code to align
with the amendments of the Model Code for Securities Transactions by Directors
of Listed Issuers of The Stock Exchange of Hong Kong Limited. The revised code
sets out the principles applying to dealings in our shares and other
securities. It applies to all directors and to all employees to whom the code
is given and who are informed that they are subject to its provisions. The
directors and all the relevant employees must comply strictly with the terms of
the code. Any breach of the code will be regarded as a very serious
disciplinary matter. 
 Item 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES The fees for the professional services rendered by our auditors,
PricewaterhouseCoopers, in 2002 and 2003 are depicted in the table below. Fees for 2002
    
    Fees for 2003(HK$)
    
    (HK$)(in thousands)Audit services(1)
    
    
    1,146
    
    
    
    1,100Audit-related services(2)
    
    
    136
    
    
    
    251Tax services(3)
    
    
    73
    
    
    
    128Other permitted services(4)
    
    
    
    
    
    
    70Total
    
    
    1,355
    
    
    
    1,549
   (1)
    
    Audit fees for the years ended December 31, 2002 and 2003 were for
professional services rendered for the audits of our audited consolidated
financial statements, statutory audits and assistance with review of
documents filed with the Stock Exchange of Hong Kong and the U.S. SEC.(2)
    
    Audit-related fees for the years ended December 31, 2002 and 2003 were
for professional services rendered for employee benefit plans audit and
issuance of certifications required by the OFTA. Audit-related fees for
the year ended December 31, 2003 also included revenue sharing review
required by one of our vendors and a system audit required by the OFTA.(3)
    
    Tax fees for the years ended December 31, 2002 and 2003 were for services
related to the preparation of Hong Kong income tax returns. Tax fees for
the year ended December 31, 2003 also included advisory services related
to queries raised by the Inland Revenue Department of Hong Kong.(4)
    
    Fees for other permitted services for the year ended December 31, 2003
were related to customer-related systems consultation services. No other
fee was billed by PricewaterhouseCoopers for such services for the year
ended December 31, 2002. The engagement of PricewaterhouseCoopers and the services provided
pursuant to such engagement were approved by our audit committee in accordance
with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X. The fees for all such
services have been pre-approved by our audit committee. Our audit committee has satisfied itself that the provision of the
above-stated non-audit services has not impaired the independence of
PricewaterhouseCoopers. 
 Item 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES None. 
 Item 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS None. 57




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PART III 
 Item 17. FINANCIAL STATEMENTS We have responded to Item 18 in lieu of responding to this item. 
 Item 18. FINANCIAL STATEMENTS See pages F-1 through F-46 incorporated herein by reference. 
 Item 19. EXHIBITS 1.1***
    
    Memorandum and Articles of Association of the Registrant (as amended).1.2*
    
    Certificate of Incorporation of the Registrant.2.1*
    
    Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary bank, and
holders and beneficial holders of the American depositary shares.2.2*
    
    Form of American depositary receipt evidencing American depositary shares.2.3*
    
    Specimen certificate of the Ordinary Shares.4.1*
    
    Rules of the Share Option Scheme adopted on March 1, 2000.4.2*
    
    Non-Competition Agreement dated as of March 3, 2000 between Distacom Communications Limited and
the Registrant.4.3**
    
    Rules of the Share Option Scheme, adopted on May 22, 2002.4.4**
    
    Mobile Carrier License dated as of October 22, 2001 issued by the Telecommunications Authority
to SUNDAY 3G (Hong Kong) Limited.4.5***
    
    Turn Key Contract for the Supply and Installation of a Mobile Communications Network and
Associated Services between Huawei Tech. Investment Co., Limited and Mandarin Communications
Limited dated as of May 13, 2004.4.6***
    
    Facility Agreement dated as of May 13, 2004 among Mandarin Communications Limited as Borrower,
SUNDAY Communications Limited as Guarantor and Huawei Tech. Investment Co., Limited as the
Original Lender.4.7***
    
    Subcontract Agreement dated as of May 13, 2004 among Huawei Tech. Investment Co., Limited as
Contractor and Mandarin Communications Limited as Subcontractor.6.1***
    
    Computation of Earnings Per Share: See Selected Financial Data table in Item 3. Key Information.8.1***
    
    Subsidiaries of the Registrant.12.1***
    
    Certification of Group Managing Director.12.2***
    
    Certification of Group Director  Finance.13.1***
    
    Certification of Group Managing Director pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.13.2***
    
    Certification of Group Director  Finance pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Incorporated by reference to the registrants Registration Statement on
Form F-1, filed on March 9, 2000 (Registration No. 333-11470).**
    
    Incorporated by reference to the registrants Form 20-F for the year
ended December 31, 2001.***
    
    Filed herewith.  Portions of the exhibit have been omitted pursuant to application for
confidential treatment, which has been filed separately with the Commission. 58




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SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused and authorized the
undersigned to sign this Annual Report on its behalf. SUNDAY Communications LimitedBy:
    /s/ WILLIAM BRUCE HICKSName:
    William Bruce HicksJune 30, 2004
    
    Title:
    Group Managing Director

Date: 59




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Auditors
    
    
    F-2Consolidated Statements of Profits and Losses for the years ended December 31,
2001, 2002 and 2003
    
    
    F-3Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the years
ended December 31, 2001, 2002 and 2003
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002
and 2003
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-10
 F-1




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REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
SUNDAY COMMUNICATIONS LIMITED In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of profits and losses, of changes in shareholders
equity and of cash flows present fairly, in all material respects, the
consolidated financial position of SUNDAY Communications Limited (the
Company) and its subsidiaries (hereafter collectively referred to as the
Group) at December 31, 2002 and 2003, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2003 in conformity with accounting principles generally accepted in Hong Kong.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of
such differences is presented in Note 27 to the consolidated financial
statements. PricewaterhouseCoopers
Certified Public Accountants Hong Kong, April 1, 2004
Except for Note 26(b), as of which the date was May 13, 2004 F-2




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF PROFITS AND LOSSES
(Amounts in thousands except per share data) Year ended December 31,2001
    
    2002
    
    2003
    
    2003Note
    
    HK$
    
    HK$
    
    HK$
    
    US$Revenues fromMobile services
    
    
    
    
    
    
    1,165,399
    
    
    
    1,217,677
    
    
    
    1,149,875
    
    
    
    148,104Sales of mobile phones and
accessories
    
    
    
    
    
    
    242,901
    
    
    
    115,291
    
    
    
    109,471
    
    
    
    14,100Other services
    
    
    
    
    
    
    14,093
    
    
    
    9,722
    
    
    
    695
    
    
    
    89Total operating revenues
    
    
    23
    
    
    
    1,422,393
    
    
    
    1,342,690
    
    
    
    1,260,041
    
    
    
    162,293Cost of services
    
    
    3
    
    
    
    (224,262
    )
    
    
    (221,071
    )
    
    
    (196,754
    )
    
    
    (25,342
    )Cost of sales of mobile phones and
accessories
    
    
    
    
    
    
    (244,981
    )
    
    
    (113,414
    )
    
    
    (133,315
    )
    
    
    (17,171
    )Gross profit
    
    
    
    
    
    
    953,150
    
    
    
    1,008,205
    
    
    
    929,972
    
    
    
    119,780Other revenues
    
    
    
    
    
    
    2,602
    
    
    
    1,917
    
    
    
    4,550
    
    
    
    586Operating expensesNetwork costs
    
    
    
    
    
    
    (301,668
    )
    
    
    (303,577
    )
    
    
    (270,070
    )
    
    
    (34,785
    )Depreciation
    
    
    11
    
    
    
    (265,102
    )
    
    
    (256,393
    )
    
    
    (233,293
    )
    
    
    (30,048
    )Rent and related costs
    
    
    
    
    
    
    (58,502
    )
    
    
    (61,074
    )
    
    
    (46,284
    )
    
    
    (5,961
    )Salaries and related costs
    
    
    4
    
    
    
    (233,202
    )
    
    
    (243,890
    )
    
    
    (152,020
    )
    
    
    (19,580
    )Advertising, promotion and other
selling costs
    
    
    
    
    
    
    (180,363
    )
    
    
    (127,798
    )
    
    
    (105,976
    )
    
    
    (13,650
    )Other operating costs
    
    
    
    
    
    
    (80,125
    )
    
    
    (60,078
    )
    
    
    (45,020
    )
    
    
    (5,799
    )(Loss)/Profit from operations
    
    
    23
    
    
    
    (163,210
    )
    
    
    (42,688
    )
    
    
    81,859
    
    
    
    10,543Interest income
    
    
    
    
    
    
    21,592
    
    
    
    3,553
    
    
    
    2,526
    
    
    
    325Finance costs
    
    
    4
    
    
    
    (70,130
    )
    
    
    (59,520
    )
    
    
    (52,787
    )
    
    
    (6,798
    )Share of losses from joint ventures
    
    
    
    
    
    
    
    
    
    
    (18,609
    )
    
    
    (4,426
    )
    
    
    (570
    )Net (loss)/profit
    
    
    4
    
    
    
    (211,748
    )
    
    
    (117,264
    )
    
    
    27,172
    
    
    
    3,500Basic and diluted (loss)/earnings per
share (in cents)
    
    
    6
    
    
    
    (7.1
    )
    
    
    (3.9
    )
    
    
    0.9
    
    
    
    0.1Shares outstanding for basic and
diluted loss/earnings
per share (thousands)
    
    
    6
    
    
    
    2,990,000
    
    
    
    2,990,000
    
    
    
    2,990,000
    
    
    
    2,990,000
 The accompanying notes are an integral part of these consolidated financial
statements. F-3




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) December 31,2002
    
    2003
    
    2003Note
    
    HK$
    
    HK$
    
    US$ASSETSCurrent assetsCash and cash equivalents
    
    
    20
    
    
    
    49,577
    
    
    
    102,413
    
    
    
    13,191Restricted cash deposits
    
    
    7
    
    
    
    156,939
    
    
    
    209,643
    
    
    
    27,002Trade receivables, net of provision for
doubtful debts
    
    
    8
    
    
    
    87,409
    
    
    
    81,069
    
    
    
    10,442Prepayment of 3G License fees
    
    
    13
    
    
    
    50,000
    
    
    
    50,000
    
    
    
    6,440Inventories
    
    
    9
    
    
    
    9,995
    
    
    
    11,621
    
    
    
    1,496Deposits, prepayments and other
receivables
    
    
    10
    
    
    
    96,355
    
    
    
    82,677
    
    
    
    10,649Total current assets
    
    
    
    
    
    
    450,275
    
    
    
    537,423
    
    
    
    69,220Non-current assetsFixed assets, net of accumulated
depreciation
    
    
    11
    
    
    
    1,213,897
    
    
    
    1,101,899
    
    
    
    141,924Investment in a joint venture
    
    
    12
    
    
    
    3,322
    
    
    
    
    
    
    
    Prepayment of 3G License fees
    
    
    13
    
    
    
    141,667
    
    
    
    91,667
    
    
    
    11,807Restricted cash deposits
    
    
    7
    
    
    
    1,682
    
    
    
    1,699
    
    
    
    219Total assets
    
    
    
    
    
    
    1,810,843
    
    
    
    1,732,688
    
    
    
    223,170LIABILITIES AND SHAREHOLDERS
EQUITYCurrent liabilitiesTrade payables
    
    
    
    
    
    
    56,348
    
    
    
    71,600
    
    
    
    9,222Other payables and accrued charges
    
    
    14
    
    
    
    171,313
    
    
    
    152,791
    
    
    
    19,679Subscriptions received in advance
    
    
    
    
    
    
    123,469
    
    
    
    87,567
    
    
    
    11,279Current portion of obligations under
finance leases
    
    
    15
    
    
    
    138
    
    
    
    
    
    
    
    Current portion of bank and vendor loans
    
    
    16
    
    
    
    238,491
    
    
    
    296,368
    
    
    
    38,172Total current liabilities
    
    
    
    
    
    
    589,759
    
    
    
    608,326
    
    
    
    78,352Long-term liabilitiesSubscriptions received in advance
    
    
    
    
    
    
    3,527
    
    
    
    1,458
    
    
    
    188Bank loans
    
    
    16
    
    
    
    240,000
    
    
    
    
    
    
    
    Vendor loans
    
    
    16
    
    
    
    306,825
    
    
    
    425,000
    
    
    
    54,740Total liabilities
    
    
    
    
    
    
    1,140,111
    
    
    
    1,034,784
    
    
    
    133,280Commitments and contingencies
    
    
    17Shareholders equityShare capital
    
    
    18
    
    
    
    299,000
    
    
    
    299,000
    
    
    
    38,511Reserve arising from the Reorganization
    
    
    18
    
    
    
    1,254,000
    
    
    
    1,254,000
    
    
    
    161,515Share premium
    
    
    18
    
    
    
    2,124,424
    
    
    
    2,124,424
    
    
    
    273,625Accumulated losses
    
    
    
    
    
    
    (3,006,692
    )
    
    
    (2,979,520
    )
    
    
    (383,761
    )Total shareholders equity
    
    
    
    
    
    
    670,732
    
    
    
    697,904
    
    
    
    89,890Total liabilities and shareholders equity
    
    
    
    
    
    
    1,810,843
    
    
    
    1,732,688
    
    
    
    223,170
 The accompanying notes are an integral part of these consolidated financial
statements. F-4




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands) Reservearising
    
    
    
    
    
    
    
    
    
    TotalShare
    
    from the
    
    Share
    
    Accumulated
    
    shareholderscapital
    
    reorganization
    
    premium
    
    losses
    
    equityHK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$As of January 1, 2001
    
    
    299,000
    
    
    
    1,254,000
    
    
    
    2,124,424
    
    
    
    (2,677,680
    )
    
    
    999,744Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211,748
    )
    
    
    (211,748
    )As of December 31, 2001
    
    
    299,000
    
    
    
    1,254,000
    
    
    
    2,124,424
    
    
    
    (2,889,428
    )
    
    
    787,996As of January 1, 2002
    
    
    299,000
    
    
    
    1,254,000
    
    
    
    2,124,424
    
    
    
    (2,889,428
    )
    
    
    787,996Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (117,264
    )
    
    
    (117,264
    )As of December 31, 2002
    
    
    299,000
    
    
    
    1,254,000
    
    
    
    2,124,424
    
    
    
    (3,006,692
    )
    
    
    670,732As of January 1, 2003
    
    
    299,000
    
    
    
    1,254,000
    
    
    
    2,124,424
    
    
    
    (3,006,692
    )
    
    
    670,732Net profit for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,172
    
    
    
    27,172As of December 31, 2003
    
    
    299,000
    
    
    
    1,254,000
    
    
    
    2,124,424
    
    
    
    (2,979,520
    )
    
    
    697,904
 The accompanying notes are an integral part of these consolidated financial
statements. F-5




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) Year ended December 31,2001
    
    2002
    
    2003
    
    2003HK$
    
    HK$
    
    HK$
    
    US$Net cash (used in)/provided by operating
activities (note a)
    
    
    (88,355
    )
    
    
    129,343
    
    
    
    241,914
    
    
    
    31,158Investing activitiesAdvances to joint ventures
    
    
    (4,940
    )
    
    
    (16,991
    )
    
    
    (1,104
    )
    
    
    (142
    )Payment of 3G License fee
    
    
    (250,000
    )
    
    
    
    
    
    
    
    
    
    
    Payment of 3G License related expenses
    
    
    (821
    )
    
    
    
    
    
    
    
    
    
    
    Purchases of fixed assets
    
    
    (146,664
    )
    
    
    (68,995
    )
    
    
    (73,409
    )
    
    
    (9,455
    )Proceeds from disposals of fixed assets
    
    
    504
    
    
    
    42
    
    
    
    66
    
    
    
    8Increase in restricted cash deposits
    
    
    (39,066
    )
    
    
    (23,530
    )
    
    
    (52,721
    )
    
    
    (6,790
    )Net cash used in investing activities
    
    
    (440,987
    )
    
    
    (109,474
    )
    
    
    (127,168
    )
    
    
    (16,379
    )Financing activities (note b)Repayment of long-term bank loans
    
    
    (24,000
    )
    
    
    (156,000
    )
    
    
    (180,000
    )
    
    
    (23,184
    )Repayment of long-term vendor loans
    
    
    (19,543
    )
    
    
    (39,000
    )
    
    
    (134,550
    )
    
    
    (17,330
    )Increase in long-term vendor loans
    
    
    
    
    
    
    179,400
    
    
    
    252,778
    
    
    
    32,558Capital element of finance lease payments
    
    
    (5,927
    )
    
    
    (2,020
    )
    
    
    (138
    )
    
    
    (18
    )Net cash used in financing activities
    
    
    (49,470
    )
    
    
    (17,620
    )
    
    
    (61,910
    )
    
    
    (7,974
    )(Decrease)/Increase in cash and cash equivalents
    
    
    (578,812
    )
    
    
    2,249
    
    
    
    52,836
    
    
    
    6,805Cash and cash equivalents at the beginning of the
year
    
    
    626,140
    
    
    
    47,328
    
    
    
    49,577
    
    
    
    6,386Cash and cash equivalents at the end of the year
    
    
    47,328
    
    
    
    49,577
    
    
    
    102,413
    
    
    
    13,191
 The accompanying notes are an integral part of these consolidated financial
statements. F-6




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
(Amounts in thousands)  (a)
    
    Reconciliation of loss from operations to net cash (used in)/provided by
operating activities: Year ended December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Loss)/Profit from operations
    
    
    (163,210
    )
    
    
    (42,688
    )
    
    
    81,859Depreciation
    
    
    265,102
    
    
    
    256,393
    
    
    
    233,293Loss on disposals of fixed assets
    
    
    1,126
    
    
    
    377
    
    
    
    414Operating profit before working capital changes
    
    
    103,018
    
    
    
    214,082
    
    
    
    315,566(Increase)/decrease in inventories
    
    
    (4,373
    )
    
    
    10,453
    
    
    
    (1,626
    )Decrease in trade receivables, deposits,
prepayments and other receivables
    
    
    1,228
    
    
    
    666
    
    
    
    20,877(Decrease)/Increase in trade payables, other payables
and accrued charges
    
    
    (75,538
    )
    
    
    (13,852
    )
    
    
    1,835Decrease in subscriptions received in advance
    
    
    (63,758
    )
    
    
    (26,329
    )
    
    
    (37,971
    )Cash (used in)/provided by operations
    
    
    (39,423
    )
    
    
    185,020
    
    
    
    298,681Interest received
    
    
    25,488
    
    
    
    3,422
    
    
    
    2,791Interest paid
    
    
    (72,990
    )
    
    
    (58,307
    )
    
    
    (56,892
    )Interest element of finance lease payments
    
    
    (413
    )
    
    
    (129
    )
    
    
    (17
    )Other incidental borrowing costs paid
    
    
    (1,017
    )
    
    
    (663
    )
    
    
    (2,649
    )Net cash (used in)/provided by operating activities
    
    
    (88,355
    )
    
    
    129,343
    
    
    
    241,914
 The accompanying notes are an integral part of these consolidated financial
statements. F-7




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
(Amounts in thousands)  (b)
    
    Analysis of changes in financing during the years: ObligationsShare
    
    Share
    
    Long-term
    
    under financecapital
    
    premium
    
    loans
    
    leasesHK$
    
    HK$
    
    HK$
    
    HK$As of January 1, 2001
    
    
    299,000
    
    
    
    2,124,424
    
    
    
    794,998
    
    
    
    8,085Net cash used in financing
    
    
    
    
    
    
    
    
    
    
    (43,543
    )
    
    
    (5,927
    )As of December 31, 2001
    
    
    299,000
    
    
    
    2,124,424
    
    
    
    751,455
    
    
    
    2,158As of January 1, 2002
    
    
    299,000
    
    
    
    2,124,424
    
    
    
    751,455
    
    
    
    2,158Net cash used in financing
    
    
    
    
    
    
    
    
    
    
    (15,600
    )
    
    
    (2,020
    )Purchases of fixed assets by directly
assuming long-term loans
    
    
    
    
    
    
    
    
    
    
    49,461
    
    
    
    As of December 31, 2002
    
    
    299,000
    
    
    
    2,124,424
    
    
    
    785,316
    
    
    
    138As of January 1, 2003
    
    
    299,000
    
    
    
    2,124,424
    
    
    
    785,316
    
    
    
    138Net cash used in financing
    
    
    
    
    
    
    
    
    
    
    (61,772
    )
    
    
    (138
    )Exchange differences
    
    
    
    
    
    
    
    
    
    
    (2,176
    )
    
    
    As of December 31, 2003
    
    
    299,000
    
    
    
    2,124,424
    
    
    
    721,368
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial
statements. F-8




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
(Amounts in thousands)  (c)
    
    Supplemental cash flow information: Year ended December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$Non-cash transactionsPurchases of fixed assets by directly assuming
long-term vendor loans
    
    
    
    
    
    
    49,461
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial
statements. F-9




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  1
    
    Description of business and basis of presentation(a)
    
    Description of businessSUNDAY Communications Limited (the Company) and its wholly-owned
subsidiaries are engaged in the provision of mobile and other services in
Hong Kong. The Company and its subsidiaries (together the Group)
commenced its operations in November 1996 and commercial operations on
September 21, 1997.(b)
    
    Basis of presentationThe consolidated financial statements have been prepared using accounting
principles which conform with accounting principles generally accepted in
Hong Kong (HK GAAP) and with accounting standards issued by the Hong
Kong Society of Accountants. These principles differ in certain
significant respects from accounting principles generally accepted in the
United States of America (US GAAP), details of the differences are set
out in note 27.The consolidated financial statements do not represent the Hong Kong
statutory financial statements of the Group as certain reclassifications
and changes in presentation have been made to the financial statements in
order to conform more closely to presentations customary in filings with
the Securities and Exchange Commission of the United States of America.Unless indicated otherwise, all amounts are expressed in Hong Kong
Dollars.2
    
    Principal accounting policiesThe principal accounting policies adopted in the preparation of the
consolidated financial statements are as follows:(a)
    
    Group accounting  (i)
    
    ConsolidationThe consolidated financial statements of the Group incorporate the
financial statements of the Company and its subsidiaries made up to
31st December. Subsidiaries are those entities in which the
Company, directly or indirectly, controls more than one half of the
voting power; has the power to govern the financial and operating
policies; to appoint or remove the majority of the members of the
board of directors; or to cast majority of votes at the meetings of
the board of directors. The results of subsidiaries acquired or
disposed of during the year are included in the statement of losses
from the effective date of acquisition or up to the effective date
of disposal as appropriate.All significant intercompany transactions and balances within the
Group are eliminated on consolidation.(ii)
    
    Joint ventureA joint venture is a contractual arrangement whereby the Group
and other parties undertake an economic activity which is subject
to joint control and none of the participating parties has
unilateral control over the economic activity.The consolidated statement of losses includes the Groups share
of the results of joint ventures for the year, and the
consolidated balance sheet includes the Groups share of the net
assets of a joint venture. F-10




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (b)
    
    Revenue recognitionThe Group recognizes revenues on the following bases:  (i)
    
    Mobile servicesRevenue from mobile services comprises connection fees and fees for
usage of the Groups network and facilities by SUNDAY subscribers
and international calls by such subscribers from mobile phones.
Connection fee revenue is recognized when received upon completion
of activation services. Subscribers pay monthly fees for usage of
the Groups network and facilities which include an agreed minimum
amount of free airtime available for local and international calls.
Fees for airtime in excess of the agreed minimum and international
calls are charged based on usage. Revenue for usage of the Groups
network and facilities is recognized in the period in which usage
of such network and facilities is provided and collectibility can
be reasonably assured. Revenue in respect of international calls
and mobile airtime in excess of the minimum agreed amount is
recognized when the respective calls are made and collectibility
can be reasonably assured.Subscriptions received in advance comprises prepaid subscription
fees received from subscribers and the up-front subscription fees
received from subscribers upon purchase of mobile phones. They are
for provision of mobile airtime and access to the Groups network
for an agreed period of time in accordance with the terms of the
sales and services agreements and are deferred and amortized on a
straight-line basis over the agreed period, except for prepaid
subscription fees from prepaid mobile services which are recognized
as revenue based on usage of the Groups network and facilities.(ii)
    
    Sales of mobile phones and accessoriesRevenue from sales of mobile phones and accessories is recognized
when the mobile phones and accessories are delivered to customers
and collectibility can be reasonably assured. Where a customer
signs a sales and services agreement in connection with the
purchase of a mobile phone and accessories from the Group and the
provision of mobile services, revenue in respect of the service
element of the agreement is recognized based on the fair value of
the service element, which is the price the Group charges to
customers who subscribe for mobile services only, without purchase
of a mobile phone and accessories. The remainder of the total
revenues from the agreement is allocated to revenue from the sale
of the mobile phone and accessories.(iii)
    
    Interest incomeInterest income is recognized on a time proportion basis, taking
into account the principal amounts outstanding and the interest
rates applicable.  (c)
    
    Subscriber acquisition costsThe direct costs of acquisition of subscribers, which comprise the loss
on sales of mobile phones and accessories to the Group and commission
expenses, are expensed as incurred. Revenue and cost of sales in respect
of sales of mobile phones and accessories are included in revenue from
sales and cost of sales of mobile phones and accessories respectively.
Commission expenses are included in advertising, promotion and other
selling costs. F-11




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)(d)
    
    Advertising and promotion costsAdvertising and promotion costs are charged to the statement of profits
and losses as incurred.(e)
    
    Warranty costsThe Group is provided with warranty from certain manufacturers in respect
of such manufacturers defects of mobile phones and accessories. The
Group provides warranty to customers upon sales of such mobile phones and
accessories with similar terms and conditions to the warranty offered by
the manufacturers. Provision is made for warranty costs not recoverable
from the manufacturers.(f)
    
    Borrowing costsBorrowing costs that are directly attributable to the acquisition,
construction or production of an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale are
capitalized as part of the cost of that asset.All other borrowing costs are charged to the statement of profits and
losses in the year in which they are incurred.(g)
    
    Employee benefits  (i)
    
    Employee leave entitlementsEmployee entitlements to annual leave are recognized when they
accrue to employees. A provision is made for the estimated
liability for annual leave as a result of services rendered by
employees up to the balance sheet date.(ii)
    
    Bonus plansThe expected bonus payments are recognized as a liability 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.Liabilities for bonus plans are expected to be settled within 12
months and are measured at the amounts expected to be paid when
they are settled.(iii)
    
    Retirement benefit costsThe Groups contributions to the defined contribution retirement
schemes are expensed as incurred and are reduced by contributions
forfeited by those employees who leave the schemes prior to vesting
fully in the contributions. The assets of the schemes are held
separately from those of the Group in independently administered
funds of respective schemes. F-12




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (h)
    
    Deferred taxationDeferred taxation is 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 accounts. Taxation rates
enacted or substantively enacted by the balance sheet date are used to
determine deferred taxation.Deferred tax assets are recognised to the extent that it is probable that
future taxable profit will be available against which the temporary
differences can be utilised.Deferred taxation is provided on temporary differences arising from
depreciation on fixed assets, except where the timing of the reversal of
the temporary difference can be controlled and it is probable that the
temporary difference will not reverse in the foreseeable future.(i)
    
    Assets under leases  (i)
    
    Finance leasesLeases that substantially transfer to the Group all the risks and
rewards of ownership of assets are accounted for as finance leases.
At the inception of a finance lease, the fair value of the asset
is recorded together with the obligation, excluding the interest
element, to pay future rentals.Payments to the lessor are treated as consisting of capital and
interest elements. Finance charges are charged to the profit and
loss account in proportion to the capital balances outstanding.Assets held under finance leases are depreciated over the shorter
of their estimated useful lives or lease periods.(ii)
    
    Operating leasesLeases where substantially all the risks and rewards of ownership
of assets remain with the leasing company are accounted for as
operating leases. Rentals applicable to such operating leases are
charged to the profit and loss account on a straight line basis
over the lease terms. F-13




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (j)
    
    Fixed assets  (i)
    
    Fixed assets are stated at cost less accumulated depreciation
and accumulated impairment losses, if any. Depreciation of fixed
assets is calculated to write off their cost over their estimated
useful lives, using a straight-line basis. Estimated useful lives
are summarized as follows: Network equipment
    
    Shorter of 10 years or lease period of 1 to 3 yearsComputer equipment
    
    Shorter of 5 years or lease period of 1 to 3 yearsLeasehold improvements
    
    Lease period of 2 to 10 yearsFurniture and fixtures
    
    5 yearsOffice equipment
    
    5 yearsMotor vehicles
    
    5 years
  The cost of the network equipment comprises (i) the purchase cost
of network assets and equipment and direct expenses in respect of
the development of the network; and (ii) the minimum annual fees
payable prior to the launch of 3G commercial services, and are
depreciated over the remaining 3G License period or their estimated
useful lives.Major costs incurred in restoring fixed assets to their normal
working condition are charged to the statement of losses.
Improvements are capitalized and depreciated over their expected
useful lives to the Group.At each balance sheet date, both internal and external sources of
information are considered to assess whether there is any
indication that fixed assets are impaired. If any such
indication exists, the recoverable amount of the fixed assets are
estimated and where relevant, an impairment loss is recognized to
reduce the fixed assets to the recoverable amount. Such
impairment losses are recognized in the profit and loss account.(ii)
    
    The gain or loss on disposal of a fixed asset is the
difference between the net sale proceeds and the carrying amount of
the relevant asset, and is recognized in the statement of profits
and losses.(iii)
    
    Leases that substantially transfer to the Group all the
risks and rewards of ownership of assets are accounted for as
finance leases. At the inception of a finance lease, the fair value
of the asset is recorded together with the obligation, excluding the
interest element, to pay future rentals.Payments to the lessor are treated as consisting of capital and
interest elements. Finance charges are charged to the statement of
profits and losses in proportion to the capital balances
outstanding.Assets held under finance leases are depreciated over the shorter
of their estimated useful lives or the lease periods. F-14




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (k)
    
    Long-lived assetsLong-lived assets are comprised of intangible assets and fixed assets.
Under HK GAAP, at each balance sheet date, both internal and external
sources of information are considered to assess whether there is any
indication that long-lived assets are impaired. If any such indication
exists, the recoverable amount of the long-lived assets is estimated and
where relevant, an impairment loss is recognized to reduce the long-lived
asset to its recoverable amount. Such impairment losses are recognized in
the statement of profits and losses. In determining the recoverable
amount, expected future cash flows generated by the long-lived assets are
discounted to their present values.Under US GAAP, long-lived assets, including certain identifiable
intangible assets related to those assets to be held and used, are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the total
expected future undiscounted cash flows is less than the carrying amount
of the asset, an impairment loss is recognized for the difference between
the quoted market price in active markets, if available, and carrying
value of the asset. If quoted market prices are not available, the
estimated fair value is based on various valuation techniques, including
a discounted value of estimated future cash flows and fundamental
analysis. No such impairment losses were required for the years ended
December 31, 2001, 2002 and 2003.(l)
    
    Trade receivablesProvision is made against trade receivables to the extent which they are
considered to be doubtful. Trade receivables in the balance sheet are
stated net of such provision.(m)
    
    InventoriesInventories are stated at the lower of cost and net realizable value.
Cost is calculated on the weighted average basis. Net realizable value is
determined on the basis of anticipated sales proceeds less estimated
selling expenses.(n)
    
    Refundable depositsRefundable deposits are received from customers who require mobile
international calls and roaming services. The refundable deposits are
retained by the Group and are included in other payables and accrued
charges for as long as the customers require these services.(o)
    
    Cash and cash equivalentsCash and cash equivalents are short-term highly liquid investments, which
are readily convertible into cash and have original maturities of three
months or less at the date of acquisition. F-15




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (p)
    
    Translation of foreign currenciesTransactions in foreign currencies during the year are translated into
Hong Kong dollars at the rates of exchange ruling at the transaction
dates. Monetary assets and liabilities denominated in foreign currencies
are incorporated into the accounts by translating foreign currencies into
Hong Kong dollars at rates of exchange ruling at the balance sheet date.
All exchange differences arising are included in the statement of profits
and losses.The balance sheet of subsidiaries and joint venture expressed in foreign
currencies are translated at the rates of exchange ruling at the balance
sheet date whilst the statement of profits and losses is translated at an
average rate. Exchange differences are dealt with as a movement in
reserves.(q)
    
    Use of estimatesThe preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
reported during the year. Actual results could differ from these
estimates.(r)
    
    Risks and uncertaintiesThe Group participates in a volatile industry with a concentration of
customers in one geographic area that are characterized by industry-wide
competition for market share resulting in aggressive pricing practices,
continually changing customers demand patterns, growing competition and
rapid technological development. The Groups operating results could be
adversely affected should the Group be unable to anticipate customer
demand accurately, to maintain short design cycles while meeting evolving
industry performance standards, to manage its product or services
transitions and inventory levels, to distribute its products and services
quickly in response to customer demand, to differentiate its products and
services from those of its competitors, or to compete successfully in the
market for its new products and services.(s)
    
    Convenience translationsThe consolidated statements of profits and losses, and of cash flows for
the year ended December 31, 2003 and the consolidated balance sheet as of
December 31, 2003 contain certain translations of Hong Kong dollars at
the rate of HK$7.764 to U.S. dollars. Such translations should not be
construed as representations that the Hong Kong dollar amounts represent
or have been or could have been converted into U.S. dollars at that or
any other rate.3
    
    Cost of servicesCost of services represents interconnection charges, cost of out-bound
roaming services, provision for doubtful debts, billing materials
charges, bill collection charges, cost of prepaid cards and revenue
sharing expenses. F-16




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  4
    
    Net (loss)/profit Year ended December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Amounts in thousands)Net (loss)/profit is stated after charging:Advertising and promotion costs
    
    
    43,727
    
    
    
    41,551
    
    
    
    41,396Auditors remuneration charge for the year
    
    
    1,153
    
    
    
    1,128
    
    
    
    1,100 under-provision in prior year
    
    
    
    
    
    
    35
    
    
    
    Cost of inventories sold
    
    
    244,981
    
    
    
    113,414
    
    
    
    133,315Loss on disposal of fixed assets
    
    
    1,126
    
    
    
    377
    
    
    
    414Provision for doubtful debts
    
    
    19,579
    
    
    
    31,016
    
    
    
    30,228Depreciation of owned fixed assets
    
    
    258,641
    
    
    
    253,668
    
    
    
    233,055Depreciation of fixed assets under finance leases
    
    
    6,461
    
    
    
    2,725
    
    
    
    238Operating lease charges on land and buildings,
including transmission sites
    
    
    209,370
    
    
    
    220,207
    
    
    
    195,945Operating lease charges on leased lines
    
    
    94,777
    
    
    
    87,130
    
    
    
    73,283Net exchange losses
    
    
    
    
    
    
    313
    
    
    
    Salaries and related costs comprise:Salaries, bonuses and allowances
    
    
    223,330
    
    
    
    212,338
    
    
    
    145,348Retirement scheme contributions
    
    
    9,872
    
    
    
    6,653
    
    
    
    5,362Termination benefits
    
    
    
    
    
    
    24,899
    
    
    
    1,310233,202
    
    
    
    243,890
    
    
    
    152,020Finance costs comprise:Interest on bank loans
    
    
    52,160
    
    
    
    37,923
    
    
    
    24,718Interest on vendor loans
    
    
    16,540
    
    
    
    20,816
    
    
    
    27,579Interest element of finance lease payments
    
    
    413
    
    
    
    129
    
    
    
    17Other incidental borrowing costs
    
    
    1,017
    
    
    
    652
    
    
    
    47370,130
    
    
    
    59,520
    
    
    
    52,787After crediting:Net exchange gains
    
    
    42
    
    
    
    
    
    
    
    614
 F-17




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  5
    
    TaxationThe Group is subject to tax on an entity basis on income arising in or
derived from Hong Kong. The rate of taxation of the companies within the
Group operating in Hong Kong for the years ended December 31, 2001, 2002
is 16% and 2003 is 17.5%. No provision for Hong Kong and overseas
profits tax has been made during the years ended December 31, 2001 and
2002, presented as the Group has no assessable profit for each of the two
years. No provision for Hong Kong and overseas profits tax has been made
during the year ended December 31, 2003 presented as the Group has
sufficient tax losses brought forward to set off against the assessable
profit for the year.The Group has not recorded a deferred tax in its consolidated statements
of profits and losses for the years ended December 31, 2001, 2002 and
2003 in respect of tax losses due to the uncertainty that the resultant
deferred tax asset will be recovered in the foreseeable future. The
differences between the effective tax rate of 0% and the Hong Kong tax
rate of 17.5% (2001 & 2002: 16%) were primarily due to valuation
allowances for deferred tax assets in respect of tax loss carryforwards,
the effect of non-deductible expenses and other temporary differences.The income tax credit and charge attributable to the loss and profit for
each of the years ended December 31, 2001, 2002 and 2003 differed from
the amounts computed by applying the Hong Kong statutory rate to the
pre-tax loss as a result of the following differences: Year ended December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Amounts in thousands)Hong Kong statutory tax rate:
    
    
    16
    %
    
    
    16
    %
    
    
    17.5
    %Income tax (credit)/charge at the Hong Kong
statutory tax rate
    
    
    (33,880
    )
    
    
    (18,762
    )
    
    
    4,755Effect of temporary differences
    
    
    (2,250
    )
    
    
    21,758
    
    
    
    22,224Effect of non-deductible expenses
    
    
    1,534
    
    
    
    8,295
    
    
    
    3,713Effect of non-taxable income
    
    
    (2,631
    )
    
    
    (431
    )
    
    
    (303
    )Effect of utilization of previously
unrecognized tax loss
    
    
    37,227
    
    
    
    (10,860
    )
    
    
    (30,389
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
  The potential deferred tax assets/(liabilities) not provided for as of
December 31, 2002 and 2003 amounted to: December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Accelerated depreciation allowances
    
    
    (102,991
    )
    
    
    (90,410
    )Tax losses
    
    
    476,859
    
    
    
    491,024373,868
    
    
    
    400,614
  Deferred income tax assets are recognized for tax loss carryforwards to
the extent that realization of the related tax benefit through the future
taxable profits is probable. The Group has net unrecognized tax losses of
HK$3,382,281,000 (2002: HK$3,555,929,000) to carry forward against future
taxable income. This tax loss has no expiry date. F-18




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  6
    
    Earnings/(Loss) per shareBasic loss per share for the years ended December 31, 2001, 2002 and
basic earnings per share for the year ended December, 31, 2003 has been
calculated based on the weighted average number of 2,990,000,000 shares
in issue during the year.There is no dilutive effect upon exercise of the share options on the
loss per share for the years ended December 31, 2001, 2002 and the
earnings per share for the year ended December 31, 2003.7
    
    Restricted cash depositsAs of December 31, 2003, a bank deposit of HK$1,699,000 (2002:
HK$1,682,000) has been pledged to a bank in return for a bank guarantee
issued in respect of the use of facilities at the Hong Kong International
Airport for the provision of mobile services. The guarantee will expire
in March 2007.As of December 31, 2003, another bank deposit of HK$209,643,000 (2002:
HK$156,939,000) was restricted to settle the bank loans, vendor loans and
the relevant interest repayable within six months.8
    
    Trade receivables, net December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Trade receivables
    
    
    95,251
    
    
    
    88,581Less: Provision for doubtful debts
    
    
    (7,842
    )
    
    
    (7,512
    )87,409
    
    
    
    81,069
  Changes in the provision for doubtful debts consist of: Year ended December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Amounts in thousands)Balance at the beginning of the year
    
    
    4,747
    
    
    
    5,266
    
    
    
    7,842Additions charged to expense
    
    
    19,791
    
    
    
    30,883
    
    
    
    30,228Write-off
    
    
    (19,060
    )
    
    
    (28,307
    )
    
    
    (30,558
    )Write back of provision
    
    
    (212
    )
    
    
    
    
    
    
    Balance at the end of the year
    
    
    5,266
    
    
    
    7,842
    
    
    
    7,512
 F-19




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  9
    
    Inventories December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Mobile
phones and accessoriesCost
    
    
    13,155
    
    
    
    15,940Less: Provision
    
    
    (3,160
    )
    
    
    (4,319
    )9,995
    
    
    
    11,621
  As of December 31, 2003, the carrying amount of inventories that were
stated at net realizable value amounted to HK$8,281,000 (2002:
HK$3,129,000).All inventories were pledged as security for the bank loan and vendor
loan facilities of the Group.10
    
    Deposits, prepayments and other receivables December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Rental deposits for transmission sites
    
    
    33,790
    
    
    
    30,778Deposits for acquisition of fixed assets
    
    
    5,848
    
    
    
    6,971Other deposits
    
    
    20,303
    
    
    
    16,776Prepayments
    
    
    27,687
    
    
    
    21,002Others
    
    
    8,727
    
    
    
    7,15096,355
    
    
    
    82,677
 F-20




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  11
    
    Fixed assets, net of accumulated depreciation FurnitureNetwork
    
    and
    
    Office
    
    Computer
    
    Motor
    
    Leaseholdequipment
    
    fixtures
    
    equipment
    
    equipment
    
    vehicles
    
    improvements
    
    TotalHK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$(Amounts in thousands)CostAs of January 1, 2002
    
    
    1,709,322
    
    
    
    7,411
    
    
    
    12,418
    
    
    
    219,754
    
    
    
    2,871
    
    
    
    303,709
    
    
    
    2,255,485Additions
    
    
    125,827
    
    
    
    883
    
    
    
    6,389
    
    
    
    4,378
    
    
    
    585
    
    
    
    30,014
    
    
    
    168,076Disposals
    
    
    (13
    )
    
    
    (845
    )
    
    
    (859
    )
    
    
    (2,392
    )
    
    
    (376
    )
    
    
    (9,459
    )
    
    
    (13,944
    )As of December 31, 2002
    
    
    1,835,136
    
    
    
    7,449
    
    
    
    17,948
    
    
    
    221,740
    
    
    
    3,080
    
    
    
    324,264
    
    
    
    2,409,617As of January 1, 2003
    
    
    1,835,136
    
    
    
    7,449
    
    
    
    17,948
    
    
    
    221,740
    
    
    
    3,080
    
    
    
    324,264
    
    
    
    2,409,617Additions
    
    
    105,581
    
    
    
    181
    
    
    
    691
    
    
    
    3,022
    
    
    
    4
    
    
    
    12,296
    
    
    
    121,775Disposals
    
    
    (39
    )
    
    
    (981
    )
    
    
    (609
    )
    
    
    (1,828
    )
    
    
    (647
    )
    
    
    (16,594
    )
    
    
    (20,698
    )Reclassifications
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    As of December 31, 2003
    
    
    1,940,678
    
    
    
    6,649
    
    
    
    17,972
    
    
    
    222,992
    
    
    
    2,437
    
    
    
    319,966
    
    
    
    2,510,694Accumulated depreciationAs of January 1, 2002
    
    
    547,091
    
    
    
    4,558
    
    
    
    8,032
    
    
    
    152,812
    
    
    
    2,209
    
    
    
    238,150
    
    
    
    952,852Charge for the year
    
    
    180,433
    
    
    
    1,256
    
    
    
    2,830
    
    
    
    36,702
    
    
    
    354
    
    
    
    34,818
    
    
    
    256,393Disposals
    
    
    (11
    )
    
    
    (660
    )
    
    
    (733
    )
    
    
    (2,363
    )
    
    
    (351
    )
    
    
    (9,407
    )
    
    
    (13,525
    )As of December 31, 2002
    
    
    727,513
    
    
    
    5,154
    
    
    
    10,129
    
    
    
    187,151
    
    
    
    2,212
    
    
    
    263,561
    
    
    
    1,195,720As of January 1, 2003
    
    
    727,513
    
    
    
    5,154
    
    
    
    10,129
    
    
    
    187,151
    
    
    
    2,212
    
    
    
    263,561
    
    
    
    1,195,720Charge for the year
    
    
    185,419
    
    
    
    940
    
    
    
    2,440
    
    
    
    14,878
    
    
    
    228
    
    
    
    29,388
    
    
    
    233,293Disposals
    
    
    (26
    )
    
    
    (894
    )
    
    
    (574
    )
    
    
    (1,824
    )
    
    
    (530
    )
    
    
    (16,370
    )
    
    
    (20,218
    )Reclassifications
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    As of December 31, 2003
    
    
    912,906
    
    
    
    5,200
    
    
    
    11,988
    
    
    
    200,212
    
    
    
    1,910
    
    
    
    276,579
    
    
    
    1,408,795Net book valueAs of December 31, 2002
    
    
    1,107,623
    
    
    
    2,295
    
    
    
    7,819
    
    
    
    34,589
    
    
    
    868
    
    
    
    60,703
    
    
    
    1,213,897As of December 31, 2003
    
    
    1,027,772
    
    
    
    1,449
    
    
    
    5,984
    
    
    
    22,780
    
    
    
    527
    
    
    
    43,387
    
    
    
    1,101,899
 F-21




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  11
    
    Fixed assets, net of accumulated depreciation  (Continued)Certain network equipment and computer equipment are held under finance
leases. The total cost of these assets and the related accumulated
depreciation as of December 31, 2002 and 2003 are as follows: December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Cost
    
    
    18,553
    
    
    
    18,553Accumulated depreciation
    
    
    (18,315
    )
    
    
    (18,553
    )238
    
    
    
    
  All fixed assets were pledged as security for the bank loan and vendor
loan facilities of the Group.12
    
    Investment in a joint venture December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Share of net liabilities
    
    
    (1,905
    )
    
    
    (4,000
    )Advance
    
    
    5,227
    
    
    
    6,331Provision for diminution in value
    
    
    
    
    
    
    (2,331
    )3,322
    
    
    
    
  Details of the joint venture as of December 31, 2003 are as follows: PrincipalPlace of
    
    
    
    
    
    activities andName
    
    Nature
    
    incorporation
    
    Voting power
    
    place of operationAtria Limited
    
    Corporate
    
    Hong Kong
    
    
    50
    %
    
    Development of
applications for
wireless
communications in
Hong Kong
  The advance to Atria Limited is unsecured, interest free and has no fixed
repayment terms.The Group regularly performs an assessment on its investment in and
advances to the joint venture with reference to the expected
recoverability. For the year ended December 31, 2003, a provision of
HK$2,331,000 (2002: Nil) was considered necessary to write down the
carrying value of these assets. Such provision is included in the share
of loss from a joint venture in the consolidated statements of profits
and losses. F-22




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  13
    
    Prepayment of 3G License fees December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)At January 1
    
    
    241,667
    
    
    
    191,667Amount capitalized as fixed assets
    
    
    (50,000
    )
    
    
    (50,000
    )At December 31
    
    
    191,667
    
    
    
    141,667Classified as:Current assets
    
    
    50,000
    
    
    
    50,000Non-current assets
    
    
    141,667
    
    
    
    91,667
  In 2001, the Group paid an amount of HK$250,000,000, equivalent to the
aggregate of the first five years annual fees for the 3G License, to the
Office of Telecommunications Authority (OFTA). For the remaining 10
years of the 3G License, the fees payable shall be the higher of 5% of
the turnover attributable to the provision of the 3G services and the
Minimum Annual Fees (as defined in the 3G License) for each year of the
3G License. The total Minimum Annual Fees over the remaining term of the
3G License is HK$1,056,838,000, the net present value of which, at an
assumed cost of capital of the Group at 11.2%, is HK$333,109,000.In accordance with the 3G Licence, the Group was required to provide a
performance bond in an amount equivalent to the 6th and 7th years
Minimum Annual Fees due on October 22, 2003. On August 30, 2003, the
OFTA granted a one-year waiver to the Group on the submission of such
performance bond. From October 22, 2004 onwards, the Group will be
required to provide additional performance bonds in amounts such that the
total of such performance bonds and the Minimum Annual Fees prepaid is
equivalent to the next five years Minimum Annual Fees due (or the
remaining Minimum Annual Fees due where less than five years remains).14
    
    Other payables and accrued charges December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Provision for commission
    
    
    11,385
    
    
    
    11,974Deposits received
    
    
    35,702
    
    
    
    33,818Accrual for network costs
    
    
    57,084
    
    
    
    36,513Accrual for purchases of fixed assets
    
    
    7,965
    
    
    
    9,350Interest payable
    
    
    5,239
    
    
    
    644Others
    
    
    53,938
    
    
    
    60,492171,313
    
    
    
    152,791
 F-23




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  15
    
    Obligations under finance leases December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Future minimum payments for finance leases payable within one year
    
    
    155
    
    
    
     in the second year
    
    
    
    
    
    
    155
    
    
    
    Less: amounts representing interest
    
    
    (17
    )
    
    
    138
    
    
    
    Obligations under finance leases repayable in the
following years: within one year
    
    
    138
    
    
    
     in the second year
    
    
    
    
    
    
    138
    
    
    
    
 F-24




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  16
    
    Banking and other borrowing facilitiesThe Groups banking and other borrowing facilities as of December 31, 2002
and 2003 are analyzed as follows: Amount available
    
    Amount utilizedDecember 31,
    
    December 31,
    
    Terms as of December 31, 20032002
    
    2003
    
    2002
    
    2003Note
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    Interest rate
    
    Repayment terms(Amounts in thousands)
    
    (Amounts in thousands)Banking facilitiesBank loans
    
    (a)
    
    
    420,000
    
    
    
    240,000
    
    
    
    420,000
    
    
    
    240,000
    
    
    HIBOR + 5.5%
    
    15 quarterly
installments from
March 11, 2001Other borrowing facilitiesVendor loans
    
    (a)
    
    
    846,167
    
    
    
    481,368
    
    
    
    365,316
    
    
    
    481,368
    
    
    LIBOR + 5.5%
    
    15 quarterlyinstallments fromMarch 11, 20011,266,167
    
    
    
    721,368
    
    
    
    785,316
    
    
    
    721,368Less:
Current portion included under current liabilities bank loans
    
    
    
    
    
    
    
    
    
    
    
    
    (180,000
    )
    
    
    (240,000
    ) vendor loans
    
    
    
    
    
    
    
    
    
    
    
    
    (58,491
    )
    
    
    (56,368
    )(238,491
    )
    
    
    (296,368
    )Long-term portion
    
    
    
    
    
    
    
    
    
    
    
    
    546,825
    
    
    
    425,000
 F-25




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  Apart from the vendor loans which are U.S. dollar denominated debts, all
other facilities are denominated in Hong Kong dollars.The HIBOR and LIBOR rates were 0.710% and 1.457%, respectively as of
December 31, 2003.(a)
    
    Bank and vendor loansAt 31st December 2003 and 2002, the Groups bank and vendor loans were
repayable as follows: Bank loans
    
    Vendor loans2002HK$000
    
    2003HK$000
    
    2002HK$000
    
    2003HK$000Within one year
    
    
    180,000
    
    
    
    240,000
    
    
    
    58,491
    
    
    
    56,368In the second year
    
    
    240,000
    
    
    
    
    
    
    
    306,825
    
    
    
    175,000In the third to fifth year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000420,000
    
    
    
    240,000
    
    
    
    365,316
    
    
    
    481,368
  The weighted-average interest rates of the long-term bank loans and the
vendor loans of the Group are 6.92% and 6.87% as of December 31, 2003
respectively (2002: 7.00% and 6.88%).As at December 31, 2003, the bank loans and the vendor loans were
secured, amongst other things, by a charge over all the assets, revenue
and shares of certain wholly-owned subsidiaries of the Company, including
Mandarin Communications Limited (Mandarin), the main operating
subsidiary.(b)
    
    Bank and vendor loans covenantsThe bank loan and the vendor loan facilities provided for a corporate
guarantee by the Company to secure all the obligations and liabilities of
its wholly-owned subsidiaries. In addition, they contained a number of
covenants which included maintenance of certain performance targets such
as number of subscribers, earnings level, tangible net worth and debt
service ratios and operation of business in accordance with the approved
business plans.(c)
    
    Post-balance sheet bank and vendor loan repaymentsOn December 30, 2003, Mandarin gave notice to the bank and Nortel for
full repayment of all the outstanding loan principal and accrued interest
of the bank loans and vendor loans of HK$721,368,000. On January 12,
2004, all the bank and vendor loans were fully paid off through operating
cash flow of Mandarin and a term loan of HK$500,000,000 provided by
Huawei Tech. Investment Co., Limited (Huawei Tech.)
(see note 26(a) for
details).HK$75,000,000 of the new term loan from Huawei Tech. is payable in July
2004, while the remaining balance is repayable from January 2005 to July
2006. As a result, HK$425,000,000 of the term loan has been classified
as non-current liabilities as at December 31, 2003.The term loan from Huawei Tech. is unsecured and repayable in five
progressively increasing semi-annual instalments after drawdown and
carries a floating interest rate tied to HIBOR. F-26




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  17
    
    Commitments and contingencies(a)
    
    Capital commitments December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)In respect of purchases of fixed assets: contracted but not provided for
    
    
    53,898
    
    
    
    38,509 authorized but not contracted for
    
    
    2,223
    
    
    
    2,45656,121
    
    
    
    40,965
  (b)
    
    Commitments under operating leasesAs of December 31, 2002 and 2003, the Group had future aggregate minimum
lease payments under non-cancelable operating leases as follows: December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)In respect of land and buildings,
including transmission sites: within one year
    
    
    156,473
    
    
    
    127,719 in the second year
    
    
    69,269
    
    
    
    54,709 in the third year
    
    
    21,141
    
    
    
    11,640 in the fourth year
    
    
    5,869
    
    
    
    1,196 in the fifth year
    
    
    1,203
    
    
    
    228 after the fifth year
    
    
    236
    
    
    
    254,191
    
    
    
    195,492In respect of leased lines: within one year
    
    
    43,871
    
    
    
    21,286 in the second year
    
    
    5,048
    
    
    
    5,01948,919
    
    
    
    26,305303,110
    
    
    
    221,797
 F-27




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  18
    
    Share capital, reserve arising from reorganization and share premium December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Amounts in thousands)Share capital
    
    
    299,000
    
    
    
    299,000
    
    
    
    299,000Reserve arising from reorganization
    
    
    1,254,000
    
    
    
    1,254,000
    
    
    
    1,254,000Share premium
    
    
    2,124,424
    
    
    
    2,124,424
    
    
    
    2,124,424
  Reserve arising from reorganization represents the difference between the
nominal value of the share capital of the subsidiaries and the nominal
value of the Companys shares issued pursuant to a reorganization
completed on February 24, 2000 to rationalize the group structure in
preparation for the dual listing of the Companys ordinary shares on The
Stock Exchange of Hong Kong Limited (the Stock Exchange) in Hong Kong
and the Nasdaq National Market in the United States of America.19
    
    Share option schemeOn March 1, 2000, the shareholders of the Company approved and adopted a
share option scheme (the Share Option Scheme). Subject to earlier
termination by the Company in a general meeting of shareholders, the
Share Option Scheme will remain in force for 10 years from its adoption
date.On May 22, 2002, the shareholders of the Company approved the adoption of
a new share option scheme (the New Option Scheme) and the termination
of the operation of the Share Option Scheme. Upon the termination of the
Share Option Scheme, no further options will be granted under the Share
Option Scheme but the provisions of the Share Option Scheme will remain
in full force and effect in respect of the existing options granted.Under the New Option Scheme, the board may, in its discretion, grant
options to any director, employee, consultant, customer, supplier, agent,
partner, shareholder or adviser of or contractor to the Group or a
company in which the Group holds an interest or a subsidiary of such
company. Each grant of options to a director, chief executive or
substantial shareholder or any of their respective associates must be
approved in accordance with the requirements of the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited.The exercise price for any particular option under the New Option Scheme
will be determined by the board but will be not less than the highest of:
(i) the closing price of shares on the date of grant of the option; (ii)
an amount equivalent to the average closing price of a share for the five
business days immediately preceding the date of grant of the option; and
(iii) the nominal value of a share.The maximum number of shares which may be issued upon exercise of all
outstanding options granted and yet to be exercised under both the New
Option Scheme and Share Option Scheme must not, in aggregate, exceed 30%
of the shares of the Company in issue. F-28




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  The total number of shares available for issue under options which may be
granted under the New Option Scheme (excluding those options that have
been granted by the Company prior to the date of approval of the New
Option Scheme) must not in aggregate, exceed 10% of the issued share
capital of the Company as at the date of approval of the New Option
Scheme (Scheme Mandate Limit). The Scheme Mandate Limit may be
refreshed by shareholders of the Company in general meeting provided that
the Scheme Mandate Limit so refreshed must not exceed 10% of the issued
share capital of the Company at the date of approval of the refreshment
by the shareholders. The board may also seek separate shareholders
approval in general meeting to grant option beyond the Scheme Mandate
Limit (whether or not refreshed) provided that the options in excess of
the Scheme Mandate Limit are granted only to the eligible participants
specified by the Company before such approval is sought.No option may be granted under the New Option Scheme to any eligible
participant which, if exercised in full, would result in the total number
of shares issued and to be issued upon exercise of the options already
granted or to be granted to such eligible participant (including
exercised, cancelled and outstanding options) in the 12-month period up
to and including the date of such new grant exceeding 1% of the issued
share capital of the Company. As at the date of such new grant, any grant
of further options above this limit will be subject to certain
requirements provided under the Listing Rules, including the approval of
shareholders at general meeting.No share options were granted under the New Option Scheme or the Share
Option Scheme during the year ended December 31, 2003. Details of the
share options outstanding as at December 31, 2003 which have been granted
under the Share Option Scheme are as follows: Options held at
    
    Options lapsed
    
    Options cancelled
    
    Options held at
    
    Exercise price
    
    Grant
    
    Exercisable1st January 2003
    
    during the year
    
    during the year
    
    31st December 2003
    
    HK$
    
    date (2)
    
    untilExecutive directors
    
    
    75,000,000
    
    
    
    
    
    
    
    75,000,000
    (2)
    
    
    
    
    
    
    1.01
    
    
    
    31/05/2000
    
    
    
    30/05/2010Non-executive
directors(3)
    
    
    15,000,000
    
    
    
    15,000,000
    (3)
    
    
    
    
    
    
    
    
    
    
    1.01
    
    
    
    31/05/2000
    
    
    
    30/05/2010Continuous contract
Employees
    
    
    17,999,077
    
    
    
    4,316,720
    (4)
    
    
    
    
    
    
    13,682,357
    
    
    
    3.05
    
    
    
    23/03/2000
    
    
    
    22/03/201020,932,545
    
    
    
    6,624,293
    (4)
    
    
    
    
    
    
    14,308,252
    
    
    
    1.01
    
    
    
    31/05/2000
    
    
    
    30/05/20101,450,632
    
    
    
    1,153,788
    (4)
    
    
    
    
    
    
    296,844
    
    
    
    3.05
    
    
    
    31/05/2000
    
    
    
    30/05/20101,959,561
    
    
    
    174,511
    (4)
    
    
    
    
    
    
    1,785,050
    
    
    
    1.01
    
    
    
    19/01/2001
    
    
    
    18/01/2011132,341,815
    
    
    
    27,269,312
    
    
    
    75,000,000
    
    
    
    30,072,503
 Notes:  (1)
    
    Of the share options granted, 40% become exercisable after
one year from the grant date and 30% per annum during the following
two years.(2)
    
    In March 2003, a total of 75,000,000 share options of the
five Executive Directors of the Company, namely, Messrs. Richard
John Siemens, Edward Wai Sun Cheng, William Bruce Hicks, Kuldeep
Saran and Andrew Chun Keung Leung, were cancelled at a total
consideration of HK$5. No share options remain exercisable by the
Executive Directors as at December 31, 2003.(3)
    
    Mr. Craig Edward Ehrlich was re-designated as Non-executive
Director on January 1, 2003 upon the expiry of his executive
director service contract. His 15,000,000 share options
automatically lapsed on January 1, 2003. Mr. Ehrlich retired as a
Non-executive Director of the Company on May 22, 2003.(4)
    
    These share options lapsed during the year upon the cessation
of employment of certain employees. F-29




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  20
    
    Cash and cash equivalents December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Cash and bank balances
    
    
    14,782
    
    
    
    43,712Bank deposits
    
    
    34,795
    
    
    
    58,70149,577
    
    
    
    102,413
  21
    
    Related party transactionsThe following is a summary of significant related party transactions
which were carried out in the normal course of the Groups business: Year ended December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Amounts in thousands)International telecommunications service
revenue received from a related
company (note a)
    
    
    6,564
    
    
    
    
    
    
    
    Operating lease charges paid to related
companies (note b)
    
    
    (4,870
    )
    
    
    (4,334
    )
    
    
    (1,346
    )Consulting service fees paid to a related
company (note c)
    
    
    (833
    )
    
    
    (1,580
    )
    
    
    (105
    )Sales and marketing service fees paid to a
beneficial shareholder (note d)
    
    
    (910
    )
    
    
    
    
    
    
    
  (a)
    
    The Group entered into certain agreements based on normal commercial
terms with a wholly-owned subsidiary of a related company, e-Kong Group
Limited (e-Kong), during the year ended December 31, 2000. Under these
agreements the Group enabled the customers of e-Kong to make international
calls by providing it interconnection to the Groups international
telecommunications service facility and referred the Groups subscribers
of 1622 international telecommunications service to make international
calls directly through a web site of e-Kong. Such arrangement was
terminated effective from September 26, 2001 pursuant to a revised
agreement entered on the same date.Messrs. Richard John Siemens, Kuldeep Saran and William Bruce Hicks are
directors of both the Company and e-Kong.(b)
    
    The Group entered into various operating lease agreements based on normal
commercial terms with subsidiaries of certain beneficial shareholders of
the Company to lease a number of premises for the Groups operating
activities. F-30




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (c)
    
    The Group entered into certain agreements based on normal commercial
terms with Lifetree Convergence Limited (Lifetree) during the year ended
December 31, 2002, which provided various software development and
consulting services to the Group.Messrs. Richard John Siemens, Edward Wai Sun Cheng, William Bruce Hicks
and Kuldeep Saran are directors of both the Company and Lifetree.(d)
    
    Distacom Communications Limited (Distacom), a beneficial shareholder of
the Company, provided the Group with sales and marketing services for fees
which were agreed based on the resources spent, expertise allocated and
actual staff costs incurred by Distacom for providing these services. No
such services were provided during the years ended December 31, 2002 and
2003.Messrs. Richard John Siemens, William Bruce Hicks, Kuldeep Saran, Simon
Murray and Tak Sing Yip are directors of both the Company and Distacom.22
    
    Retirement benefit arrangementsPursuant to a trust deed entered into by the Group on April 1, 1998, the
Group has set up a defined contribution scheme to provide retirement
benefits for its employees in Hong Kong with retrospective effect from
July 1, 1997 (the Retirement Scheme).All permanent full time employees in Hong Kong were eligible to join the
Retirement Scheme before the Mandatory Provident Fund (MPF) Scheme was
set up on December 1, 2000. Under the Retirement Scheme, the employees
were required to choose to contribute either nil or 5% of their monthly
salaries. The Groups contributions were calculated at 5% of the
employees monthly salaries.With effect from December 1, 2000, the Group has set up another defined
contribution scheme, the MPF Scheme, for all the eligible employees of
the Group in Hong Kong including the employees under the Retirement
Scheme. The contributions from the employees and employer are made to
the MPF Scheme only and are no longer made to the Retirement Scheme.Under the MPF Scheme, the employees are required to contribute 5% of
their monthly salaries up to a maximum of HK$1,000 and they can choose to
make additional contributions. The Groups monthly contributions are
calculated at 5% of the employees monthly salaries up to a maximum of
HK$1,000 (the mandatory contributions). The Group makes certain
additional contributions if the employees monthly salaries exceed
HK$20,000 (the voluntary contributions).Under the MPF Scheme, the employees are entitled to 100% of the
employers mandatory contributions upon their retirement at the age of 65
years old, death or total incapacity. The employees are entitled to 100%
of the Groups voluntary contributions after seven years of completed
service or at a reduced scale of the Groups voluntary contributions
after completion of two to six years service. Under the Retirement
Scheme, the employees are entitled to 100% of the employers
contributions after seven years of completed service, or at a reduced
scale after completion of two to six years service. Forfeited
contributions are to be refunded to the Group. F-31




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  The Groups contributions for the years ended December 31, 2001, 2002 and
2003 amounted to HK$9,872,000, HK$6,653,000 and HK$5,362,000
respectively. The scheme assets are held separately from those of the
Group under respective provident funds managed by independent
administrators.The pension scheme which covers the employees in the Peoples Republic of
China (PRC) is a defined contribution scheme at various applicable
rates of monthly salary that are in accordance with the local practice
and regulations.23
    
    Business segment informationThe following segment reporting information is prepared based on the
segmental operating results regularly reviewed by the Groups chief
operating decision maker. The Group is principally engaged in three
business segments in Hong Kong: mobile services, sales of mobile phones
and accessories and other services. 2001
    
    MobileservicesHK$(restated)
    
    Sales ofmobile phonesand accessoriesHK$
    
    Other servicesHK$
    
    GroupHK$(restated)(Amounts in thousands)Turnover
    
    
    1,165,399
    
    
    
    242,901
    
    
    
    14,093
    
    
    
    1,422,393Loss from operations
    
    
    (38,127
    )
    
    
    (52,958
    )
    
    
    (72,125
    )
    
    
    (163,210
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,592Finance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,130
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211,748
    )Segment assets
    
    
    1,641,795
    
    
    
    47,904
    
    
    
    57,167
    
    
    
    1,746,866Investment in a joint
venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,940Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,371Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,936,177Capital expenditure
    
    
    114,744
    
    
    
    3,604
    
    
    
    1,029
    
    
    
    119,377
 F-32




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Sales ofMobile
    
    mobile phonesservices
    
    and accessories
    
    Other services
    
    Group2002
    
    HK$
    
    HK$
    
    HK$
    
    HK$(Amounts in thousands)Turnover
    
    
    1,217,677
    
    
    
    115,291
    
    
    
    9,722
    
    
    
    1,342,690Profit/(loss) from
operations
    
    
    815
    
    
    
    (38,239
    )
    
    
    (5,264
    )
    
    
    (42,688
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,553Finance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,520
    )Share of losses from
joint ventures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,609
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (117,264
    )Segment assets
    
    
    1,557,242
    
    
    
    28,823
    
    
    
    12,987
    
    
    
    1,599,052Investment in a joint
venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,322Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208,469Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,810,843Capital expenditure
    
    
    164,701
    
    
    
    3,375
    
    
    
    
    
    
    
    168,076
 F-33




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Sales ofMobile
    
    mobile phonesservices
    
    and accessories
    
    Other services
    
    Group2003
    
    HK$
    
    HK$
    
    HK$
    
    HK$(Amounts in thousands)Turnover
    
    
    1,149,875
    
    
    
    109,471
    
    
    
    695
    
    
    
    1,260,041Profit/(loss) from
operations
    
    
    145,685
    
    
    
    (61,076
    )
    
    
    (2,750
    )
    
    
    81,859Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,526Finance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,787
    )Share of loss from
a joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,426
    )Net profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,172Segment assets
    
    
    1,378,228
    
    
    
    29,757
    
    
    
    10,824
    
    
    
    1,418,809Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313,879Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,732,688Capital expenditure
    
    
    119,934
    
    
    
    1,841
    
    
    
    
    
    
    
    121,775
  The Groups principal activities are undertaken in one geographic area,
Hong Kong.24
    
    Particulars of subsidiariesThe Company has the following principal wholly-owned subsidiaries as of
December 31, 2003: Place of
    
    Issued and fullyName
    
    incorporation
    
    paid up capital
    
    Principal activitiesShares held directlySUNDAY HOLDINGS
(HONG KONG)
CORPORATION
    
    British Virgin Islands
    
    100 ordinary shares
of US$1 each
    
    Investment holdingSUNDAY HOLDINGS
(CHINA) CORPORATION
    
    British Virgin Islands
    
    1 ordinary shares
of US$1
    
    Investment holdingSUNDAY IP HOLDINGS
CORPORATION
    
    British Virgin Islands
    
    1 ordinary share of
US$1
    
    Investment holding
 F-34




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Shares held indirectlyMANDARIN
COMMUNICATIONS
LIMITED
    
    Hong Kong
    
    100 ordinary
shares of HK$1 each
and
1,254,000,000
non-voting deferred
shares of HK$1 each
    
    Provision of mobile
and other services,
and sales of mobile
phones and
accessoriesSUNDAY 3G HOLDINGS
(HONG KONG)
CORPORATION
    
    British Virgin Islands
    
    1 ordinary share of
US$1
    
    Investment holdingSUNDAY 3G (HONG KONG)
LIMITED
    
    Hong Kong
    
    2 ordinary shares
of HK$1 each
    
    Licensee of Hong
Kong 3G LicenseSUNDAY IP Limited
    
    British Virgin Islands
    
    1 ordinary share of
US$1
    
    Holding the Groups
intellectual
property rights and
trade marksSUNDAY
COMMUNICATIONS
SERVICES (SHENZHEN)
LIMITED (SCSSL)
    
    Peoples Republic
of China
    
    US$1,500,000
    
    Provision of back
office support
services to the
Group
  The principal activities of the subsidiaries, except for SCSSL which is
operated in the Peoples Republic of China (PRC), are undertaken in Hong
Kong.SCSSL is registered as a wholly foreign-owned enterprise in the PRC. The
registered capital of SCSSL had been fully paid up.25
    
    Financial instruments(a)
    
    Fair valueFinancial assets of the Group include restricted cash deposits, cash and
cash equivalents, trade receivables, deposits, prepayments and other
receivables. The fair values of the financial assets approximate carrying
amount due to the short-term nature of these items. Financial
liabilities of the Group include bank loans, vendor loans, obligations
under finance leases, trade payables, other payables and accrued charges,
and subscriptions received in advance. F-35




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  The fair values of the Groups bank loans, vendor loans and obligations
under finance leases are estimated based on applying a discounted cash
flow using current market rates for similar financial instruments. The
carrying amounts and fair values of the Groups bank loans, vendor loans
and obligations under finance leases are as follows: Carry amount
    
    Fair valueDecember 31,
    
    December 31,2002
    
    2003
    
    2002
    
    2003HK$
    
    HK$
    
    HK$
    
    HK$(Amounts in thousands)
    
    (Amounts in thousands)Bank loans
    
    
    420,000
    
    
    
    240,000
    
    
    
    412,883
    
    
    
    240,000Vendor loans
    
    
    365,316
    
    
    
    481,368
    
    
    
    364,498
    
    
    
    481,368Obligations under finance
leases
    
    
    138
    
    
    
    
    
    
    
    138
    
    
    
    
  The fair values of the Groups bank loans and vendor loans as of December
31, 2003 approximate their respective carrying amount since they were
fully repaid shortly after year end (note 16).(b)
    
    Concentration of credit riskFinancial instruments which potentially subject the Group to
concentration of credit risk consist principally of cash and cash
equivalents, trade receivables, deposits, prepayments and other
receivables.Restricted cash deposits, cash and cash equivalents are substantially the
entire Groups cash and bank balances. They are placed with a number of
international banks in Hong Kong to which the Group believes its exposure
to risk is limited.Trade receivables mainly represent service fee receivables from the
Groups subscribers in Hong Kong. No major customers make up more than
10% of the Groups trade receivables or revenue at December 31, 2002 and
2003 or each of the three years ended December 31, 2003.Deposits, prepayments and other receivables are spread among numerous
third parties.(c)
    
    Interest rate riskThe interest rates and terms of repayment of loans of the Group are set
out in note 16. F-36




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  26
    
    Subsequent events(a)
    
    On January 12, 2004, pursuant to the Heads of Agreement of Facility
Agreements executed in December 2003 with Mandarin, Huawei Tech., a
subsidiary of Huawei Technologies Co., Ltd. (Huawei), provided a term
loan of HK$500,000,000 (New Loan) to Mandarin. The loan was used to
repay part of the outstanding principal and accrued interest and charges
in respect of certain bank and vendor loans as set out in Note 16. The
term loan from Huawei Tech. is unsecured and repayable in five
progressively increasing semi-annual instalments after drawdown and
carries a floating interest rate tied to HIBOR.(b)
    
    On May 13, 2004, pursuant to the Heads of Agreement of Supply Contract
and Heads of Agreement of Facility Agreements between Mandarin and Huawei
executed in December 2003, Mandarin entered into a Supply Contract and a
Facility Agreement with Huawei Tech. in respect of the supply of its 3G
network and the provision of long-term financing, respectively.Under the Supply Contract, Huawei Tech. agrees to design, construct,
manufacture, sell, supply and deliver to Mandarin equipment and services
for the establishment, installation, implementation and commissioning of
the 3G network on a turnkey basis. The contract price is HK$859,000,000
over a term of three years.The Facility Agreement was made between Mandarin, the Company and Huawei
Tech. and comprises:  (a)
    
    an equipment supply facility of HK$859,000,000;(b)
    
    a general facility of HK$500,000,000; and(c)
    
    a 3G performance bond facility.  The general facility will replace the New Loan, and the term of the
general facility is 2.5 years from the date of the original drawdown of
the New Loan. The repayment schedule and the interest rate for the
general facility are the same as the New Loan. The term of the equipment
supply facility is 7.5 years from the date the Facility Agreement comes
into effect, and it is repayable by eight semi-annual instalments
commencing four years from the date of the Facility Agreement.The 3G performance bond facility is a facility for the issuance of the
performance bonds required under the terms of the 3G License in the years
2004  2010 inclusive.As security for the provision of the facilities under the Facility
Agreement, Huawei Tech. is granted a security package and benefits from
representations, financial covenants and general covenants, which are
customary to transactions of this nature. F-37




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  27
    
    Summary of differences between HK GAAP and US GAAPThe Groups consolidated financial statements are prepared in accordance
with HK GAAP, which differ in certain significant respects from US GAAP.
Differences between HK GAAP and US GAAP which have significant effects on
the net loss and total shareholders equity of the Group are summarized
as follows:(a)
    
    Net profit/ (loss) and total shareholders equity Year ended December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Amounts in thousands)Net (loss)/profit under HK GAAP
    
    
    (211,748
    )
    
    
    (117,264
    )
    
    
    27,172US GAAP adjustments:Deferred tax on accelerated depreciation
allowances (i)
    
    
    (24,459
    )
    
    
    (10,169
    )
    
    
    (12,581
    )Deferred tax assets on tax loss and others (i)
    
    
    24,459
    
    
    
    10,169
    
    
    
    12,581Amortization of net connection fees (ii)
    
    
    (10,390
    )
    
    
    (1,878
    )
    
    
    10,145(Charge)/write-back of compensation cost in respect of amortization of deferred
compensation for share options (iii)
    
    
    (3,800
    )
    
    
    111
    
    
    
    1,188Net (loss)/profit under US GAAP
    
    
    (225,938
    )
    
    
    (119,031
    )
    
    
    38,505Basic and diluted (loss)/earnings per share
under US GAAP (in cents)
    
    
    (7.6
    )
    
    
    (4.0
    )
    
    
    1.3Shares outstanding for basic and diluted
(loss)/earnings per share (thousands)
    
    
    2,990,000
    
    
    
    2,990,000
    
    
    
    2,990,000
 As of December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Amounts in thousands)Total shareholders equity under HK GAAP
    
    
    787,996
    
    
    
    670,732
    
    
    
    697,904US GAAP adjustments:Deferred tax non-current assets (i)
    
    
    367,878
    
    
    
    375,358
    
    
    
    399,821Valuation allowance (i)
    
    
    (367,878
    )
    
    
    (375,358
    )
    
    
    (399,821
    )Deferred net connection fees (ii)
    
    
    (10,390
    )
    
    
    (12,268
    )
    
    
    (2,123
    )Share premium in respect of deferred
compensation for share options (iii)
    
    
    9,573
    
    
    
    7,854
    
    
    
    6,253Deferred compensation not yet amortized for
share options (iii)
    
    
    (2,021
    )
    
    
    (413
    )
    
    
    Compensation cost in respect of amortization
of deferred compensation for share options
(iii)
    
    
    (7,552
    )
    
    
    (7,441
    )
    
    
    (6,253
    )Total shareholders equity under US GAAP
    
    
    777,606
    
    
    
    658,464
    
    
    
    695,781
 F-38




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (i)
    
    Under both HK GAAP and US 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 recognized for future tax consequences
attributable to differences between the financial statements
carrying amounts of existing assets and liabilities, and their
respective tax bases and tax credit carryforwards using enacted tax
rates in effect for the year in which the differences are expected
to be recovered or settled.Under HKGAAP, a deferred tax asset is recognized to the extent that
it is probable that future taxable profit will be available against
which the temporary differences can be utilized. The unrecognized
deferred tax asset is disclosed in the note to the financial
statements. Under US GAAP, a valuation allowance is recorded to
reduce the carrying amount of deferred tax asset unless it is more
likely than not that such asset will be realized.No deferred tax assets are recognized under HK GAAP, while a
valuation allowance is set against the deferred tax assets under US
GAAP, the net effect of which causes no impact to the financial
statements of the Group presented under US GAAP.Details of deferred income taxes provided under US GAAP are
disclosed in note 27(c).(ii)
    
    Under HK GAAP, connection fee revenue is recognized when
received upon completion of activation services.Under US GAAP, connection fees of the mobile services, net of the
direct incremental costs incurred, are deferred and recognized over
the estimated customer service periods, which are estimated based
on the expected stabilized churn rates. Connected fee revenue for
2002 and 2003 amounted to HK$16,254,000 and HK$411,000,
respectively, of which HK$10,788,000 and HK$175,000 was deferred as
of December 31, 2002 and 2003 respectively. Connected fee revenue
of HK$1,480,000 and HK$8,840,000 deferred in 2001 and 2002,
respectively have been credited to the consolidated statement of
profits and losses during 2003.(iii)
    
    Under HK GAAP, no compensation cost to employees is required
to be recognized in respect of the grant of share options. Proceeds
from issue of shares upon the exercise of share options are credited
to share capital and share premium account respectively and there is
no effect on the results of the Group in connection with the Share
Option Scheme.Under US GAAP, intrinsic value of stock options issued to employees
has been used in the computation of the compensation cost for
outstanding share options granted to the Groups employees.
Accordingly, deferred compensation of HK$10,254,000 was recognized
on options granted with an exercise price lower than the fair
market value of the Companys shares at the grant date. The
deferred compensation is amortized over the three-year vesting
period. Deferred compensation of HK$4,001,000 for the options
forfeited are reversed in shareholders equity. No compensation is
recognized for options which are granted with an exercise price
equal to or greater than the fair market value of the Companys shares at the grant date. For the year ended December 31, 2001,
compensation costs charged to the consolidated statement of losses
and credited to the deferred compensation were HK$3,800,000. For
the years ended December 31, 2002 and 2003, compensation costs of
HK$111,000 and HK$1,189,000 respectively were written back to the
consolidated statement of profits and losses and debited to the
deferred compensation. F-39




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##### Table of Contents



SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  A summary of the status of the Companys Share Option Scheme is as
follows: Number of
    
    Weighted averageshares to be
    
    exercise pricesubscribed
    
    per optionOutstanding as of January 1, 2002
    
    
    167,741,689
    
    
    HK$1.36Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (35,399,874
    )
    
    HK$1.79Outstanding as of December 31, 2002
    
    
    132,341,815
    
    
    HK$1.31Outstanding as of January 1, 2003
    
    
    132,341,815
    
    
    HK$1.31Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (102,269,312
    )
    
    HK$1.12Outstanding as of December 31, 2003
    
    
    30,072,503
    
    
    HK$1.96
  The following table summarizes information about share options
outstanding as of December 31, 2003: Number
    
    Weighted-average
    
    Numberoutstanding as of
    
    remaining
    exercisable as ofExercise price
    
    December 31, 2003
    
    contractual life
    December 31, 2003HK$1.01
    
    
    16,093,302
    
    
    
    6.49
    
    
    
    16,093,3023.05
    
    
    13,979,201
    
    
    
    6.23
    
    
    
    13,979,20130,072,503
  The Company has also computed, for pro forma disclosure purposes,
the fair value of all share options granted to employees of the
Company using the Black-Scholes option pricing model and the
following weighted average assumptions for the year ended December
31, 2003: 2002
    
    2003Risk-free interest rate
    
    
    6.49
    %
    
    
    6.49
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility of the market price of the
Companys shares
    
    
    70
    %
    
    
    70
    %Weighted-average expected life of the options
    
    10 years
    
    10 years
 F-40




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  The weighted-average fair value of options granted to employees
during the years ended December 31, 2002 and 2003 were HK$1.01 and
HK$1.57 per share respectively. If the Company had accounted for
the plan using the fair value method, the Groups net profit would
have decreased as follows: Year ended December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Net (loss)/profitAs reported
    
    
    (119,031
    )
    
    
    38,505Pro forma
    
    
    (139,836
    )
    
    
    34,450Basic and diluted (loss)/earnings per share
(in cents)As reported
    
    
    (4.0
    )
    
    
    1.3Pro forma
    
    
    (4.7
    )
    
    
    1.2
  (iv)
    
    GAAP difference for 3G LicenseUnder HK GAAP, the HK$250,000,000 which represents the annual fees
for the first five years of the 3G License term is recorded as a
prepayment with the license fees charge prior to the launch of the
3G services being included in fixed assets. Depreciation of the
fixed assets will be provided from the commencement of 3G services
over the shorter of the remaining life of the 3G License or the
estimated useful lives of the fixed assets.Under US GAAP, the amount paid for the 3G License fees is
classified as intangible asset which will be amortized commencing
upon the launch of the 3G services over the remaining 3G License
period or the estimated useful lives of the related 3G network
assets, whichever is the shorter.There is no impact of this difference under HK GAAP and US GAAP to
the consolidated statement of profits and losses for the years
ended December 31, 2001, 2002 and 2003, since depreciation /
amortization will only start when the 3G network is available /
ready for use. F-41




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (b)
    
    Consolidated statements of profits and lossesUnder HK GAAP, the consolidated statement of profits and losses is
reported by nature whereby network costs are presented separately under
operating expenses and bad debts expenses are presented under costs of
services.Under US GAAP, however, the statement of profits and losses is reported
by function and the network costs and salaries and related costs,
excluding depreciation, which are directly related to the generation of
revenue are included in cost of services, is separately shown. Rental,
salaries and related costs and bad debts expenses are included in
selling, general and administration expenses. As a result, under US GAAP,
the consolidated statements of profits and losses, including the US GAAP
adjustments as set out in note 27(a), would be reported as follows: Year ended December 31,2001
    
    2002
    
    2003HK$
    
    HK$
    
    HK$(Amounts in thousands)Revenues fromMobile services
    
    
    1,155,009
    
    
    
    1,215,799
    
    
    
    1,160,020Sales of mobile phones and accessories
    
    
    242,901
    
    
    
    115,291
    
    
    
    109,471Other services
    
    
    14,093
    
    
    
    9,722
    
    
    
    695Total operating revenues
    
    
    1,412,003
    
    
    
    1,340,812
    
    
    
    1,270,186Cost of sales of mobile phones and
accessories
    
    
    (244,981
    )
    
    
    (113,414
    )
    
    
    (133,315
    )Cost of services
    
    
    (548,342
    )
    
    
    (547,676
    )
    
    
    (465,283
    )Gross profit
    
    
    618,680
    
    
    
    679,722
    
    
    
    671,588Other revenues
    
    
    2,602
    
    
    
    1,917
    
    
    
    4,550Operating costsDepreciation
    
    
    (265,102
    )
    
    
    (256,393
    )
    
    
    (233,293
    )Selling, general and administrative costs
    
    
    (533,580
    )
    
    
    (469,701
    )
    
    
    (349,653
    )(Loss)/profit from operations
    
    
    (177,400
    )
    
    
    (44,455
    )
    
    
    93,192Interest income
    
    
    21,592
    
    
    
    3,553
    
    
    
    2,526Finance costs
    
    
    (70,130
    )
    
    
    (59,520
    )
    
    
    (52,787
    )Share of losses of joint ventures
    
    
    
    
    
    
    (18,609
    )
    
    
    (4,426
    )Net (loss)/profit
    
    
    (225,938
    )
    
    
    (119,031
    )
    
    
    38,505
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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (c)
    
    Deferred taxUnder US GAAP, deferred tax (liabilities) / assets comprise the following: Year ended December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Deferred tax liabilities:Accelerated depreciation allowances
    
    
    (102,991
    )
    
    
    (90,410
    )Deferred tax assets:Tax losses carried forward
    
    
    478,349
    
    
    
    490,231Valuation allowance
    
    
    (375,358
    )
    
    
    (399,821
    )Deferred tax assets
    
    
    102,991
    
    
    
    90,410Net deferred tax liabilities
    
    
    
    
    
    
    
  As of December 31, 2003, the Group has accumulated tax losses, with no
definite period of expiration, amounting to HK$3,382,281,000 (the tax
effect thereon is HK$591,899,000) which may be carried forward and
applied to reduce future taxable income which is earned in or derived
from Hong Kong. Management believes it is not more likely than not that the
results of future operations will generate sufficient taxable income to
realize deferred tax assets, and hence valuation allowance of
HK$375,358,000 and HK$399,821,000 at December 31, 2002 and 2003,
respectively has been established.Changes in the valuation allowance consist of: Year ended December 31,2002
    
    2003HK$
    
    HK$(Amounts in thousands)Balance at the beginning of the year
    
    
    367,878
    
    
    
    375,358Additions to income tax expenses
    
    
    7,480
    
    
    
    24,463Balance at the end of the year
    
    
    375,358
    
    
    
    399,821
 F-43




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (d)
    
    Recent accounting pronouncements(i)
    
    HK GAAPIn March 2004, the Hong Kong Society of Accountants
(HKSA) issued the
following Hong Kong Accounting Standards (HKASs) and HKAS
Interpretation (HKAS-Ints) that were converged with equivalent
International Accounting Standards and Standing Interpretations Committee
Interpretations issued by the International Accounting Standards Board
(IASB), most of which were revised recently as a result of the IASBs
improvements project: HKAS 1
    
    Presentation of Financial StatementsHKAS 2
    
    InventoriesHKAS 8
    
    Accounting Policies, Changes in Accounting Estimates and ErrorsHKAS 10
    
    Events after the Balance Sheet DateHKAS 16
    
    Property, Plant and EquipmentHKAS 21
    
    The Effects of Changes in Foreign Exchange RatesHKAS 27
    
    Consolidated and Separate Financial StatementsHKAS 28
    
    Investments in AssociatesHKAS 29
    
    Financial Reporting in Hyperinflationary EconomiesHKAS 33
    
    Earnings Per ShareHKAS-Ints-12
    
    Consolidation  Special Purposes Entities
  The above HKASs and HKAS-Int will become effective for accounting periods
beginning on or after January 1, 2005 and are required to be adopted by
the Group for the year ending December 31, 2005. As a consequence, the
following SSAPs and Interpretations of the HKSA will be superseded at
that time: SSAP 1
    
    Presentation of Financial Statements (revised 2001)SSAP 2
    
    Net Profit or Loss for the Period, Fundamental Errors and Changes in
Accounting Policies (revised 2001)SSAP 5
    
    Earnings Per Share (revised 1998)SSAP 9
    
    Events after the Balance Sheet Date (revised 2001)SSAP 10
    
    Accounting for Investments in Associates (revised 2001)SSAP 11
    
    Foreign Currency Translation (revised 2001)SSAP 17
    
    Property, Plant and Equipment (revised 2001)SSAP 22
    
    Inventories (revised 2001)SSAP 32
    
    Consolidated Financial Statements and Accounting for Investments in
Subsidiaries (revised 2001)Interpretation 1
    
    Costs of Modifying Existing SoftwareInterpretation 5
    
    Property, Plant and Equipment  Compensation for the Impairment or
Loss of ItemsInterpretation 8
    
    Presentation of Financial Statements  Current Assets: Classification of
Restricted and Appropriated Cash BalanceInterpretation 10
    
    Earnings per Share  Financial Instruments and Other Contracts that may
be Settled in SharesInterpretation 18
    
    Consolidated and Equity Method  Potential Voting Rights and
Allocation of Ownership Interests
  Given the HKSAs policy to converge Hong Kong accounting standards with
the IASBs financial reporting standards, the HKASs were issued to adopt
the changes made as a result of the IASB improvements project as well as
to eliminate, to the greatest extent possible, all differences that
previously existed between Hong Kong accounting standards and the
equivalent IASs. F-44




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  In April 2004, the HKSA issued HKFRS 2 Share-based Payment (HKFRS).
HKFRS prescribes the recognition principles and fair value measurement
basis for all-share based payment transactions, including (i)
equity-settled share-based payment transactions; (ii) cash-settled
share-based payment transactions; and (iii) transactions with a choice of
whether they are settled in cash or by issuing equity instruments. It
requires companies to reflect in their profit or loss and financial
position the effects of share-based payment transactions, including
expenses associated with transactions in which share options are granted
to employees. HKFRS 2 applies to grant of shares, share options or other
equity instruments that were granted after November 7, 2002 and had not
yet vested as at January 1, 2005.(ii)
    
    US GAAPIn January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities  An Interpretation of
Accounting Research Bulletins No. 51 (FIN 46). FIN 46 addresses
consolidation by business enterprises of variable interest entities. FIN
46 provides guidance on the identification of entities for which control
is achieved through means other than through voting rights (variable
interest enterprises or VIEs) and to determine when and which business
enterprise should consolidate VIE (the primary beneficiary). This new
model for consolidation applies to an entity either (i) the equity
investors (if any) do not have a controlling financial interest or (ii)
the equity investment at risk is insufficient to finance that entitys
activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. The provisions of the
statement apply immediately to variable interest entities created
beginning after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date, FIN 46 applies
in the first fiscal year beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003.In December 2003, the FASB issued a revision to Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51(FIN 46R), which was issued in January 2003. FIN 46R clarifies the
application of ARB No. 51, Consolidated Financial Statements to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support. FIN 46R requires the consolidation of these entities,
known as variable interest entities (VIEs), by the primary beneficiary
of the entity. The primary beneficiary is the entity, if any, that will
absorb a majority of the entitys expected losses, receive a majority of
the entitys expected residual returns, or both. Among other changes, the
revisions of FIN 46R (a) clarified some requirements of the original FIN
46, which had been issued in January 2003, (b) eased some implementation
problems, and (c) added new scope exceptions. FIN 46R deferred the
effective date of the Interpretation for public companies to the end of
the first reporting period ending after March 15, 2004, except that all
public companies must at a minimum apply the provisions of the
Interpretation to entities that were previously considered
special-purpose entities under the FASB literature prior to the
issuance of FIN 46R by the end of the first reporting period ending after
December 15, 2003. F-45




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SUNDAY COMMUNICATIONS LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  In May 2003, the Financial Accounting Standards Board issued Statement
No. 150 (SFAS No. 150), Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS No. 150
specifies that instruments within its scope embody obligations of the
issuer and that the issuer must classify them as liabilities. SFAS No.
150 requires issuers to classify as liabilities the following three types
of freestanding financial instruments: (1) mandatorily redeemable
financial instruments, (2) obligations to repurchase the
issuers equity shares by transferring assets, and (3) certain obligations to issue a
variable number of shares. SFAS No. 150 defines a freestanding financial
instrument as a financial instrument that (1) is entered into separately
and apart from any of the entitys other financial instruments or equity
transactions or (2) is entered into in conjunction with some other
transaction and can be legally detached and exercised on a separate
basis. For all financial instruments entered into or modified after May
31, 2003, SFAS No. 150 is effective immediately. For all other
instruments of public companies, SFAS No. 150 went into effect at the
beginning of the first interim period beginning after June 15, 2003. In
November 2003, the Financial Accounting Standards Board deferred the
effective date for selected provisions of SFAS No. 150, limited to
mandatorily redeemable noncontrolling interests associated with
finite-lived subsidiaries.The Group believes the adoption of these pronouncements would not have a
material impact on its consolidated financial statements. F-46




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APPENDIX A 
 GLOSSARY OF TECHNICAL TERMS This glossary contains certain definitions and other terms as they relate
to our businesses and as they are used in this Annual Report. As such, these
definitions may not correspond to standard industry definitions. 2G
    
    Second Generation, a type of wireless communications technology based on
the digital technology, including GSM, CDMA and D-AMPS technology, and which
was developed primarily for voice applications.3G
    
    Third Generation, the next wave of wireless communications technology
based on the UMTS standard that has broadband transmission capability to
support multimedia services, such as real time interactive video.base station
    
    fixed transceiver (transmitter and receiver) equipment, containing base
transceiver stations, used for communicating between mobile phones within a
certain area in a mobile network and a fixed link base station controller.base station controller (BSC)
    
    a switch controlling a number of base stations.base transceiver station (BTS)
    
    radio equipment, contained in a base station, used for transmitting and
receiving signals to and from mobile phones within a single cell.broadband
    
    a service or connection allowing a considerable amount of information to be
conveyed. Broadband is generally defined as bandwidth of at least 1.5 Mbps.browser
    
    a software program that retrieves, displays, and prints information from the
World Wide Web.CDMA
    
    code division multiple access, a digital cellular technology developed in
the United States which is a way of multiplying a variety of signals onto a
single communications channel.cell
    
    coverage area for a single base transceiver station.cell site
    
    the location of a base station.digital
    
    in recording or computing, the use of binary code to represent information.e-mail
    
    electronic messages sent via the internet.EFR
    
    enhanced full rate, a technology which enables voice transmission quality
over digital mobile systems, which is equivalent to voice transmission
quality over a landline, by filtering background noise.ETS
    
    external telecommunication services, which are regulated and licensed in
Hong Kong by the Hong Kong Telecommunications Authority for external
telecommunications services over IPLCs.FTNS
    
    fixed telecommunication network services, which are regulated and licensed
in Hong Kong by the Hong Kong Telecommunications Authority for
telecommunications services between fixed points.GPRS
    
    general packet radio services, an evolved version of 2G GSM technology which
transmits and receives packets of data in bursts instead of using a
continuous open radio channel. GPRS bandwidth is 115.2 Kbps.GSM 1800
    
    global system for mobile communications standard, which uses the 1800 MHz
frequency band. This standard was previously known as DCS 1800 and is the
standard for PCS networks in Hong Kong.
 A-1




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##### Table of Contents



GSM 900
    
    global system for mobile communications standard, which uses the 900 MHz
frequency band.IN
    
    intelligent network.international roaming
    
    a service which permits subscribers to use their existing mobile phone and
telephone number when travelling in other countries outside their local
network.internet
    
    international computer network, a worldwide electronic communication network.IPLC
    
    international private leased circuit.ISR
    
    International Simple Resale, a mechanism enabling operators who are licensed
to provide external telecommunications services which enable international
long distance calls using external telecommunications facilities of fixed
telecommunication network service operators who are licensed to provide
them.Java
    
    object-oriented programming language for creating software applications
which are independent of operating systems and can be uploaded from servers
to subscribers allowing, for example, the functionality of browsers to be
increased.Java SIM card
    
    a rewriteable SIM Card with 32K memory.Kbps
    
    kilobits per second, which is a measurement of speed for digital signal
transmission expressed in thousands of bits per second.LAN
    
    local area network.Mbps
    
    megabits per second, which is a measurement of speed for digital signal
transmission expressed in millions of bits per second.MHz
    
    megahertz, million hertz.MNP
    
    mobile number portability, which was introduced by OFTA in March 1999. This
allows mobile telephone users in Hong Kong to switch service providers and
keep their existing mobile telephone numbers without penalty.mobile switch
    
    a switch in a GSM network responsible for telephony switching functions.PCS
    
    personal communication service or system, the generic term for the type of
digital cellular network constructed in Hong Kong using frequency bands at
1800 MHz.PDA
    
    personal digital assistant, a hand-held device that functions as a personal
organizer, containing calendar, address and perhaps e-mail or fax
capabilities.PNETS
    
    public non-exclusive telecommunications services, which are regulated and
licensed by the Hong Kong Telecommunications Authority for services such as
international value-added network services (which also covers the licensing
of ISPs), virtual private network services (or VPNs) and external
telecommunications services (or ETS).PNETS (ETS) license
    
    a public non-exclusive telecommunications services (external
telecommunications service) license, which is required to be obtained by an
international long distance service provider in order to provide customers
short code access to that service providers international long distance
services, and permits such a service provider to use ISR to provide the
international long distance services.PRS license
    
    a public radiocommunication service license, which permits the provision by
a mobile operator of PCS public mobile communication services.server
    
    a computer that allows other computers to connect to it. Servers store
information and allow
 A-2




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##### Table of Contents



client computers to retrieve information for users.SIM card
    
    subscriber identity module card, a smart card which stores the subscriber
identity information and authentication key and which needs to be inserted
into a GSM mobile phone to make it operable.switch
    
    a node in a telephony network in which circuits are connected automatically
in response to signals generated by subscribers mobile phones.switching center
    
    the physical location of one or several switching systems.TDMA
    
    time division multiple access, a digital cellular technology, which is
deployed on the 800 MHz and 1900 MHz frequencies.UMTS
    
    universal mobile telephony system or service, a standard for 3G networks.WAP
    
    wireless application protocol, an open, global specification that allows
internet access and other broadband services on mobile wireless devices.
 A-3




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##### Table of Contents



EXHIBIT INDEX 1.1***
    
    Memorandum and Articles of Association of the Registrant (as amended).1.2*
    
    Certificate of Incorporation of the Registrant.2.1*
    
    Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary bank, and
holders and beneficial holders of the American depositary shares.2.2*
    
    Form of American depositary receipt evidencing American depositary shares.2.3*
    
    Specimen certificate of the Ordinary Shares.4.1*
    
    Rules of the Share Option Scheme adopted on March 1, 2000.4.2*
    
    Non-Competition Agreement dated as of March 3, 2000 between Distacom Communications Limited and
the Registrant.4.3**
    
    Rules of the Share Option Scheme, adopted on May 22, 2002.4.4**
    
    Mobile Carrier License dated as of October 22, 2001 issued by the Telecommunications Authority
to SUNDAY 3G (Hong Kong) Limited.4.5***
    
    Turn Key Contract for the Supply and Installation of a Mobile Communications Network and
Associated Services between Huawei Tech. Investment Co., Limited and Mandarin Communications
Limited dated as of May 13, 2004.4.6***
    
    Facility Agreement dated as of May 13, 2004 among Mandarin Communications Limited as Borrower,
SUNDAY Communications Limited as Guarantor and Huawei Tech. Investment Co., Limited as the
Original Lender.4.7***
    
    Subcontract Agreement dated as of May 13, 2004 among Huawei Tech. Investment Co., Limited as
Contractor and Mandarin Communications Limited as Subcontractor.6.1***
    
    Computation of Earnings Per Share: See Selected Financial Data table in Item 3. Key Information.8.1***
    
    Subsidiaries of the Registrant.12.1***
    
    Certification of Group Managing Director.12.2***
    
    Certification of Group Director  Finance.13.1***
    
    Certification of Group Managing Director pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.13.2***
    
    Certification of Group Director  Finance pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Incorporated by reference to the registrants Registration Statement on
Form F-1, filed on March 9, 2000 (Registration No. 333-11470).**
    
    Incorporated by reference to the registrants Form 20-F for the year
ended December 31, 2001.***
    
    Filed herewith.  Portions of the exhibit have been omitted pursuant to application for
confidential treatment, which has been filed separately with the Commission. E-1