| — | | For unquoted equity securities and current and non-current receivables that are stated at cost or amortized cost are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognized as follows: | - | For investment securities carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of the asset). |
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the consolidated statement of operations. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.
| - | For receivables that are carried at cost, the impairment loss is measured as the difference between the asset’s carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for current and non-current receivables that are carried at cost are reversed if in a subsequent period the amount of the impairment loss decreases. Impairment losses for equity securities are not reversed. |
(ii) | Impairment of other assets |
Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decrease:
| | - | investment property;For financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets). This assessment is made collectively where financial assets carried at amortized cost share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group. |
F-16
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
| 2 | | Basis of preparation and principal accounting policies (continued) |
| | (i) | | Impairment of assets (continued) | | | (i) | | Impairment of investment securities and other receivables (continued) |
| | | If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the consolidated statement of operations. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years. | | | | | For available-for-sale securities, the cumulative loss that has been recognized directly in equity is removed from equity and is recognized in consolidated statement of operations. The amount of the cumulative loss that is recognized in consolidated statement of operations is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in consolidated statement of operations. | | | | | Impairment losses recognized in consolidated statement of operations in respect of available-for-sale equity securities are not reversed through consolidated statement of operations. Any subsequent increase in the fair value of such assets is recognized directly in equity. | | | | | Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognised. Reversals of impairment losses in such circumstances are recognised in profit or loss. | | | Impairment losses are written off against the corresponding assets directly, except for impairment losses recognised in respect of trade debtors, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or loss. |
| (ii) | | Impairment of other assets (continued) | | | | Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decrease: |
If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.
| | -— | Calculation of recoverable amount | fixed assets; |
The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).
| | | -— | Recognition of impairment losses | investment property; and |
An impairment loss is recognized in consolidated statement of operations whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.
| | | -— | Reversals of impairment losses | goodwill. |
Except in the case of goodwill, an impairment loss is reversed if there has been a favorable change in the estimate used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.F-17
A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to consolidated statement of operations in the year in which the reversals are recognized.
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
| 2 | | Basis of preparation and principal accounting policies (continued) | | | (ii) | | Impairment of other assets (continued) | | | | If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment. |
| — | | Calculation of recoverable amount | | | | | The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). | | | — | | Recognition of impairment losses | | | | | An impairment loss is recognized in consolidated statement of operations whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable. | | | — | | Reversals of impairment losses | | | | | Except in the case of goodwill, an impairment loss is reversed if there has been a favorable change in the estimate used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. | | | | | A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to consolidated statement of operations in the year in which the reversals are recognized. |
F-18
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2008 | (j) | | Investment securities | | | | The Group’s accounting policy for investments securities is as follows: | | | | Financial assets at fair value through profit or loss comprise of financial assets held for trading and those designated as of fair value through profit or loss at inception. They are initially stated at fair value and are classified as current assets, if they are expected to be realized within 12 months. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized in the consolidated statement of operations. The net gain or loss recognized in the consolidated statement of operations does not include any interest earned on these investments as these are recognized in accordance with the policies set out in notes 2(u)(v). | | | | Held-to-maturity securities are dated debt securities that the Group has the positive ability and intention to hold to maturity. They are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, they are stated in the balance sheet at amortized cost less impairment losses (see note 2(i)(i)). | | | | Investment securities that are not classified as held for trading, financial assets at fair value through profit or loss, or held-to-maturity securities, are classified as available-for-sale securities. Available-for sale securities are initially recognized at fair value plus transaction costs. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized directly in equity, except for impairment losses (see note 2(i)(i)) and, in the case of monetary items such as debt securities, foreign exchange gains and losses that are recognized directly in the consolidated statement of operations. Where these investments are interest-bearing, interest calculated using the effective interest method is recognized in the consolidated statement of operations. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in the consolidated statement of operations. | | | | Investments are recognized on the date the Group commits to purchase the investments. Investments are derecognized when: |
The Group’s accounting policy for investments securities is as follows:
Financial assets at fair value through profit or loss comprise of financial assets held for trading and those designated as at fair value through profit or loss at inception. They are initially stated at fair value and are classified as current assets, if they are expected to be realized within 12 months. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized in the consolidated statement of operations. The net gain or loss recognized in the consolidated statement of operations does not include any interest earned on these investments as these are recognized in accordance with the policies set out in notes 2(t)(v).
Held-to-maturity securities are dated debt securities that the Group has the positive ability and intention to hold to maturity. They are initially recognized in the balance sheet at fair value plus transaction costs. Subsequently, they are stated in the balance sheet at amortized cost less impairment losses (see note 2(i)(i)).
Investment securities that are not classified as held for trading, financial assets at fair value through profit or loss, or held-to-maturity securities, are classified as available-for-sale securities. Available-for sale securities are initially recognized at fair value plus transaction costs. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognized directly in equity, except for impairment losses (see note 2(i)(i)) and, in the case of monetary items such as debt securities, foreign exchange gains and losses that are recognized directly in the consolidated statement of operations. Where these investments are interest-bearing, interest calculated using the effective interest method is recognized in the consolidated statement of operations. When these investments are derecognized, the cumulative gain or loss previously recognized directly in equity is recognized in the consolidated statement of operations.
Investments are recognized on the date the Group commits to purchase the investments. Investments are derecognized when:
| | (i) | | the contractual rights to the cash flows from the investment securities expire; or |
| | | (ii) | | the Group transfers the contractual rights to receive the cash flows of the investment securities. |
| (k) | | Derivative financial instruments | | | | Derivative financial instruments that are not designated as hedge are recognized initially at fair value. At each balance sheet date the fair value is remeasured. The gain or loss on remeasurement to fair value is charged immediately to the consolidated statement of operations. | | | (l) | | Deferred expenditure | | | | Deferred expenditure represents customer acquisition costs incurred for successful acquisition or origination of a service subscription agreement with a customer. Such costs are deferred and amortized on a straight-line basis over the period of the underlying service subscription agreements. |
Derivative financial instruments are recognized initially at fair value. At each balance sheet date the fair value is remeasured. The gain or loss on remeasurement to fair value is charged immediately to the consolidated statement of operations, except where the derivative qualify for cash flow hedge accounting or hedge the net investment in a foreign operation, in which case recognition of any resultant gain or loss depends on the nature of the item being hedged.F-19
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
| 2 | | Basis of preparation and principal accounting policies (continued) | | (l)(m) | | Deferred expenditureAccounts receivables | | | | Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for doubtful debts (see note 2(i)(i)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts. | | | (n) | | Inventories | | | | Inventories are carried at the lower of cost or net realizable value. | | | | Cost is determined using the first in, first out method and comprises all costs of purchase. | | | | Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. | | | | When inventories are sold, the carrying amount of the inventory is recognized in the consolidated statement of operations as cost of inventories sold in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value is recognized as an expense in the period the write-down occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction of network costs in the period in which the reversal occurs. | | | | For the years ended August 31, 2006, 2007 and 2008, there was no write-down of inventories. | | | (o) | | Cash, bank balances and pledged bank deposits | | | | Cash and bank balances consist of cash on hand, cash in bank accounts and interest-bearing savings accounts. Cash that is restricted for use or pledged as security is disclosed separately on the face of the consolidated balance sheet, and is not included in the cash and bank balances total in the consolidated statements of cash flows. The pledged bank deposits represent cash maintained at a bank as security for bank facility and bank guarantees issued by the bank to third party suppliers and utility vendors (see note 16). |
Deferred expenditure represents customer acquisition costs incurred for successful acquisition or origination of a service subscription agreement with a customer. Such costs are deferred and amortized on a straight-line basis over the period of the underlying service subscription agreement.F-20
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
2 | | | | 2 | | Basis of preparation and principal accounting policies (continued) |
(m)(p) | | Accounts receivablesProvisions and contingent liabilities | | | | Provisions are recognized for other liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation. | | | | Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote. |
Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for doubtful debts (see note 2(i)(i)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts.
| | | (n)(q) | | InventoriesEmployee benefits |
Inventories are carried at the lower of cost or net realizable value.
Cost is determined using the first in, first out method and comprises all costs of purchase.
Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
When inventories are sold, the carrying amount of the inventory is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value is recognized as an expense in the period the write-down occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.
For the years ended August 31, 2005, 2006 and 2007, there was no write-down of inventories.
(o)(i) | Cash, bank balances | Employee leave entitlements | | | | Employee entitlements to annual leave and pledged bank depositslong service leave are recognized when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as services are rendered by employees. Employee entitlements to sick leave and maternity or paternity leave are not recognized until the time of leave. | | | (ii) | | Profit sharing and bonus plans | | | | Provisions for profit sharing and bonus plans are recognized when the Group has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made. |
Cash and bank balances consist of cash on hand, cash in bank accounts and interest-bearing savings accounts. Cash that is restricted for use or pledged as security is disclosed separately on the face of the consolidated balance sheet, and is not included in the cash and bank balances total in the consolidated statements of cash flows. The pledged bank deposits represent cash maintained at a bank as security for bank facility and bank guarantees issued by the bank to third party suppliers and utility vendors (see note 15).F-21
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
2 | | | | 2 | | Basis of preparation and principal accounting policies (continued) |
(p)(q) | Provisions | Employee benefits (continued) | | | (iii) | | Retirement benefit costs | | | | The Group contributes to defined contribution retirement schemes which are available to certain employees. Contributions to the schemes by the Group are calculated as a percentage of employees’ basic salaries and contingent liabilitiescharged to the consolidated statement of operations. The Group’s contributions are reduced by contributions forfeited by those employees who leave the scheme prior to being fully vested in the Group’s contributions. | | | | The assets of the scheme are held in an independently administered fund that is separated from the Group’s assets. | | | (iv) | | Share-based payments | | | | The fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in a capital reserve within equity. The fair value is measured at grant date using the Black-Scholes option pricing model or Monte Carlo model, taking into account the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest. | | | | During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged/credited to the consolidated statement of operations in the year of the review, unless the original employee cost qualified for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The amount relating to share options expense is recorded in the capital reserve until either the option is exercised or the option expires. |
| | Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits. | | | | Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. | | | | Deferred taxation is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not be reversed in the foreseeable future. |
Provisions are recognized for other liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.F-22
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
2 | | | | 2 | | Basis of preparation and principal accounting policies (continued) |
(i) | Employee leave entitlements |
Employee entitlements to annual leave and long service leave are recognized when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as services are rendered by employees. Employee entitlements to sick leave and maternity or paternity leave are not recognized until the time of leave.
(ii) | Profit sharing and bonus plans |
Provisions for profit sharing and bonus plans are recognized when the Group has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made.
(iii) | Retirement benefit costs |
The Group contributes to defined contribution retirement schemes which are available to certain employees. Contributions to the schemes by the Group are calculated as a percentage of employees’ basic salaries and charged to the consolidated statement of operations. The Group’s contributions are reduced by contributions forfeited by those employees who leave the scheme prior to being fully vested in the Group’s contributions.
The assets of the scheme are held in an independently administered fund that is separated from the Group’s assets.
The fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in a capital reserve within equity. The fair value is measured at grant date using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.
During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged/credited to the consolidated statement of operations in the year of the review, unless the original employee cost qualified for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The amount relating to share options expense is recorded in the capital reserve until either the option is exercised or the option expires.
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 2007
2 | Basis of preparation and principal accounting policies (continued) |
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.
Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
Deferred taxation is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not be reversed in the foreseeable future.
| (s) | | Senior notes | | | | Senior notes are recognized initially at fair value less direct and incremental issuance costs. Subsequent to initial recognition, the senior notes are stated at amortized cost. The difference between the original issuance price and redemption price of the notes is recognized in the consolidated statement of operations over the period of the notes using the effective interest method. |
Senior notes are recognized initially at fair value less direct and incremental issuance costs. Subsequent to initial recognition, the senior notes are stated at amortized cost. The difference between the original issuance price and redemption price of the notes is recognized in the consolidated statement of operations over the period of the notes using the effective interest method.
In the event that the senior notes are redeemed prior to the maturity date, the unamortized notes issuance costs are charged immediately to the consolidated statement of operations.
| | | | (t) | | Trade and other payables |
| | Trade and other payables are initially recognized at fair value and are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost. | | | | As at August 31, 2007 and 2008, the Group’s trade and other payables are stated at cost as the effect of discounting is immaterial. |
| (i) | | Revenue for the provision of international telecommunications and fixed telecommunications network services is recognized, when an arrangement exists, service is rendered, the fee is fixed or determinable, and collectibilitycollectability is probable. |
| | (ii) | | Tariff-free period granted to subscribers of fixed telecommunications network services are recognized in the consolidated statement of operations rateablyratably over the term of the service subscription agreement. Unbilled revenue represents revenue recognized in accordance with the requirements in 2(t)2(u)(i) that has not been billed to the subscriber. |
| | (iii) | | Amount received in advance for the provision of fixed telecommunications network services is deferred and included under deferred services income, and subsequently recognized as revenue on a straight-line basis over the agreed period of time stipulated in the terms of the subscription agreement.related service period. |
| | (iv) | | Revenue from the sales of products is recognized upon the transfer of risks and rewards of ownership to the customer, which generally coincides with the time when the goods are delivered to the customer and title has passed. |
F-23
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
2 | | | | 2 | | Basis of preparation and principal accounting policies (continued) |
(t)(u) | | Revenue recognition (continued) |
| | (v) | | Interest income is recognized as it accrues using the effective interest method. |
| | (vi) | | Rental income receivable under operating leases is recognized in the consolidated statement of operations in equal instalmentsinstallments over the periods covered by the lease term. Lease incentives granted are recognized in the consolidated statement of operations as an integral part of the aggregate net lease payments receivable. |
Borrowing costs are expensed in the consolidated statement of operations in the period which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset.
The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.
Borrowing costs of $2,047,000, nil and nil was capitalized for the years ended August 31, 2005, 2006 and 2007, respectively.
| | Borrowing costs are expensed in the consolidated statement of operations in the period which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset. | | | | The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete. | | | | No borrowing cost was capitalized for the years ended August 31, 2006, 2007 and 2008, respectively. |
| | In accordance with the Group’s internal financial reporting, the Group has determined that business segment is the primary reporting format and geographical is the secondary reporting format. | | | | Segment assets consist primarily of goodwill, fixed assets, trade and other receivables and cash and bank deposits. Segment liabilities comprise operating liabilities and exclude items such as taxation and senior notes. Capital expenditure comprises purchases of fixed assets. | | | | In respect of geographical segment reporting, sales are reported based on the country in which the customer is located. Total assets and capital expenditure are reported based on where the assets are located. |
F-24 Segment assets consist primarily of goodwill, fixed assets, trade and other receivables and cash and bank deposits. Segment liabilities comprise operating liabilities and exclude items such as taxation and senior notes. Capital expenditure comprises purchases of fixed assets.
In respect of geographical segment reporting, sales are reported based on the country in which the customer is located. Total assets and capital expenditure are reported based on where the assets are located.
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
2 | | | | 2 | | Basis of preparation and principal accounting policies (continued) |
(w)(x) | | Accounting for barter transactions | | | | When goods or services are exchanged for goods or services which are of a similar nature and value, the exchange is not regarded as a revenue generating transaction. | | | | When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the consideration received or receivable adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services provided, adjusted by the amount of any cash or cash equivalents transferred. |
When goods or services are exchanged for goods or services which are of a similar nature and value, the exchange is not regarded as a revenue generating transaction.
When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the consideration received or receivable adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services provided, adjusted by the amount of any cash or cash equivalents transferred.
For the purposes of these financial statements, a party is considered to be related to the Group if:
| | For the purposes of these financial statements, a party is considered to be related to the Group if: |
| | (i) | | the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group; |
| | | (ii) | | the Group and the party are subject to common control; |
| | | (iii) | | the party is an associate of the Group or a joint venture in which the Group is a venturer; |
| | | (iv) | | the party is a member of key management personnel of the Group or the Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals; |
| | | (v) | | the party is a close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or |
| | | (vi) | | the party is a post-employment benefit plan which is for the benefit of employees of the Group or of any entity that is a related party of the Group. |
| | Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity. |
Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.F-25
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
3 | | | | 3 | | Changes in accounting policies |
| | The HKICPA has issued a number of new and revised HKFRSs and Interpretations that are effective or available for early adoption for the current accounting period of the Group. | | | | There have been no significant changes to the accounting policies applied in these financial statements for the years presented as a result of adoption of these new standards. However, as a result of the adoption of HKFRS 7, Financial instruments: Disclosures and the amendment to HKAS 1, Presentation of financial statements: Capital disclosures, there have been some additional disclosures provided as follows: | | | | As a result of the adoption of HKFRS 7 and as compared with the information previously required to be disclosed by HKAS 32, Financial instruments: Disclosure and presentation, the financial statements include expanded disclosure about the significance of the Group’s financial instruments and the nature and extent of risks arising from those instruments. These disclosures are provided throughout these financial statements, in particular in note 27. | | | | The amendment to HKAS 1 introduces additional disclosure requirements to provide information about the level of capital and the Group’s objectives, policies and processes for managing capital. These new disclosures are set out in note 19. | | | | Both HKFRS 7 and the amendment to HKAS 1 do not have any material impact on the classification, recognition and measurement of the amounts recognized in the financial instruments. | | | | The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 30). |
| | Network costs mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, production costs for the pay-TV using Internet Protocol service and costs of inventories sold, and exclude depreciation charge which is included in general and administration expenses. | | | | Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a Fixed Telecommunications Network Services (“FTNS”) licensee, is obligated to contribute Universal Services Contributions (“USC”) as compensation to PCCW-HKT Telephone Limited (“PCCW-HKT”) for the cost of network development in remote areas in Hong Kong. | | | | The Group estimates the USC payable to PCCW-HKT based on the provisional rates announced by the Telecommunications Authority (“TA”). The TA periodically reviews the actual costs incurred by PCCW-HKT in the network development and revises the amounts owed to, or be refunded by, PCCW-HKT to the respective USC contributing parties, including the HKBN (“the Rate Revisions”). Accordingly, the estimate made by the HKBN’s management is subject to change based on the Rate Revisions identified during a financial year and up to the date prior to the release of the financial statements of the Group. The Group adjusts such differences as an addition or reduction of the corresponding costs of services in that particular reporting period. | | | | Any sum received in advance from PCCW-HKT as an estimated refund of the USC on a provisional basis, which is subject to the final confirmation and determination of TA, is recorded in other payables and accrued expenses in the Group’s consolidated balance sheet. | | | | On November 13, 2006, TA issued a statement (the “2006 TA”) on the USC and confirmed the actual contribution level for calendar year 2004. In aggregate, an amount of HK$1,365,088 was recorded as a reduction against the network costs of the Group for the year ended August 31, 2006. | | | | As of the date of issuance of the Group’s financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes, the actual contribution level for calendar year 2005, 2006 and 2007 had not yet been confirmed by the TA. For the year ended August 31, 2007, the Group recorded USC charges based on the provisional rates set out in the 2006 TA. On December 28, 2007, TA issued a statement (the “2007 TA”) on the USC and confirmed that the actual contribution level for the period from January 1, 2005 to June 30, 2007. Based on the 2007 TA, an amount of HK$7,617,000 was recovered as a reduction against the network cost of the Group for the year ended August 31, 2008. | | | | The actual contribution level for the period subsequent to June 30, 2007 has not yet been confirmed by the TA. Therefore, for the year ended August 31, 2008, the Group recorded USC charges based on the provisional rates set out in the 2007 TA. |
F-26 Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a Fixed Telecommunications Network Services (“FTNS”) licensee, is obligated to contribute Universal Services Contributions (“USC”) as compensation to PCCW-HKT Telephone Limited (“PCCW-HKT”) for the cost of network development in remote areas in Hong Kong.
The Group estimates the USC payable to PCCW-HKT based on the provisional rates announced by the TA. The TA periodically reviews the actual costs incurred by PCCW-HKT in the network development and revises the amounts owed to, or be refunded by, PCCW-HKT to the respective USC contributing parties, including the HKBN (“the Rate Revisions”). Accordingly, the estimate made by the HKBN’s management is subject to change based on the Rate Revisions identified during a financial year and up to the date prior to the release of the financial statements of the Group. The Group adjusts such differences as an addition or reduction of the corresponding costs of services in that particular reporting period.
Any sum received in advance from PCCW-HKT as an estimated refund of the USC on a provisional basis, which is subject to the final confirmation and determination of TA, is recorded in other payables and accrued expenses in the Group’s consolidated balance sheet.
On November 11, 2005, the TA issued a statement on the USC and confirmed the actual contribution level for calendar year 2003. In aggregate, an amount of $6,448,000 was recorded as a reduction against the network cost of the Group for the year ended August 31, 2005.
On November 13, 2006, TA issued a statement (the “2006 TA”) on the USC and confirmed the actual contribution level for calendar year 2004. In aggregate, an amount of $1,365,088 was recorded as a reduction against the network costs of the Group for the year ended August 31, 2006.
The actual contribution level for calendar year 2005, 2006 and 2007 had not yet been confirmed by the TA as of the date of issuance of the Group’s financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes. For the year ended August 31, 2007, the Group recorded USC charges based on the provisional rates set out in the 2006 TA.
See note 30 for discussion of Rate Revisions issued by TA subsequent to the date of issuance of the Group’s financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes.
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
4 | | | | 5 | | (Loss)/income before taxation |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | (Loss)/income before taxation is arrived at after charging: | | | | | | | | | | | | | | | | Amortization of deferred expenditure | | | 13,973 | | | | 15,580 | | | | 33,777 | | | Depreciation of purchased fixed assets | | | 275,538 | | | | 257,052 | | | | 209,464 | | | Depreciation of fixed assets held under finance leases | | | 926 | | | | 1,051 | | | | 587 | | | Impairment loss — investment property | | | 1,131 | | | | — | | | | — | | | Operating lease charges in respect of: | | | | | | | | | | | | | | — Land and buildings | | | 17,556 | | | | 13,879 | | | | 13,296 | | | — Computer equipment | | | 840 | | | | 32 | | | | 50 | | | Research and development costs | | | 9,605 | | | | 4,977 | | | | 9,593 | | | Retirement benefit costs — defined contribution plans (note 24) | | | 27,956 | | | | 23,933 | | | | 29,738 | | | | | | | | | | | | | | | | Interest expense comprises: | | | | | | | | | | | | | | | | Interest element of finance leases | | | 54 | | | | 62 | | | | 34 | | | Interest on senior notes | | | 85,235 | | | | 85,313 | | | | 70,010 | | | Amortization of debt issuance cost | | | 1,429 | | | | 2,129 | | | | 1,665 | | | Other borrowing costs | | | 1,919 | | | | — | | | | 3,428 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | | 88,637 | | | | 87,504 | | | | 75,137 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income net, comprises: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net exchange gain/(loss) | | | 1,044 | | | | (114 | ) | | | 1,923 | | | Gain on extinguishment of 10-year senior notes | | | — | | | | — | | | | 2,582 | | | Others | | | 3,421 | | | | 3,263 | | | | 4,888 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,465 | | | | 3,149 | | | | 9,393 | | | | | | | | | | | | | | | |
F-27 | | | | | | | | | | | | Year ended August 31, | | | | | 2005 | | | 2006 | | 2007 | | | | | HK$’000 | | | HK$’000 | | HK$’000 | | (Loss)/income before taxation isarrived at after charging: | | | | | | | | | | | | | Goodwill amortization | | 1,065 | | | — | | — | | Amortization of deferred expenditure | | 12,927 | | | 13,973 | | 15,580 | | Depreciation of purchased fixed assets | | 236,269 | | | 275,538 | | 257,052 | | Depreciation of fixed assets held under finance leases | | 380 | | | 926 | | 1,051 | | Impairment loss - investment property | | — | | | 1,131 | | — | | Operating lease charges in respect of: | | | | | | | | | - Land and buildings | | 13,081 | | | 17,556 | | 13,879 | | - Computer equipment | | 914 | | | 840 | | 32 | | Research and development costs | | 11,023 | | | 9,605 | | 4,977 | | Retirement benefit costs - defined contribution plans (note 23) | | 27,437 | | | 27,956 | | 23,933 | | Interest expense comprises: | | | | | | | | | | | | | Interest element of finance leases | | 23 | | | 54 | | 62 | | Interest on senior notes | | 52,372 | | | 85,235 | | 85,313 | | Interest on bank overdrafts | | 2,421 | | | — | | — | | Amortization of debt issuance cost | | 1,693 | | | 1,429 | | 2,129 | | Other borrowing costs | | — | | | 1,919 | | — | | | | | | | | | | | | | 56,509 | | | 88,637 | | 87,504 | | Less: Amount capitalized as fixed assets - Interest capitalized | | (2,047 | ) | | — | | — | | | | | | | | | | | Total interest expense | | 54,462 | | | 88,637 | | 87,504 | | | | | | | | | | | Other income net, comprises: | | | | | | | | | | | | | Net exchange gain/(loss) | | 3,300 | | | 1,044 | | (114 | ) | Others | | 2,737 | | | 3,421 | | 3,263 | | | | | | | | | | | | | 6,037 | | | 4,465 | | 3,149 | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
56 | | Income tax credit/(expense) | | | | (Loss)/income before taxation by geographical location is as follows: |
(Loss)/income before taxation by geographical location is as follows:
| | | | | | | | | | | | Year ended August 31, | | | | 2005 | | | 2006 | | | 2007 | | | | HK$’000 | | | HK$’000 | | | HK$’000 | Hong Kong (loss)/income | | (167,416 | ) | | (150,624 | ) | | 24,574 | Overseas (loss)/income | | (2,805 | ) | | 1,318 | | | 6,317 | | �� | | | | | | | | (Loss)/income before taxation | | (170,221 | ) | | (149,306 | ) | | 30,891 | | | | | | | | | |
Income tax credit/(expense) consist of the following:
| | | | | | | | | | | | | Year ended August 31, | | | | | 2005 | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Hong Kong income tax | | | | | | | | | | - current (note (a)) | | (147 | ) | | (24 | ) | | (121 | ) | - under-provision of current tax in prior years | | (333 | ) | | (552 | ) | | — | | - deferred (note 11) | | 8,325 | | | 10,046 | | | 47 | | Overseas taxation | | | | | | | | | | - current (note (b)) | | (919 | ) | | (2,367 | ) | | (1,964 | ) | - deferred (note 11) | | (201 | ) | | 141 | | | 12 | | | | | | | | | | | | | | 6,725 | | | 7,244 | | | (2,026 | ) | | | | | | | | | | |
Notes:
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Hong Kong (loss)/income | | | (150,624 | ) | | | 24,574 | | | | 100,514 | | | Overseas income | | | 1,318 | | | | 6,317 | | | | 7,858 | | | | | | | | | | | | | | | | | | | (Loss)/income before taxation | | | (149,306 | ) | | | 30,891 | | | | 108,372 | | | | | | | | | | | | | | | |
| | | Income tax credit/(expense) consist of the following: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Hong Kong income tax | | | | | | | | | | | | | | — current (note (a)) | | | (24 | ) | | | (121 | ) | | | (391 | ) | | — under-provision of current tax in prior years | | | (552 | ) | | | — | | | | — | | | — deferred (note 12) | | | 10,046 | | | | 47 | | | | 21,757 | | | Overseas taxation | | | | | | | | | | | | | | — current (note (b)) | | | (2,367 | ) | | | (1,964 | ) | | | (1,929 | ) | | — under-provision of current tax in prior years | | | — | | | | — | | | | (2,552 | ) | | — deferred (note 12) | | | 141 | | | | 12 | | | | (67 | ) | | | | | | | | | | | | | | | | | | | 7,244 | | | | (2,026 | ) | | | 16,818 | | | | | | | | | | | | | | | |
| | | | Notes: | | | (a) | | The Company and its subsidiaries operating in Hong Kong are subject to tax on an entity basis on income arising in or derived from Hong Kong. The rate of taxation of subsidiaries operating in Hong Kong for the years ended August 31, 2005, 2006 and 2007 was 17.5% and for the year ended August 31, 2008 was 16.5%. |
| | | (b) | | Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rate of taxation prevailing in the countries in which the foreign subsidiaries operate. |
F-28
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
56 | | Income tax credit/(expense) (continued) | | | | The income tax credit/ (expense) for the years ended August 31, 2006, 2007 and 2008 differs from the amounts determined by applying the applicable statutory rate in Hong Kong of 17.5% (2008:16.5%) to income/ (loss) before taxation as a result of the following differences: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Computed “expected” income tax credit/(expense) | | | 26,129 | | | | (5,406 | ) | | | (17,881 | ) | | Difference in statutory tax rates of foreign subsidiaries | | | (459 | ) | | | (1,006 | ) | | | (1,046 | ) | | Effect of expenses not deductible for income taxes | | | (883 | ) | | | (772 | ) | | | (6,243 | ) | | Recognition of prior year unrecognized tax losses | | | — | | | | — | | | | 26,335 | | | Effect of bank interest income not subject to income taxes | | | 2,944 | | | | 3,533 | | | | 2,370 | | | Effect of other income not subject to income taxes | | | 548 | | | | 686 | | | | 1,508 | | | Under-provision for Hong Kong current income tax in prior years | | | (552 | ) | | | — | | | | — | | | Under provision for overseas current income tax in prior years | | | — | | | | — | | | | (2,552 | ) | | Adjustment for changes in new tax laws on share based payment | | | — | | | | — | | | | 2,324 | | | Effect of prior year tax losses utilized | | | 2,416 | | | | 6,678 | | | | 12,013 | | | Effect of tax loss not recognized | | | (20,597 | ) | | | (4,539 | ) | | | (74 | ) | | Effect of share based payment not recognized | | | (2,305 | ) | | | (1,125 | ) | | | (110 | ) | | Others | | | 3 | | | | (75 | ) | | | 174 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax credit/(expense) | | | 7,244 | | | | (2,026 | ) | | | 16,818 | | | | | | | | | | | | | | | |
The income tax credit/ (expense) for the years ended August 31, 2005, 2006 and 2007 differs from the amounts determined by applying the applicable statutory rate in Hong Kong of 17.5% to income/ (loss) before taxation as a result of the following differences:F-29
| | | | | | | | | | | | | Year ended August 31, | | | | | 2005 | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Computed “expected” income tax credit/(expense) | | 29,789 | | | 26,129 | | | (5,406 | ) | Difference in statutory tax rates of foreign subsidiaries | | (137 | ) | | (459 | ) | | (1,006 | ) | Effect of expenses not deductible for income taxes | | (1,788 | ) | | (883 | ) | | (772 | ) | Effect of bank interest income not subject to income taxes | | 2,262 | | | 2,944 | | | 3,533 | | Effect of other income not subject to income taxes | | 1,701 | | | 548 | | | 686 | | Under-provision for Hong Kong current income tax in prior years | | (333 | ) | | (552 | ) | | — | | Effect of prior year tax losses utilized | | 4,981 | | | 2,416 | | | 6,678 | | Effect of tax loss not recognized | | (28,464 | ) | | (20,597 | ) | | (4,539 | ) | Effect of share based payment not recognized | | (1,219 | ) | | (2,305 | ) | | (1,125 | ) | Others | | (67 | ) | | 3 | | | (75 | ) | | | | | | | | | | | Income tax credit/(expense) | | 6,725 | | | 7,244 | | | (2,026 | ) | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
6 | | | | 7 | | (Loss)/earnings per share |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Net (loss)/income | | | (142,062 | ) | | | 28,865 | | | | 125,190 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Number of shares in thousands | | | Weighted average number of shares in issue | | | 614,134 | | | | 614,840 | | | | 634,015 | | | Incremental shares from assumed exercise of share options | | | — | | | | 16,479 | | | | 23,982 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted weighted average number of shares | | | 614,134 | | | | 631,319 | | | | 657,997 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic (loss)/earnings per share | | HK(23.1) cents | | | HK4.7 cents | | | HK19.7 cents | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted (loss)/earnings per share | | HK(23.1) cents | | | HK4.6 cents | | | HK19.0 cents | | | | | | | | | | | | |
| | Basic (loss)/earnings per share is calculated based on the weighted average number of issued ordinary shares and the related (loss)/income amount. Diluted (loss)/earnings per share is calculated based on the weighted average number of issued ordinary shares and the number of incremental shares from assumed exercise of share options has been determined using the treasury stock method and the related (loss)/income amount. | | | | For the years ended August 31, 2006, the number of shares used in the calculation of diluted loss per share was equal to the number of shares used to calculate basic loss per share as the incremental effect of share options was anti-dilutive in a loss-making year. |
F-30 | | | | | | | | | | Year ended August 31, | | | | 2005 | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | | HK$’000 | Net (loss)/income | | (163,496) | | (142,062) | | 28,865 | | | | | | | | | | | | | Number of shares in thousands | Weighted average number of shares in issue | | 613,525 | | 614,134 | | 614,840 | Incremental shares from assumed exercise of share options | | — | | — | | 16,479 | | | | | | | | Diluted weighted average number of shares | | 613,525 | | 614,134 | | 631,319 | | | | | | | | Basic (loss)/earnings per share | | HK(26.6) cents | | HK(23.1) cents | | HK4.7 cents | | | | | | | | Diluted (loss)/earnings per share | | HK(26.6) cents | | HK(23.1) cents | | HK4.6 cents | | | | | | | |
Basic earnings/(loss) per share is calculated based on the weighted average number of issued ordinary shares and the related income/(loss) amount. Diluted earning/(loss) per share is calculated based on the weighted average number of issued ordinary shares and the number of incremental shares from assumed exercise of share options and warrants has been determined using the treasury stock method and the related income/(loss) amount.
For the years ended August 31, 2005 and 2006, the number of shares used in the calculation of diluted loss per share was equal to the number of shares used to calculate basic loss per share as the incremental effect of share options and warrants was anti-dilutive in a loss-making year.
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
| (a) | | Trade receivables, net |
| | | | | | | | | | August 31, | | | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | Trade receivables (note (i)) | | 196,343 | | | 192,943 | | Less: Provision for doubtful accounts (note (ii)) | | (55,745 | ) | | (22,392 | ) | | | | | | | | | | 140,598 | | | 170,551 | | | | | | | | |
Notes:
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Trade receivables | | | 192,943 | | | | 152,227 | | | Less: Allowance for doubtful debts | | | (22,392 | ) | | | (11,944 | ) | | | | | | | | | | | | | | | | | | | | | | | | | 170,551 | | | | 140,283 | | | | | | | | | | | |
| | (i) | Trade receivables includeThe aging analysis of accounts receivable relating to mobile interconnection charges of $103,847,000 for the year ended August 31, 2007 (2006: $82,864,000). See note 25(c) for detailed discussion of mobile interconnection charges.is as follows: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Current - 30 days | | | 50,282 | | | | 45,462 | | | 31 - 60 days | | | 15,619 | | | | 17,507 | | | 61 - 90 days | | | 8,876 | | | | 7,249 | | | Over 90 days | | | 118,166 | | | | 82,009 | | | | | | | | | | | | | | | | | | | | | | | | | | 192,943 | | | | 152,227 | | | | | | | | | | | |
| | (ii) | ProvisionThe majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted. |
| | | | (b) | | Impairment of trade receivables |
| | Impairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly. | | | | The movement in the allowance for doubtful accountsdebts during the year, including both specific and collective loss components is as atfollows: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Balance at beginning of the year | | | 48,316 | | | | 55,745 | | | | 22,392 | | | Additions | | | 17,450 | | | | 15,973 | | | | 14,293 | | | Reversals | | | — | | | | (9,404 | ) | | | — | | | Write-off | | | (10,021 | ) | | | (39,922 | ) | | | (24,741 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at the end of the year | | | 55,745 | | | | 22,392 | | | | 11,944 | | | | | | | | | | | | | | | |
| | Allowance for doubtful debts as of August 31, 2006 includes provisionallowance for mobile interconnection charges receivables of $20,809,000.HK$20,809,000. Following TA’s Final2004 Determination issued in June 2007 (note 25(c)26(c)), the Group has reversed $9,404,000HK$9,404,000 of the provisionallowance for mobile interconnection charges to the consolidated statement of operations (note 25(c)26(c)) and has written off the remaining balance of the provisionallowance of $11,405,000HK$11,405,000 against the related accounts receivable. |
Changes in the provision for doubtful accounts consist of:F-31
| | | | | | | | | | | | | Year ended August 31, | | | | | 2005 | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Balance at beginning of the year | | 22,959 | | | 48,316 | | | 55,745 | | Additions charged to expense | | 35,445 | | | 17,450 | | | 15,973 | | Reversals | | — | | | — | | | (9,404 | ) | Write-off | | (10,088 | ) | | (10,021 | ) | | (39,922 | ) | | | | | | | | | | | Balance at the end of the year | | 48,316 | | | 55,745 | | | 22,392 | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
78 | | Receivables (continued) | | | (c) | | Trade receivables that are not impaired | | | | The aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Neither past due nor impaired | | | 50,282 | | | | 45,462 | | | 0-30 past due | | | 15,619 | | | | 17,507 | | | 31-60 past due | | | 8,876 | | | | 7,249 | | | Over 60 past due | | | 95,774 | | | | 70,065 | | | | | | | | | | | | | | | | | | | | | | | | | | 170,551 | | | | 140,283 | | | | | | | | | | | |
| | Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default. | | | | Trade receivables over 60 days past due for the Group include receivable relating to mobile interconnection charges of HK$64,407,000 as of August 31, 2008 (August 31, 2007: HK$92,383,000) (See note 26(c)). | | | | Other accounts receivable that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold collateral over these balances. |
(b)(d) | | Other receivables, deposits and prepayments |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Deposits for purchase of fixed assets | | | 6,007 | | | | 9,094 | | | Deposits for lease of land and building | | | 7,256 | | | | 10,528 | | | Interest receivable | | | 1,344 | | | | 757 | | | Prepayments | | | 19,895 | | | | 30,635 | | | Unbilled revenue | | | 15,572 | | | | 23,293 | | | Others | | | 9,298 | | | | 8,419 | | | | | | | | | | | | | | | | | | | | | | | | | | 59,372 | | | | 82,726 | | | | | | | | | | | |
F-32 | | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Deposits for purchase of fixed assets | | 8,636 | | 6,007 | Deposits for lease of land and building | | 9,237 | | 7,256 | Interest receivable | | 1,503 | | 1,344 | Prepayments | | 17,207 | | 19,895 | USC refund receivable | | 1,364 | | — | Unbilled revenue | | 35,700 | | 15,572 | Others | | 3,936 | | 9,298 | | | | | | | | 77,583 | | 59,372 | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | Cost and carrying amount: | | | | | | | | | | | | | | | | | | | | Beginning of the year/at the end of the year | | | 1,066 | | | | 1,066 | | | | | | | | | | | |
| | Goodwill has been allocated to the Group’s fixed telecommunications network services cash-generating unit (“CGU”) for purposes of the goodwill impairment test. | | | | Based on management’s goodwill impairment test, the carrying amount of the fixed telecommunications network services CGU was lower than its recoverable amount. The recoverable amount was determined based on the value-in-use methodology. This methodology uses cash flow projections based on financial budgets approved by management covering a three-year period. Cash flows for the three-year period were estimated based on growth rates between 1% to 14% and a pre-tax discount rate of 14%. Cash flows beyond the three year period were assumed to remain constant. The estimated growth rates used were comparable to the growth rate for the industry. The key assumption used in the value-in-use methodology was the annual growth of the revenue of the fixed telecommunications network services CGU which is determined based on the past performance and management’s expectation for future performance. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessment of the time value of money and the risks specific to the fixed telecommunications services CGU. Any adverse change in the key assumption could reduce the recoverable amount below carrying amount. |
F-33 | | | | | | | | | August 31, | | | | 2006 | | | 2007 | | | | HK$’000 | | | HK$’000 | Cost: | | | | | | | | | Beginning of the year | | 5,326 | | | 1,066 | Opening balance adjustment to eliminate accumulated amortization | | (4,260 | ) | | — | | | | | | | At the end of the year | | 1,066 | | | 1,066 | | | | | | | Accumulated amortization: | | | | | | | | | Beginning of the year | | 4,260 | | | — | Eliminated against cost at the beginning of the year | | (4,260 | ) | | — | | | | | | | At the end of the year | | — | | | — | | | | | | | Net book value: | | | | | | | | | At the end of the year | | 1,066 | | | 1,066 | | | | | | |
With effect from September 1, 2005, goodwill is no longer amortized in accordance with HKFRS 3 but tested for impairment on an annual basis. The amount of accumulated amortization as at September 1, 2005 has been offset against the cost of goodwill.
Goodwill has been allocated to the Group’s fixed telecommunications network services cash-generating unit (“CGU”) for purposes of the goodwill impairment test.
Based on management’s goodwill impairment test, the carrying amount of the fixed telecommunications network services CGU was lower than its recoverable amount. The recoverable amount was determined based on the value-in-use methodology. This methodology uses cash flow projections based on financial budgets approved by management covering a three-year period. Cash flows for the three-year period were estimated based on growth rates between 10% to 16% and a pre-tax discount rate of 14%. Cash flows beyond the three year period were assumed to remain constant. The estimated growth rates used were comparable to the growth rate for the industry. The key assumption used in the value-in-use methodology was the annual growth of the revenue of the fixed telecommunications network services CGU which is determined based on the past performance and management’s expectation for future performance. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessment of the time value of money and the risks specific to the fixed telecommunications services CGU. Any adverse change in the key assumption could reduce the recoverable amount below carrying amount.
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Furniture, | | Tele- | | | | | | | | | | | | Leasehold | | | | | | fixtures | | communications, | | | | | | | | Investment | | land and | | Leasehold | | and | | computer and | | Motor | | | | | | property | | buildings | | improvements | | fittings | | office equipment | | vehicles | | Total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | | | (Note (a)) | | (Note (a)) | | | | | | | | | | | | | | | | | | | | | Cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At September 1, 2006 | | | 5,197 | | | | 79,598 | | | | 78,241 | | | | 17,770 | | | | 2,352,253 | | | | 6,956 | | | | 2,540,015 | | | Exchange adjustments | | | — | | | | — | | | | 773 | | | | 253 | | | | 2,560 | | | | — | | | | 3,586 | | | Additions | | | — | | | | — | | | | 1,627 | | | | 496 | | | | 129,950 | | | | 177 | | | | 132,250 | | | Disposals | | | — | | | | — | | | | (3 | ) | | | (1,100 | ) | | | (8,988 | ) | | | (315 | ) | | | (10,406 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2007 | | | 5,197 | | | | 79,598 | | | | 80,638 | | | | 17,419 | | | | 2,475,775 | | | | 6,818 | | | | 2,665,445 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At September 1, 2007 | | | 5,197 | | | | 79,598 | | | | 80,638 | | | | 17,419 | | | | 2,475,775 | | | | 6,818 | | | | 2,665,445 | | | Exchange adjustments | | | — | | | | — | | | | 1,470 | | | | 445 | | | | 2,840 | | | | — | | | | 4,755 | | | Additions | | | — | | | | 4,646 | | | | 2,469 | | | | 2,189 | | | | 196,230 | | | | 6,150 | | | | 211,684 | | | Disposals | | | — | | | | — | | | | — | | | | (478 | ) | | | (30,564 | ) | | | (344 | ) | | | (31,386 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2008 | | | 5,197 | | | | 84,244 | | | | 84,577 | | | | 19,575 | | | | 2,644,281 | | | | 12,624 | | | | 2,850,498 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated depreciation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At September 1, 2006 | | | 1,997 | | | | 7,531 | | | | 40,428 | | | | 12,447 | | | | 1,104,864 | | | | 5,514 | | | | 1,172,781 | | | Exchange adjustments | | | — | | | | — | | | | 612 | | | | 160 | | | | 1,874 | | | | — | | | | 2,646 | | | Charge for the year | | | 104 | | | | 1,592 | | | | 9,269 | | | | 2,028 | | | | 244,581 | | | | 529 | | | | 258,103 | | | Disposals | | | — | | | | — | | | | — | | | | (683 | ) | | | (4,465 | ) | | | (160 | ) | | | (5,308 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2007 | | | 2,101 | | | | 9,123 | | | | 50,309 | | | | 13,952 | | | | 1,346,854 | | | | 5,883 | | | | 1,428,222 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At September 1, 2007 | | | 2,101 | | | | 9,123 | | | | 50,309 | | | | 13,952 | | | | 1,346,854 | | | | 5,883 | | | | 1,428,222 | | | Exchange adjustments | | | — | | | | — | | | | 1,334 | | | | 313 | | | | 2,077 | | | | — | | | | 3,724 | | | Charge for the year | | | 104 | | | | 1,604 | | | | 9,626 | | | | 1,617 | | | | 196,198 | | | | 902 | | | | 210,051 | | | Disposals | | | — | | | | — | | | | — | | | | (286 | ) | | | (22,390 | ) | | | (222 | ) | | | (22,898 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2008 | | | 2,205 | | | | 10,727 | | | | 61,269 | | | | 15,596 | | | | 1,522,739 | | | | 6,563 | | | | 1,619,099 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net book value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2008 | | | 2,992 | | | | 73,517 | | | | 23,308 | | | | 3,979 | | | | 1,121,542 | | | | 6,061 | | | | 1,231,399 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2007 | | | 3,096 | | | | 70,475 | | | | 30,329 | | | | 3,467 | | | | 1,128,921 | | | | 935 | | | | 1,237,223 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-34 | | | | | | | | | | | | | | | | | | | | | | | | Investment
property | | Leasehold
land and
buildings | | | Leasehold
improvements | | | Furniture,
fixtures
and
fittings | | | Tele-
communications,
computer and
office equipment | | | Motor
vehicles | | | Total | | | | | HK$’000 | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | | | (Note (a)) | | (Note (a)) | | | | | | | | | | | | | | | | | Cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At September 1, 2005 | | — | | 84,170 | | | 68,618 | | | 15,492 | | | 2,067,146 | | | 8,372 | | | 2,243,798 | | Exchange adjustments | | — | | — | | | 281 | | | 126 | | | 2,180 | | | — | | | 2,587 | | Additions | | — | | 625 | | | 9,342 | | | 2,880 | | | 309,744 | | | 344 | | | 322,935 | | Disposals | | — | | — | | | — | | | (728 | ) | | (26,817 | ) | | (1,760 | ) | | (29,305 | ) | Transfer to investment property | | 5,197 | | (5,197 | ) | | — | | | — | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2006 | | 5,197 | | 79,598 | | | 78,241 | | | 17,770 | | | 2,352,253 | | | 6,956 | | | 2,540,015 | | | | | | | | | | | | | | | | | | | | | | | At September 1, 2006 | | 5,197 | | 79,598 | | | 78,241 | | | 17,770 | | | 2,352,253 | | | 6,956 | | | 2,540,015 | | Exchange adjustments | | — | | — | | | 773 | | | 253 | | | 2,560 | | | — | | | 3,586 | | Additions | | — | | — | | | 1,627 | | | 496 | | | 129,950 | | | 177 | | | 132,250 | | Disposals | | — | | — | | | (3 | ) | | (1,100 | ) | | (8,988 | ) | | (315 | ) | | (10,406 | ) | | | | | | | | | | | | | | | | | | | | | | At August 31, 2007 | | 5,197 | | 79,598 | | | 80,638 | | | 17,419 | | | 2,475,775 | | | 6,818 | | | 2,665,445 | | | | | | | | | | | | | | | | | | | | | | | Accumulated depreciation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At September 1, 2005 | | — | | 6,702 | | | 30,225 | | | 10,509 | | | 853,325 | | | 6,494 | | | 907,255 | | Exchange adjustments | | — | | — | | | 223 | | | 74 | | | 1,642 | | | — | | | 1,939 | | Charge for the year | | — | | 1,695 | | | 9,980 | | | 2,190 | | | 261,819 | | | 780 | | | 276,464 | | Disposals | | — | | — | | | — | | | (326 | ) | | (11,922 | ) | | (1,760 | ) | | (14,008 | ) | Transfer to investment property | | 866 | | (866 | ) | | — | | | — | | | — | | | — | | | — | | Impairment loss (note (a)) | | 1,131 | | — | | | — | | | — | | | — | | | — | | | 1,131 | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2006 | | 1,997 | | 7,531 | | | 40,428 | | | 12,447 | | | 1,104,864 | | | 5,514 | | | 1,172,781 | | | | | | | | | | | | | | | | | | | | | | | At September 1, 2006 | | 1,997 | | 7,531 | | | 40,428 | | | 12,447 | | | 1,104,864 | | | 5,514 | | | 1,172,781 | | Exchange adjustments | | — | | — | | | 612 | | | 160 | | | 1,874 | | | — | | | 2,646 | | Charge for the year | | 104 | | 1,592 | | | 9,269 | | | 2,028 | | | 244,581 | | | 529 | | | 258,103 | | Disposals | | — | | — | | | — | | | (683 | ) | | (4,465 | ) | | (160 | ) | | (5,308 | ) | | | | | | | | | | | | | | | | | | | | | | At August 31, 2007 | | 2,101 | | 9,123 | | | 50,309 | | | 13,952 | | | 1,346,854 | | | 5,883 | | | 1,428,222 | | | | | | | | | | | | | | | | | | | | | | | Net book value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2007 | | 3,096 | | 70,475 | | | 30,329 | | | 3,467 | | | 1,128,921 | | | 935 | | | 1,237,223 | | | | | | | | | | | | | | | | | | | | | | | At August 31, 2006 | | 3,200 | | 72,067 | | | 37,813 | | | 5,323 | | | 1,247,389 | | | 1,442 | | | 1,367,234 | | | | | | | | | | | | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
910 | | Fixed assets (continued) |
Notes:
| | | | Notes: | | | | (a) | | The interests in leasehold land and buildings and investment property situated in Hong Kong at their net book values are analyzed as follows: |
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Leases of between 10 to 50 years | | 75,267 | | 73,571 | | | | | |
Representing:
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Leasehold land and building carried at cost | | 72,067 | | 70,475 | Investment property at cost less accumulated depreciation and impairment loss | | 3,200 | | 3,096 | | | | | | | | 75,267 | | 73,571 | | | | | |
During the year ended August 31, 2006, a property which had been held for own use was leased to a third party to earn rental income. Upon adoption of HKAS 40, the Group assessed the open market value of the property and based on such assessment, wrote down the carrying amount of the property by $1,131,000 (included in “other operating expenses”). The estimate of open market value was made by reference to net rental income allowing for reversionary income potential.
The estimated fair value of the investment property held by the Group as of August 31, 2006 and 2007 amounted to HK$3,200,000 and HK$3,096,000, respectively.
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Leases of between 10 to 50 years | | | 73,571 | | | | 76,509 | | | | | | | | | | | |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Leasehold land and building carried at cost | | | 70,475 | | | | 73,517 | | | Investment property at cost less accumulated depreciation and impairment loss | | | 3,096 | | | | 2,992 | | | | | | | | | | | | | | | | | | | | | | | | | | 73,571 | | | | 76,509 | | | | | | | | | | | |
| | | | | During the year ended August 31, 2006, a property which had been held for own use was leased to a third party to earn rental income. Upon adoption of HKAS 40, the Group assessed the open market value of the property and based on such assessment, wrote down the carrying amount of the property by $1,131,000 (included in “other operating expenses”). The estimate of open market value was made by reference to net rental income allowing for reversionary income potential. | | | | The estimated fair value of the investment property held by the Group as of August 31, 2007 and 2008 amounted to HK$3,096,000 and HK$2,992,000, respectively. | | | (b) | | The Group’s total future aggregate lease income receivable under non-cancellable operating lease of the investment property isare receivable as follows: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Lease in respect of investment property which are receivable: | | | | | | | | | | — within 1 year | | | 228 | | | | 258 | | | — after 1 year but within 5 years | | | — | | | | 258 | | | | | | | | | | | | | | | | | | | | | | | | | | 228 | | | | 516 | | | | | | | | | | | | | | | | | | | | | | | Leases in respect of telecommunications facilities and computer equipment which are receivable: | | | | | | | | | | — within 1 year | | | 1,065 | | | | 979 | | | — after 1 year but within 5 years | | | 214 | | | | 292 | | | | | | | | | | | | | | | | | | | | | | | | | | 1,279 | | | | 1,271 | | | | | | | | | | | | | | | | | | | | | | | | | | 1,507 | | | | 1,787 | | | | | | | | | | | |
F-35 | | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Within 1 year | | 228 | | 228 | In the second year | | 228 | | — | | | | | | | | 456 | | 228 | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year ended August 31, 20072008
910 | | Fixed assets (continued) |
Notes: (continued)
| | | | Notes: (continued) | | | | (c) | | The Group leases telecommunications, computer and office equipment for terms ranging from one to five years. At the end of the lease term the Group has the option to purchase the equipment at a price deemed to be a bargain purchase option and accordingly the lease arrangements have been classified as finance leases. None of the leases included contingent rental. The total cost of these assets and the related accumulated depreciation are as follows: |
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Cost | | 4,079 | | 4,236 | Accumulated depreciation | | 1,307 | | 2,238 | | | | | | | | 2,772 | | 1,998 | | | | | |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Cost | | | 4,236 | | | | 4,236 | | | Accumulated depreciation | | | 2,238 | | | | 2,825 | | | | | | | | | | | | | | | | | | | | | | | | | | 1,998 | | | | 1,411 | | | | | | | | | | | |
| | | | (d) | | Management reviews the estimated useful lives of fixed assets annually and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the estimate is changed to reflect the changed pattern. The depreciation expense for future period is adjusted if there are significant changes from previous estimates. Management determines the useful life of the Group’s fixed assets based on its historical experience with similar assets, expected usage of the assets and anticipated technological changes with respect to those assets. Estimates and assumptions used in setting depreciable lives require both judgementjudgment and estimation. | | | | During the second half of fiscal 2007, taking into consideration of the current conditions and expected usage of existing telecommunications equipment, management engaged an external valuation firm to assist with its assessment of the estimated useful lives of such asset. As a result of this assessment, management revised the estimated useful lives of the fiber network and related peripherals from 4-15 years to 6-20 years. | | | | The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. As a result of such change, depreciation expense decreased by HK$15,930,000, and both income before taxation and net income after taxation decreased by HK$15,930,000 for the year ended August 31, 2007. The increase in net income resulted in a HK2.6 cents increase in both the basic earnings per share and diluted earnings per share. Such change also increased each of total assets, retained profits and total shareholders’ equity at August 31, 2007 by HK$15,930,000. |
During the second half of fiscal 2007, taking into consideration of the current conditions and expected usage of existing telecommunications equipment, management engaged an external valuation firm to assist with its assessment of the estimated useful lives of such asset. As a result of this assessment, management revised the estimated useful lives of the fibre network and related peripherals from 4-15 years to 6-20 years.F-36
The change in the estimated useful lives is a change in accounting estimate that is accounted for prospectively from June 1, 2007. As a result of such change, depreciation expense decreased by HK$15,930,000, and both income before taxation and net income after taxation decreased by HK$15,930,000 for the year ended August 31, 2007. The increase in net income resulted in a HK2.6 cents increase in both the basic earnings per share and diluted earnings per share. Such change also increased each of total assets, retained profits and total shareholders’ equity at August 31, 2007 by HK$15,930,000.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
10 | | | | 11 | | Other payables and accrued charges |
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Accrual for staff salaries and bonus | | 27,747 | | 33,833 | Accrual for customer reward program | | 2,636 | | 6,567 | Accrual for carrier fees and charges | | 10,705 | | 11,264 | Accrual for international call forwarding service charges | | 4,793 | | 5,784 | Payable for purchase of fixed assets | | 51,862 | | 34,749 | Payable for advertising and promotional expenses | | 11,966 | | 15,972 | Interest payable on senior notes | | 7,109 | | 7,164 | Others accrual (note) | | 26,668 | | 29,934 | | | | | | | | 143,486 | | 145,267 | | | | | |
Note: Amount of other accruals consisted of primarily accruals for utilities, rent and other administrative charges.
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Accrual for staff salaries and bonus | | | 33,833 | | | | 42,652 | | | Accrual for customer reward program | | | 6,567 | | | | 7,608 | | | Accrual for carrier fees and charges | | | 11,264 | | | | 7,495 | | | Accrual for international call forwarding service charges | | | 5,784 | | | | 6,305 | | | Payable for purchase of fixed assets | | | 34,749 | | | | 56,049 | | | Payable for advertising and promotional expenses | | | 15,972 | | | | 10,043 | | | Interest payable on senior notes | | | 7,164 | | | | 5,082 | | | Others accrual (note) | | | 29,934 | | | | 42,880 | | | | | | | | | | | | | | | | | | | | | | | | | | 145,267 | | | | 178,114 | | | | | | | | | | | |
11 | | | | Note: | | Amount of other accruals consisted of primarily accruals for utilities, rent and other administrative charges. |
The movement of deferred tax liabilities is
| | The components of deferred tax (liabilities)/assets recognized in the consolidated balance sheet and the movements of deferred tax assets/ (liabilities) are as follows: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | At the beginning of the year | | | (353 | ) | | | (291 | ) | | Exchange differences | | | 3 | | | | (1 | ) | | Deferred taxation credited/ (charged) to consolidated statement of operations | | | | | | | | | | — relating to the origination and reversal of temporary differences | | | 59 | | | | (4,645 | ) | | — relating to the recognition of unrecognized tax losses in prior years | | | — | | | | 26,335 | | | | | | | | | | | | | | | | | | | | | | | At the end of the year | | | (291 | ) | | | 21,398 | | | | | | | | | | | |
| | Management projects future taxable income by considering all available information, including tax planning strategies, historical taxable income, and the expiration period of the unused tax losses carry forwards of each of the Company and its subsidiaries. During the year ended August 31, 2008, taking into consideration of the current results of operations, management assessed that it is probable that sufficient future taxable profits will be generated to utilize the unused tax losses of HK$159,606,000 which resulted in the recognition of deferred tax assets of HK$26,335,000. |
F-37
| | | | | | | | | | August 31, | | | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | At the beginning of the year | | 10,539 | | | 353 | | Exchange differences | | 1 | | | (3 | ) | Deferred taxation credited to consolidated statement of operations | | (10,187 | ) | | (59 | ) | | | | | | | | At the end of the year | | 353 | | | 291 | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
11 | | | | 12 | | Deferred taxation (continued) |
| | As of August 31, 2006 and 2007, the Group had accumulated tax losses amounting to HK$1,159,787,000 and HK$1,037,141,000, respectively that can be carried forward to reduce future taxable income derived in Hong Kong, Canada and the United States, as applicable. As of August 31, 2006 and 2007 and 2008, the Group had accumulated tax losses amounting to HK$1,037,141,000 and HK$905,341,000, respectively that can be carried forward to reduce future taxable income derived in Hong Kong, Canada and the United States, as applicable. As of August 31, 2007 and 2008, the tax effect of the accumulated tax losses amounted to HK$204,300,000 and HK$182,739,000 and HK$150,234,000, respectively. These tax losses expire in the following periods: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Within one year | | | 737 | | | | — | | | In the second year | | | 395 | | | | — | | | In the third year | | | — | | | | — | | | In the fourth year | | | — | | | | — | | | After five years | | | 4,313 | | | | 3,967 | | | No expiry date | | | 1,031,696 | | | | 901,374 | | | | | | | | | | | | | | | | | | | | | | | | | | 1,037,141 | | | | 905,341 | | | | | | | | | | | |
| | The tax losses of the Company and its Hong Kong subsidiaries can be carried forward indefinitely while tax loss carryforwards period of subsidiaries in Canada and the United States range between 10 to 20 years under the respective tax laws. | | | | Deferred tax assets are recognized to the extent that realization of the related tax benefit is probable. The Group has unrecognized tax losses carried forward from prior years of HK$268,004,000 and HK$9,518,000 at August 31, 2007 and 2008 respectively which can offset against future taxable income. Accumulated tax losses for which deferred tax assets were not recognized expire in the following periods: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Within one year | | | 737 | | | | — | | | In the second year | | | 395 | | | | — | | | In the third year | | | — | | | | — | | | In the fourth year | | | — | | | | — | | | After five years | | | 4,313 | | | | 3,810 | | | No expiry date | | | 262,559 | | | | 5,708 | | | | | | | | | | | | | | | | | | | | | | | | | | 268,004 | | | | 9,518 | | | | | | | | | | | |
F-38
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Within one year | | — | | 737 | In the second year | | 1,512 | | 395 | In the third year | | 396 | | — | In the fourth year | | — | | — | After five years | | 4,344 | | 4,313 | No expiry date | | 1,153,535 | | 1,031,696 | | | | | | | | 1,159,787 | | 1,037,141 | | | | | |
The tax losses of the Company and its Hong Kong subsidiaries can be carried forward indefinitely while tax losses of subsidiaries in Canada and the United States expire within periods ranging from 2 to 20 years.
Deferred tax assets are recognized to the extent that realization of the related tax benefit is probable. The Group has unrecognized tax losses carried forward from prior years of HK$279,199,000 and HK$268,004,000 at August 31, 2006 and 2007 respectively which can offset against future taxable income. Accumulated tax losses for which deferred tax assets were not recognized expire in the following periods:
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Within one year | | 1,513 | | 737 | In the second year | | 396 | | 395 | In the third year | | — | | — | In the fourth year | | — | | — | After five years | | 4,130 | | 4,313 | No expiry date | | 273,160 | | 262,559 | | | | | | | | 279,199 | | 268,004 | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
11 | | | | 12 | | Deferred taxation (continued) |
The movements in deferred tax assets and liabilities
| | The movements in deferred tax assets and (liabilities) (prior to offsetting of balances within the same taxation jurisdiction) during the years ended August 31, 2006 and 2007 and 2008, are as follows: |
| | | | | | | | | | | | | Accelerated | | | | depreciation allowances | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | Deferred tax liabilities | | | | | | | | | | At the beginning of the year | | | (154,678 | ) | | | (134,910 | ) | | Credited to consolidated statement of operations | | | 19,772 | | | | 8,463 | | | Exchange differences | | | (4 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | At the end of the year | | | (134,910 | ) | | | (126,447 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share-based payment | | Tax losses | | Total | | | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | Deferred tax assets: | | | | | | | | | | | | | | | | | | | | | | | | | | At the beginning of the year | | | 123 | | | | — | | | | 154,202 | | | | 134,619 | | | | 154,325 | | | | 134,619 | | | (Charged)/ credited to consolidated statement of operations | | | (123 | ) | | | — | | | | (19,590 | ) | | | 13,227 | | | | (19,713 | ) | | | 13,227 | | | Exchange differences | | | — | | | | — | | | | 7 | | | | (1 | ) | | | 7 | | | | (1 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At the end of the year | | | — | | | | — | | | | 134,619 | | | | 147,845 | | | | 134,619 | | | | 147,845 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are reported in the consolidated balance sheet: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Deferred tax assets | | | — | | | | 26,335 | | | Deferred tax liabilities | | | (291 | ) | | | (4,937 | ) | | | | | | | | | | | | | | | | | | | | | | | | | (291 | ) | | | 21,398 | | | | | | | | | | | |
F-39
| | | | | | | | | | | | | | | | | | | | | Accelerated
depreciation allowances | | | Others | | Total | | | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | HK$’000 | | | HK$’000 | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | | At the beginning of the year | | 158,477 | | | 154,678 | | | 85 | | | — | | 158,562 | | | 154,678 | | Credited to consolidated statement of operations | | (3,805 | ) | | (19,772 | ) | | (86 | ) | | — | | (3,891 | ) | | (19,772 | ) | Exchange differences | | 6 | | | 4 | | | 1 | | | — | | 7 | | | 4 | | | | | | | | | | | | | | | | | | | | At the end of the year | | 154,678 | | | 134,910 | | | — | | | — | | 154,678 | | | 134,910 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Share-based payment | | | Tax losses | | | Total | | | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Deferred tax assets: | | | | | | | | | | | | | | | | | | | At the beginning of the year | | — | | | (123 | ) | | (148,023 | ) | | (154,202 | ) | | (148,023 | ) | | (154,325 | ) | Charged/ (credited) to consolidated statement of operations | | (123 | ) | | 123 | | | (6,173 | ) | | 19,590 | | | (6,296 | ) | | 19,713 | | Exchange differences | | — | | | — | | | (6 | ) | | (7 | ) | | (6 | ) | | (7 | ) | | | | | | | | | | | | | | | | | | | | At the end of the year | | (123 | ) | | — | | | (154,202 | ) | | (134,619 | ) | | (154,325 | ) | | (134,619 | ) | | | | | | | | | | | | | | | | | | | |
Deferred income tax assets and liabilities are offset when there is a legally enforceable rights to set off current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are reported in the consolidated balance sheet:
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Deferred tax assets | | — | | — | Deferred tax liabilities | | 353 | | 291 | | | | | | | | 353 | | 291 | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
| | | | | | | | | | August 31, | | | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | Balance at the beginning of the year | | 21,131 | | | 12,445 | | Additions during the year | | 5,287 | | | 24,502 | | Less: Amortization charge for the year (note 4) | | (13,973 | ) | | (15,580 | ) | | | | | | | | Balance at the end of the year | | 12,445 | | | 21,367 | | Current portion | | (10,808 | ) | | (13,584 | ) | | | | | | | | | | 1,637 | | | 7,783 | | | | | | | | |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Balance at the beginning of the year | | | 12,445 | | | | 21,367 | | | Additions during the year | | | 24,502 | | | | 68,505 | | | Less: Amortization charge for the year (note 5) | | | (15,580 | ) | | | (33,777 | ) | | | | | | | | | | | | | | | | | | | | | | Balance at the end of the year | | | 21,367 | | | | 56,095 | | | Current portion | | | (13,584 | ) | | | (40,704 | ) | | | | | | | | | | | | | | | | | | | | | | | | | 7,783 | | | | 15,391 | | | | | | | | | | | |
13 | | | | 14 | | Long-term debt and other liabilitiesobligations under finance leases, excluding current portion |
The Group’s long-term debt and other liabilities were
| | The Group’s long-term debt and obligations under finance leases are repayable as follows: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | 8.75% senior notes due 2015 | | | 952,593 | | | | 683,242 | | | | | | | | | | | | | | | | | | | | | | | Obligation under finance leases | | | | | | | | | | — Within one year | | | 835 | | | | 121 | | | — In the second year | | | 121 | | | | 129 | | | — In the third year | | | 254 | | | | 126 | | | | | | | | | | | | | | | | | | | | | | | | | | 1,210 | | | | 376 | | | Less: Current portion of obligation under finance leases | | | (835 | ) | | | (121 | ) | | | | | | | | | | | | | | | | | | | | | | | | | 375 | | | | 255 | | | | | | | | | | | | | | | | | | | | | | | | | | 952,968 | | | | 683,497 | | | | | | | | | | | |
F-40
| | | | | | | | | | August 31, | | | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | 8.75% senior notes due 2015 | | 948,027 | | | 952,593 | | | | | | | | | Obligation under finance leases | | | | | | | - Within one year | | 1,297 | | | 835 | | - In the second year | | 806 | | | 121 | | - In the third year | | 270 | | | 254 | | | | | | | | | | | 2,373 | | | 1,210 | | Less: Current portion of obligation under finance leases | | (1,297 | ) | | (835 | ) | | | | | | | | | | 1,076 | | | 375 | | | | | | | | | | | 949,103 | | | 952,968 | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
13 | | | | 14 | | Long-term debt and other liabilities (continued) |
On January 20, 2005, the Company issued unsecured 10-year senior fixed rates notes (the “10-year senior notes”) with a principle amount of US$125 million at par value. The 10-year senior notes mature on February 1, 2015 and bear interest at the fixed rate of 8.75% per annum and is payable semi-annually on February 1 and August 1 of each year, commencing August 1, 2005.
The 10-year senior notes are fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).
The net proceeds of 10-year senior notes were approximately US$121 million after issuance costs and commission. The Group used the net proceeds, in part, to repay in full an existing bank loan in the outstanding amount of HK$196.7 million. The remaining net proceeds is to be used for capital expenditures, including expanding and upgrading the Group’s Metro Ethernet network in Hong Kong, and for additional working capital and general corporate purposes.
The Company may redeem the 10-year senior notes, in whole or in part, on or after February 1, 2010, at the redemption price set forth in the indenture governing the 10-year senior notes. In addition, prior to February 1, 2008, using the proceeds from one or more specified public or private offerings of the Company’s common stock, the Company may redeem up to a maximum of 35% of the original aggregate principal amount of the 10-year senior notes at a redemption price equal to 108.75% of the principal amount of the 10-year senior notes. In all cases of redemption, the Company will pay principal at the redemption price specified plus accrued and unpaid interest through the date of redemption.
The indenture governing the 10-year senior notes contains covenants that limit, among other things, the Group’s ability and the ability of certain of its existing and future subsidiaries to:
| | On January 20, 2005, the Company issued unsecured 10-year senior fixed rates notes (the “10-year senior notes”) with a principle amount of US$125 million at par value. The 10-year senior notes mature on February 1, 2015 and bear interest at the fixed rate of 8.75% per annum and is payable semi-annually on February 1 and August 1 of each year, commencing August 1, 2005. | | | | The 10-year senior notes are fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”). | | | | The net proceeds of 10-year senior notes were approximately US$121 million after issuance costs and commission. The Group used the net proceeds, in part, to repay in full an existing bank loan in the outstanding amount of HK$196.7 million. The remaining net proceeds is to be used for capital expenditures, including expanding and upgrading the Group’s Metro Ethernet network in Hong Kong, and for additional working capital and general corporate purposes. | | | | The Company may redeem the 10-year senior notes, in whole or in part, on or after February 1, 2010, at the redemption price set forth in the indenture governing the 10-year senior notes. In addition, prior to February 1, 2008, using the proceeds from one or more specified public or private offerings of the Company’s common stock, the Company may redeem up to a maximum of 35% of the original aggregate principal amount of the 10-year senior notes at a redemption price equal to 108.75% of the principal amount of the 10-year senior notes. In all cases of redemption, the Company will pay principal at the redemption price specified plus accrued and unpaid interest through the date of redemption. | | | | The indenture governing the 10-year senior notes contains covenants that limit, among other things, the Group’s ability and the ability of certain of its existing and future subsidiaries to: |
| | (i) | | pay dividends, make distributions, redeem capital stock and make certain other restricted payments or investments; |
| | | (ii) | | incur additional indebtedness or issue certain equity interests; |
| | | (iii) | | merge, consolidate or sell substantially all assets; |
| | | (iv) | | issue or sell capital stock of certain subsidiaries; |
| | | (v) | | sell or exchange assets or enter into new businesses; |
| | | (vi) | | create any restrictions on the payment of dividends, the making of distributions, the making of loans and the transfer of assets; |
| | | (vii) | | create liens on assets; |
| | | (viii) | | enter into certain transactions with affiliates or relates persons; and |
| | | (ix) | | enter into sale and lease back transactions. |
| | During the year ended August 31, 2008, the Group repurchased a portion of the 10-year senior notes with a cumulative principal value of US$35,647,000 in the open market. The total consideration paid was approximately US$35,352,000. The gain on extinguishment of the 10-year senior notes was US$332,000 (equivalent to HK$2,582,000) which has been recorded as other income in the consolidated income statement. | | | | As of August 31, 2008, the remaining principal amount of the 10-year senior notes remaining in issued after the repurchase was US$89,353,000 (equivalent to HK$697,857,000). | | | | At August 31, 2007 and 2008, the 10-year senior notes were stated at the amortized cost of US$122,127,000 (equivalent to HK$952,593,000) and US$87,483,000 (equivalent to HK$683,242,000) respectively. |
At August 31, 2006 and 2007, the 10-year senior notes were stated at the amortized cost of US$121,854,000 (equivalent to HK$948,027,000) and US$122,127,000 (equivalent to HK$952,593,000), respectively.F-41
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
14 | | | | 15 | | Commitments and contingencies |
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Purchases of telecommunications, computer and office equipment contracted but not provided for | | 80,240 | | 54,165 | | | | | |
| | | | | �� | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Purchases of telecommunications, computer and office equipment contracted but not provided for | | | 54,165 | | | | 143,888 | | | | | | | | | | | |
| | | | (b) | | Commitments under operating leases |
(i) | | As of August 31, 20062007 and 2007, the Group had future aggregate lease income receivable under non-cancellable operating leases as follows: |
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Leases in respect of telecommunications and computer equipment: | | | | | - within one year | | 1,980 | | 1,065 | - in the second year | | 798 | | 214 | | | | | | | | 2,778 | | 1,279 | | | | | |
(ii) | As of August 31, 2006 and 2007,2008, the Group had future aggregate minimum lease payments under non-cancellable operating leases as follows: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Leases in respect of land and buildings: | | | | | | | | | | — within one year | | | 12,562 | | | | 16,472 | | | — in the second year | | | 2,484 | | | | 11,493 | | | — in the third year | | | — | | | | 152 | | | | | | | | | | | | | | | | | | | | | | | | | | 15,046 | | | | 28,117 | | | | | | | | | | | |
F-42 | | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Leases in respect of land and buildings: | | | | | - within one year | | 15,212 | | 12,562 | - in the second year | | 8,041 | | 2,484 | - in the third year | | 760 | | — | - in the fourth year | | 431 | | — | - in the fifth year | | 138 | | — | | | | | | | | 24,582 | | 15,046 | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
14 | | | | 15 | | Commitments and contingencies (continued) |
| (b) | | Commitments under operating leases (continued) |
(ii) | | | At August 31, 20062007 and 2007,2008, the Group had future aggregate minimum lease payments under non-cancellable operating leases as follows: (continued) |
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Leases in respect of telecommunications and computer equipment: | | | | | - within one year | | 24,881 | | 31,004 | - in the second year | | 3,100 | | 6,258 | - in the third year | | 875 | | 5,016 | - in the fourth year | | 800 | | 4,946 | - in the fifth year | | 800 | | 4,946 | - within sixth year to twelve years | | 6,400 | | 16,384 | | | | | | | | 36,856 | | 68,554 | | | | | | | | 61,438 | | 83,600 | | | | | |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Leases in respect of telecommunications and computer equipment: | | | | | | | | | | — within one year | | | 31,004 | | | | 38,623 | | | — in the second year | | | 6,258 | | | | 7,567 | | | — in the third year | | | 5,016 | | | | 1,865 | | | — in the fourth year | | | 4,946 | | | | 1,722 | | | — in the fifth year | | | 4,946 | | | | 1,722 | | | — within sixth year to twelve years | | | 16,384 | | | | 7,384 | | | | | | | | | | | | | | | | | | | | | | | | | | 68,554 | | | | 58,883 | | | | | | | | | | | | | | | | | | | | | | | | | | 83,600 | | | | 87,000 | | | | | | | | | | | |
| | | | (c) | | Program fee commitments |
| | The Group entered into several agreements with program content providers with respect to the Group’s IP-TV services. The amount of program fees payable by the Group is as follows: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Program fee payable: | | | | | | | | | | — within one year | | | 10,345 | | | | 6,583 | | | — in the second year | | | 3,633 | | | | 219 | | | — in the third year | | | 3 | | | | 60 | | | | | | | | | | | | | | | | | | | | | | | | | | 13,981 | | | | 6,862 | | | | | | | | | | | |
F-43 | | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Program fee payable: | | | | | - within one year | | 7,638 | | 10,345 | - in the second year | | 4,340 | | 3,633 | - in the third year | | 548 | | 3 | | | | | | | | 12,526 | | 13,981 | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
14 | | | | 15 | | Commitments and contingencies (continued) |
| (d) | | Contingent liabilities |
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Bank guarantees provided to suppliers (note 15(i) and (ii)) | | 6,303 | | 5,903 | Bank guarantee in lieu of payment of utility deposits (note 15(iii)) | | 5,272 | | 5,272 | | | | | | | | 11,575 | | 11,175 | | | | | |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Bank guarantees provided to suppliers (note 16(i) and (ii)) | | | 5,903 | | | | 24,671 | | | Bank guarantee in lieu of payment of utility deposits (note 16(iii)) | | | 5,272 | | | | 5,272 | | | | | | | | | | | | | | | | | | | | | | | | | | 11,175 | | | | 29,943 | | | | | | | | | | | |
As of August 31, 2007 and 2006, the Group had pledged bank deposits of US$9,900,000 (equivalent to HK$77,220,000 and HK$77,022,000, respectively) and HK$10,000,000 as security for the following banking facilities:
| | As of August 31, 2007 and 2008, the Group had pledged bank deposits of US$9,900,000 (equivalent to HK$77,220,000 and HK$77,319,000, respectively) and HK$10,000,000 as security for the following banking facilities: |
| | (i) | | bank facility of US$9,000,000 (equivalent to HK$70,200,000) and US$9,900,000 (equivalent to HK$77,319,000) respectively granted by the bank for issuance of bank guarantees to third party suppliers, letters of credit, short term loan, overdraft, foreign exchange and interest rate hedging arrangements. As of August 31, 2007 and 2006,2008, bank guarantees of HK$1,603,000 and HK$2,003,000,20,371,000, respectively were issued against this bank facility; |
| | | (ii) | | bank guarantees of HK$4,300,000 issued by a bank to third party suppliers of the Company and one of its subsidiaries as of August 31, 2007 and 20062008 for payment of certain products and services procured by the Company from these third party suppliers; and |
| | | (iii) | | bank guarantees of HK$5,272,000 issued by a bank to certain utility vendors of the Company as of August 31, 2007 and 20062008 in lieu of payment of utility deposits. |
F-44
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
16 | | | | 17 | | Investment securities |
| | | | | | | | | August 31, | | | | | 2006 | | 2007 | | | | | HK$’000 | | HK$’000 | | Debt securities, at fair value and unlisted outside Hong Kong (note (a)) | | 26,633 | | 28,577 | | Long term bank deposit, at amortized cost (note (b)) | | 13,641 | | 14,415 | | | | | | | | | | 40,274 | | 42,992 | | Less: Current portion | | — | | (3,779 | ) | | | | | | | | | 40,274 | | 39,213 | | | | | | | |
Notes:
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Debt securities, at fair value and unlisted outside Hong Kong (note (a)) | | | 28,577 | | | | 27,997 | | | Long term bank deposit, at amortized cost (note (b)) | | | 14,415 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | 42,992 | | | | 27,997 | | | | | | | | | | | | | Less: Current portion | | | (3,779 | ) | | | (27,997 | ) | | | | | | | | | | | | | | | | | | | | | | | | | 39,213 | | | | — | | | | | | | | | | | |
| | | | Notes: | | | | (a) | | The Group maintained an investment portfolio of HK$26,633,00028,577,000 and HK$28,577,00027,997,000 as of August 31, 2007 and 2006,2008, respectively, which primarily consisted of equity-linked mutual fund securities. |
For the years ended August 31, 2005, 2006 and 2007 the net unrealized investment gains/(losses) were HK$300,000, HK$698,000 and HK$1,887,000 respectively. No realized investment gains or losses were recognized during the years ended August 31, 2005, 2006 and 2007.
| | | | For the years ended August 31, 2006, 2007 and 2008 the net unrealized investment gains were HK$698,000, HK1,887,000 and HK$3,163,000 respectively. No realized investment gains or losses were recognized during the years ended August 31, 2006 and 2007. During the year ended August 31, 2008, a debt security with principal amount of US$500,000 (equivalent to HK$3,900,000) matured with a realized gain of HK$121,000. | | | (b) | | Represents a ten-year US$2 million (equivalent to HK$15,600,000 at August 31, 2007) deposit placed with a bank for which the Group receives a floating rate deposit interest. The deposit has a 10-year term maturing on August 22, 2013. An interest rate of 10% per annum has been guaranteed for the first year from the inception date on August 22, 2003. The deposit will terminate or mature once the cumulative interest reaches the predetermined accrued interest cap at 13% of the principal amount or an aggregate sum of US$260,000 (equivalent to HK$2,028,000 at August 31, 2007). During the year ended August 31, 2008, the Group early redeemed the deposit and recognized a gain of HK$1,185,000 in the consolidated statement of operations. |
17 | | | | 18 | | Derivative financial instrument |
| | | | | | | | | | | August 31, | | | 2007 | | 2008 | | | HK$’000 | | HK$’000 | Non-current assets | | | | | | | | | | Interest rate swap, at fair value through profit or loss | | | 1,039 | | | | — | | | | | | | | | | |
| | As of August 31, 2007, the Group has an outstanding interest rate swap contract with notional principal amount of HK$46,666,667. Under this arrangement, the Group pays a fixed rate interest of 2.675% per annum on the notional amount on a monthly basis, and receives a floating interest rate based on HIBOR rate. The maturity date of the contract is December 1, 2009. | | | | During the year ended August 31, 2008, the Group early terminated the interest rate swap contract and recognized a loss of HK$1,039,000 in the consolidated statement of operations. |
F-45 | | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Non-current assets | | | | | Interest rate swap, at fair value through profit or loss (note 26(e)) | | 1,845 | | 1,039 | | | | | |
As of August 31, 2007 and 2006, the Group has an outstanding interest rate swap contract with notional principal amount of HK$46,666,667 and HK$66,666,667, respectively. Under this arrangement, the Group pays a fixed rate interest of 2.675% per annum on the notional amount on a monthly basis, and receives a floating interest rate based on HIBOR rate. The maturity date of the contract is December 1, 2009.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issued and fully paid (ordinary shares of HK$0.10 each) | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | Total | | | | shares | | Amount | | Share | | Capital | | Translation | | Retained | | shareholders’ | | | | outstanding | | outstanding | | premium | | reserve | | reserve | | profits | | equity | | | | | | | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | | | | | | | (Amounts in thousands, except number of shares) | | Balance at September 1, 2005 | | | 614,125,404 | | | | 61,412 | | | | 619,408 | | | | 7,052 | | | | 840 | | | | 338,351 | | | | 1,027,063 | | | Shares issued upon exercise of share options (note (i)) | | | 50,000 | | | | 5 | | | | 8 | | | | — | | | | — | | | | — | | | | 13 | | | Equity settled share-based compensation | | | — | | | | — | | | | 882 | | | | 5,941 | | | | — | | | | — | | | | 6,823 | | | Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (142,062 | ) | | | (142,062 | ) | | Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (183 | ) | | | — | | | | (183 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2006 | | | 614,175,404 | | | | 61,417 | | | | 620,298 | | | | 12,993 | | | | 657 | | | | 196,289 | | | | 891,654 | | | Dividend paid in respect of previous year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24,635 | ) | | | (24,635 | ) | | Shares issued upon exercise of share options (note (i)) | | | 2,328,000 | | | | 233 | | | | 2,135 | | | | (611 | ) | | | — | | | | — | | | | 1,757 | | | Equity settled share-based compensation | | | — | | | | — | | | | — | | | | 5,727 | | | | — | | | | — | | | | 5,727 | | | Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 28,865 | | | | 28,865 | | | Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 514 | | | | — | | | | 514 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2007 | | | 616,503,404 | | | | 61,650 | | | | 622,433 | | | | 18,109 | | | | 1,171 | | | | 200,519 | | | | 903,882 | | | Dividend paid in respect of previous year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,915 | ) | | | (5,915 | ) | | Shares issued in respect of scrip dividend of previous year (note (ii)) | | | 11,227,213 | | | | 1,123 | | | | 18,044 | | | | — | | | | — | | | | (19,167 | ) | | | — | | | Dividend paid in respect of current year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (11,371 | ) | | | (11,371 | ) | | Shares issued in respect of scrip dividend of current year (note (iii)) | | | 8,838,938 | | | | 884 | | | | 13,347 | | | | — | | | | — | | | | (14,231 | ) | | | — | | | Shares issued upon exercise of share options (note (i)) | | | 14,052,268 | | | | 1,405 | | | | 16,893 | | | | (3,300 | ) | | | — | | | | — | | | | 14,998 | | | Equity settled share-based compensation | | | — | | | | — | | | | — | | | | 4,204 | | | | — | | | | — | | | | 4,204 | | | Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 125,190 | | | | 125,190 | | | Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 1,619 | | | | — | | | | 1,619 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2008 | | | 650,621,823 | | | | 65,062 | | | | 670,717 | | | | 19,013 | | | | 2,790 | | | | 275,025 | | | | 1,032,607 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-46 | | | | | | | | | | | | | | | | | | | | | | | | | | | Ordinary shares | | | | | | | | | | | | | | | | | | | Number of
shares
outstanding | | Amount
outstanding | | Share
premium | | Capital
reserve | | | Warrant
reserve | | | Translation
reserve | | | Retained
profits | | | Total
shareholders’
equity | | | | | | | HK$ | | HK$ | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | (Amounts in thousands, except number of shares) | | Balance at September 1, 2004 | | 610,573,361 | | 61,057 | | 617,986 | | 87 | | | 365 | | | 983 | | | 495,220 | | | 1,175,698 | | Release of warrant reserve upon warrant expiration | | — | | — | | — | | — | | | (18 | ) | | — | | | 18 | | | — | | Shares issued upon exercise of warrants | | 3,500,043 | | 350 | | 1,397 | | — | | | (347 | ) | | — | | | — | | | 1,400 | | Shares issued upon exercise of share options | | 52,000 | | 5 | | 25 | | — | | | — | | | — | | | — | | | 30 | | Equity settled share-based compensation | | — | | — | | — | | 6,965 | | | — | | | — | | | — | | | 6,965 | | Net loss | | — | | — | | — | | — | | | — | | | — | | | (163,496 | ) | | (163,496 | ) | Foreign currency translation adjustment | | — | | — | | — | | — | | | — | | | (143 | ) | | — | | | (143 | ) | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2005 | | 614,125,404 | | 61,412 | | 619,408 | | 7,052 | | | — | | | 840 | | | 331,742 | | | 1,020,454 | | Changes in accounting policy - opening balance adjustment arising from adoption of HKAS 32 and HKAS 39 (note (a)) | | — | | — | | — | | — | | | — | | | — | | | 6,609 | | | 6,609 | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 1, 2005 | | 614,125,404 | | 61,412 | | 619,408 | | 7,052 | | | — | | | 840 | | | 338,351 | | | 1,027,063 | | Shares issued upon exercise of share options | | 50,000 | | 5 | | 8 | | — | | | — | | | — | | | — | | | 13 | | Equity settled share-based compensation | | — | | — | | 882 | | 5,941 | | | — | | | — | | | — | | | 6,823 | | Net loss | | — | | — | | — | | — | | | — | | | — | | | (142,062 | ) | | (142,062 | ) | Foreign currency translation adjustment | | — | | — | | — | | — | | | — | | | (183 | ) | | — | | | (183 | ) | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2006 | | 614,175,404 | | 61,417 | | 620,298 | | 12,993 | | | — | | | 657 | | | 196,289 | | | 891,654 | | 2007 interim dividends declared and paid | | — | | — | | — | | — | | | — | | | — | | | (24,635 | ) | | (24,635 | ) | Shares issued upon exercise of share options | | 2,328,000 | | 233 | | 2,135 | | (611 | ) | | — | | | — | | | — | | | 1,757 | | Equity settled share-based compensation | | — | | — | | — | | 5,727 | | | — | | | — | | | — | | | 5,727 | | Net income | | — | | — | | — | | — | | | — | | | — | | | 28,865 | | | 28,865 | | Foreign currency translation adjustment | | — | | — | | — | | — | | | — | | | 514 | | | — | | | 514 | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2007 | | 616,503,404 | | 61,650 | | 622,433 | | 18,109 | | | — | | | 1,171 | | | 200,519 | | | 903,882 | | | | | | | | | | | | | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
18 | | | | 19 | | Capital and reserves (continued) |
| | | | | | | | Authorized ordinary shares of HK$0.10 each | | | | No. of Shares | | Amount | | | | | | HK$’000 | At August 31, 2006 and August 31, 2007 | | 2,000,000,000 | | 200,000 | | | | | |
| | | | | | | | | | | | | | | | Issued and fully paid (ordinary shares of HK$0.10 each) | | | | August 31, 2005 | | August 31, 2006 | | August 31, 2007 | | | | No. of shares | | Amount | | No. of shares | | Amount | | No. of shares | | Amount | | | | | | HK$’000 | | | | HK$’000 | | | | HK$’000 | At the beginning of the year | | 610,573,361 | | 61,057 | | 614,125,404 | | 61,412 | | 614,175,404 | | 61,417 | Exercise of share options (note (b)) | | 52,000 | | 5 | | 50,000 | | 5 | | 2,328,000 | | 233 | Exercise of warrants (note (c)) | | 3,500,043 | | 350 | | — | | — | | — | | — | | | | | | | | | | | | | | At the end of the year | | 614,125,404 | | 61,412 | | 614,175,404 | | 61,417 | | 616,503,404 | | 61,650 | | | | | | | | | | | | | |
Notes:
| (a) | | Capital and reserves (continued) |
| | | | | | | | | | | | | Authorized ordinary shares | | | | of HK$0.10 each | | | | No. of | | | | | | Shares | | Amount | | | | | | | | HK$’000 | | At August 31, 2007 and August 31, 2008 | | | 2,000,000,000 | | | | 200,000 | | | | | | | | | | | |
| | | | Notes: | | | (a)(i) | With effect from September 1, 2005, the Group adopted HKAS 32 “Financial instruments: Disclosure and presentation” and HKAS 39 “Financial instruments: Recognition and measurement”. The adoption of the HKAS 32 and HKAS 39 resulted in recognition of derivative financial instruments as assets of HK$6,609,000 and a corresponding increase in opening balance of retained profits at September 1, 2005. |
| (b) | During the years ended August 31, 2005, 2006, 2007 and 2007, 52,000,2008, 50,000, 2,328,000 and 2,328,00014,052,268 ordinary shares were issued at a weighted average price of HK$0.580.26 per share, HK$0.260.75 per share and HK$0.751.07 per share respectively, to share option holders who had exercised their subscription rights. These shares issued rank pari passu with the then existing ordinary shares in issue. |
| | (c)(ii) | The | On 4 February 2008, the Company effected a warrant issue at a price of HK$0.11 per warrant to certain qualifying shareholders (shareholders domiciled in Hong Kong) for cash during the year ended August 31, 2002. One warrant was offered for every five existingissued and allotted 11,227,213 ordinary shares held onto shareholders who elected to receive, the date of record. The warrants entitled2007 final dividend in new shares pursuant to the holders to subscribe for ordinary shares ofscrip dividend scheme announced by the Company (on a oneon 4 January 2008 under which shareholders may elect to one basis) at a pricereceive the dividend in new shares in lieu of HK$0.40 per share (subject to adjustment), totalling HK$39,325,920 in cash at any time on or before November 1, 2004. If the warrants were fully exercised, the Company would be required to issue 98,314,800 additional ordinary shares. During the year ended August 31, 2005, 3,500,043 warrants were exercised for an equivalent number of ordinarycash. These new shares at a price of HK$0.40 per share. The shares issued rank pari passu with the then existing shares of the Company in all respects. | | | (iii) | | On 23 July 2008, the Company issued and allotted 8,838,938 ordinary shares to shareholder, who elected to receive the 2008 interim dividend in issue. The remaining outstanding warrantsnew shares pursuant to the scrip dividend scheme announced by the Company on 19 June 2008 under which shareholders may elect to receive the dividend in new shares in lieu of 135,396 expired on November 1, 2004.cash. These new shares rank pari passu with the existing shares of the Company in all respects. |
| | (d)(iv) | | Details of the share option scheme of the Group, the share options granted by the Group during the relevant years and options outstanding at August 31, 2005, 2006, 2007 and 20072008 are set out in note 24.25. |
19 | | | | (b) | | Nature and purpose of reserves |
| (i) | | Share premium | | | | The application of the share premium account is governed by Sections 48B of the Hong Kong Companies Ordinance. | | | (ii) | | Capital reserve | | | | The capital reserve which comprises the fair value of the actual or estimated number of unexercised share options granted to employees of the Group was recognised in accordance with the accounting policy adopted for share based payment in note 2(q). | | | (iii) | | PRC statutory reserve | | | | In accordance with Accounting Regulations for Business Enterprises, foreign investment enterprises in the PRC are required to transfer at least 10% of their profit after taxation, as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to the general reserve until the balance of the general reserve is equal to 50% of their registered capital. For the year ended August 31, 2007 and August 31, 2008, CTI Guangzhou Customer Services Company Limited (“CTIGZ”), a wholly owned subsidiary of the Group, made appropriation to the statutory reserve of RMB379,000 and RMB324,000, respectively. The accumulated balance of the statutory reserve maintained at the CTIGZ as of August 31, 2007 and August 31, 2008 were RMB581,000 and RMB905,000, respectively. The statutory reserve can be used to reduce previous years’ losses and to increase the capital of the subsidiary. | | | (iv) | | Exchange reserve | | | | The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 2(d)(ii). |
F-47
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008 | | | | 19 | | Capital and reserves (continued) |
| (c) | | Capital management | | | | The Group’s primary objectives when managing capital are to maintain a reasonable capital structure and safeguard the Group’s ability to continue as a going concern, in order to provide returns for shareholders. | | | | The Group manages the amount of capital in proportion to risk, and makes adjustments to its capital structure through the amount of dividend payment to shareholders, issuance of scrip and new shares, and managing its debt portfolio in conjunction with cash flow requirements, taking into account its future financial obligations and commitments. | | | | The Group monitors its capital structure by reviewing its net debt to net asset gearing ratio. For this purpose, the Group defines net debt as total loans less cash at bank and in hand and long-term bank deposits. | | | | The net debt to net asset gearing ratio as of August 31, 2007 and 2008 are as follows: |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Unsecured | | | | | | | | | | 8.75% senior notes due 2015 | | | 952,593 | | | | 683,242 | | | Obligation under finance lease | | | 1,210 | | | | 376 | | | | | | | | | | | | | | | | | | | | | | | Total loans | | | 953,803 | | | | 683,618 | | | Less: Cash at bank and in hand | | | (532,894 | ) | | | (421,610 | ) | | Less: Long-term bank loan | | | (14,415 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | Net debt | | | 406,494 | | | | 262,008 | | | Net asset | | | 903,882 | | | | 1,032,607 | | | | | | | | | | | | | | | | | | | | | | | Net debt to net asset gearing ratio | | | 0.45 | | | | 0.25 | | | | | | | | | | | |
| | | | | | | | August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Cash at bank and in hand | | 44,717 | | 50,164 | Time deposits with banks and other financial institution (note (a)) | | 100,200 | | 482,730 | | | | | | | | 144,917 | | 532,894 | | | | | | Term deposits with banks and other financial institution (note (b)) | | 237,496 | | — | | | | | |
Notes:
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | Cash at bank and in hand | | | 50,164 | | | | 156,667 | | | Time deposits with banks and other financial institution (note (a)) | | | 482,730 | | | | 264,943 | | | | | | | | | | | | | | | | | | | | | | | | | | 532,894 | | | | 421,610 | | | | | | | | | | | |
| | | | Notes: | | | | (a) | | Amounts represented time deposits with original maturities of less than three months. |
F-48 | (b) | Amounts represented term deposits with original maturities of more than three months. |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
| (a) | | Dividends payable to equity shareholders of the Company attributable to the year |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Interim dividend, declared and paid, of HK4 cents (2007: HK4 cents, 2006: HK$Nil) per ordinary share | | | — | | | | 24,635 | | | | 25,602 | | | Final dividend proposed after the balance sheet date of HK2 cents (2007: HK4 cents, 2006: HK$Nil) per ordinary shares | | | — | | | | 24,660 | | | | 13,012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | 49,295 | | | | 38,614 | | | | | | | | | | | | | | | |
| | During the year ended August 31, 2008, a scrip dividend option was offered to all shareholders with registered addresses in Hong Kong that were entitled to the interim dividend in respect of the six-month period ended February 29, 2008. 8,838,938 shares were issued during the year ended August 31, 2008 to shareholders who had elected to receive all or part of their entitlement to dividends in form of scrip. | | | | | Year ended August 31, | | | 2005 | | 2006 | | 2007 | | | HK$’000 | | HK$’000 | | HK$’000 | Interim dividend, declared and paid, of HK4 cents (2006: HK$Nil, 2005: HK$Nil) per ordinary share
| | — | | — | | 24,635 | FinalThe final dividend proposed after the balance sheet date of HK4 cents (2006: HK$Nil, 2005: HK$Nil) per ordinary shares
has not been recognized as a liability at August 31, 2007 and August 31, 2008. |
| | | | (b) | | —Dividends attributable to the previous financial year, approved and paid during the year |
| | | — | | 24,660 | | | | | | | | | | | —Year ended August 31, | | | | — 2006 | | 49,2952007 | | 2008 | | | HK$’000 | | HK$’000 | | HK$’000 | | Final dividend in respect of the financial year ended August 31, 2007 approved and paid, of HK4 cents per ordinary share (2007: HK$Nil, 2006: HK$Nil) | | | — | | | | — | | | | 25,082 | | | | | | | | | | | | | | |
21 | Banking facilities | During the year ended August 31, 2008, a scrip dividend option was offered to all shareholders with registered addresses in Hong Kong that were entitled to the final dividend in respect of the financial year ended August 31, 2007. 11,227,213 shares were issued during the year ended August 31, 2008 to the shareholders who had elected to receive all or part of their entitlement to dividends in the form of scrip. |
The Group’s banking facilities were denominated in Hong Kong dollars as follows:F-49
| | | | | | | | | | | | | | Amount available August 31, | | Amount utilized August 31, | | Terms of facilities as
at August 31, 2007
Interest rate | | | | 2006 | | 2007 | | 2006 | | 2007 | | | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | | Bank overdrafts/ bank loans | | 80,020 | | 80,200 | | 2,003 | | 1,603 | | HIBOR or cost of
Funds + 0.8% per
annum | | | | | | | | | | | | | | | | | | | | | | |
The amounts utilized as of August 31, 2006 and 2007 represented bank guarantees and letter of credit issued against the banking facilities (see note 15) which the Group has not drawn upon. The utilized banking facilities as of August 31, 2006 and 2007 were denominated in Hong Kong dollar.
22 | Related party transactions |
In addition to the transactions and balances disclosed elsewhere in these financial statements, the Group entered into the following material related party transactions.
Key management personnel remuneration
Remuneration for key management personnel, including amounts paid to the Group’s directors and certain of the highest paid employees, is as follows:
| | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | Short-term employee benefits | | 21,443 | | 26,791 | Post-employment benefits | | 1,916 | | 2,197 | Equity compensation benefits | | 4,571 | | 4,388 | | | | | | | | 27,930 | | 33,376 | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
23 | Retirement schemes | | | 22 | | Banking facilities |
| | The Group’s banking facilities were denominated in Hong Kong dollars as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Terms of facilities as | | | | Amount available | | Amount utilized | | at August 31, 2008 | | | | August 31, | | August 31, | | Interest rate | | | | 2007 | | 2008 | | 2007 | | 2008 | | | | | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | | | | | Bank overdrafts/ bank loans | | | 80,200 | | | | 87,319 | | | | 1,603 | | | | 29,943 | | | HIBOR or cost | | | | | | | | | | | | | | | | | | | | of Funds + 0.8% per annum |
| | The amounts utilized as of August 31, 2007 and 2008 represented bank guarantees and letter of credit issued against the banking facilities (see note 16) which the Group has not drawn upon. The utilized banking facilities as of August 31, 2007 and 2008 were denominated in Hong Kong dollar and Singaporean dollar. |
| | | | 23 | | Related party transactions |
| | In addition to the transactions and balances disclosed elsewhere in these financial statements, the Group entered into the following material related party transactions. | | | | Key management personnel remuneration | | | | Remuneration for key management personnel, including amounts paid to the Group’s directors and certain of the highest paid employees, is as follows: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Short-term employee benefits | | | 21,443 | | | | 26,791 | | | | 28,850 | | | Post-employment benefits | | | 1,916 | | | | 2,197 | | | | 2,425 | | | Equity compensation benefits | | | 4,571 | | | | 4,388 | | | | 3,664 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 27,930 | | | | 33,376 | | | | 34,939 | | | | | | | | | | | | | | | |
The Group contributes to, the Occupational Retirement Scheme (“the ORSO Scheme”), a defined contribution retirement scheme, which is available to certain employees. Under the ORSO Scheme, the employees are required to contribute 5% of their monthly salaries, while the Group’s contributions are calculated at 10% and 5% of the monthly salaries of senior management staff and all other staff, respectively. The employees are entitled to 100% of the employer’s contributions after 10 years of completed service, or at a reduced scale after completion of 3 to 9 years of service. Contributions to the ORSO Scheme are reduced by amounts forfeited by employees who leave the ORSO Scheme prior to vesting fully in the Group’s contributions.F-50
In December 2000, the Group established a defined contribution retirement scheme, Mandatory Provident Fund Scheme (“the MPF Scheme”), under the Hong Kong Mandatory Provident Fund Scheme Ordinance where the then existing employees of the Group in Hong Kong could elect to join the MPF Scheme. All new employees who join the Group in Hong Kong after December 2000 are required to join the MPF Scheme. Both the Group and the employees are required to contribute 5% of each individual’s relevant income subject to a maximum amount of contribution of HK$1,000 per month. The employee is fully vested in the Group’s mandatory contributions. Senior employees who are under MPF Scheme may also elect to join a Mutual Voluntary Plan (“the Mutual Plan”) whereby both the Group and the employees make additional voluntary contributions, so that the total amount of contributions made under the MPF Scheme and the Mutual Plan is similar to the contribution made under the ORSO Scheme.
The Group also contributes to defined contribution pension schemes for staff in overseas countries as required by the respective local statutory requirements.
The aggregate employer’s contributions, net of forfeited contributions, which have been dealt with in the consolidated statement of operations during the year are as follows:
| | | | | | | | | | | | | Year ended August 31, | | | | | 2005 | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Gross contributions | | 27,789 | | | 28,912 | | | 24,545 | | Less: Forfeited contributions utilized to offset the Group’s contributions during the year | | (352 | ) | | (956 | ) | | (612 | ) | | | | | | | | | | | Net contributions charged to the consolidated statement of operations | | 27,437 | | | 27,956 | | | 23,933 | | | | | | | | | | | |
At August 31, 2007, there is no forfeited contribution available to offset future contributions by the Group to the ORSO scheme and the Mutual Plan.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
| 24 | | Retirement schemes | | | | The Group contributes to an Occupational Retirement Scheme (the “ORSO Scheme”), a defined contribution retirement scheme, which is available to some of its employees in Hong Kong. Under the ORSO Scheme, the employees are required to contribute 5% of their monthly salaries, while the Group’s contributions are calculated at 10% and 5% of the monthly salaries of senior management staff and all other staff respectively. The employees are entitled to 100% of the employer’s contributions after 10 years of completed service, or at a reduced scale after completion of 3 to 9 years’ service. Contributions to the ORSO Scheme are reduced by contributions forfeited by those employees who leave the ORSO Scheme prior to vesting fully in the Group’s contributions. | | | | A mandatory provident fund scheme (the “MPF Scheme”) has been established under the Hong Kong Mandatory Provident Fund Scheme Ordinance in December 2000. The then existing employees of the Group in Hong Kong could elect to join the MPF Scheme, while all new employees joining the Group in Hong Kong from then onwards are required to join the MPF Scheme. Both the Group and the employees are required to contribute 5% of each individual’s relevant income with a maximum amount of HK$1,000 per month as a mandatory contribution. Employer’s mandatory contributions are 100% vested in the employees as soon as they are paid to the MPF Scheme. Senior employees may also elect to join a Mutual Voluntary Plan (the “Mutual Plan”) in which both the Group and the employee, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the extent of contributions that would have been made under the ORSO Scheme. | | | | Pursuant to the relevant regulations in the People’s Republic of China (the “PRC”), the Group contributes to the defined contribution retirement scheme organised by the local social security bureau for each employee of the subsidiary in the PRC at a rate of 20% of a standard salary base as determined by the local social security bureau. The Group has no other obligation to make payments in respect of retirement benefits of these employees. | | | | The retirement schemes for staff of the Group in other countries follow the local statutory requirements of the respective countries. | | | | The aggregate employer’s contributions, net of forfeited contributions, which have been dealt with in the consolidated statement of operations during the year are as follows: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Gross contributions | | | 28,912 | | | | 24,545 | | | | 29,738 | | | Less: Forfeited contributions utilized to offset the Group’s contributions during the year | | | (956 | ) | | | (612 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net contributions charged to the consolidated statement of operations | | | 27,956 | | | | 23,933 | | | | 29,738 | | | | | | | | | | | | | | | |
| | At August 31, 2008, there is no forfeited contribution available to offset future contributions by the Group to the ORSO scheme and the Mutual Plan. |
| 25 | | Equity settled share-based transactions |
| | 2002 Share Option Scheme | | | | The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by the shareholders of the Company on December 23, 2002 and where the directors may, at their discretion, invite eligible participants to take up options to subscribe for shares subject to the terms and conditions stipulated therein. | | | | Under the 2002 Share Option Scheme, the Company may grant options to employees (including executive, non-executive and independent non-executive directors), suppliers and professional advisers to subscribe for shares of the Company. The maximum number of options authorized under the 2002 Share Option Scheme may not, when aggregated with any shares subject to any other executive and employee share option scheme, exceed 10% of the Company’s issued share capital on the date of adoption. The exercise price of the option is determined by the Company’s board of directors at a price not less than the highest of (a) the par value of a share; (b) the average closing price of the Company’s shares for five trading days preceding the grant date; and (c) the closing price of the Company’s shares on the date of grant. The 2002 Share Option Scheme is valid and effective for a ten year period up to December 22, 2012 subject to earlier termination by the Company by resolution in general meeting or by the board of directors. The period during which the option may be exercised will be determined by the board of directors at its discretion, save that no option may be exercised after more than ten years from the date of grant. During the year ended August 31, 2008, options were granted under the 2002 Share Option Scheme to eligible participants for the subscription of 18,300,000 shares (2007: 300,000 shares) of the Company at a weighted average exercise price of HK$1.84 (2007: HK$1.16) each. |
2002 Share Option SchemeF-51
The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by the shareholders of the Company on December 23, 2002 and where the directors may, at their discretion, invite eligible participants to take up options to subscribe for shares subject to the terms and conditions stipulated therein.
Under the 2002 Share Option Scheme, the Company may grant options to employees (including executive, non-executive and independent non-executive directors), suppliers and professional advisers to subscribe for shares of the Company. The maximum number of options authorized under the 2002 Share Option Scheme may not, when aggregated with any shares subject to any other executive and employee share option scheme, exceed 10% of the Company’s issued share capital on the date of adoption. The exercise price of the option is determined by the Company’s board of directors at a price not less than the highest of (a) the par value of a share; (b) the average closing price of the Company’s shares for five trading days preceding the grant date; and (c) the closing price of the Company’s shares on the date of grant. The 2002 Share Option Scheme is valid and effective for a ten year period up to December 22, 2012 subject to earlier termination by the Company by resolution in general meeting or by the board of directors. The period during which the option may be exercised will be determined by the board of directors at its discretion, save that no option may be exercised after more than ten years from the date of grant. During the year ended August 31, 2007, options were granted under the 2002 Share Option Scheme to eligible participants for the subscription of 300,000 shares (2006: 34,310,000 shares) of the Company at a weighted average exercise price of HK$1.16 (2006: HK$0.67) each.
1997 Share Option Scheme
The Company also had a previous share option scheme (the “1997 Share Option Scheme”) adopted by shareholders on July 12, 1997 which was terminated on December 23, 2002 upon the adoption of the 2002 Share Option Scheme. Unexercised options granted under the 1997 Share Option Scheme lapsed automatically on 12 July 2007.
Each option issued under the 2002 Share Option Scheme or the 1997 Share Option Scheme entitles the holder to subscribe for one ordinary share in the Company at a predetermined exercise price.
Prior to September 1, 2005, under Hong Kong GAAP, no compensation cost was required to be recognized in respect of the grant of share options. At the time of exercise of the options, proceeds from issue of shares were credited to share capital and share premium account.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2425 | | Equity settled share-based transactions (continued) |
1997 Share Option Scheme (continued)
Effective from September 1, 2005, upon the adoption of HKFRS 2 “Share-based payment”, the Group recognizes the fair value of share options granted over the vesting period, or as an asset, if the cost qualifies for recognition as an asset. The fair value of share option is measured at the date of grant. The Group has taken advantage of the transitional provisions set out in paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not been applied to the following options:
| | The Company also had a previous share option scheme (the “1997 Share Option Scheme”) adopted by shareholders on July 12, 1997 which was terminated on December 23, 2002 upon the adoption of the 2002 Share Option Scheme. Unexercised options granted under the 1997 Share Option Scheme lapsed automatically on 12 July 2007. | | | | Each option issued under the 2002 Share Option Scheme or the 1997 Share Option Scheme entitles the holder to subscribe for one ordinary share in the Company at a predetermined exercise price. | | | | Prior to September 1, 2005, under Hong Kong GAAP, no compensation cost was required to be recognized in respect of the grant of share options. At the time of exercise of the options, proceeds from issue of shares were credited to share capital and share premium account. | | | | Effective from September 1, 2005, upon the adoption of HKFRS 2 “Share-based payment”, the Group recognizes the fair value of share options granted over the vesting period, or as an asset, if the cost qualifies for recognition as an asset. The fair value of share option is measured at the date of grant. The Group has taken advantage of the transitional provisions set out in paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not been applied to the following options: |
| | (i) | | share options granted under the 1997 Share Option Scheme since all options were granted to employees before November 7, 2002; and |
| | | (ii) | | share options granted under the 2002 Share Option Scheme and vested before September 1, 2005. |
| | Details of share options granted pursuant to the 2002 Share Option Scheme and 1997 Share Option Scheme that were outstanding at August 31, 2005, 2006, and 2007 and 2008, are as follows: |
| | | | | | | | | | | | | | | | | September 3, | | September 10, | | October 20, | | Date of grant | | 1998 | | 1999 | | 2000 | | Exercise price per share (HK$) at date of grant | | | 0.26 | | | | 2.10 | | | | 0.58 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market price per share (HK$) at date of grant | | | 0.26 | | | | 2.10 | | | | 0.58 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2005 | | | 190,000 | | | | 60,000 | | | | 298,000 | | | Exercised | | | (50,000 | ) | | | — | | | | — | | | Lapsed upon resignation of employees | | | — | | | | (20,000 | ) | | | (20,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2006 | | | 140,000 | | | | 40,000 | | | | 278,000 | | | Exercised | | | (140,000 | ) | | | — | | | | (278,000 | ) | | Lapsed upon expiry of the options | | | — | | | | (40,000 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2007 and August 31, 2008 | | | — | | | | — | | | | — | | | | | | | | | | | | | | | |
F-52
1997 Share Option Scheme
| | | | | | | | | | Date of grant | | September 3,
1998 | | | September 10,
1999 | | | October 20,
2000 | | Exercise price per share (HK$) | | 0.26 | | | 2.10 | | | 0.58 | | | | | | | | | | | | Market price per share (HK$) at date of grant | | 0.26 | | | 2.10 | | | 0.58 | | | | | | | | | | | | Outstanding at September 1, 2004 | | 190,000 | | | 60,000 | | | 350,000 | | Exercised | | — | | | — | | | (52,000 | ) | | | | | | | | | | | Outstanding at August 31, 2005 | | 190,000 | | | 60,000 | | | 298,000 | | Exercised | | (50,000 | ) | | — | | | — | | Lapsed upon resignation of employees | | — | | | (20,000 | ) | | (20,000 | ) | | | | | | | | | | | Outstanding at August 31, 2006 | | 140,000 | | | 40,000 | | | 278,000 | | Exercised | | (140,000 | ) | | — | | | (278,000 | ) | Lapsed upon expiry of the options | | — | | | (40,000 | ) | | — | | | | | | | | | | | | Outstanding at August 31, 2007 | | — | | | — | | | — | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2425 | | Equity settled share-based transactions (continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | November | | | | | | | | | | | | | | | | | | June 3, | | October 21, | | January 5, | | October 3, | | May 22, | | July 3, | | August 3, | | 22, | | May 23, | | December | | February 6, | | February | | February 15, | | March | | May 2, | | Date of grant | | 2004 | | 2004 | | 2005 | | 2005 | | 2006 | | 2006 | | 2006 | | 2006 | | 2007 | | 12, 2007 | | 2008 | | 11, 2008 | | 2008 | | 11, 2008 | | 2008 | | | | (note (a)) | | (note (b)) | | (note (c)) | | (note (d)) | | (note (e)) | | (note (f)) | | (note(g)) | | (note(h)) | | (note(i)) | | (note (j)) | | (note (k)) | | (note(l)) | | (note (m)) | | (note (n)) | | (note(o)) | | Exercise price per share (HK$) at date of grant | | | 1.47 | | | | 1.54 | | | | 1.54 | | | | 0.81 | | | | 0.66 | | | | 0.68 | | | | 0.71 | | | | 0.73 | | | | 2.03 | | | | 2.45 | | | | 1.77 | | | | 1.88 | | | | 1.77 | | | | 1.83 | | | | 1.80 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market price per share (HK$) at date of grant | | | 1.47 | | | | 1.49 | | | | 1.48 | | | | 0.81 | | | | 0.64 | | | | 0.68 | | | | 0.71 | | | | 0.73 | | | | 2.10 | | | | 2.40 | | | | 1.86 | | | | 1.76 | | | | 1.80 | | | | 1.70 | | | | 1.75 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2005 | | | 6,000,000 | | | | 14,670,000 | | | | 16,000,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Granted | | | — | | | | — | | | | — | | | | 1,000,000 | | | | 32,210,000 | | | | 1,000,000 | | | | 100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Lapsed upon resignation of employees | | | — | | | | (5,220,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2006 | | | 6,000,000 | | | | 9,450,000 | | | | 16,000,000 | | | | 1,000,000 | | | | 32,210,000 | | | | 1,000,000 | | | | 100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Granted | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 200,000 | | | | 100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Exercised | | | — | | | | (330,000 | ) | | | — | | | | — | | | | (1,250,000 | ) | | | (300,000 | ) | | | (30,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Lapsed upon resignation of employees | | | — | | | | (780,000 | ) | | | — | | | | — | | | | (2,020,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2007 | | | 6,000,000 | | | | 8,340,000 | | | | 16,000,000 | | | | 1,000,000 | | | | 28,940,000 | | | | 700,000 | | | | 70,000 | | | | 200,000 | | | | 100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Adjustment to the number of options for 2007 Final Dividend (note p) | | | — | | | | 32,397 | | | | 63,292 | | | | — | | | | 101,301 | | | | 2,769 | | | | 277 | | | | 534 | | | | 396 | | | | 3,956 | | | | — | | | | — | | | | — | | | | — | | | | — | | | Adjustment to the number of options for 2008 Interim Dividend (note q) | | | — | | | | 21,002 | | | | 43,664 | | | | — | | | | 65,221 | | | | — | | | | 191 | | | | 368 | | | | — | | | | — | | | | 16,309 | | | | 16,309 | | | | 10,873 | | | | 816 | | | | 2,718 | | | Granted | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,000,000 | | | | 6,000,000 | | | | 6,000,000 | | | | 4,000,000 | | | | 300,000 | | | | 1,000,000 | | | Exercised | | | (6,000,000 | ) | | | (821,344 | ) | | | — | | | | (1,000,000 | ) | | | (6,135,805 | ) | | | — | | | | (30,119 | ) | | | (65,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Lapsed upon resignation of employees | | | — | | | | (473 | ) | | | — | | | | — | | | | (583,162 | ) | | | (702,769 | ) | | | — | | | | — | | | | (100,396 | ) | | | (1,003,956 | ) | | | — | | | | — | | | | (3,008,155 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2008 | | | — | | | | 7,571,582 | | | | 16,106,956 | | | | — | | | | 22,387,555 | | | | — | | | | 40,349 | | | | 135,902 | | | | — | | | | — | | | | 6,016,309 | | | | 6,016,309 | | | | 1,002,718 | | | | 300,816 | | | | 1,002,718 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2002 Share Option SchemeF-53
| | | | | | | | | | | | | | | | | | | | | | | Date of grant | | June 3,
2004 | | October 21,
2004 | | | January 5,
2005 | | October 3,
2005 | | May 22, 2006 | | | July 3,
2006 | | | August 3,
2006 | | | November 22,
2006 | | May 23,
2007 | | | | (note (a)) | | (note (b)) | | | (note (c)) | | (note (d)) | | (note (e)) | | | (note (f)) | | | (note(g)) | | | (note(h)) | | (note(i)) | Exercise price per share (HK$) | | 1.47 | | 1.54 | | | 1.54 | | 0.81 | | 0.66 | | | 0.68 | | | 0.71 | | | 0.73 | | 2.03 | | | | | | | | | | | | | | | | | | | | | | | | Market price per share (HK$) at date of grant | | 1.47 | | 1.49 | | | 1.48 | | 0.81 | | 0.64 | | | 0.68 | | | 0.71 | | | 0.73 | | 2.10 | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at September 1, 2004 | | 6,000,000 | | — | | | — | | — | | — | | | — | | | — | | | — | | — | Granted | | — | | 14,670,000 | | | 16,000,000 | | — | | — | | | — | | | — | | | — | | — | Exercised | | — | | — | | | — | | — | | — | | | — | | | — | | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2005 | | 6,000,000 | | 14,670,000 | | | 16,000,000 | | — | | — | | | — | | | — | | | — | | — | Granted | | — | | — | | | — | | 1,000,000 | | 32,210,000 | | | 1,000,000 | | | 100,000 | | | — | | — | Lapsed upon resignation of employees | | — | | (5,220,000 | ) | | — | | — | | — | | | — | | | — | | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2006 | | 6,000,000 | | 9,450,000 | | | 16,000,000 | | 1,000,000 | | 32,210,000 | | | 1,000,000 | | | 100,000 | | | — | | — | Granted | | — | | — | | | — | | — | | — | | | — | | | — | | | 200,000 | | 100,000 | Exercised | | — | | (330,000 | ) | | — | | — | | (1,250,000 | ) | | (300,000 | ) | | (30,000 | ) | | — | | — | Lapsed upon resignation of employees | | — | | (780,000 | ) | | — | | — | | (2,020,000 | ) | | — | | | — | | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at August 31, 2007 | | 6,000,000 | | 8,340,000 | | | 16,000,000 | | 1,000,000 | | 28,940,000 | | | 700,000 | | | 70,000 | | | 200,000 | | 100,000 | | | | | | | | | | | | | | | | | | | | | | | |
Notes:
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008 | 25 | | Equity settled share-based transactions (continued) |
| | | | Notes: | | | | | | (a) | | On June 3, 2004, an employee was granted options to subscribe for 6,000,000 shares at a price of HK$1.47 per share. The vesting period for the options is June 3, 2004 to April 30, 2006. |
| | | (b) | | On October 21, 2004, employees, including executive directors, were granted options to subscribe for 14,670,000 shares at a price of HK$1.54 per share. The vesting period for the options is October 21, 2004 to December 31, 2006. |
| | | (c) | | On January 5, 2005, executive directors were granted options to subscribe for 16,000,000 shares at a price of HK$1.54 per share. The vesting period for the options is January 5, 2005 to December 31, 2006. |
| | | (d) | | On October 3, 2005, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$0.81 per share. The vesting period for the options is October 3, 2005 to September 30, 2006. |
| | | (e) | | On May 22, 2006, employees, including executive directors, were granted options to subscribe for 32,210,000 shares at a price of HK$0.66 per share. The vesting period for the options is May 22, 2006 to May 21, 2009. |
| | | (f) | | On July 3, 2006, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$0.68 per share. The vesting period for the options is July 3, 2006 to July 2, 2009. |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2007
24 | Equity settled share-based transactions (continued) |
2002 Share Option Scheme (continued)
Notes: (continued)
| | | (g) | | On August 3, 2006, an employee was granted options to subscribe for 100,000 shares at a price of HK$0.71 per share. The vesting period of the option is August 3, 2006 to August 2, 2009. |
| | | (h) | | On November 22, 2006, an employee was granted options to subscribe for 200,000 shares at a price of HK$0.73 per share. The vesting period of the option is November 22, 2006 to November 14, 2009. |
| | | (i) | | On May 23, 2007, an employee was granted options to subscribe for 100,000 shares at a price of HK$2.03 per share. The vesting period of the option is May 23, 2007 to June 11, 2010. |
| | | (j) | | On December 12, 2007, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$2.45 per share. The vesting period for the options is December 12, 2007 to December 11, 2010. | | | (k) | | On February 6, 2008, an employee was granted options to subscribe for 6,000,000 shares at a price of HK$1.77 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three to four years from the date of fulfillment of the performance condition. | | | (l) | | On February 11, 2008, an executive director was granted options to subscribe for 6,000,000 shares at a price of HK$1.88 per share. Vesting of the options is conditional upon the performance of the Company’s shares over the period from the close of trading in Hong Kong on November 22, 2007 to November 21, 2010. Options granted will be evenly vested immediately and over a period of three years from the date of fulfillment of the performance condition. | | | (m) | | On February 15, 2008, an employee was granted options to subscribe for 4,000,000 shares at a price of HK$1.77 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three years from the date of fulfillment of the performance condition. | | | (n) | | On March 11, 2008, an employee was granted options to subscribe for 300,000 shares at a price of HK$1.83 per share. The vesting period for the options is March 11, 2008 to March 10, 2011. | | | (o) | | On May 2, 2008, an employee was granted options to subscribe for 1,000,000 shares at a price of HK$1.80 per share. Vesting of the options is conditional upon the performance of the participants. Options granted will be vested over a period of three years from the date of fulfillment of the performance condition. | | | (p) | | As a result of allotment of 11,227,213 new shares to shareholders of the Company who elected to receive the 2007 Final Dividend in shares on February 4, 2008, the exercise price of and the number of share subject to the 51,805,000 options outstanding on December 21, 2007 (being the Record Date for determining the entitlement of 2007 Final Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from February 4, 2008. The closing price per ordinary share immediately before the date of the grant of the options was HK$1.70. |
F-54
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008 | 25 | | Equity settled share-based transactions (continued) |
| | 2002 Share Option Scheme (continued) |
| | | | Notes: (continued) | | | (q) | | As a result of allotment of 8,838,938 new shares to shareholders of the Company who elected to receive the 2008 Interim Dividend in shares on 23 July 2008, the exercise price of and the number of share subject to the 65,296,047 options outstanding on 6 June 2008 (being the Record Date for determining the entitlement of 2008 Interim Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from 23 July 2008. The closing price per ordinary share immediately before the date of the grant of the options was HK$1.79. | | | (r) | | The share options outstanding in respect of the 1997 Share Option Scheme and 2002 Share Options Scheme as of August 31, 2005, 2006, 2007 and 20072008 is summarized as follows: |
| | | | | | | | | | | | | | | | | | | | | Weighted | | Weighted | | | | Number of | | average | | average | | | | share | | exercise | | market price | | | | options | | prices per | | at the date | | | | outstanding | | share | | of grant | | | | (thousands) | | HK$’000 | | HK$’000 | | Balance at August 31, 2005 | | | 37,218 | | | | 1.51 | | | | 1.46 | | | Granted during the year | | | 34,310 | | | | 0.67 | | | | 0.74 | | | Exercised during the year | | | (50 | ) | | | 0.26 | | | | N/A | | | Lapsed during the year | | | (5,260 | ) | | | 1.54 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2006 | | | 66,218 | | | | 1.08 | | | | 1.04 | | | Granted during the year | | | 300 | | | | 1.16 | | | | 1.19 | | | Exercised during the year | | | (2,328 | ) | | | 0.76 | | | | 0.74 | | | Lapsed during the year | | | (2,840 | ) | | | 0.93 | | | | 0.89 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2007 | | | 61,350 | | | | 1.09 | | | | 1.06 | | | Adjustment to the number of options for 2007 Final Dividend | | | 205 | | | | 1.10 | | | | 1.07 | | | Adjustment to the number of options for 2008 Interim Dividend | | | 177 | | | | 1.28 | | | | 1.26 | | | Granted during the year | | | 18,300 | | | | 1.84 | | | | 1.83 | | | Exercised during the year | | | (14,052 | ) | | | 1.07 | | | | 1.06 | | | Lapsed during the year | | | (5,399 | ) | | | 1.63 | | | | 1.64 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2008 | | | 60,581 | | | | 1.27 | | | | 1.25 | | | | | | | | | | | | | | | |
F-55 | | | | | | | | | | | Number of
share
options
outstanding | | | Weighted
average
exercise
prices per
share | | Weighted
average
market price
at the date
of grant | | | | (thousands) | | | HK$’000 | | HK$’000 | Balance at September 1, 2004 | | 6,600 | | | 1.39 | | 1.36 | Granted during the year | | 30,670 | | | 1.54 | | 1.48 | Exercised during the year | | (52 | ) | | 0.58 | | N/A | | | | | | | | | Balance at August 31, 2005 | | 37,218 | | | 1.51 | | 1.46 | Granted during the year | | 34,310 | | | 0.67 | | 0.74 | Exercised during the year | | (50 | ) | | 0.26 | | N/A | Lapsed during the year | | (5,260 | ) | | 1.54 | | N/A | | | | | | | | | Balance at August 31, 2006 | | 66,218 | | | 1.08 | | 1.04 | Granted during the year | | 300 | | | 1.16 | | 1.19 | Exercised during the year | | (2,328 | ) | | 0.76 | | 0.74 | Lapsed during the year | | (2,840 | ) | | 0.93 | | 0.89 | | | | | | | | | Balance at August 31, 2007 | | 61,350 | | | 1.09 | | 1.06 | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
24 | | | | 25 | | Equity settled share-based transactions (continued) |
2002 Share Option Scheme (continued)
Notes: (continued)
| | (k) | 2002 Share Option Scheme (continued) |
| | | | Notes: (continued) | | | (s) | | The following table summarizes the information about share options outstanding at August 31, 2007:2008: |
| | | | | | | | | Date of grant | | Exercise
price at
August 31,
2007 | | Number of
outstanding
at August 31,
2007 | | Remaining
life | | Exercisable
options at
August 31,
2007 | | | | | | (thousands) | | (months) | | (thousands) | June 3, 2004 | | 1.47 | | 6,000 | | 81 | | 6,000 | October 21, 2004 | | 1.54 | | 8,340 | | 86 | | 8,340 | January 5, 2005 | | 1.54 | | 16,000 | | 86 | | 16,000 | October 3, 2005 | | 0.81 | | 1,000 | | 97 | | 1,000 | May 22, 2006 | | 0.66 | | 28,940 | | 105 | | 9,120 | July 3, 2006 | | 0.68 | | 700 | | 106 | | — | August 3, 2006 | | 0.71 | | 70 | | 107 | | — | November 22, 2006 | | 0.73 | | 200 | | 110 | | — | May 23, 2007 | | 2.03 | | 100 | | 117 | | — | | | | | | | | | | | | | | 61,350 | | | | 40,460 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Exercise | | Number of | | | | | | Exercisable | | | | price at | | outstanding | | | | | | options at | | | | August 31, | | at August 31, | | Remaining | | August 31, | | Date of grant | | 2008 | | 2008 | | life | | 2008 | | | | | | | | (thousands) | | (months) | | (thousands) | | October 21, 2004 | | | 1.5297 | | | | 7,572 | | | | 74 | | | | 7,572 | | | January 5, 2005 | | | 1.5297 | | | | 16,107 | | | | 74 | | | | 16,107 | | | May 22, 2006 | | | 0.6554 | | | | 22,387 | | | | 93 | | | | 12,784 | | | August 3, 2006 | | | 0.7052 | | | | 40 | | | | 95 | | | | — | | | November 22, 2006 | | | 0.7251 | | | | 136 | | | | 98 | | | | — | | | February 6, 2008 | | | 1.7652 | | | | 6,016 | | | | 52 | | | | — | | | February 11, 2008 | | | 1.8749 | | | | 6,016 | | | | 52 | | | | — | | | February 15, 2008 | | | 1.7652 | | | | 1,003 | | | | 52 | | | | — | | | March 11, 2008 | | | 1.8250 | | | | 301 | | | | 52 | | | | — | | | May 2, 2008 | | | 1.7951 | | | | 1,003 | | | | 52 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 60,581 | | | | | | | | 36,463 | | | | | | | | | | | | | | | | | | | |
| (l) | | | (t) | | Fair value of share options and assumptions: | | | | In determining the value of the share options granted during the year ended August 31, 2008, the Black-Scholes option pricing model (the “Black-Scholes Model”) has been used except for the share options granted on February 11, 2008 which adopts the Monte Carlo model. Both models are the most generally accepted methodologies used to calculate the value of options. The variables of the models include expected life of the options, risk-free interest rate, expected volatility and expected dividend yield of the shares of the Company. |
In determining the fair value of the share options granted, the Black-Scholes option pricing model (the “Black-Scholes Model”) has been used. The Black-Scholes Model is one of the most generally accepted methodologies used to calculate the value of options and is one of the recommended option pricing models as set out in Chapter 17 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. The variables of the Black-Scholes Model include expected life of the options, risk-free interest rate, expected volatility and expected dividend yield of the shares of the Company.F-56
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
24 | | | | 25 | | Equity settled share-based transactions (continued) |
2002 Share Option Scheme (continued)
Notes: (continued)
| | (l) | 2002 Share Option Scheme (continued) |
| | | | Notes: (continued) | | | (t) | | Fair value of share options and assumptions: (continued) |
In determining the fair value of the share options granted during the year, the following variables have been applied to the Black-Scholes Model:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Measurement date | | June 3,
2004 | | | October 21,
2004 | | | January 5,
2005 | | | October 3,
2005 | | | May 22,
2006 | | | July 3,
2006 | | | August 3,
2006 | | | November 22,
2006 | | | May 23,
2007 | | Variables | | | | | | | | | | | | | | | | | | | | | | | | | | | | - Expected life (i) | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | - Risk-free rate (ii) | | 3.78 | % | | 2.65 | % | | 2.75 | % | | 4.41 | % | | 4.63 | % | | 4.45 | % | | 4.06 | % | | 3.76 | % | | 4.45 | % | - Expected volatility (iii) | | 59.04 | % | | 72.06 | % | | 69.37 | % | | 58.29 | % | | 55.04 | % | | 53.56 | % | | 52.71 | % | | 51.02 | % | | 56.01 | % | - Expected dividend yield (iv) | | 1 | % | | 1 | % | | 1 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % |
The above variables were determined as follows:
| | | | In determining the value of the share options granted during the year, the following variables have been applied to the models: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 3, | | October 21, | | January 5, | | October 3, | | May 22, | | July 3, | | August 3, | | November 22, | | May 23, | | December 12, | | February 6, | | February 11, | | February 15, | | March 11, | | May 2, | | Measurement date | | 2004 | | 2004 | | 2005 | | 2005 | | 2006 | | 2006 | | 2006 | | 2006 | | 2007 | | 2007 | | 2008 | | 2008 | | 2008 | | 2008 | | 2008 | | Variables | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — Expected life (i) | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | 5 years | | | Average
4 years | | | 3 years | | | 5 years | | | 5 years | | | — Risk-free rate (ii) | | | 3.78 | % | | | 2.65 | % | | | 2.75 | % | | | 4.41 | % | | | 4.63 | % | | | 4.45 | % | | | 4.06 | % | | | 3.76 | % | | | 4.45 | % | | | 3.10 | % | | | 2.16 | % | | | 2.16 | % | | | 2.16 | % | | | 2.04 | % | | | 2.88 | % | | — Expected volatility (iii) | | | 59.04 | % | | | 72.06 | % | | | 69.37 | % | | | 58.29 | % | | | 55.04 | % | | | 53.56 | % | | | 52.71 | % | | | 51.02 | % | | | 56.01 | % | | | 61.86 | % | | | 63.22 | % | | | 63.32 | % | | | 63.22 | % | | | 63.35 | % | | | 63.56 | % | | — Expected dividend yield (iv) | | | 1 | % | | | 1 | % | | | 1 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 2 | % | | | 2 | % | | | 2 | % | | | 2 | % | | | 2 | % | | | 2 | % |
| The above variables were determined as follows: |
| (i) | | The expected life is estimated to be 3 to 5 years from the date of grant (the “Measurement Date”). |
| | | (ii) | | The risk-free rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as atof the Measurement Date. |
| | | (iii) | | The expected volatility represents the annualized standard deviation of the continuously compounded rates of return on the sharesdaily share price of the most recentCompany over the period from the Measurement Date that is generally commensurate withto the expected termlife of optionthe options (taking into account the remaining contractual life of the option and the effect of the expected early exercise of the option). | | | (iv) | | The expected dividend yield is based on the historical dividend yield over the last five years. |
F-57
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008 | | | | 25 | | Equity settled share-based transactions (continued) |
| | (iv) | Dividend yield has been assumed as 1% for2002 Share Option Scheme (continued) |
| | | | Notes: (continued) | | | (t) | | Fair value of share options and assumptions: (continued) | | | | The fair value of the options granted in fiscal years 2004 and 2005 and 0% for fiscal years 2006 and 2007.during the year is estimated as below: |
Using
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 3, | | October 21, | | January 5, | | October 3, | | May 22, | | July 3, | | August 3 | | November 22, | | May 23, | | December 12, | | February 6, | | February 11, | | February 15, | | March 11, | | May 2, | | Date of grant | | 2004 | | 2004 | | 2005 | | 2005 | | 2006 | | 2006 | | 2006 | | 2006 | | 2007 | | 2007 | | 2008 | | 2008 | | 2008 | | 2008 | | 2008 | | | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | Fair value per share option | | | 0.70 | | | | 0.84 | | | | 0.80 | | | | 0.44 | | | | 0.33 | | | | 0.35 | | | | 0.36 | | | | 0.35 | | | | 1.13 | | | | 1.13 | | | | 0.90 | | | | 0.41 | | | | 0.72 | | | | 0.87 | | | | 0.83 | |
Both the Black-Scholes Model and Monte Carlo Model, applied for the determination of the estimated fair value per share option is as follows: | | | | | | | | | | | | | | | | | | | Date of grant | | June 3,
2004 | | October 21,
2004 | | January 5,
2005 | | October 3,
2005 | | May 22,
2006 | | July 3,
2006 | | August 3
2006 | | November 22,
2006 | | May 23,
2007 | | | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | | HK$ | Fair value per share option | | 0.70 | | 0.84 | | 0.80 | | 0.44 | | 0.33 | | 0.35 | | 0.36 | | 0.35 | | 1.13 |
The Black-Scholes Model, was developed for use in estimating the fair value of tradedthe options that are fully transferable and have no vesting restrictions. Such an option pricing model requiresgranted under 2002 Share Option Scheme require input of highly subjective assumptions, including the expected stock volatility. As the Company’s share options have characteristics significantly different from those of traded options, changes in subjective inputs may materially affect the estimated fair value of the options granted.
F-58
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
25 | | | | 26 | | Revenues and segmental information |
Revenue recognized during the year is as follows:
| | | | | | | | | | Year ended August 31, | | | | 2005 | | 2006 | | 2007 | | | | HK$’000 | | HK$’000 | | HK$’000 | Revenue | | | | | | | International telecommunications services | | 532,595 | | 418,276 | | 324,470 | Fixed telecommunications network services (note (c)) | | 629,464 | | 716,600 | | 816,800 | | | | | | | | | | 1,162,059 | | 1,134,876 | | 1,141,270 | | | | | | | | Other income | | | | | | | Interest income | | 13,578 | | 20,378 | | 22,671 | Other income | | 6,037 | | 4,465 | | 3,149 | | | | | | | | | | 19,615 | | 24,843 | | 25,820 | | | | | | | |
| | Revenue recognized during the year is as follows: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | Revenue | | | | | | | | | | | | | | International telecommunications services | | | 418,276 | | | | 324,470 | | | | 291,943 | | | Fixed telecommunications network services (note (c)) | | | 716,600 | | | | 816,800 | | | | 1,011,038 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,134,876 | | | | 1,141,270 | | | | 1,302,981 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income | | | | | | | | | | | | | | Interest income | | | 20,378 | | | | 22,671 | | | | 15,596 | | | Other income | | | 4,465 | | | | 3,149 | | | | 9,393 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 24,843 | | | | 25,820 | | | | 24,989 | | | | | | | | | | | | | | | |
| (a) | | Primary reporting format -— business segments |
The Group is organized on a worldwide basis into two business segments:
| | - | The Group is organized on a worldwide basis into two business segments: |
| — | | International telecommunications -— provision of international long distance calls services. |
| | | -— | | Fixed telecommunications network -— provision of dial up and broadband Internet access services, local voice-over-IP services and IP-TV services. |
| | The Group’s reportable segments are strategic business units that offer different type of telecommunications services. Each of these business units are operated and managed separately. | | | | The Group’s inter-segment transactions mainly consist of provision of leased lines services. |
F-59 The Group’s inter-segment transactions mainly consist of provision of leased lines services.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2526 | | Revenues and segmental information (continued) |
| | (a) | | Primary reporting format -— business segments (continued) | | | | Segment results are income/(loss) from operations excluding interest expense and interest income, but includes other income, net. All segment measures are based on accounting policies that are consistent with those used in the preparation of the consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | Year ended August 31, 2006 | | | | International | | Fixed tele- | | | | | | | | tele- | | communications | | | | | | | | communications | | network | | | | | | | | services | | services | | Elimination | | Group | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Revenue (note (c)) | | | | | | | | | | | | | | | | | | — External sales | | | 418,276 | | | | 716,600 | | | | — | | | | 1,134,876 | | | — Inter-segment sales | | | 5,670 | | | | 31,275 | | | | (36,945 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 423,946 | | | | 747,875 | | | | (36,945 | ) | | | 1,134,876 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment results | | | 22,095 | | | | (107,607 | ) | | | | | | | (85,512 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest income | | | 17,728 | | | | 2,650 | | | | — | | | | 20,378 | | | Interest expense | | | | | | | | | | | | | | | (88,637 | ) | | Other income | | | | | | | | | | | | | | | 4,465 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loss before taxation | | | | | | | | | | | | | | | (149,306 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | 626,480 | | | | 1,497,388 | | | | — | | | | 2,123,868 | | | Unallocated assets | | | — | | | | — | | | | — | | | | 347 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | | | | | | | | | 2,124,215 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment liabilities | | | 114,847 | | | | 167,370 | | | | — | | | | 282,217 | | | Unallocated liabilities | | | | | | | | | | | | | | | 950,344 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | | | | | | | | | | | | | 1,232,561 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditure | | | 13,838 | | | | 309,097 | | | | — | | | | 322,935 | | | Depreciation | | | 23,598 | | | | 252,866 | | | | — | | | | 276,464 | |
Segment results are income/(loss) from operations excluding interest expense and interest income, but includes other income, net. All segment measures are based on accounting policies that are consistent with those used in the preparation of the consolidated financial statements.F-60
| | | | | | | | | | | | | | | Year ended August 31, 2005 | | | | | International
tele-
communications
services | | Fixed tele-
communications
network services | | | Elimination | | | Group | | | | | HK$’000 | | HK$’000 | | | HK$’000 | | | HK$’000 | | Revenue (note (c)) | | | | | | | | | | | | - External sales | | 532,595 | | 629,464 | | | — | | | 1,162,059 | | - Inter-segment sales | | 4,108 | | 33,188 | | | (37,296 | ) | | — | | | | | | | | | | | | | | | | 536,703 | | 662,652 | | | (37,296 | ) | | 1,162,059 | | | | | | | | | | | | | | Segment results | | 89,835 | | (219,172 | ) | | | | | (129,337 | ) | | | | | | | | | | | | | Interest income | | 13,240 | | 338 | | | — | | | 13,578 | | Interest expense | | | | | | | | | | (54,462 | ) | | | | | | | | | | | | | Loss before taxation | | | | | | | | | | (170,221 | ) | | | | | | | | | | | | | Segment assets | | 942,304 | | 1,404,589 | | | — | | | 2,346,893 | | Unallocated assets | | | | | | | | | | 535 | | | | | | | | | | | | | | Total assets | | | | | | | | | | 2,347,428 | | | | | | | | | | | | | | Segment liabilities | | 130,011 | | 721,748 | | | — | | | 851,759 | | Unallocated liabilities | | | | | | | | | | 475,215 | | | | | | | | | | | | | | Total liabilities | | | | | | | | | | 1,326,974 | | | | | | | | | | | | | | Capital expenditure | | 11,582 | | 407,544 | | | — | | | 419,126 | | Depreciation | | 24,928 | | 211,721 | | | — | | | 236,649 | | Goodwill amortization | | — | | 1,065 | | | — | | | 1,065 | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2526 | | Revenues and segmental information (continued) |
| (a) | | Primary reporting format -— business segments (continued) |
| | | | | | | | | | | | | | | | | | | | | Year ended August 31, 2007 | | | | International | | Fixed tele- | | | | | | | | tele- | | communications | | | | | | | | communications | | network | | | | | | | | services | | services | | Elimination | | Group | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Revenue (note (c)) | | | | | | | | | | | | | | | | | | — External sales | | | 324,470 | | | | 816,800 | | | | — | | | | 1,141,270 | | | — Inter-segment sales | | | 5,699 | | | | 27,633 | | | | (33,332 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 330,169 | | | | 844,433 | | | | (33,332 | ) | | | 1,141,270 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment results | | | 49,702 | | | | 42,873 | | | | | | | | 92,575 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest income | | | 15,032 | | | | 7,639 | | | | — | | | | 22,671 | | | Interest expense | | | | | | | | | | | | | | | (87,504 | ) | | Other income | | | | | | | | | | | | | | | 3,149 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | | | | | | | | | | | 30,891 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | 541,502 | | | | 1,619,631 | | | | — | | | | 2,161,133 | | | Unallocated assets | | | | | | | | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | | | | | | | | | 2,161,133 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment liabilities | | | 101,148 | | | | 201,738 | | | | — | | | | 302,886 | | | Unallocated liabilities | | | | | | | | | | | | | | | 954,365 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | | | | | | | | | | | | | 1,257,251 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditure | | | 4,060 | | | | 128,190 | | | | — | | | | 132,250 | | | Depreciation | | | 21,707 | | | | 236,396 | | | | — | | | | 258,103 | |
F-61 | | | | | | | | | | | | | | | Year ended August 31, 2006 | | | | | International
tele-
communications
services | | Fixed tele-
communications
network services | | | Elimination | | | Group | | | | | HK$’000 | | HK$’000 | | | HK$’000 | | | HK$’000 | | Revenue (note (c)) | | | | | | | | | | | | - External sales | | 418,276 | | 716,600 | | | — | | | 1,134,876 | | - Inter-segment sales | | 5,670 | | 31,275 | | | (36,945 | ) | | — | | | | | | | | | | | | | | | | 423,946 | | 747,875 | | | (36,945 | ) | | 1,134,876 | | | | | | | | | | | | | | Segment results | | 25,677 | | (106,724 | ) | | | | | (81,047 | ) | | | | | | | | | | | | | Interest income | | 17,728 | | 2,650 | | | — | | | 20,378 | | Interest expense | | | | | | | | | | (88,637 | ) | | | | | | | | | | | | | Loss before taxation | | | | | | | | | | (149,306 | ) | | | | | | | | | | | | | Segment assets | | 626,480 | | 1,497,388 | | | — | | | 2,123,868 | | Unallocated assets | | — | | — | | | — | | | 347 | | | | | | | | | | | | | | Total assets | | | | | | | | | | 2,124,215 | | | | | | | | | | | | | | Segment liabilities | | 114,847 | | 921,230 | | | — | | | 1,036,077 | | Unallocated liabilities | | | | | | | | | | 196,484 | | | | | | | | | | | | | | Total liabilities | | | | | | | | | | 1,232,561 | | | | | | | | | | | | | | Capital expenditure | | 13,838 | | 309,097 | | | — | | | 322,935 | | Depreciation | | 23,598 | | 252,866 | | | — | | | 276,464 | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2526 | | Revenues and segmental information (continued) |
| (a) | | Primary reporting format -— business segments (continued) |
| | | | | | | | | | | | | | | | | | | | | Year ended August 31, 2008 | | | | International | | Fixed tele- | | | | | | | | tele- | | communications | | | | | | | | communications | | network | | | | | | | | services | | services | | Elimination | | Group | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Revenue (note (c)) | | | | | | | | | | | | | | | | | | — External sales | | | 291,943 | | | | 1,011,038 | | | | — | | | | 1,302,981 | | | — Inter-segment sales | | | 5,692 | | | | 22,680 | | | | (28,372 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 297,635 | | | | 1,033,718 | | | | (28,372 | ) | | | 1,302,981 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment results | | | 63,225 | | | | 95,295 | | | | | | | | 158,520 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest income | | | 8,590 | | | | 7,006 | | | | — | | | | 15,596 | | | Interest expense | | | | | | | | | | | | | | | (75,137 | ) | | Other income | | | | | | | | | | | | | | | 9,393 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | | | | | | | | | | | 108,372 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | 426,781 | | | | 1,627,300 | | | | — | | | | 2,054,081 | | | Unallocated assets | | | | | | | | | | | | | | | 26,335 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | | | | | | | | | 2,080,416 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment liabilities | | | 80,756 | | | | 276,771 | | | | — | | | | 357,527 | | | Unallocated liabilities | | | | | | | | | | | | | | | 690,282 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | | | | | | | | | | | | | 1,047,809 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditure | | | 4,293 | | | | 207,391 | | | | — | | | | 211,684 | | | Depreciation | | | 19,587 | | | | 190,464 | | | | — | | | | 210,051 | |
F-62 | | | | | | | | | | | | | | Year ended August 31, 2007 | | | | | International tele- communications services | | Fixed tele- communications network services | | Elimination | | | Group | | | | | HK$’000 | | HK$’000 | | HK$’000 | | | HK$’000 | | Revenue (note (c)) | | | | | | | | | | | - External sales | | 324,470 | | 816,800 | | — | | | 1,141,270 | | - Inter-segment sales | | 5,699 | | 27,633 | | (33,332 | ) | | — | | | | | | | | | | | | | | | 330,169 | | 844,433 | | (33,332 | ) | | 1,141,270 | | | | | | | | | | | | | Segment results | | 53,673 | | 42,051 | | | | | 95,724 | | | | | | | | | | | | | Interest income | | 15,032 | | 7,639 | | — | | | 22,671 | | Interest expense | | | | | | | | | (87,504 | ) | | | | | | | | | | | | Profit before taxation | | | | | | | | | 30,891 | | | | | | | | | | | | | Segment assets | | 541,502 | | 1,619,631 | | — | | | 2,161,133 | | Unallocated assets | | | | | | | | | — | | | | | | | | | | | | | Total assets | | | | | | | | | 2,161,133 | | | | | | | | | | | | | Segment liabilities | | 101,148 | | 955,598 | | — | | | 1,056,746 | | Unallocated liabilities | | | | | | | | | 200,505 | | | | | | | | | | | | | Total liabilities | | | | | | | | | 1,257,251 | | | | | | | | | | | | | Capital expenditure | | 4,060 | | 128,190 | | — | | | 132,250 | | Depreciation | | 21,707 | | 236,396 | | — | | | 258,103 | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2526 | | Revenues and segmental information (continued) |
| (b) | | Geographical segments | | | | Although the Group’s two business segments are managed on a worldwide basis, they operate in two main geographical areas: |
Although the Group’s two business segments are managed on a worldwide basis, they operate in two main geographical areas:
| | - | CanadaIn disclosing information on the basis of geographical segments, revenue and segment results are disclosed based on the geographical location of customers. Total assets and capital expenditure are disclosed based on the geographical location of the assets. | | | | There were no sales between the geographical segments. |
| | | | | | | | | | | | | | | | | | | | | August 31, 2006 | | | | | | | | Total | | Capital | | Fixed | | | | Revenue | | assets | | expenditure | | assets, net | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Hong Kong | | | 1,114,452 | | | | 2,114,018 | | | | 321,708 | | | | 1,362,359 | | | Canada | | | 20,424 | | | | 9,850 | | | | 1,227 | | | | 4,875 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,134,876 | | | | 2,123,868 | | | | 322,935 | | | | 1,367,234 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unallocated assets | | | | | | | 347 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,124,215 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | August 31, 2007 | | | | | | | | Total | | Capital | | Fixed | | | | Revenue | | assets | | expenditure | | assets, net | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Hong Kong | | | 1,120,538 | | | | 2,149,728 | | | | 132,031 | | | | 1,233,100 | | | Canada | | | 20,732 | | | | 11,405 | | | | 219 | | | | 4,123 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,141,270 | | | | 2,161,133 | | | | 132,250 | | | | 1,237,223 | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unallocated assets | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,161,133 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In presenting information on the basis of geographical segments, revenue and segment results are based on the geographical location of customers. Total assets and capital expenditure are based on the geographical location of the assets.F-63
There were no sales between the geographical segments.
| | | | | | | | | | | | August 31, 2005 | | | | Revenue | | Total assets | | Capital expenditure | | Fixed assets, net | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | Hong Kong | | 1,138,821 | | 2,337,793 | | 418,981 | | 1,332,172 | Canada | | 23,238 | | 9,100 | | 145 | | 4,371 | | | | | | | | | | | | 1,162,059 | | 2,346,893 | | 419,126 | | 1,336,543 | | | | | | | | | | Unallocated assets | | | | 535 | | | | | | | | | | | | | | | | | | 2,347,428 | | | | | | | | | | | | | | | | | | | August 31, 2006 | | | | Revenue | | Total assets | | Capital expenditure | | Fixed assets, net | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | Hong Kong | | 1,114,452 | | 2,114,018 | | 321,708 | | 1,362,359 | Canada | | 20,424 | | 9,850 | | 1,227 | | 4,875 | | | | | | | | | | | | 1,134,876 | | 2,123,868 | | 322,935 | | 1,367,234 | | | | | | | | | | Unallocated assets | | | | 347 | | | | | | | | | | | | | | | | | | 2,124,215 | | | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2526 | | Revenues and segmental information (continued) |
| (b) | | Geographical segments (continued) |
| | | | | | | | | | | | August 31, 2007 | | | | Revenue | | Total assets | | Capital expenditure | | Fixed assets, net | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | Hong Kong | | 1,120,538 | | 2,149,728 | | 132,031 | | 1,233,100 | Canada | | 20,732 | | 11,405 | | 219 | | 4,123 | | | | | | | | | | | | 1,141,270 | | 2,161,133 | | 132,250 | | 1,237,223 | | | | | | | | | | Unallocated assets | | | | — | | | | | | | | | | | | | | | | | | 2,161,133 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | August 31, 2008 | | | | | | | | Total | | Capital | | Fixed | | | | Revenue | | assets | | expenditure | | assets, net | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Hong Kong | | | 1,281,069 | | | | 2,040,496 | | | | 211,482 | | | | 1,227,907 | | | Canada | | | 21,912 | | | | 13,585 | | | | 202 | | | | 3,492 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,302,981 | | | | 2,054,081 | | | | 211,684 | | | | 1,231,399 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unallocated assets | | | | | | | 26,335 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,080,416 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (c) | | Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Group, as a FTNS licensee, provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the TA and interconnection services have been provided, in accordance with the FTNS license granted by the Telecommunications Authority (the “TA”), HKBN has been billing mobile operators for the interconnection services provided to them and recognizing revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts it expected to collect. AIn prior years, majority of the mobile operators, however, rejected HKBN’s demand for payment. As a result of non-payment by certain mobile operators, in 2004, the Group asked the TA to make a determination (the “Determination”“2004 Determination”) on the level of mobile and fixed interconnection charges payable by one of the mobile operators to HKBN; and the effective date of the determined mobile interconnection charges. | | | | In March 2006, TA issued a preliminary analysis (the “2006 PA”) on the 2004 Determination with respect to the rates of mobile interconnection charges payable by the mobile operator under dispute. However, as of August 31, 2006, the final level of mobile interconnection charges was still subject to the 2004 Determination to be issued by TA. | | | | For the year ended August 31, 2006, the Group recognized mobile interconnection charges of HK$22,037,000 based on the 2006 PA. |
In November 2005, HKBN entered into a contractual agreement with one of the mobile operators, which agreed to pay mobile interconnection charges at an interim rate. The final rate to be paid by this mobile operator was subject to adjustment based on the Determination to be issued by the TA.F-64
In March 2006, the TA issued a preliminary analysis (the “2006 PA”) on the Determination with respect to the rates of mobile interconnection charges payable by the mobile operator under dispute and the timing of the Determination. The final level of mobile interconnection charges was still subject to the Determination by the TA as of August 31, 2006.
For the year ended August 31, 2005, the Group recognized revenue for mobile interconnection charges of HK$24,703,000, based on the Group’s best estimate of the amount it expected to collect. For the year ended August 31, 2006, the Group recognized mobile interconnection charges of HK$22,037,000 based on the 2006 PA.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2526 | | Revenues and segmental information (continued) |
In March 2007, TA issued a revised preliminary analysis (the “2007 PA”) which superseded the 2006 PA. The 2007 PA set out the rates of mobile interconnection charges, which are different from those rates stated in the 2006 PA.
In June 2007, TA issued a final determination (the “Final Determination”) which set out the rates of mobile interconnection charges payable by the mobile operator under dispute, which approximate the rates stated in the 2007 PA.
For the year ended August 31, 2007, the Group recognized revenue for mobile interconnection charges of HK$40,877,000 based on the rates set forth in the Final Determination. The amount recognized includes charges for the fiscal year ended August 31, 2007 and additional charges for the years ended August 31, 2005 and 2006 in excess of amounts previously recognized based on the 2006 PA. As a result of the Final Determination, the Group has also reversed a portion of a previously recognized bad debt provision for mobile interconnection charges receivables of HK$9,404,000 to the consolidated statement of operations (note 7(a)(ii)) based on the amount it expected to collect for billings outstanding through that date.
26 | | Financial instruments | In March 2007, TA issued a revised preliminary analysis (the “2007 PA”) which superseded the 2006 PA. The 2007 PA set out the rates of mobile interconnection charges, which are different from those rates stated in the 2006 PA. | | | | In June 2007, TA issued the 2004 Determination which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from April 1, 2002 to August 31, 2004, which superseded the rates stated in both the 2006 PA and 2007 PA issued by TA previously. | | | | For the year ended August 31, 2007, the Group recognized revenue related to mobile interconnection charges of HK$40,877,000 based on the 2004 Determination which included charges for the year ended August 31, 2007 and additional charges for the years ended August 31, 2005 and 2006 previously measured based on the 2006 PA. The Group has also written back bad debt provision for mobile interconnection charges receivables of HK$9,404,000 to the consolidated statement of operations based on the amount it expected to collect for billings outstanding through that date. | | | | During the year ended August 31, 2008, HKBN entered into contractual agreements with additional mobile operators which agreed to pay mobile interconnection charges based on the 2004 determination for period from April 1, 2002 to August 31, 2004 and for the subsequent period at an interim rate stated in the agreements which will be adjusted based on further determination to be issued by TA. | | | | In February 2008, HKBN requested TA to make a new determination with four mobile operators (the “2008 Determination”) on the rate of mobile interconnection charge and interest thereon. In September 2008, TA indicated that it accepted HKBN’s request for determination, which covers the mobile interconnection charges payable by the mobile operators under the determination, for the period from April 1, 2002 to April 26, 2009 (for those mobile operators who have not reached the relevant contractual agreements with HKBN) or for the period from September 1, 2004 to April 26, 2009 (for those mobile operators who have reached the relevant contractual agreements with HKBN), and the interest rate thereon. | | | | For the year ended August 31, 2008, the Group recognized revenue related to mobile interconnection charges of HK$29,568,000 representing the amount of mobile interconnection charges management expects to collect. |
Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Group’s business. These risks are limited by the Group’s financial management policies and practices described below.F-65
The Group’s credit risk is primarily attributable to trade and other receivables, investments securities, derivative financial instruments and term bank deposits. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The maximum exposure to credit risk is represented by the carrying amount of financial asset, including derivative financial instruments. Except for the financial guarantee issued by the Group as disclosed in note 14(d), the Group does not provide any other guarantees which expose the Group to credit risk.
In respect of trade receivables, credit evaluations are performed on all customers requiring credit over a certain amount. Trade receivables are generally due within 30 days from the date of billing. Subscribers with receivables that are more than 3 months overdue are requested to settle all outstanding balances before any further credit is granted. The Group generally does not obtain collateral from customers.
Cash deposits and transactions involving derivative financial instruments with counterparties are placed or limited to high credit-quality financial institutions. The Group has policies that limit the amount of credit exposure to any financial institution. Given the high credit ratings of these financial institutions, management does not expect any of the financial institutions not to meet their obligations.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2627 | | Financial instruments (continued) | | | | Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Group’s business. These risks are limited by the Group’s financial management policies and practices described below. |
(b)(a) | | LiquidityCredit risk | | | | The Group’s credit risk is primarily attributable to trade and other receivables, and debt investments. Management has a credit policy in place and the exposure to the credit risk is monitored on an ongoing basis. | | | | In respect of trade and other receivables, credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer locates. These receivables are due within 30 days from the date of billing. Subscribers with receivables that are more than 3 months overdue are requested to settle all outstanding balances before any further credit is granted. The Group generally does not obtain collateral from customers. | | | | The Group’s exposure to credit risk is influenced mainly by individual characteristics of each customer. The default risk of the country in which customer locates also has an influence on credit risk but to a lesser extent. Concentrations of credit risk with respect to accounts receivable are limited due to the Group’s customer base being large and unrelated. As such, management does not expect any significant losses of accounts receivable that have not been provided for by way of allowances as disclosed in note 8. | | | | The maximum exposure to credit risk is represented by the carrying amount of each financial asset after deducting any impairment allowance, in the balance sheet. Except for the financial guarantee given by the Group as disclosed in note 15(d), the Group does not provide any other guarantees which expose the Group to credit risk. The maximum exposure to credit risk in respect of these financial guarantees at the balance sheet date is disclosed in note 15 (d). | | | | Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from accounts receivable are set out in note 8. |
Management is responsible for the cash management of the Group, including the short term investment of cash surplus and the raising of funds to cover expected cash demands. Management regularly monitors current and expected liquidity requirements and compliance with lending covenants to ensure the Group maintains sufficient cash, readily realizable marketable securities and has adequate amount of committed credit facilities to meet the Group’s liquidity requirements in the short and long term.F-66
The Group’s interest-rate risk arises mainly from its 10-year senior notes which bear interest at the fixed rate of 8.75% per annum. Details of the 10-year senior notes are disclosed in note 13.
All of the Group’s monetary assets and liabilities are primarily denominated in either Hong Kong dollars or United States dollars. Given the exchange rate of Hong Kong dollar to the U.S. dollar has been pegged at the rate of HK$7.8 = US$1.00 since 1983, management does not expect significant foreign exchange gains or losses between the Hong Kong dollar and the United States dollar.
The Group is exposed to a certain amount of foreign exchange risk in relation to fluctuations between the Hong Kong dollars and the Renminbi arising from its operations in the PRC. In order to limit this foreign currency risk exposure, the Group maintains Renminbi cash balance that approximates three months’ operating cash flows.
The carrying amount of trade receivables less impairment loss for doubtful debts and account payables approximate their fair values. The carrying value and the fair value of the Group’s investment securities, derivative financial instruments and the senior notes as at August 31, 2006 and 2007 are as follows:
| | | | | | | | | | | | | | | | | | Note | | 2006 | | | 2007 | | | | | | Carrying amount | | | Fair value | | | Carrying amount | | | Fair value | | | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Long-term bank deposit | | (a) | | 13,641 | | | 13,459 | | | 14,415 | | | 14,277 | | Debt securities | | (b) | | 26,633 | | | 26,633 | | | 28,577 | | | 28,577 | | Interest rate swap | | (c) | | 1,845 | | | 1,845 | | | 1,039 | | | 1,039 | | 8.75% senior notes | | (b) | | (948,027 | ) | | (722,081 | ) | | (952,593 | ) | | (970,125 | ) | | | | | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2627 | | Financial instruments (continued) |
| (b) | | Liquidity risk | | | | The Group has a cash management policy, which includes the short term investment of cash surpluses and the raising of loans and other borrowings to cover expected cash demands. The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient cash and readily realizable marketable securities and adequate amount of committed credit facilities from major financial institutions to meet its liquidity requirements in the short and long term. Due to the dynamic nature of the underlying business, the Group aims to maintain flexibility in funding by maintaining committed credit lines available. |
F-67
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008 | 27 | | Financial instruments (continued) |
| (b) | | Liquidity risk (continued) | | | The following table details the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on undiscounted cash flows (including interest) and the earliest date the Group are required to pay. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | 2008 | | | | | | | | | Total | | | | | | | More than | | | More than | | | | | | | | | | | Total | | | | | | | More than | | | More than | | | | | | | | | | | | contractual | | | Within | | | 1 year but | | | 2 years but | | | | | | | | | | | contractual | | | Within | | | 1 year but | | | 2 years but | | | | | | | | Carrying | | | undiscounted | | | 1 year or | | | less than | | | less than | | | More than | | | Carrying | | | undiscounted | | | 1 year or | | | less than | | | less than | | | More than | | | | | amount | | | cash flow | | | on demand | | | 2 years | | | 5 years | | | 5 years | | | amount | | | cash flow | | | on demand | | | 2 years | | | 5 years | | | 5 years | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts payable | | | 76,019 | | | | 76,019 | | | | 76,019 | | | | — | | | | — | | | | — | | | | 52,324 | | | | 52,324 | | | | 52,324 | | | | — | | | | — | | | | — | | | Other payables and accrued charges | | | 145,267 | | | | 145,267 | | | | 145,267 | | | | — | | | | — | | | | — | | | | 178,114 | | | | 178,114 | | | | 178,114 | | | | — | | | | — | | | | — | | | Deposits received | | | 16,188 | | | | 16,188 | | | | 16,188 | | | | — | | | | — | | | | — | | | | 16,264 | | | | 16,264 | | | | 16,264 | | | | — | | | | — | | | | — | | | Obligations under finance leases | | | 835 | | | | 869 | | | | 869 | | | | — | | | | — | | | | — | | | | 121 | | | | 142 | | | | 142 | | | | — | | | | — | | | | — | | | Tax payable | | | 1,481 | | | | 1,481 | | | | 1,481 | | | | — | | | | — | | | | — | | | | 2,103 | | | | 2,103 | | | | 2,103 | | | | — | | | | — | | | | — | | Non current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8.75% senior notes | | | 952,593 | | | | 1,614,184 | | | | 85,278 | | | | 85,278 | | | | 255,834 | | | | 1,187,794 | | | | 683,242 | | | | 1,093,852 | | | | 61,012 | | | | 61,012 | | | | 183,036 | | | | 788,792 | | | Obligation under finance leases | | | 375 | | | | 414 | | | | — | | | | 142 | | | | 272 | | | | — | | | | 255 | | | | 272 | | | | — | | | | 142 | | | | 130 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,192,758 | | | | 1,854,422 | | | | 325,102 | | | | 85,420 | | | | 256,106 | | | | 1,187,794 | | | | 932,423 | | | | 1,343,071 | | | | 309,959 | | | | 61,154 | | | | 183,166 | | | | 788,792 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-68
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008 | 27 | | Financial instruments (continued) |
| (c) | | Interest rate risk | | | | The Group’s interest-rate risk arises mainly from its 10-year 8.75% senior notes which bear interest at the fixed rate of 8.75% per annum. Borrowings issued at fixed rate expose the Group to fair value interest-rate risk. |
| (i) | | Interest rate profile | | | | | The following table details the interest rate profile of the Group’s net borrowings at the balance sheet date. |
| | | | | | | | | | | | | | | | | | | | | August 31, | | | | 2008 | | 2007 | | | | Effective | | | | | | Effective | | | | | | | | interest rate | | | | interest rate | | | | | | % | | HK$’000 | | % | | HK$’000 | | Fixed rate borrowings: | | | | | | | | | | | | | | | | | | 8.75% senior notes | | | 9.2 | | | | 952,593 | | | | 9.2 | | | | 683,242 | | | Obligation under finance lease | | | 6.8 | | | | 1,210 | | | | 6.8 | | | | 376 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 953,803 | | | | | | | | 683,618 | | | | | | | | | | | | | | | | | | | |
| (ii) | | Sensitivity analysis | | | | | Management determines that the Group’s exposure of interest rate risk was not significant and hence no sensitivity analysis is prepared. |
| (d) | | Foreign currency risk | | | | All the Group’s monetary assets and liabilities are primarily denominated in either Hong Kong dollars or United States dollars. Given the exchange rate of the Hong Kong dollar to the U.S. dollar has remained close to the current pegged rate of HKD7.80 = USD1.00 since 1983, management does not expect significant foreign exchange gains or losses between the two currencies |
| (i) | | Exposure to currency risk | | | | | The following table details the Group’s exposure at the balance sheet date to currency risk arising from recognized assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | August 31, | | | | | 2007 | | | 2008 | | | | | United | | | | | | | | | | | United | | | | | | | | | | | States | | | Japanese | | | Canadian | | | States | | | Japanese | | | Canadian | | | | | Dollars | | | Yen | | | Dollars | | | Dollars | | | Yen | | | Dollars | | | | | ’000 | | | ’000 | | | ’000 | | | ’000 | | | ’000 | | | ’000 | | | Cash at bank and in hand and pledged bank deposits | | | 21,172 | | | | 2,218 | | | | 111 | | | | 22,330 | | | | 1,099 | | | | 176 | | | Accounts payable | | | (4,781 | ) | | | — | | | | — | | | | (2,500 | ) | | | — | | | | — | | | Other payables and accrued charges | | | (1,563 | ) | | | — | | | | — | | | | (3,390 | ) | | | — | | | | — | | | 8.75% senior notes | | | (122,127 | ) | | | — | | | | — | | | | (87,483 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Overall net exposure | | | (107,299 | ) | | | 2,218 | | | | 111 | | | | (71,043 | ) | | | 1,099 | | | | 176 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-69
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008 | 27 | | Financial instruments (continued) |
| (d) | | Foreign currency risk (continued) |
| (ii) | | Sensitivity analysis | | | | | Management determines that the Group’s exposure of foreign currency risk was not significant and hence no sensitivity analysis is prepared. |
| (e) | | Fair values | | | | Except for the following instruments, all financial instruments are carried at amounts not materially different from their fair values as of August 31, 2007 and 2008: |
| | | | | | | | | | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | Carrying | | | | | | Carrying | | | | | | amount | | Fair value | | amount | | Fair value | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Long-term bank deposit | | | 14,415 | | | | 14,277 | | | | — | | | | — | | | 8.75% senior notes | | | (952,593 | ) | | | (970,125 | ) | | | (683,242 | ) | | | (672,236 | ) | | | | | | | | | | | | | | | | | | |
F-70
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2008 | | | | 27 | | Financial instruments (continued) |
| (e) | | Fair values (continued) | | | | Fair value of financial instruments is estimated as follows: |
Notes:
| | (a)(i) | | The fair value of the long term bank deposit is based on issuer’s quoted market price. |
| (b) | The fair value of debt securities and the 8.75% senior notesfinancial instruments traded in active markets is based on quoted market prices at the balance sheet date. The fair value of the 8.75% senior notes is determined based on quoted market price. The fair value of the long term bank deposits are determined based on the issuer’s quoted price. |
| | | (c)(ii) | | The fair value of the interest rate swapfinancial instruments that are not traded in an active market (for example, over-the-counter derivatives) is the estimated amountdetermined by using valuation techniques. The Group uses a variety of methods and makes assumptions that the Group would receive or pay to terminate the swapare based on market conditions existing at theeach balance sheet taking intodate. | | | (iii) | | Trade receivables less impairment provision and account current interest rates and the current creditworthiness of the counterparties.payables are assumed to approximate their fair values. |
(a) | | During the year ended August 31, 2004, Hong Kong Broadband Network (“HKBN”), a subsidiary of the Company entered into two agreements with a third party (the “Contract Party 1”). Pursuant to first agreement (“First Agreement”), the Contract Party 1 agreed to sell to HKBN an telecommunications facility (the “Facility”) for cash consideration of approximately HK$42.4 million (the “Facility Consideration”), which was paid by HKBN during the year ended August 31, 2004. In conjunction with the First Agreement, HKBN also entered into an operations and maintenance agreement with the Contract Party 1 for the provision of ongoing operations and maintenance services for the Facility at a fee of approximately HK$1 million per annum, commencing September 1, 2007 onwards. | | | | A second agreement (“Second Agreement”) was entered into on the same date by both parties whereby HKBN agree to provide certain telecommunications services to the Contract Party 1 (the “Services”) for an amount equal to the unit service charges specified in the Second Agreement. The Contract Party 1 is required to pay to HKBN a guarantee minimum service fee of approximately HK$42.4 million over a period of three years, commencing September 1, 2004. A prepayment of the service charges of HK$36.5 million (the “Prepaid Charges”) was paid by the Contract Party 1 to HKBN during the year ended August 31, 2004. | | | | The directors of the Group made an assessment of the fair values of the goods and services exchanged and concluded that no fair values could be assigned to them. Accordingly, the Facility was not recognized as an asset and no revenue or deferred revenue was recognized in the consolidated financial statements as of and for any of the periods presented. The difference between the Facility Consideration and the Prepaid Charges, amounting to approximately HK$5.9 million, was included in long-term receivable balance, and other receivables, deposits and prepayments as of August 31, 2006 and 2007 respectively. In accordance with the terms of agreement, the unpaid portion of the HK$42.2 million guarantee minimum service fee, amounting to approximately HK$5.9 million has been billed to the Contract Party 1 upon the end of service period on September 1, 2007 and subsequently settled. |
A second agreement (“Second Agreement”) was entered into on the same date by both parties whereby HKBN agree to provide certain telecommunications services to the Contract Party 1 (the “Services”) for an amount equal to the unit service charges specified in the Second Agreement. The Contract Party 1 is required to pay to HKBN a guarantee minimum service fee of approximately HK$42.4 million over a period of three years, commencing September 1, 2004. A prepayment of the service charges of HK$36.5 million (the “Prepaid Charges”) was paid by the Contract Party 1 to HKBN during the year ended August 31, 2004.F-71
The directors of the Group made an assessment of the fair values of the goods and services exchanged and concluded that no fair values could be assigned to them. Accordingly, the Facility was not recognized as an asset and no revenue or deferred revenue was recognized in the consolidated financial statements as at and for any of the periods presented. The difference between the Facility Consideration and the Prepaid Charges, amounting to approximately HK$5.9 million, was included in long-term receivable balance, and other receivables, deposits and prepayments as at August 31, 2006 and 2007 respectively. In accordance with the terms of agreement, the unpaid portion of the HK$42.2 million guarantee minimum service fee, amounting to approximately HK$5.9 million has been billed to the Contract Party 1 upon the end of service period on September 1, 2007.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2007
27 | Barter transaction (continued) | | | 29 | | Comparative figures |
| | Certain comparative figures have been reclassified to conform with the current year presentation. |
| | | | 30 | | Recent accounting pronouncements |
(b)(a) | | HKFRSsDuring | | | | Up to the date of issuance of the accompanying consolidated financial statements, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended August 31, 2005, HKBN entered into2008 and which have not been adopted in the accompanying consolidated financial statements. | | | | The Group is in the process of making an agreement with a third party (“assessment of what the Contract Party 2”). Pursuantimpact of these amendments, new standards and new interpretations is expected to be in the agreement:period of initial application. So far it has concluded that the adoption of the following developments is unlikely to have significant impact on the Group’s results of operations and financial position: |
| | (i) | HKBN and the Contract Party 2 agreed to make available certain telecommunications services (the “Services Component”) to each other on a barter basis for no consideration for a period of ten years, commencing January 1, 2005. |
| | (ii) | HKBN agreed to provide network capacity to the Contract Party 2 for a service term of fifteen years from the respective activation of the relevant network capacity, and, in exchange, the Contract Party 2 agreed to provide HKBN the right to use telecommunications facilities (the “Capacity Component”) for a term of fifteen years from the respective activation of the relevant facilities. The transaction was entered into on a barter basis with no consideration being exchanged. |
The Directors of the Group made an assessment and concluded that since the Services Component and Capacity Component involve an exchange of services of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. Accordingly, both components have not been recognized as an asset or expense and no revenue or deferred revenue was recognized in the financial statements of the Group since inception of the agreement.
28 | New effective standards/recent accounting pronouncements |
Up to the date of issuance of the accompanying consolidated financial statements, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended August 31, 2007 and which have not been adopted in the accompanying consolidated financial statements.
The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of the following developments may result in new or amended disclosure in its consolidated financial statements:
| | | | | | | | | | Effective for
| | | | | | accounting periods
| | | | | | beginning on or after | | | | | Amendments to HKAS 1 | | | | | | | | HK(IFRIC) Interpretation 13 | | Customer loyalty programmes | | July 1, 2008 | | | | | | | | | | HKAS 1 (Revised) | | Presentation of financial statements:
capital disclosuresstatements | | January 1, 20072009 | | | | | HKFRS 7 | | Financial instruments: disclosures | | | | | | HKAS 23 (Revised) | | Borrowing costs | | January 1, 20072009 | | | | | | | | | | HKFRS 8 | | Operating segments
| | January 1, 2009 | |
In respect of other amendments, new standards and new interpretations, the Group is not yet in a position to state whether they would have a significant impact on the Group’s results of operations and financial position.F-72
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
28 | New effective standards/recent | | | 30 | | Recent accounting pronouncements (continued) |
| (b) | | U.S. GAAP | | | | Statement of Financial Accounting Standards No. 157 (“SFAS 157”) | | | | In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosure required for fair value measurement. SFAS 157 applies to other accounting pronouncements that require fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and is effective for the Group on September 1, 2008. However, FASB Staff Position FAS 157-2 delayed the adoption date until January 1, 2009 for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Management does not expect the initial adoption of SFAS 157 to have a material impact on the Group’s results of operations and financial position. |
| | | | | Statement of Financial Accounting Standards No. 159 (“SFAS 159”) |
| | In February 2007, the FASB issued SFAS 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains or losses on items for which the fair value option has been elected be reported in earnings. Early adoption of SFAS 159 is permitted provided that the entity also adopts SFAS No. 157. Effective from September 1, 2008, management has elected not to adopt the fair value option for all the financial assets and financial liabilities held at September 1, 2008. |
FASB Interpretation No. 48 (“FIN 48”)F-73
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statements No. 109, which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Group recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. FIN 48 will be effective for the accounting period from September 1, 2007. Management does not expect the adoption of this interpretation to have a material effect on the Group’s consolidated financial statements.
Statement of Financial Accounting Standards No. 157 (“SFAS 157”)
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which defines fair value, provides a framework for measuring the fair value, and expands the disclosures required for fair value measurements. SFAS 157 does not require any new fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Group is in the process of evaluating the impact of this standard.
Statement of Financial Accounting Standards No. 159 (“FAS 159”)
In February 2007, the FASB issued SFAS 159, “Fair Value Option for Financial Assets and Financial Liabilities”. SFAS 159 permits companies to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains or losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the Company on 1 September 2008. The Group is in the process of evaluating the impact of this standard.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
29 | | | | 31 | | Summary of significant differences between HKFRSs and U.S. GAAP |
| | The Group’s consolidated financial statements are prepared in accordance with HKFRSs, which differ in certain significant respects from U.S. GAAP. The following are significant differences between HKFRSs and U.S. GAAP which pertain to the Group:City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2007
29 | Summary of significant differences between HKFRSs and U.S. GAAP (continued)which pertain to the Group: |
Net income/(loss)
| | | | | | | | | | | | | | | | Year ended 31 August, | | | | Note | | 2005 | | | 2006 | | | 2007 | | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | As reported under HKFRSs | | | | (163,496 | ) | | (142,062 | ) | | 28,865 | | | | | | U.S. GAAP adjustments: | | | | | | | | | | | - Share-based compensation under intrinsic Value method | | (a) | | 389 | | | — | | | — | - Reversal of retrospective HK GAAP adjustment in respect of share-based compensation | | (a) | | 6,965 | | | — | | | — | - Reversal of amortization of goodwill (acquired after June 30, 2001) | | (b) | | 1,065 | | | — | | | — | - Fair value of interest rate swap | | (c) | | 1,890 | | | — | | | — | - Fair value of foreign forward exchange contracts | | (c) | | 4,039 | | | — | | | — | - Tax effect of U.S. GAAP adjustments | | (d) | | — | | | — | | | — | | | | | | | | | | | | Net income/(loss) under U.S. GAAP | | | | (149,148 | ) | | (142,062 | ) | | 28,865 | | | | | | | | | | | | Basic weighted average common shares issued and outstanding (in 000’s) | | | | 613,525 | | | 614,134 | | | 614,840 | Incremental shares from assumed exercise of share options (in 000’s) | | | | — | | | — | | | 16,479 | | | | | | | | | | | | Diluted weighted average common and potential shares issued and outstanding (in 000’s) | | ‘’ | | 613,525 | | | 614,134 | | | 631,319 | | | | | | | | | | | | Earnings/(loss) per share under U.S. GAAP (note) | | | | | | | | | | | - Basic | | | | (24.3) cents | | | (23.1) cents | | | 4.7 cents | | | | | | | | | | | | - Diluted | | | | (24.3) cents | | | (23.1) cents | | | 4.6 cents | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Year ended 31 August, | | | | Note | | 2006 | | 2007 | | 2008 | | | | | | HK$’000 | | HK$’000 | | HK$’000 | | As reported under HKFRSs and U.S. GAAP | | | | | (142,062 | ) | | | 28,865 | | | | 125,190 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic weighted average common shares issued and outstanding (in 000’s) | | | | | 614,134 | | | | 614,840 | | | | 634,015 | | | Incremental shares from assumed exercise of share options (in 000’s) | | | | | — | | | | 16,479 | | | | 23,982 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted weighted average common and potential shares issued and outstanding (in 000’s) | | | | | 614,134 | | | | 631,319 | | | | 657,997 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings/(loss) per share under U.S. GAAP (note) | | | | | | | | | | | | | | | | — Basic | | | | | (23.1) cents | | | | 4.7 cents | | | | 19.7 cents | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — Diluted | | | | | (23.1) cents | | | | 4.6 cents | | | | 19.0 cents | | | | | | | | | | | | | | | | | |
| | | | Note: | | The number of incremental shares from assumed exercise of stock options and warrants is determined using the treasury stock method. At August 31, 2005 and 2006, the number of shares used in the calculation of diluted loss per share is equal to the basic weighted average common shares issued and outstanding as the incremental effect of outstanding share options would be anti-dilutive in a loss making year. |
| | | | | Total shareholders’ equity |
| | | | | | | | | | | | | | | | | | | | | Year ended August 31, | | | | Note | | 2006 | | 2007 | | 2008 | | | | | | HK$’000 | | HK$’000 | | HK$’000 | Total shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As reported under HKFRSs | | | | | 891,654 | | | | 903,882 | | | | 1,032,607 | | | | | | | | | | | | | | | | | | | U.S. GAAP adjustments: | | | | | | | | | | | | | | | | — Goodwill | | (a) | | | 5,092 | | | | 5,092 | | | | 5,092 | | | — Accumulated amortization of goodwill | | (a) | | | (3,735 | ) | | | (3,735 | ) | | | (3,735 | ) | | — Reversal of amortization of goodwill | | (a) | | | 4,260 | | | | 4,260 | | | | 4,260 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total shareholders’ equity under U.S. GAAP | | | | | 897,271 | | | | 909,499 | | | | 1,038,224 | | | | | | | | | | | | | | | | | |
F-74
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
29 | | | | 31 | | Summary of significant differences between HKFRSs and U.S. GAAP (continued) |
| | Condensed consolidated statements of operations under US GAAP | | | | Under HKFRS, depreciation charges of network assets are included in general and administrative expenses. | | | | Under US GAAP, however, depreciation charges of networks assets which are directly related to the generation of revenue are included in network costs. As a result, under US GAAP, the consolidated statements of operations would be reported as follows: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Revenue, net | | | 1,134,876 | | | | 1,141,270 | | | | 1,302,981 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | — Network costs, net | | | (554,136 | ) | | | (451,080 | ) | | | (368,278 | ) | | — Salaries and related costs | | | (256,721 | ) | | | (221,102 | ) | | | (247,460 | ) | | — Sales and marketing expenses | | | (204,952 | ) | | | (203,673 | ) | | | (307,743 | ) | | — General and administrative expenses | | | (187,129 | ) | | | (166,271 | ) | | | (206,687 | ) | | — Provision for doubtful accounts | | | (17,450 | ) | | | (6,569 | ) | | | (14,293 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Loss)/ income from operations | | | (85,512 | ) | | | 92,575 | | | | 158,520 | | | Interest income | | | 20,378 | | | | 22,671 | | | | 15,596 | | | Interest expense | | | (88,637 | ) | | | (87,504 | ) | | | (75,137 | ) | | Other income, net | | | 4,465 | | | | 3,149 | | | | 9,393 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Loss)/ income before income taxes | | | (149,306 | ) | | | 30,891 | | | | 108,372 | | | Income tax credit/ (expense) | | | 7,244 | | | | (2,026 | ) | | | 16,818 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (loss)/ income | | | (142,062 | ) | | | 28,865 | | | | 125,190 | | | | | | | | | | | | | | | |
Total shareholders’ equityF-75
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | | Note | | 2005 | | | 2006 | | | 2007 | | | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Total shareholders’ equity | | | | | | | | | | | | | | | | | As reported under HKFRSs | | | | 1,020,454 | | | 891,654 | | | 903,882 | | | | | | | U.S. GAAP adjustments: | | | | | | | | | | | | - Goodwill | | (b) | | 5,092 | | | 5,092 | | | 5,092 | | - Accumulated amortization of goodwill | | (b) | | (3,735 | ) | | (3,735 | ) | | (3,735 | ) | - Reversal of amortization of goodwill | | (b) | | 4,260 | | | 4,260 | | | 4,260 | | - Fair value of interest rate swap | | (c) | | 2,570 | | | — | | | — | | - Fair value of forward foreign exchange contracts | | (c) | | 4,039 | | | | | | | | - Tax effect of U.S. GAAP adjustments | | (d) | | — | | | — | | | — | | | | | | | | | | | | | | Total shareholders’ equity under U.S. GAAP | | | | 1,032,680 | | | 897,271 | | | 909,499 | | | | | | | | | | | | | |
Condensed consolidated statements of operations
| | | | | | | | | | | | | Year ended August 31, | | | | | 2005 | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Revenue, net | | 1,162,059 | | | 1,134,876 | | | 1,141,270 | | | | | | | | | | | | Operating expenses: | | | | | | | | | | - Network costs | | (550,029 | ) | | (554,136 | ) | | (451,080 | ) | - Sales and marketing expenses | | (267,423 | ) | | (204,952 | ) | | (203,673 | ) | - General and administrative expenses | | (436,117 | ) | | (443,850 | ) | | (387,373 | ) | - Provision for doubtful accounts | | (35,445 | ) | | (17,450 | ) | | (6,569 | ) | | | | | | | | | | | Income/(loss) from operations | | (126,955 | ) | | (85,512 | ) | | 92,575 | | Interest income | | 13,578 | | | 20,378 | | | 22,671 | | Interest expense | | (54,462 | ) | | (88,637 | ) | | (87,504 | ) | Other income, net | | 11,966 | | | 4,465 | | | 3,149 | | | | | | | | | | | | Income/(loss) before income taxes | | (155,873 | ) | | (149,306 | ) | | 30,891 | | Income tax (expense)/credit | | 6,725 | | | 7,244 | | | (2,026 | ) | | | | | | | | | | | Net income/(loss) | | (149,148 | ) | | (142,062 | ) | | 28,865 | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
29 | | | | 31 | | Summary of significant differences between HKFRSs and U.S. GAAP (continued) |
| | Statement of changes in shareholders’ equity under US GAAP |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ordinary shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | Number of | | | | | | Additional | | other | | | | | | | | | | Total | | | | shares | | Amount | | paid-in | | comprehensive | | Capital | | Retained | | shareholders’ | | | | outstanding | | outstanding | | capital | | income | | reserve | | profits | | equity | | | | | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Balance at August 31, 2005 | | | 614,125,404 | | | | 61,412 | | | | 619,408 | | | | 840 | | | | 27,815 | | | | 323,205 | | | | 1,032,680 | | | Shares issued upon exercise of share options | | | 50,000 | | | | 5 | | | | 8 | | | | — | | | | — | | | | — | | | | 13 | | | Compensation cost for share options | | | — | | | | — | | | | 251 | | | | — | | | | 6,572 | | | | — | | | | 6,823 | | | Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (142,062 | ) | | | (142,062 | ) | | Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | (183 | ) | | | — | | | | — | | | | (183 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2006 | | | 614,175,404 | | | | 61,417 | | | | 619,667 | | | | 657 | | | | 34,387 | | | | 181,143 | | | | 897,271 | | | Shares issued upon exercise of share options | | | 2,328,000 | | | | 233 | | | | 2,135 | | | | — | | | | (611 | ) | | | — | | | | 1,757 | | | Compensation cost for share options | | | — | | | | — | | | | — | | | | — | | | | 5,727 | | | | — | | | | 5,727 | | | Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 28,865 | | | | 28,865 | | | Dividend paid in respect of previous year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24,635 | ) | | | (24,635 | ) | | Foreign currency translation adjustment | | | — | �� | | | — | | | | — | | | | 514 | | | | — | | | | — | | | | 514 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2007 | | | 616,503,404 | | | | 61,650 | | | | 621,802 | | | | 1,171 | | | | 39,503 | | | | 185,373 | | | | 909,499 | | | Shares issued upon exercise of share options | | | 14,052,268 | | | | 1,405 | | | | 16,893 | | | | — | | | | (3,300 | ) | | | — | | | | 14,998 | | | Compensation cost for share options | | | — | | | | — | | | | — | | | | — | | | | 4,204 | | | | — | | | | 4,204 | | | Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 125,190 | | | | 125,190 | | | Dividend paid in respect of previous year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,915 | ) | | | (5,915 | ) | | Shares issued in respect of scrip dividend of previous year | | | 11,227,213 | | | | 1,123 | | | | 18,044 | | | | — | | | | — | | | | (19,167 | ) | | | — | | | Dividend paid in respect of current year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (11,371 | ) | | | (11,371 | ) | | Shares issued in respect of scrip dividend of current year | | | 8,838,938 | | | | 884 | | | | 13,347 | | | | — | | | | — | | | | (14,231 | ) | | | — | | | Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 1,619 | | | | — | | | | — | | | | 1,619 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 650,621,823 | | | | 65,062 | | | | 670,086 | | | | 2,790 | | | | 40,407 | | | | 259,879 | | | | 1,038,224 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Statement of changes in shareholders’ equityF-76
| | | | | | | | | | | | | | | | | | | | | | | | | Ordinary shares | | Additional paid-in capital | | | | | | | | | | | | | | | | | Number of
shares
outstanding | | Amount
outstanding | | Share premium | | Warrant
reserve | | | Cumulative foreign
currency
translation
reserve | | | Capital
reserve | | | Retained profits | | | Total
shareholders’
equity | | | | | | | HK$ | | HK$ | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | (Amounts in thousands, except number of shares) | | Balance at August 31, 2004 | | 610,573,361 | | 61,057 | | 617,986 | | 365 | | | 983 | | | 28,204 | | | 472,335 | | | 1,180,930 | | Shares issued upon exercise of share options | | 52,000 | | 5 | | 25 | | — | | | — | | | — | | | — | | | 30 | | Compensation cost for share options | | — | | — | | — | | — | | | — | | | (389 | ) | | — | | | (389 | ) | Release of warrant reserve upon warrant expiration | | — | | — | | — | | (18 | ) | | — | | | — | | | 18 | | | — | | Shares issued upon exercise of warrants | | 3,500,043 | | 350 | | 1,397 | | (347 | ) | | — | | | — | | | — | | | 1,400 | | Net loss | | — | | — | | — | | — | | | — | | | — | | | (149,148 | ) | | (149,148 | ) | Foreign currency translation adjustment | | — | | — | | — | | — | | | (143 | ) | | — | | | — | | | (143 | ) | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2005 | | 614,125,404 | | 61,412 | | 619,408 | | — | | | 840 | | | 27,815 | | | 323,205 | | | 1,032,680 | | Shares issued upon exercise of share options | | 5,000 | | 5 | | 8 | | — | | | — | | | — | | | — | | | 13 | | Compensation cost for share options | | — | | — | | 251 | | — | | | — | | | 6,572 | | | — | | | 6,823 | | Net loss | | — | | — | | — | | — | | | — | | | — | | | (142,062 | ) | | (142,062 | ) | Foreign currency translation adjustment | | — | | — | | — | | — | | | (183 | ) | | — | | | — | | | (183 | ) | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2006 | | 614,175,404 | | 61,417 | | 619,667 | | — | | | 657 | | | 34,387 | | | 181,143 | | | 897,271 | | Shares issued upon exercise of share options | | 2,328,000 | | 233 | | 2,135 | | — | | | — | | | (611 | ) | | — | | | 1,757 | | Compensation cost for share options | | — | | — | | — | | — | | | — | | | 5,727 | | | — | | | 5,727 | | Net income | | — | | — | | — | | — | | | — | | | — | | | 28,865 | | | 28,865 | | 2007 interim dividend declared and paid | | — | | — | | — | | — | | | — | | | — | | | (24,635 | ) | | (24,635 | ) | Foreign currency translation adjustment | | — | | — | | — | | — | | | 514 | | | — | | | — | | | 514 | | | | | | | | | | | | | | | | | | | | | | | | Balance at August 31, 2007 | | 616,503,404 | | 61,650 | | 621,802 | | — | | | 1,171 | | | 39,503 | | | 185,373 | | | 909,499 | | | | | | | | | | | | | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
29 | | | | 31 | | Summary of significant differences between HKFRSs and U.S. GAAP (continued) |
| | Comprehensive (loss)/income under US GAAP | | | | The comprehensive (loss)/income of the Group, determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130 “Reporting Comprehensive Income”, is set out as follows: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | (Loss)/Net income under U.S. GAAP | | | (142,062 | ) | | | 28,865 | | | | 125,190 | | | Foreign currency translation adjustment (net of nil tax) | | | (183 | ) | | | 514 | | | | 1,619 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive (loss)/income | | | (142,245 | ) | | | 29,379 | | | | 126,809 | | | | | | | | | | | | | | | |
| | | | | Condensed consolidated statement of cash flows |
| | Under HKFRSs, in adopting HKAS 7, three categories of activities are reported: operating activities; investing activities and financing activities, which is similar to U.S. GAAP. However, under HKFRSs, the difference is that cash flows from interest income would be included in investing activities whereas under U.S. GAAP it would be included in operating activities. | | | | Summary cash flow information under U.S. GAAP is as follows: |
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Net cash provided by operating activities | | | 204,583 | | | | 406,732 | | | | 394,159 | | | Net cash (used in)/provided by investing activities | | | (513,120 | ) | | | 91,382 | | | | (163,346 | ) | | Net cash used in financing activities | | | (86,486 | ) | | | (109,566 | ) | | | (342,550 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Increase/(decrease) in cash and bank balances | | | (395,023 | ) | | | 388,548 | | | | (111,737 | ) | | Cash and bank balances at the beginning of year | | | 539,591 | | | | 144,917 | | | | 532,894 | | | Effect of foreign currency exchange rate changes on cash | | | 349 | | | | (571 | ) | | | 453 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and bank balances at the end of year | | | 144,917 | | | | 532,894 | | | | 421,610 | | | | | | | | | | | | | | | |
Comprehensive (loss)/incomeF-77
The comprehensive (loss)/income of the Group, determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130 “Reporting Comprehensive Income”, is set out as follows:
| | | | | | | | | | | | Year ended August 31, | | | | 2005 | | | 2006 | | | 2007 | | | | HK$’000 | | | HK$’000 | | | HK$’000 | (Loss)/Net income under U.S. GAAP | | (149,148 | ) | | (142,062 | ) | | 28,865 | Foreign currency translation adjustment | | (143 | ) | | (183 | ) | | 514 | | | | | | | | | | Comprehensive (loss)/income | | (149,291 | ) | | (142,245 | ) | | 29,379 | | | | | | | | | |
Condensed consolidated statement of cash flows
Under HKFRSs, in adopting HKAS 7, three categories of activities are reported: operating activities; investing activities and financing activities, which is similar to U.S. GAAP. However, under HKFRSs, the difference is that cash flows from interest income would be included in investing activities whereas under U.S. GAAP it would be included in operating activities.
Summary cash flow information under U.S. GAAP is as follows:
| | | | | | | | | | | | | Year ended August 31, | | | | | 2005 | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Net cash provided by operating activities | | 90,984 | | | 204,583 | | | 406,732 | | Net cash (used in)/provided by investing activities | | (571,018 | ) | | (513,120 | ) | | 91,382 | | Net cash provided by/(used in) financing activities | | 773,023 | | | (86,486 | ) | | (109,566 | ) | | | | | | | | | | | Increase/(decrease) in cash and bank balances | | 292,989 | | | (395,023 | ) | | 388,548 | | Cash and bank balances at the beginning of year | | 247,517 | | | 539,591 | | | 144,917 | | Effect of foreign exchange rate changes | | (915 | ) | | 349 | | | (571 | ) | | | | | | | | | | | Cash and bank balances at the end of year | | 539,591 | | | 144,917 | | | 532,894 | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
29 | Summary of significant differences between HKFRSs and U.S. GAAP (continued) | |
(a)31 | Share-based compensation |
Prior to HKFRS 2 “Share-based payment” becoming effective for the fiscal year beginning on September 1, 2005, no staff compensation cost was recognized in respect of the grant of share options. Proceeds from the issuance of shares upon the exercise of share options were credited to share capital and share premium accounts. With effect from September 1, 2005, in order to comply with HKFRS 2, the Group recognizes the fair value of share options as compensation expense, or an asset, if the cost qualifies for recognition as an asset with the corresponding increase to capital reserve. The new accounting policy has been applied retrospectively with comparatives restated in accordance with HKFRS 2. The impact of the restatement for the year ended August 31, 2005 was HK$6,965,000 which was reversed under U.S. GAAP.
Under U.S. GAAP, for periods ended on or prior to August 31, 2005, the Group applied the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations to account for share options. Under APB 25, share-based compensation was recorded on the date of grant only if the then market price of the underlying stock exceeded the exercise price of the share options.
For the year ended August 31, 2005, under U.S. GAAP, the Group recognized share-based compensation expenses of HK$389,000 because options were granted when the then market price of the underlying ordinary share exceeded the exercise price of the share options as described in the following. On October 21, 2004, the Company issued 14,670,000 share options to employees at an exercise price of HK$1.54 each when the market value of the ordinary shares on that date was HK$1.49. The difference of HK$0.05 between the exercise price and the market value of the ordinary shares was recognized in the consolidated statement of operations over the vesting period. On January 4, 2005, the Company issued 16,000,000 share options to certain directors of the Group at an exercise price of HK$1.54 each when the market value of the ordinary shares of the Company was HK$1.48. The difference of HK$0.06 between the exercise price and the market value of the ordinary shares was recognized in the consolidated statement of operations over the vesting period.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2007
29 | Summary of differences between HKFRSs and U.S. GAAP (continued) |
| (a) | Share-based compensation (continued) |
On September 1, 2005, the Group adopted SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No.123 “Accounting for Stock-Based Compensation” and supersedes APB 25. Under SFAS No. 123(R), the Group is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize the cost over the period during which an employee is required to provide service in exchange for the award. In applying the transition provisions of SFAS No.123(R), the Group used the modified prospective method in which the grant-date fair values of unvested awards that are outstanding on the date of adoption are charged to expense over their remaining vesting periods.
As a result of the adoption of HKFRS 2 and SFAS No. 123(R) on September 1, 2005, there was no difference arising from the recognition of share-based compensation because there was no difference in the results of applying the transitional provisions under HKFRSs and U.S. GAAP and the methods used to determined the share-based compensation were the same under HKFRSs and U.S. GAAP.
The following table illustrates the pro forma effect on net income as if the fair-value-based method under SFAS No. 123 had been applied to all outstanding and unvested share options for the year ended August 31, 2005.
| | | | | | Year ended
August 31, 2005Goodwill | | | | | | HK$’000Prior to September 1, 2001, goodwill arising from a business combination was charged against available reserves. In January 2001, HKICPA issued Statement of Standard Accounting Practice (“SSAP”) No. 30 “Business Combinations” which applied to business combinations for which the agreement date is on or after September 1, 2001. As a result of the adoption of this SSAP in the fiscal year ended August 31, 2002 and up to September 1, 2005, goodwill on acquisitions occurring on or after September 1, 2001 was shown separately on the consolidated balance sheet and amortized using the straight-line method over its estimated useful life. | | | Net loss
| | | | | | As reported
| | (149,148 | ) | Less: Total share-based compensation expense determined under intrinsic value method for all awards
| | (389 | ) | Less: Total share-based compensation expense determined under fair value method for all awards, net of tax
| | (20,547 | ) | | | | On September 1, 2005, the Group adopted HKFRS 3 “Business Combinations”. Under HKFRS 3, goodwill is recorded at cost less any accumulated impairment losses and is no longer amortized. Goodwill is subject to an annual impairment test and when there is an indication of impairment. An impairment loss is recognized when the carrying amount of the cash generating unit to which the goodwill has been allocated exceeds its recoverable amounts. In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken directly to reserves (i.e. goodwill which arose before September 1, 2001) is not recognized in the consolidated statement of operations on disposal or impairment of the acquired business, or under any other circumstances. The adoption of HKFRS 3 did not result in any restatement in the consolidated financial statements of prior years and therefore had no impact on U.S. GAAP adjustments of prior years. | | | (170,084 | ) | | | | Under U.S. GAAP, goodwill arising from a business combination is not amortized and is required to be tested annually for impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. | Basic loss per share
| | | | | | As reported
| | HK(24.3) cents | | Pro forma
| | HK(27.7) cents | | | | Diluted loss per share
| | | | | | As reported | | HK(24.3) cents | | Pro forma
| | HK(27.7) cents | a result of the adoption of HKFRS 3, there were no U.S. GAAP adjustments to the net loss/ income pertaining to goodwill for the years ended August 31, 2006 ,2007 and 2008. |
F-78
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
29 | | | | 31 | | Summary of differences between HKFRSs and U.S. GAAP (continued) |
(a)(b) | Share-based compensation (continued) |
The weighted average fair value of share options at the date of grant was HK$0.82 per option for the year ended August 31, 2005. The value was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
| | | | | | Year ended
August 31, 2005Deferred taxes | | | | | | HK$’000Under HKFRSs, deferred taxes are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. | | | Weighted average
| | | Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. | | | Risk-free interest rates
| | 2.7 | %Under U.S. GAAP, the Group is required to recognize deferred tax assets and liabilities for the expected future tax consequences of all events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future tax benefits in respect of tax loss carry forwards are also required to be recognized in full. A valuation allowance is required to be established for such assets if it is more likely than not that the Group will not be able to realize such benefits in the future. | Dividend yield
| | | 1 | %Under HKFRS, deferred tax assets and liabilities shall be classified as noncurrent assets or noncurrent liabilities. Under U.S. GAAP, deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax asset related to tax loss carryforwards, are classified according to the expected reversal date of the temporary difference. The valuation allowance for a particular tax jurisdiction shall be allocated between current and non-current deferred tax assets for that tax jurisdiction on a pro rata basis. | Volatility factor of the expected market price of the Company’s shares
| | | 70.66 | %Except for the presentation differences, there were no differences in the amount of deferred tax assets recognized under HKFRSs and U.S. GAAP. For the years ended August 31, 2006, 2007 and 2008, no adjustment was made for tax effects of U.S. GAAP adjustments because the U.S. GAAP adjustments in those years had no tax consequences under Hong Kong tax laws. | Expected life of the options
| | | 5 years | The following additional financial statements disclosures are required under U.S. GAAP and are presented on a U.S. GAAP basis. |
| | | | | | | | | | | | | August 31, | | | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | Deferred tax assets: | | | | | | | | | | | | | | | | | | | | Tax loss carryforwards | | | 182,739 | | | | 150,234 | | | | | | | | | | | | | | | | | | | | | | | Total gross deferred tax assets | | | 182,739 | | | | 150,234 | | | Valuation allowance | | | (48,120 | ) | | | (2,389 | ) | | | | | | | | | | | | | | | | | | | | | | Net deferred tax assets | | | 134,619 | | | | 147,845 | | | | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | | | | Accelerated depreciation allowance | | | (134,910 | ) | | | (126,447 | ) | | | | | | | | | | | | | | | | | | | | | | Total gross deferred tax liabilities | | | (134,910 | ) | | | (126,447 | ) | | | | | | | | | | | | | | | | | | | | | | Net deferred tax asset /(liability) | | | (291 | ) | | | 21,398 | | | | | | | | | | | | | | | | | | | | | | | Net current deferred tax assets | | | — | | | | 11,399 | | | Net non-current deferred tax assets | | | — | | | | 16,630 | | | Net non-current deferred tax liabilities | | | (291 | ) | | | (6,631 | ) | | | | | | | | | | | | | | | | | | | | | | Net deferred tax asset /(liability) | | | (291 | ) | | | 21,398 | | | | | | | | | | | |
F-79 Prior to September 1, 2001, goodwill arising from a business combination was charged against available reserves. In January 2001, HKICPA issued Statement of Standard Accounting Practice (“SSAP”) No. 30 “Business Combinations” which applied to business combinations for which the agreement date is on or after September 1, 2001. As a result of the adoption of this SSAP in the fiscal year ended August 31, 2002 and up to September 1, 2005, goodwill on acquisitions occurring on or after September 1, 2001 was shown separately on the consolidated balance sheet and amortized using the straight-line method over its estimated useful life.
On September 1, 2005, the Group adopted HKFRS 3 “Business Combinations”. Under HKFRS 3, goodwill is recorded at cost less any accumulated impairment losses and is no longer amortized. Goodwill is subject to an annual impairment test and when there is an indication of impairment. An impairment loss is recognized when the carrying amount of the cash generating unit to which the goodwill has been allocated exceeds its recoverable amounts. In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken directly to reserves (i.e. goodwill which arose before September 1, 2001) is not recognized in the consolidated statement of operations on disposal or impairment of the acquired business, or under any other circumstances. The adoption of HKFRS 3 did not result in any restatement in the consolidated financial statements of prior years and therefore had no impact on U.S. GAAP adjustments of prior years.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
29 | | | | 31 | | Summary of differences between HKFRSs and U.S. GAAP (continued) |
| (b) | | GoodwillDeferred taxes (continued) | | | | The valuation allowance for deferred tax assets as August 31, 2006, 2007 and 2008 was HK$52,404,000, HK$48,120,000 and HK$2,389,000 respectively. The valuation allowance as at August 31, 2006, 2007 and 2008 was primarily related to tax loss carryforwards that, in the judgement of management, are not more likely than not to be realized. | | | | In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary difference are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryforward periods) and projected taxable income in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax rules. Based on the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences, net of existing valuation allowance at August 31, 2008. The amount of the deferred tax asset considered realizable; however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. | | | | Changes in the valuation allowance consist of: |
Under U.S. GAAP, goodwill arising from a business combination is not amortized and is required to be tested annually for impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”.
As a result of the adoption of HKFRS 3, there were no U.S. GAAP adjustments pertaining to goodwill for the years ended August 31, 2006 and 2007.
| | | | | | | | | | | | | | | | | Year ended August 31, | | | | 2006 | | 2007 | | 2008 | | | | HK$’000 | | HK$’000 | | HK$’000 | | Balance at beginning of the year | | | 29,804 | | | | 52,404 | | | | 48,120 | | | Addition/(reduction) to income tax expense | | | 22,600 | | | | (1,979 | ) | | | (37,834 | ) | | Valuation allowance written off | | | — | | | | (2,305 | ) | | | (7,897 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at end of the year | | | 52,404 | | | | 48,120 | | | | 2,389 | | | | | | | | | | | | | | | |
(c) | Derivative instruments | The net change in the total valuation allowance for the year ended August 31, 2008 was a decrease of HK$45,731,000 which primarily relates to the release of the valuation allowance of HK$12,013,000 due to the utilization of tax loss carryforwards during the year ended August 31, 2008 and the release of valuation allowance of HK$26,335,000 due to the changes in estimate of future taxable income of the Company’s major operating subsidiary. As at August 31, 2008, considering the operating results of this major operating subsidiary during the year ended August 31, 2008 and the previous years as well as the Company’s forecast for future years, management reassessed that it is more likely than not that this subsidiary will be able to generate sufficient future taxable income to realize the tax benefit of its tax loss carryforwards, which resulted in the release of the valuation allowance of HK$26,335,000. In addition, the write-off of the valuation allowance in the amount of HK$7,897,000 during the fiscal year ended August 31, 2008 was offset by a corresponding reduction in the gross deferred tax asset relating to tax loss carryforwards since management assessed that certain tax positions are not more likely than not sustainable upon examination by the relevant tax authority. |
Prior to September 1, 2005, derivative financial instruments entered into by the Group to hedge the interest rate risk of a recognized asset or liability or the foreign currency risk of a committed future transaction were recognized on an accrual basis with reference to the timing of the recognition of the hedged transaction.F-80
With effect from September 1, 2005, and in accordance with HKAS 39, all derivative financial instruments entered into by the Group are stated at fair value. Changes in the fair value of derivatives that are designated and qualified as a cash flow hedge are recognized in equity to the extent that the hedge is effective and until the hedged transaction occurs. Any changes in fair value of derivative financial instruments which do not qualify as cash flow hedges are recognized in the consolidated statement of operations. The adoption of HKAS 39 did not result in any restatement in the consolidated financial statements of prior years and therefore had no impact on U.S. GAAP adjustments of prior years.
Under U.S. GAAP, the Group follows SFAS No. 133 “Accounting for Derivative Instruments and Hedge Activities”, as amended by SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, which requires all derivative instruments be recognized on the balance sheet at fair value. The accounting for changes in fair value depends on whether the derivative instrument qualifies as a hedge. Gains or loss on a derivative instrument designated and qualifying as a fair value hedge as well as the offsetting loss or gain on the hedged item attributable to the hedged risk shall be recognized currently in the consolidated statement of operations. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument shall be reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged forecasted transaction impacts earnings. The ineffective portion of gain or loss on the derivative instrument, if any, shall be recognized currently in earnings. For derivative that does not qualify as a hedge, the gain or loss reflecting changes in fair value is recognized in earnings. As of the periods presented, none of the financial derivatives of the Group qualified as hedges.
As a result of the adoption of HKAS 39, there were no reconciling differences pertaining to derivative instruments for the years ended August 31, 2006 and 2007.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2931 | | Summary of differences between HKFRSs and U.S. GAAP (continued) |
(d)(b) | | Deferred taxes (continued) | | | | Effective September 1, 2007, the Group adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. The Interpretation prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return. For each tax position, the enterprise must determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is then measured to determine the amount of benefit to recognize within the financial statements. No benefits may be recognized for tax positions that do not meet the more likely than not threshold. The benefit to be recognized is the largest amount that is more likely than not to be realized upon settlement. | | | | The adoption of FIN 48 did not result in a change to the Group’s retained earnings. The aggregate changes in the balance of the Company’s gross unrecognized tax benefits were as follows: |
| | | | | | | HK$’000 | | Balance at September 1, 2007 | | | 7,897 | | | Additions based on tax positions related to the current year | | | 1,797 | | | | | | | | | | | | | Balance at August 31, 2008 | | | 9,694 | | | | | | |
| | All of these unrecognized tax benefits, if recognized, would affect the Group’s effective tax rate. As of August 31, 2008, the Group did not have any accrued interest and penalties related to the unrecognized tax benefits. The Company will recognize interest and penalties, if any, related to unrecognized tax benefits in financial expense and other operating expense, respectively. | | | | The Group files income tax returns in Hong Kong, PRC, Canada and USA. The open tax years for the Company and its subsidiaries range between fiscal 2002 and fiscal 2008. The provisions made as a result of these open tax years are subject to the final agreement with the tax authorities. However, management does not believe there will be any material changes in the unrecognized tax benefits within the next 12 months. |
Under HKFRSs, deferred taxes are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.F-81
Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Under U.S. GAAP, the Group is required to recognize deferred tax assets and liabilities for the expected future tax consequences of all events that have been included in the account or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future tax benefits in respect of tax losses carry forward are also required to be recognized in full. A valuation allowance is required to be established for such assets if it is more likely than not that the Group will not be able to utilize such benefits in the future.
There were no differences in the amount of deferred tax assets recognised under HKFRSs and U.S. GAAP. For the years ended August 31, 2005, 2006 and 2007, no adjustment was made for tax effects of U.S. GAAP adjustments because the U.S. GAAP adjustments in those years had no tax consequences under Hong Kong tax laws.
The following additional financial statements disclosures are required under U.S. GAAP and are presented on a U.S. GAAP basis.
| | | | | | | | | | August 31, | | | | | 2006 | | | 2007 | | | | | HK$’000 | | | HK$’000 | | Deferred tax assets: | | | | | | | | | | Tax losses | | 204,300 | | | 182,739 | | Share-based payment | | 2,429 | | | — | | | | | | | | | Total gross deferred tax assets | | 206,729 | | | 182,739 | | Valuation allowance | | (52,404 | ) | | (48,120 | ) | | | | | | | | Net deferred tax assets | | 154,325 | | | 134,619 | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Accelerated depreciation allowance | | (154,678 | ) | | (134,910 | ) | | | | | | | | Total gross deferred tax liabilities | | (154,678 | ) | | (134,910 | ) | | | | | | | | Net deferred tax liabilities | | (353 | ) | | (291 | ) | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
2931 | | Summary of differences between HKFRSs and U.S. GAAP (continued) |
(d)(c) | Deferred taxes (continued) |
The tax effect on accumulated tax losses amounted to HK$182,739,000 (2006: HK$204,300,000). Realization of deferred tax assets associated with tax loss carrying forwards is dependent upon generating sufficient taxable income. As of August 31, 2007, a valuation allowance of HK$48,120,000 (2006: HK$52,404,000) has been provided against deferred tax assets since management believes it is more likely than not the Group will not be able to utilise such benefits in the foreseeable future.
Changes in the valuation allowance consist of:
| | | | | | | | | | | Year ended August 31, | | | | | 2005 | | 2006 | | 2007 | | | | | HK$’000 | | HK$’000 | | HK$’000 | | Balance at beginning of the year | | 7,633 | | 29,804 | | 52,404 | | Addition/(reduction) to income tax expense | | 22,171 | | 22,600 | | (1,979 | ) | Valuation allowance written off | | — | | — | | (2,305 | ) | | | | | | | | | Balance at end of the year | | 29,804 | | 52,404 | | 48,120 | | | | | | | | | |
The Group’s investment securities consist of equity-indexed mutual fund securities and long-term bank deposits.
Under HKFRSs, the equity-linked mutual fund securities have been designated as financial asset at fair value through profit or loss as permitted under HKAS 39 “Financial Instruments: Recognition and Measurement”.
Under U.S. GAAP, the Group follows SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” which requires the embedded derivative in the equity-linked mutual fund securities to be separated and accounted for as a derivative instrument, and the host contract to be accounted for based on generally accepted accounting principles applicable to the instruments of that type that do not contain derivative instruments. Accordingly, the host contracts of the equity-linked mutual fund securities are classified as held-to-maturity securities under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” and measured at amortized cost while the embedded derivatives are accounted for in accordance with SFAS No. 133 and measured at fair value.
| | | The Group’s investment securities consist of equity-indexed mutual fund securities and long-term bank deposits. | | | | Under HKFRSs, the equity-linked mutual fund securities have been designated as financial asset at fair value through profit or loss as permitted under HKAS 39 “Financial Instruments: Recognition and Measurement”. | | | | Under U.S. GAAP, the Group follows SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” which requires the embedded derivative in the equity-linked mutual fund securities to be separated and accounted for as a derivative instrument, and the host contract to be accounted for based on generally accepted accounting principles applicable to the instruments of that type that do not contain derivative instruments. Accordingly, the host contracts of the equity-linked mutual fund securities are classified as held-to-maturity securities under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” and measured at amortized cost while the embedded derivatives are accounted for in accordance with SFAS No. 133 and measured at fair value. | | | | For the periods presented, there were no differences between i) the fair value of the equity-indexed debt securities; and ii) the aggregate of the amortized cost of the host contracts and the fair value of the embedded derivative instruments.City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 2007
29 | Summary of differences between HKFRSsi) the fair value of the equity-indexed debt securities; and U.S. GAAP (continued)ii) the aggregate of the amortized cost of the host contracts and the fair value of the embedded derivative instruments. |
(f)(d) | | Deposits for purchase of fixed assets and lease of land and building | | | | Under HKFRSs, deposits for purchase of fixed assets and lease of land and buildings are classified as current assets if the amounts are expected to be realized within twelve months after the balance sheet date. Under U.S. GAAP, such deposits are classified as non-current assets. As of August 31, 2007 and 2008, deposits for purchase of fixed assets and lease of land and building were HK$13,263,000 and HK$19,622,000, respectively. |
Under HKFRSs, deposits for purchase of fixed assets and lease of land and buildings are classified as current assets if the amounts are expected to be realized within twelve months after the balance sheet date. Under U.S. GAAP, such deposits are classified as non-current assets. As at August 31, 2006 and 2007, deposits for purchase of fixed assets and lease of land and building were HK$17,873,000 and HK$13,263,000, respectively.
(g)(e) | | Debt issue costs | | | | Under HKFRSs, debt issue costs are reported as a reduction against the related debt proceeds and amortized over the life of the related debt using effective interest method. Under U.S. GAAP, such costs are disclosed separately as non-current asset and are similarly amortized. As of August 31, 2007 and 2008, the unamortized debt issue costs were HK$22,336,000 and HK$14,605,000, respectively. |
Under HKFRSs, debt issue costs are reported as a reduction against the related debt proceeds and amortized over the life of the related debt using effective interest method. Under U.S. GAAP, such costs are disclosed separately as non-current asset and are similarly amortized. As at August 31, 2006 and 2007, the unamortized debt issue costs were HK$24,473,000 and HK$22,336,000, respectively.F-82
On December 28, 2007, subsequent to the issuance of the Group’s consolidated financial statements for the year ended August 31, 2007 for Hong Kong statutory purposes, the TA issued a statement (“TA statement”) on the USC and confirmed the actual contribution level for the period from January 1, 2005 to June 30, 2007. Based on the TA statement, management estimated that there will be a refund of previously contributed USC of HK$7,617,000, which is expected to be recorded as a reduction against the Group’s network costs for the fiscal year ending August 31, 2008.
Between September 1, 2007 and January 22, 2008, the Group repurchased the 8.75% senior notes with a cumulative principal value of US$21,850,000 (equivalent to HK$170,430,000) in the open market. The total consideration paid including accrued interest was approximately US$22,057,000 (equivalent to HK$172,044,600). The gain on extinguishment was approximately US$46,000 (equivalent to HK$359,000) which is expected to be recorded in the consolidated statement of operations for the year ending August 31, 2008. The principal value of the 8.75% notes remaining in issue after the repurchases is US$103,150,000 (equivalent to HK$804,570,000).
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
3132 | | Supplemental guarantors consolidated financial information | | | | The senior notes described in note 13 are fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”). | | | | The condensed consolidated financial information is presented below and should be read in connection with the consolidated financial statements of City Telecom (H.K.) Limited prepared under HKFRSs. Separate financial statements of the Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries are wholly-owned and have fully and unconditionally guaranteed the Notes on a joint and several basis. Reconciliations to U.S. GAAP are not presented because the majority of the reconciling items relate to City Telecom (H.K.) Limited and Guarantor Subsidiaries are already disclosed and explained in Note 29. | | | | The following condensed consolidated financial information presents the condensed consolidated balance sheets as of August 31, 2007 and 2008 and the related condensed consolidated statements of operations and statements of cash flows for the years ended August 31, 2006, 2007 and 2008 of (a) City Telecom (H.K.) Limited, the parent; (b) the Guarantor Subsidiaries on a combined basis; (c) the Non-guarantor Subsidiary; (d) eliminating entries; and (e) the total consolidated amounts. |
The senior notes mentioned above in note 13 are fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).F-83
The condensed consolidated financial information is presented below and should be read in connection with the consolidated financial statements of City Telecom (H.K.) Limited prepared under HKFRSs. Separate financial statements of the Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries are wholly-owned and have fully and unconditionally guaranteed the Notes on a joint and several basis. Reconciliations to U.S. GAAP are not presented because the majority of the reconciling items relate to City Telecom (H.K.) Limited and Guarantor Subsidiaries are already disclosed and explained in Note 29.
The following condensed consolidated financial information presents the condensed consolidated balance sheets as of August 31, 2006 and 2007 and the related condensed consolidated statements of operations and statements of cash flows for the years ended August 31, 2005, 2006 and 2007 of (a) City Telecom (H.K.) Limited, the parent; (b) the Guarantor Subsidiaries on a combined basis; (c) the Non-guarantor Subsidiary; (d) eliminating entries; and (e) the total consolidated amounts.
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
3132 | | Supplemental guarantors consolidated financial information (continued) | | | | Condensed consolidated balance sheet as of August 31, 2008 |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | Current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and bank balances | | | 90,386 | | | | 263,386 | | | | 67,838 | | | | — | | | | 421,610 | | | Pledged bank deposits | | | 87,319 | | | | — | | | | — | | | | | | | | 87,319 | | | Trade receivables, net | | | 11,418 | | | | 128,865 | | | | — | | | | | | | | 140,283 | | | Other receivables, deposits and prepayments | | | 3,378 | | | | 80,293 | | | | 2,759 | | | | (3,704 | ) | | | 82,726 | | | Investment securities | | | 27,997 | | | | — | | | | — | | | | | | | | 27,997 | | | Deferred expenditure | | | — | | | | 40,704 | | | | — | | | | | | | | 40,704 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total current assets | | | 220,498 | | | | 513,248 | | | | 70,597 | | | | | | | | 800,639 | | | Fixed assets, net | | | 87,483 | | | | 1,135,394 | | | | 8,522 | | | | | | | | 1,231,399 | | | Investments in subsidiaries (note) | | | 1,499,437 | | | | 260,399 | | | | — | | | | (1,759,836 | ) | | | — | | | Other long-term assets | | | — | | | | 61,499 | | | | — | | | | (13,121 | ) | | | 48,378 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 1,807,418 | | | | 1,970,540 | | | | 79,119 | | | | | | | | 2,080,416 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts due to subsidiaries/ fellow subsidiaries | | | 10,830 | | | | 1,316,410 | | | | 51,059 | | | | (1,378,299 | ) | | | — | | | Trade payables | | | 26,440 | | | | 25,884 | | | | — | | | | | | | | 52,324 | | | Deposits received | | | 7,943 | | | | 8,321 | | | | — | | | | | | | | 16,264 | | | Current portion of deferred service income | | | 11,172 | | | | 102,678 | | | | — | | | | (3,401 | ) | | | 110,449 | | | Other payables and accrued charges | | | 17,831 | | | | 149,548 | | | | 10,735 | | | | | | | | 178,114 | | | Income tax payable | | | 356 | | | | 496 | | | | 1,251 | | | | | | | | 2,103 | | | Current portion of obligation under finance leases | | | 112 | | | | 9 | | | | — | | | | | | | | 121 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total current liabilities | | | 74,684 | | | | 1,603,346 | | | | 63,045 | | | | | | | | 359,375 | | | Long-term liabilities | | | 702,917 | | | | 17 | | | | — | | | | (14,500 | ) | | | 688,434 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 777,601 | | | | 1,603,363 | | | | 63,045 | | | | | | | | 1,047,809 | | | | | | | | | | | | | | | | | | | | | | | |
Condensed consolidated balance sheet as of August 31, 2007F-84
| | | | | | | | | | | | | | | | City Telecom (H.K.) Limited | | Guarantor subsidiaries | | Non- guarantor subsidiary | | | Eliminating entries | | | Consolidated total | | | | HK$’000 | | HK$’000 | | HK$’000 | | | HK$’000 | | | HK$’000 | Current assets | | | | | | | | | | | | | | | | | | | Cash and bank balances | | 220,531 | | 303,227 | | 9,136 | | | | | | 532,894 | Pledged bank deposits | | 87,220 | | — | | — | | | | | | 87,220 | Trade receivables, net | | 12,105 | | 158,446 | | — | | | | | | 170,551 | Other receivables, deposits and prepayments | | 4,579 | | 56,290 | | 2,207 | | | (3,704 | ) | | 59,372 | Inventories | | 477 | | — | | — | | | | | | 477 | Investment securities | | — | | 3,779 | | — | | | | | | 3,779 | Deferred expenditure | | — | | 13,584 | | — | | | | | | 13,584 | | | | | | | | | | | | | | Total current assets | | 324,912 | | 535,326 | | 11,343 | | | | | | 867,877 | Fixed assets, net | | 100,201 | | 1,126,870 | | 10,152 | | | | | | 1,237,223 | Investments in subsidiaries (note) | | 1,495,935 | | 274,449 | | — | | | (1,770,384 | ) | | — | Investment securities | | 39,213 | | — | | — | | | | | | 39,213 | Other long-term assets | | — | | 33,645 | | — | | | (16,825 | ) | | 16,820 | | | | | | | | | | | | | | Total assets | | 1,960,261 | | 1,970,290 | | 21,495 | | | | | | 2,161,133 | | | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | | | | | | Amounts due to subsidiaries/ fellow subsidiaries | | 10,830 | | 1,490,567 | | (4,771 | ) | | (1,496,626 | ) | | — | Trade payables | | 37,477 | | 38,542 | | — | | | | | | 76,019 | Deposits received | | 7,876 | | 8,312 | | — | | | | | | 16,188 | Current portion of deferred service income | | 11,380 | | 56,532 | | — | | | (3,710 | ) | | 64,202 | Other payables and accrued charges | | 18,694 | | 119,642 | | 6,931 | | | | | | 145,267 | Income tax payable | | 356 | | 62 | | 1,063 | | | | | | 1,481 | Current portion of obligation under finance leases | | 104 | | 731 | | — | | | | | | 835 | | | | | | | | | | | | | | Total current liabilities | | 86,717 | | 1,714,388 | | 3,223 | | | | | | 303,992 | Long-term liabilities | | 970,833 | | 386 | | (70 | ) | | (17,890 | ) | | 953,259 | | | | | | | | | | | | | | Total liabilities | | 1,057,550 | | 1,714,774 | | 3,153 | | | | | | 1,257,251 | | | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
3132 | | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated balance sheet as of August 31, 2007 (continued)
| | | | | | | | | | | | | | | | City Telecom (H.K.) Limited | | Guarantor subsidiaries | | | Non- guarantor subsidiary | | Eliminating entries | | | Consolidated total | | | | HK$’000 | | HK$’000 | | | HK$’000 | | HK$’000 | | | HK$’000 | Commitments andcontingencies | | | | | | | | | | | | | | | | | | | Shareholders’ equity | | | | | | | | | | | | | - Ordinary shares, par value | | | | | | | | | | | | | HK$0.1 per share | | | | | | | | | | | | | - 2,000,000,000 shares authorized | | | | | | | | | | | | | - 616,503,404 shares issued and outstanding at August 31, 2007 | | 61,650 | | 15,485 | | | 8,131 | | (23,616 | ) | | 61,650 | Share premium | | 622,433 | | 470,836 | | | — | | (470,836 | ) | | 622,433 | Retained profits/(accumulated losses) | | 200,519 | | (230,666 | ) | | 9,033 | | 221,633 | | | 200,519 | Other reserves | | 18,109 | | (139 | ) | | 1,178 | | 132 | | | 19,280 | | | | | | | | | | | | | | Total shareholders’ equity | | 902,711 | | 255,516 | | | 18,342 | | | | | 903,882 | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | 1,960,261 | | 1,970,290 | | | 21,495 | | | | | 2,161,133 | | | | | | | | | | | | | |
| | | | Condensed consolidated balance sheet as of August 31, 2008(continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | Commitments and contingencies | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | — Ordinary shares, par value | | | | | | | | | | | | | | | | | | | | | | HK$0.1 per share | | | | | | | | | | | | | | | | | | | | | | — 2,000,000,000 shares authorized | | | | | | | | | | | | | | | | | | | | | | — 650,621,823 shares issued and outstanding at August 31, 2008 | | | 65,062 | | | | 15,485 | | | | 8,131 | | | | (23,616 | ) | | | 65,062 | | | Share premium | | | 670,717 | | | | 470,836 | | | | — | | | | (470,836 | ) | | | 670,717 | | | Retained profits/(accumulated losses) | | | 275,025 | | | | (118,907 | ) | | | 5,006 | | | | 113,901 | | | | 275,025 | | | Other reserves | | | 19,013 | | | | (237 | ) | | | 2,937 | | | | 90 | | | | 21,803 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | 1,029,817 | | | | 367,177 | | | | 16,074 | | | | | | | | 1,032,607 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | | 1,807,418 | | | | 1,970,540 | | | | 79,119 | | | | | | | | 2,080,416 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Note: | | The amounts of investment in subsidiaries at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting. |
F-85
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
31 | | | | 32 | | Supplemental guarantors consolidated financial information (continued) |
| | Condensed consolidated balance sheet as of August 31, 2007 |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | Current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and bank balances | | | 220,531 | | | | 303,227 | | | | 9,136 | | | | | | | | 532,894 | | | Pledged bank deposits | | | 87,220 | | | | — | | | | — | | | | | | | | 87,220 | | | Trade receivables, net | | | 12,105 | | | | 158,446 | | | | — | | | | | | | | 170,551 | | | Other receivables, deposits and prepayments | | | 4,579 | | | | 56,290 | | | | 2,207 | | | | (3,704 | ) | | | 59,372 | | | Inventories | | | 477 | | | | — | | | | — | | | | | | | | 477 | | | Investment securities | | | — | | | | 3,779 | | | | — | | | | | | | | 3,779 | | | Deferred expenditure | | | — | | | | 13,584 | | | | — | | | | | | | | 13,584 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total current assets | | | 324,912 | | | | 535,326 | | | | 11,343 | | | | | | | | 867,877 | | | Fixed assets, net | | | 100,201 | | | | 1,126,870 | | | | 10,152 | | | | | | | | 1,237,223 | | | Investments in subsidiaries (note) | | | 1,495,935 | | | | 274,449 | | | | — | | | | (1,770,384 | ) | | | — | | | Investment securities | | | 39,213 | | | | — | | | | — | | | | | | | | 39,213 | | | Other long-term assets | | | — | | | | 33,645 | | | | — | | | | (16,825 | ) | | | 16,820 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 1,960,261 | | | | 1,970,290 | | | | 21,495 | | | | | | | | 2,161,133 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts due to subsidiaries/ fellow subsidiaries | | | 10,830 | | | | 1,490,567 | | | | (4,771 | ) | | | (1,496,626 | ) | | | — | | | Trade payables | | | 37,477 | | | | 38,542 | | | | — | | | | | | | | 76,019 | | | Deposits received | | | 7,876 | | | | 8,312 | | | | — | | | | | | | | 16,188 | | | Current portion of deferred service income | | | 11,380 | | | | 56,532 | | | | — | | | | (3,710 | ) | | | 64,202 | | | Other payables and accrued charges | | | 18,694 | | | | 119,642 | | | | 6,931 | | | | | | | | 145,267 | | | Income tax payable | | | 356 | | | | 62 | | | | 1,063 | | | | | | | | 1,481 | | | Current portion of obligation under finance leases | | | 104 | | | | 731 | | | | — | | | | | | | | 835 | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total current liabilities | | | 86,717 | | | | 1,714,388 | | | | 3,223 | | | | | | | | 303,992 | | | Long-term liabilities | | | 970,833 | | | | 386 | | | | (70 | ) | | | (17,890 | ) | | | 953,259 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 1,057,550 | | | | 1,714,774 | | | | 3,153 | | | | | | | | 1,257,251 | | | | | | | | | | | | | | | | | | | | | | | |
Condensed consolidated balance sheet as of August 31, 2006F-86
| | | | | | | | | | | | | | | | City Telecom (H.K.) Limited | | Guarantor subsidiaries | | Non- guarantor subsidiary | | | Eliminating entries | | | Consolidated total | | | | HK$’000 | | HK$’000 | | HK$’000 | | | HK$’000 | | | HK$’000 | Current assets | | | | | | | | | | | | | | | | | | | Cash and bank balances | | 86,670 | | 31,349 | | 26,898 | | | | | | 144,917 | Term deposit | | 121,037 | | 65,000 | | 51,459 | | | | | | 237,496 | Pledged bank deposits | | 87,022 | | — | | — | | | | | | 87,022 | Trade receivables, net | | 12,506 | | 128,092 | | — | | | | | | 140,598 | Other receivables, deposits and prepayments | | 5,210 | | 73,785 | | 2,292 | | | (3,704 | ) | | 77,583 | Inventories | | 812 | | 44 | | — | | | | | | 856 | Deferred expenditure | | — | | 10,808 | | — | | | | | | 10,808 | Tax recoverable | | — | | 347 | | — | | | | | | 347 | | | | | | | | | | | | | | Total current assets | | 313,257 | | 309,425 | | 80,649 | | | | | | 699,627 | Fixed assets, net | | 115,014 | | 1,236,269 | | 15,951 | | | | | | 1,367,234 | Investments in subsidiaries (note) | | 1,502,480 | | 245,819 | | — | | | (1,748,299 | ) | | — | Investment securities | | 36,645 | | 3,629 | | — | | | | | | 40,274 | Other long-term assets | | — | | 37,609 | | — | | | (20,529 | ) | | 17,080 | | | | | | | | | | | | | | Total assets | | 1,967,396 | | 1,832,751 | | 96,600 | | | | | | 2,124,215 | | | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | | | | | | Amounts due to subsidiaries/ fellow subsidiaries | | 10,830 | | 1,428,297 | | 75,315 | | | (1,514,442 | ) | | — | Trade payables | | 59,143 | | 27,242 | | — | | | | | | 86,385 | Deposits received | | 8,283 | | 7,947 | | — | | | | | | 16,230 | Current portion of deferred service income | | 8,157 | | 29,282 | | — | | | (3,696 | ) | | 33,743 | Other payables and accrued charges | | 19,116 | | 117,734 | | 6,636 | | | | | | 143,486 | Income tax payable | | 908 | | 18 | | 1,038 | | | | | | 1,964 | Current portion of obligation under finance leases | | 71 | | 1,226 | | — | | | | | | 1,297 | | | | | | | | | | | | | | Total current liabilities | | 106,508 | | 1,611,746 | | 82,989 | | | | | | 283,105 | Long-term liabilities | | 969,891 | | 1,166 | | (56 | ) | | (21,545 | ) | | 949,456 | | | | | | | | | | | | | | Total liabilities | | 1,076,399 | | 1,612,912 | | 82,933 | | | | | | 1,232,561 | | | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
31 | | | | 32 | | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated balance sheet as of August 31, 2006 (continued)
| | | | | | | | | | | | | | | | City Telecom (H.K.) Limited | | Guarantor subsidiaries | | | Non- guarantor subsidiary | | Eliminating entries | | | Consolidated total | | | | HK$’000 | | HK$’000 | | | HK$’000 | | HK$’000 | | | HK$’000 | Commitments andcontingencies | | | | | | | | | | | | | | | | | | | Shareholders’ equity | | | | | | | | | | | | | - Ordinary shares, par value | | | | | | | | | | | | | HK$0.1 per share | | | | | | | | | | | | | - 2,000,000,000 shares authorised | | | | | | | | | | | | | - 614,175,404 shares issued and outstanding at August 31, 2006 | | 61,417 | | 15,485 | | | 8,131 | | (23,616 | ) | | 61,417 | Share premium | | 620,298 | | 470,836 | | | — | | (470,836 | ) | | 620,298 | Retained profits/(accumulated losses) | | 196,289 | | (266,477 | ) | | 5,217 | | 261,260 | | | 196,289 | Other reserves | | 12,993 | | (5 | ) | | 319 | | 343 | | | 13,650 | | | | | | | | | | | | | | Total shareholders’ equity | | 890,997 | | 219,839 | | | 13,667 | | | | | 891,654 | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | 1,967,396 | | 1,832,751 | | | 96,600 | | | | | 2,124,215 | | | | | | | | | | | | | |
| | | Condensed consolidated balance sheet as of August 31, 2007(continued) |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | Commitments and contingencies | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | — Ordinary shares, par value | | | | | | | | | | | | | | | | | | | | | | HK$0.1 per share | | | | | | | | | | | | | | | | | | | | | | — 2,000,000,000 shares authorized | | | | | | | | | | | | | | | | | | | | | | — 616,503,404 shares issued and outstanding at August 31, 2007 | | | 61,650 | | | | 15,485 | | | | 8,131 | | | | (23,616 | ) | | | 61,650 | | | Share premium | | | 622,433 | | | | 470,836 | | | | — | | | | (470,836 | ) | | | 622,433 | | | Retained profits/(accumulated losses) | | | 200,519 | | | | (230,666 | ) | | | 9,033 | | | | 221,633 | | | | 200,519 | | | Other reserves | | | 18,109 | | | | (139 | ) | | | 1,178 | | | | 132 | | | | 19,280 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | 902,711 | | | | 255,516 | | | | 18,342 | | | | | | | | 903,882 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | | 1,960,261 | | | | 1,970,290 | | | | 21,495 | | | | | | | | 2,161,133 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Note: | | The amounts of investment in subsidiaries at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting. |
F-87
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
31 | | | | 32 | | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated statement of operations for the year ended August 31, 2007
| | | | | | | | | | | | | | | | | | | City Telecom
(H.K.) Limited | | | Guarantor
subsidiaries | | | Non-
guarantor
subsidiary | | | Eliminating
entries | | | Consolidated
Total | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Revenue | | 124,017 | | | 1,186,356 | | | 108,692 | | | (277,795 | ) | | 1,141,270 | | Network costs | | (50,522 | ) | | (203,506 | ) | | — | | | 39,437 | | | (214,591 | ) | Operating expenses: | | | | | | | | | | | | | | | | - Salaries and related costs | | (30,475 | ) | | (209,065 | ) | | (77,594 | ) | | 96,032 | | | (221,102 | ) | - Sales and marketing expenses | | (12,601 | ) | | (362,975 | ) | | — | | | 171,903 | | | (203,673 | ) | - General and administrative expenses | | (43,149 | ) | | (344,162 | ) | | (26,050 | ) | | 10,601 | | | (402,760 | ) | - Provision for doubtful accounts | | (796 | ) | | (5,773 | ) | | — | | | | | | (6,569 | ) | | | | | | | | | | | | | | | | | Income/(loss) from operations | | (13,526 | ) | | 60,875 | | | 5,048 | | | | | | 92,575 | | Interest income | | 13,390 | | | 8,606 | | | 675 | | | | | | 22,671 | | Interest expense | | (87,474 | ) | | (68,161 | ) | | — | | | 68,131 | | | (87,504 | ) | Other income, net | | 50,031 | | | 59,200 | | | 43 | | | (106,125 | ) | | 3,149 | | Share of net losses from subsidiaries (note) | | 66,444 | | | — | | | — | | | (66,444 | ) | | — | | | | | | | | | | | | | | | | | | Income before taxation | | 28,865 | | | 60,520 | | | 5,766 | | | | | | 30,891 | | Income tax credit | | — | | | (75 | ) | | (1,951 | ) | | | | | (2,026 | ) | | | | | | | | | | | | | | | | | Net income | | 28,865 | | | 60,445 | | | 3,815 | | | | | | 28,865 | | | | | | | | | | | | | | | | | |
| | | Condensed consolidated statement of operations for the year ended August 31, 2008 |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | Total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Revenue | | | 116,130 | | | | 1,283,296 | | | | 135,374 | | | | (231,819 | ) | | | 1,302,981 | | | Network costs | | | (28,398 | ) | | | (184,851 | ) | | | — | | | | 34,882 | | | | (178,367 | ) | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | — Salaries and related costs | | | (35,057 | ) | | | (231,196 | ) | | | (102,067 | ) | | | 120,860 | | | | (247,460 | ) | | — Sales and marketing expenses | | | (5,743 | ) | | | (403,425 | ) | | | — | | | | 101,425 | | | | (307,743 | ) | | — General and administrative expenses | | | (45,797 | ) | | | (331,030 | ) | | | (28,414 | ) | | | 8,643 | | | | (396,598 | ) | | — Provision for doubtful accounts | | | (954 | ) | | | (13,339 | ) | | | — | | | | | | | | (14,293 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income from operations | | | 181 | | | | 119,455 | | | | 4,893 | | | | | | | | 158,520 | | | Interest income | | | 6,817 | | | | 7,518 | | | | 1,261 | | | | | | | | 15,596 | | | Interest expense | | | (71,702 | ) | | | (71,753 | ) | | | — | | | | 68,318 | | | | (75,137 | ) | | Other income, net | | | 86,677 | | | | 30,234 | | | | 75 | | | | (107,593 | ) | | | 9,393 | | | Share of net income from subsidiaries (note) | | | 108,154 | | | | — | | | | — | | | | (108,154 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before taxation | | | 130,127 | | | | 85,454 | | | | 6,229 | | | | | | | | 108,372 | | | Income tax (expense)/credit | | | (4,937 | ) | | | 26,306 | | | | (4,551 | ) | | | | | | | 16,818 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | 125,190 | | | | 111,760 | | | | 1,678 | | | | | | | | 125,190 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Note: | | The net (loss)/income amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses)/income of its subsidiaries using the equity method of accounting. |
F-88
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
31 | | | | 32 | | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated statement of operations for the year ended August 31, 2006
| | | | | | | | | | | | | | | | | | | City Telecom (H.K.) Limited | | | Guarantor
subsidiaries | | | Non-
guarantor
subsidiary | | | Eliminating
entries | | | Consolidated
total | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Revenue | | 174,113 | | | 1,110,256 | | | 116,355 | | | (265,848 | ) | | 1,134,876 | | Network costs | | (87,849 | ) | | (254,740 | ) | | — | | | 41,996 | | | (300,593 | ) | Operating expenses: | | | | | | | | | | | | | | | | - Salaries and related costs | | (44,254 | ) | | (233,105 | ) | | (81,887 | ) | | 102,525 | | | (256,721 | ) | - Sales and marketing expenses | | (20,567 | ) | | (336,985 | ) | | — | | | 152,600 | | | (204,952 | ) | - General and administrative expenses | | (56,366 | ) | | (366,635 | ) | | (30,353 | ) | | 12,682 | | | (440,672 | ) | - Provision for doubtful accounts | | (1,090 | ) | | (16,360 | ) | | — | | | | | | (17,450 | ) | | | | | | | | | | | | | | | | | (Loss)/income from operations | | (36,013 | ) | | (97,569 | ) | | 4,115 | | | | | | (85,512 | ) | Interest income | | 16,594 | | | 2,946 | | | 838 | | | | | | 20,378 | | Interest expense | | (88,584 | ) | | (60,454 | ) | | — | | | 60,401 | | | (88,637 | ) | Other income, net | | 67,672 | | | 39,201 | | | 2,245 | | | (104,653 | ) | | 4,465 | | Share of net losses from subsidiaries (note) | | (111,171 | ) | | — | | | — | | | 111,171 | | | — | | | | | | | | | | | | | | | | | | (Loss)/income before taxation | | (151,502 | ) | | (115,876 | ) | | 7,198 | | | | | | (149,306 | ) | Income tax expense/(credit) | | 9,440 | | | 11 | | | (2,207 | ) | | | | | 7,244 | | | | | | | | | | | | | | | | | | Net (loss)/income | | (142,062 | ) | | (115,865 | ) | | 4,991 | | | | | | (142,062 | ) | | | | | | | | | | | | | | | | |
| | | Condensed consolidated statement of operations for the year ended August 31, 2007 |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | Total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Revenue | | | 124,017 | | | | 1,186,356 | | | | 108,692 | | | | (277,795 | ) | | | 1,141,270 | | | Network costs | | | (50,522 | ) | | | (203,506 | ) | | | — | | | | 39,437 | | | | (214,591 | ) | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | — Salaries and related costs | | | (30,475 | ) | | | (209,065 | ) | | | (77,594 | ) | | | 96,032 | | | | (221,102 | ) | | — Sales and marketing expenses | | | (12,601 | ) | | | (362,975 | ) | | | — | | | | 171,903 | | | | (203,673 | ) | | — General and administrative expenses | | | (43,149 | ) | | | (344,162 | ) | | | (26,050 | ) | | | 10,601 | | | | (402,760 | ) | | — Provision for doubtful accounts | | | (796 | ) | | | (5,773 | ) | | | — | | | | | | | | (6,569 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income/(loss) from operations | | | (13,526 | ) | | | 60,875 | | | | 5,048 | | | | | | | | 92,575 | | | Interest income | | | 13,390 | | | | 8,606 | | | | 675 | | | | | | | | 22,671 | | | Interest expense | | | (87,474 | ) | | | (68,161 | ) | | | — | | | | 68,131 | | | | (87,504 | ) | | Other income, net | | | 50,031 | | | | 59,200 | | | | 43 | | | | (106,125 | ) | | | 3,149 | | | Share of net losses from subsidiaries (note) | | | 66,444 | | | | — | | | | — | | | | (66,444 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before taxation | | | 28,865 | | | | 60,520 | | | | 5,766 | | | | | | | | 30,891 | | | Income tax credit | | | — | | | | (75 | ) | | | (1,951 | ) | | | | | | | (2,026 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | 28,865 | | | | 60,445 | | | | 3,815 | | | | | | | | 28,865 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Note: | | The net (loss)/income amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses)/income of its subsidiaries using the equity method of accounting. |
F-89
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
31 | | | | 32 | | Supplemental guarantors consolidated financial information (continued) |
Condensed consolidated statement of operations for the year ended August 31, 2005
| | | | | | | | | | | | | | | | | | | City
Telecom
(H.K.)
Limited | | | Guarantor
subsidiaries | | | Non-
guarantor
subsidiary | | | Eliminating
entries | | | Consolidated
total | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Revenue | | 227,045 | | | 1,104,389 | | | 122,054 | | | (291,429 | ) | | 1,162,059 | | Network costs | | (111,836 | ) | | (271,203 | ) | | — | | | 43,637 | | | (339,402 | ) | Operating expenses: | | | | | | | | | | | | | | | | - Salaries and related costs | | (50,705 | ) | | (224,799 | ) | | (94,120 | ) | | 110,232 | | | (259,392 | ) | - Sales and marketing expenses | | (25,506 | ) | | (416,728 | ) | | — | | | 174,251 | | | (267,983 | ) | - General and administrative expenses | | (65,552 | ) | | (316,284 | ) | | (26,132 | ) | | 12,757 | | | (395,211 | ) | - Provision for doubtful accounts | | (1,814 | ) | | (33,631 | ) | | — | | | | | | (35,445 | ) | | | | | | | | | | | | | | | | | (Loss)/income from operations | | (28,368 | ) | | (158,256 | ) | | 1,802 | | | | | | (135,374 | ) | Interest income | | 13,061 | | | 403 | | | 114 | | | | | | 13,578 | | Interest expense | | (54,167 | ) | | (17,354 | ) | | — | | | 17,059 | | | (54,462 | ) | Other income, net | | 25,617 | | | 43,515 | | | 99 | | | (63,194 | ) | | 6,037 | | Share of net losses from subsidiaries (note) | | (128,156 | ) | | — | | | — | | | 128,156 | | | — | | | | | | | | | | | | | | | | | | (Loss)/income before taxation | | (172,013 | ) | | (131,692 | ) | | 2,015 | | | | | | (170,221 | ) | Income tax expense/(credit) | | 8,517 | | | (854 | ) | | (938 | ) | | | | | 6,725 | | | | | | | | | | | | | | | | | | Net (loss)/income | | (163,496 | ) | | (130,546 | ) | | 1,077 | | | | | | (163,496 | ) | | | | | | | | | | | | | | | | |
| | | Condensed consolidated statement of operations for the year ended August 31, 2006 |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Revenue | | | 174,113 | | | | 1,110,256 | | | | 116,355 | | | | (265,848 | ) | | | 1,134,876 | | | Network costs | | | (87,849 | ) | | | (254,740 | ) | | | — | | | | 41,996 | | | | (300,593 | ) | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | — Salaries and related costs | | | (44,254 | ) | | | (233,105 | ) | | | (81,887 | ) | | | 102,525 | | | | (256,721 | ) | | — Sales and marketing expenses | | | (20,567 | ) | | | (336,985 | ) | | | — | | | | 152,600 | | | | (204,952 | ) | | — General and administrative expenses | | | (56,366 | ) | | | (366,635 | ) | | | (30,353 | ) | | | 12,682 | | | | (440,672 | ) | | — Provision for doubtful accounts | | | (1,090 | ) | | | (16,360 | ) | | | — | | | | | | | | (17,450 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Loss)/income from operations | | | (36,013 | ) | | | (97,569 | ) | | | 4,115 | | | | | | | | (85,512 | ) | | Interest income | | | 16,594 | | | | 2,946 | | | | 838 | | | | | | | | 20,378 | | | Interest expense | | | (88,584 | ) | | | (60,454 | ) | | | — | | | | 60,401 | | | | (88,637 | ) | | Other income, net | | | 67,672 | | | | 39,201 | | | | 2,245 | | | | (104,653 | ) | | | 4,465 | | | Share of net losses from subsidiaries (note) | | | (111,171 | ) | | | — | | | | — | | | | 111,171 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Loss)/income before taxation | | | (151,502 | ) | | | (115,876 | ) | | | 7,198 | | | | | | | | (149,306 | ) | | Income tax expense/(credit) | | | 9,440 | | | | 11 | | | | (2,207 | ) | | | | | | | 7,244 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (loss)/income | | | (142,062 | ) | | | (115,865 | ) | | | 4,991 | | | | | | | | (142,062 | ) | | | | | | | | | | | | | | | | | | | | | | |
| | | | Note: | | The net loss amounts at City Telecom (H.K.) Limited level have included the share of net income/(losses) of its subsidiaries using the equity method of accounting. |
F-90
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
31 | | | | 32 | | Supplemental guarantors consolidated financial information (continued) |
| | Condensed consolidated statement of cash flows for the year ended August 31, 2008 |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Net cash provided by operating activities | | | 193,001 | | | | 125,504 | | | | 59,866 | | | | 158 | | | | 378,529 | | | Net cash generated from/ (used in) investing activities | | | 18,775 | | | | (164,222 | ) | | | (2,303 | ) | | | | | | | (147,750 | ) | | Net cash used in financing activities | | | (341,786 | ) | | | (730 | ) | | | — | | | | | | | | (342,516 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (decrease)/increase in cash and bank balances | | | (130,010 | ) | | | (39,448 | ) | | | 57,563 | | | | | | | | (111,737 | ) | | Cash and bank balances at beginning of year | | | 220,531 | | | | 303,227 | | | | 9,136 | | | | | | | | 532,894 | | | Effects of foreign exchange rates changes | | | (135 | ) | | | (393 | ) | | | 1,139 | | | | (158 | ) | | | 453 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and bank balances at end of year | | | 90,386 | | | | 263,386 | | | | 67,838 | | | | | | | | 421,610 | | | | | | | | | | | | | | | | | | | | | | | |
| | Condensed consolidated statement of cash flows for the year ended August 31, 2007 |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Net cash provided/(used in) by operating activities | | | 110,190 | | | | 342,627 | | | | (69,035 | ) | | | 217 | | | | 383,999 | | | Net cash generated from/ (used in) investing activities | | | 132,039 | | | | (69,197 | ) | | | 51,211 | | | | | | | | 114,053 | | | Net cash used in financing activities | | | (108,277 | ) | | | (1,227 | ) | | | — | | | | | | | | (109,504 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net increase/(decrease) in cash and bank balances | | | 133,952 | | | | 272,203 | | | | (17,824 | ) | | | | | | | 388,548 | | | Cash and bank balances at beginning of year | | | 86,670 | | | | 31,349 | | | | 26,898 | | | | | | | | 144,917 | | | Effects of foreign exchange rates changes | | | (91 | ) | | | (325 | ) | | | 62 | | | | (217 | ) | | | (571 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and bank balances at end of year | | | 220,531 | | | | 303,227 | | | | 9,136 | | | | | | | | 532,894 | | | | | | | | | | | | | | | | | | | | | | | |
Condensed consolidated statement of cash flows for the year ended August 31, 2007F-91
| | | | | | | | | | | | | | | | | | | City Telecom (H.K.) Limited | | | Guarantor
subsidiaries | | | Non-
guarantor
subsidiary | | | Eliminating
entries | | | Consolidated
total | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Net cash provided/(used in) by operating activities | | 110,190 | | | 342,627 | | | (69,035 | ) | | 217 | | | 383,999 | | Net cash generated from/ (used in) investing activities | | 132,039 | | | (69,197 | ) | | 51,211 | | | | | | 114,053 | | Net cash (used in)/provided by financing activities | | (108,277 | ) | | (1,227 | ) | | — | | | | | | (109,504 | ) | | | | | | | | | | | | | | | | | Net increase/(decrease) in cash and bank balances | | 133,952 | | | 272,203 | | | (17,824 | ) | | | | | 388,548 | | Cash and bank balances at beginning of year | | 86,670 | | | 31,349 | | | 26,898 | | | | | | 144,917 | | Effects of foreign exchange rates changes | | (91 | ) | | (325 | ) | | 62 | | | (217 | ) | | (571 | ) | | | | | | | | | | | | | | | | | Cash and bank balances at end of year | | 220,531 | | | 303,227 | | | 9,136 | | | | | | 532,894 | | | | | | | | | | | | | | | | | |
Condensed consolidated statement of cash flows for the year ended August 31, 2006
| | | | | | | | | | | | | | | | | | | City
Telecom
(H.K.)
Limited | | | Guarantor
subsidiaries | | | Non-
guarantor
subsidiary | | | Eliminating
entries | | | Consolidated
total | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | Net cash (used in)/provided by operating activities | | (278,174 | ) | | 403,086 | | | 58,994 | | | 245 | | | 184,151 | | Net cash used in investing activities | | (12,087 | ) | | (425,348 | ) | | (55,307 | ) | | | | | (492,742 | ) | Net cash provided by financing activities | | (85,238 | ) | | (1,248 | ) | | — | | | 54 | | | (86,432 | ) | | | | | | | | | | | | | | | | | Net (decrease)/increase in cash and bank balances | | (375,499 | ) | | (23,510 | ) | | 3,687 | | | | | | (395,023 | ) | Cash and bank balances at beginning of year | | 461,001 | | | 55,309 | | | 23,281 | | | | | | 539,591 | | Effects of foreign exchange rates changes | | 1,168 | | | (450 | ) | | (70 | ) | | (299 | ) | | 349 | | | | | | | | | | | | | | | | | | Cash and bank balances at end of year | | 86,670 | | | 31,349 | | | 26,898 | | | | | | 144,917 | | | | | | | | | | | | | | | | | |
City Telecom (H.K.) Limited
Consolidated financial statements for the year August 31, 20072008
31 | | | | 32 | | Supplemental guarantors consolidated financial information (continued) |
| | Condensed consolidated statement of cash flows for the year ended August 31, 2006 |
| | | | | | | | | | | | | | | | | | | | | | | | | City | | | | | | | | | | | | | | Telecom | | | | | | Non- | | | | | | | | (H.K.) | | Guarantor | | guarantor | | Eliminating | | Consolidated | | | | Limited | | subsidiaries | | subsidiary | | entries | | total | | | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | HK$’000 | | Net cash (used in)/provided by operating activities | | | (278,174 | ) | | | 403,086 | | | | 58,994 | | | | 245 | | | | 184,151 | | | Net cash used in investing activities | | | (12,087 | ) | | | (425,348 | ) | | | (55,307 | ) | | | | | | | (492,742 | ) | | Net cash provided by financing activities | | | (85,238 | ) | | | (1,248 | ) | | | — | | | | 54 | | | | (86,432 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net (decrease)/increase in cash and bank balances | | | (375,499 | ) | | | (23,510 | ) | | | 3,687 | | | | | | | | (395,023 | ) | | Cash and bank balances at beginning of year | | | 461,001 | | | | 55,309 | | | | 23,281 | | | | | | | | 539,591 | | | Effects of foreign exchange rates changes | | | 1,168 | | | | (450 | ) | | | (70 | ) | | | (299 | ) | | | 349 | | | | | | | | | | | | | | | | | | | | | | | | | Cash and bank balances at end of year | | | 86,670 | | | | 31,349 | | | | 26,898 | | | | | | | | 144,917 | | | | | | | | | | | | | | | | | | | | | | | |
Condensed consolidated statement of cash flows for the year ended August 31, 2005F-92
| | | | | | | | | | | | | | | | | | | City
Telecom
(H.K.)
Limited | | | Guarantor
subsidiaries | | | Non-
guarantor
subsidiary | | | Eliminating
entries | | | Consolidated
total | | | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | HK$’000 | | | | | | | | | | | | | | (Note (a)) | | | | | Net cash (used in)/provided by operating activities | | (75,334 | ) | | 129,263 | | | 23,094 | | | 360 | | | 77,383 | | Net cash used in investing activities | | (536,911 | ) | | (497,143 | ) | | (5,786 | ) | | 482,400 | | | (557,440 | ) | Net cash provided by financing activities | | 892,713 | | | 381,903 | | | — | | | (482,400 | ) | | 792,216 | | | | | | | | | | | | | | | | | | Net increase in cash and bank balances | | 280,468 | | | 14,023 | | | 17,308 | | | | | | 312,159 | | Cash and bank balances at beginning of year | | 180,473 | | | 41,691 | | | 6,183 | | | | | | 228,347 | | Effects of foreign exchange rates changes | | 60 | | | (405 | ) | | (210 | ) | | (360 | ) | | (915 | ) | | | | | | | | | | | | | | | | | Cash and bank balances at end of year | | 461,001 | | | 55,309 | | | 23,281 | | | | | | 539,591 | | | | | | | | | | | | | | | | | |
SIGNATURE
SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. | | | | | | CITY TELECOM (H.K.) LIMITED
| | | | | By: | | /s/ Lai Ni Quiaque | | | Name: | | Lai Ni Quiaque | | | Title: | | Chief Financial Officer | |
Date: January 28, 200816, 2009 |
|
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