CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE
13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
November 18, 2009
CITY TELECOM (H.K.) LIMITED
(Translation of registrant’s name into English)
Level 39
Tower I, Metroplaza
No. 223 Hing Fong Road
Kwai Chung
New Territories
Hong Kong
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
x
Form 20-F
¨
Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
¨
Yes
x
No
If
“Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2 (b): n/a
City Telecom (H.K.) Limited (the “Company”) is furnishing under cover of Form 6-K the
Company’s annual report and audited consolidated financial statements for the year ended August 31, 2009.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
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CITY TELECOM (H.K.) LIMITED
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By:
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S
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AI
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I
Q
UIAQUE
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Name:
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Lai Ni Quiaque
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Title:
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Executive Director,
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Chief Financial Officer and Company Secretary
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Dated: November 18, 2009
City
Telecom (H.K.) Limited
Stock Code – SEHK: 1137;
NASDAQ: CTEL
— : 1137 ;
: CTEL
ANNUAL REPORT 2009
Journey to the Fibre Age
Contents
Financial Highlights 01
Statistical Review 02
Major Milestones and Events
04
Chairman’s Statement 06
Management’s Discussion and Analysis 10
Products at a Glance 16
Retail Expansion 18
Partnership Expansion 19
Talent Engagement 20
Corporate Social
Responsibility 23
Profile of Directors and Senior Management 24
Financial Information
Corporate Governance Report 29
Report of the
Directors 37
Independent Auditor’s Report 46
Consolidated Income Statement 47
Balance Sheet 48
Consolidated Statement of
Changes in Equity 50
Consolidated Cash Flow Statement 51
Notes to the Financial Statements 52
Five-Year Financial Summary 99
Corporate
Information 100
Established in 1992, City Telecom (H.K.) Limited
(SEHK : 1137, NASDAQ : CTEL) is a fast growing and innovative provider of residential and corporate fixed telecommunications
network and international telecommunications services in Hong Kong. Its wholly-owned subsidiary, Hong Kong Broadband Network Limited, is a major fixed telecommunications network services operator, providing broadband Internet access up to 1Gbps,
telephony and IPTV services, with its self-built Metro Ethernet IP and fibre network. In addition to the operations in Hong Kong, the Group also has branch offices in Canada and Guangzhou, China.
OUR CORE
PURPOSES
1. TO EXPERIENCE THE EMOTION OF COMPETITION, WINNING, AND CRUSHING COMPETITORS.
2. TO EXPERIENCE THE JOY OF ADVANCING AND APPLYING TELECOMMUNICATIONS TECHNOLOGY FOR THE BENEFIT OF THE PUBLIC.
3. TO FULFILL THE DESIRE OF SELF-ACTUALIZATION AND “TO BECOME EVERYTHING THAT ONE IS CAPABLE OF BECOMING”.
Illustration of cover
The drawing on the cover of our annual report was inspired by two Chinese classics.
Along the River during the Qingming Festival (Qingmíng Shànghé Tú) . This is a famous series of panoramic paintings renowned as China’s “Mona
Lisa”, which reflects the prosperity of the Song Dynasty. We believe CTI Group is currently delivering similar prosperity to the people of Hong Kong with special focus on our latest developments including retail shop expansion, partnerships
with leading on-line game developers and service variety.
Journey to the West . This is one of the four great
classical novels of Chinese literature, featuring the main character, Sun Wukong, who is known in the West as the “Monkey King”, one of the most powerful and influential immortals in Chinese fable. Sun possesses the golden Jingu Bang,
which size he can change and multiply at will. Sun is well-known for superb speed, flexibility and creativity, which are representative of our Group’s competitive fibre and talent advantages.
FINANCIAL HIGHLIGHTS 01
WE HAVE NOW LAID A STRONG FOUNDATION FOR FUTURE GROWTH.
FINANCIAL HIGHLIGHTS
In thousands of Hong Kong dollars except for per share amounts and ratios
For the year ended
31 August 2009
31 August 2008
Turnover
1,478,239
1,302,981
Earnings before interest, tax, depreciation and amortization (EBITDA1)
508,058
377,964
EBITDA margin
34.4%
29.0%
Profit attributable to shareholders
212,829
125,190
Earnings per share
– Basic (HK cents)
32.4
19.7
– Diluted (HK cents)
31.8
19.0
Total dividend declared per share (HK cents)2
19.0
6.0
– Interim
3.0
4.0
– Final
16.0
2.0
Capital expenditures
286,734
211,684
Adjusted free cash flow3
171,066
106,739
As at 31 August 2009
As at 31 August 2008
Cash at bank and in hand
221,052
421,610
Total outstanding borrowings
163,318
683,618
Total equity attributable to equity shareholders
1,228,527
1,032,607
Shares in issue (in thousands)
664,180
650,622
Net asset per share (HK$)
1.85
1.59
Net gearing ratio (net debt/net assets)4
N/A
0.25
1 EBITDA for any period means, without duplication, net income/(loss) for such period, plus the following to the extent deducted in calculating such net income/(loss): interest expense / (income), income taxes, depreciation
and amortization expense (excluding any such non cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period not included in the
calculation).
2 For the dividend declared for the year ended 31 August 2008, a scrip or cash option was
provided.
3 Adjusted free cash flow means (EBITDA - capital expenditure - net finance costs).
4 As the Group was in net cash position as of 31 August 2009, no net gearing ratio is presented.
City Telecom (H.K.) Limited Annual Report 2009
02
STATISTICAL REVIEW
TURNOVER HK$’000
05 1,137,356
06 1,159,579
07 1,141,270
08 1,302,981
09 1,478,239
NUMBER OF REGISTERED BROADBAND
SUBSCRIPTIONS
05 229,000
06 220,000
07 247,000
08 316,000
09 391,000
NUMBER OF REGISTERED VOICE-OVER-IF SUBSCRIPTIONS
05 294,000
06 281,000
07 308,000
08 329,000
09 382,000
NUMBER OF REGISTERED IP-TV SUBSCRIPTIONS
05 109,000
06 116,000
07 128,000
08 156,000
09 170,000
City Telecom (H.K.) Limited Annual Report 2009
STATISTICAL REVIEW 03
NUMBER OF REGISTERED INTERNATIONAL TELECOMMUNICATIONS SUBSCRIPTIONS
05 2,054,000
06 2,202,000
07 2,331,000
08 2,336,000
09 2,383,000
INTERNATIONAL TELECOMMUNICATIONS
TRAFFIC VOLUME
Million Minutes
05 947.1
06 788.0
07 659.0
08 574.0
09 487.0
Fixed Telecommunications Network Services
TURNOVER BY PRINCIPAL ACTIVITIES IN 2009
83.3%
16.7%
International Telecommunications Services
City Telecom (H.K.) Limited Annual Report 2009
04
MAJOR MILESTONES AND EVENTS
2009 FEBRUARY
City Telecom launched Talent Upgrade Program: “Next Station: University”
JUNE
HKBN launched the first Online Broadband Service Registration Platform in Hong Kong
1992 MAY
City Telecom (H.K.) Limited (“City Telecom”) was incorporated in Hong Kong
1997 JANUARY
Launch of IDD300 Calling Service
MARCH
Set up INC (the Specialized IDD Network for Corporations) for corporate sector
AUGUST
City Telecom was listed on The Stock Exchange of Hong Kong Limited
1998 NOVEMBER
The first company to receive the license of ISR voice service in Hong Kong
1999 JANUARY
Launch of IDD1666 Direct Calling Service
NOVEMBER
ADR listing on the Nasdaq National Market of USA
2000 FEBRUARY
Hong Kong Broadband Network Limited
(“HKBN”), a subsidiary of City Telecom obtained the Local Wireless FTNS license
MARCH
Launch of Broadband Internet services by HKBN
2001 MAY
City Telecom awarded the Satellite-based Fixed Carrier license
2002 MARCH
City Telecom awarded the Cable-based External FTNS license
APRIL
HKBN officially launched local on-net VOIP telephony service
HKBN upgraded to become
a wireline-based FTNS licensee
JUNE
Launch of HKBN IDD0030 service
HKBN was confirmed by Cisco Systems to have successfully established the largest Metro Ethernet IP network in the world
City Telecom (H.K.) Limited Annual Report 2009
MAJOR
MILESTONES AND EVENTS 05
JULY
HKBN awarded 2009 HKMA Quality Award (Bronze)
2003 AUGUST
HKBN officially launched IP-TV service
2004 JULY
HKBN launched corporate data services
AUGUST
HKBN launched off-net residential VoIP service, namely, the Broadband Phone Service
NOVEMBER
HKBN announced the launch of “bb100”, Hong Kong’s first 100Mbps residential broadband service, and the release of its 1Gbps residential broadband service by 2Q 2005
2005 APRIL
HKBN officially launched “bb1000” Fibre-to-the-Home 1Gbps residential broadband service
SEPTEMBER
HKBN conferred as the winner of Global Entrepolis@Singapore Award 2005, which was
presented by the Asian Wall Street Journal in association with the Economic Development Board of Singapore
OCTOBER
HKBN launched 2b Broadband Phone Service, providing VoIP service to local and overseas
users via software version broadband phone
HKBN has become the first service provider in the world to achieve
the Cisco Powered Network Metro Ethernet QoS Certified status
2006 SEPTEMBER
City Telecom enhanced Work-Life Balance with the launch of eight employee-beneficial measures
SEPTEMBER
HKBN launched 12 New “Fibre Shops”
HKBN announced partnerships with the
leading Massively Multiplayer Online Role Playing Game (MMORPG) developers across the Greater China region
2007 MARCH
HKBN enhanced Digital TV Platform and launched new application “bbBOX”
JUNE
City Telecom received recognition for its Talent Management Award at the Hong Kong HR Awards 2007
JULY
HKBN was awarded “Integrated Support
Team” of the Year at the Asia Pacific Customer Service Consortium (APCSC) Customer Relationship Excellence Awards (CRE Awards)
SEPTEMBER
HKBN launched “Fibre-To-The-Home” (FTTH) residential broadband
services “FibreHome100”, “FibreHome200” and “FibreHome1000”
2008 JANUARY
HKBN launched the free WiFi Service at public rental housing estates
HKBN launched Dual Mode High Definition Terrestrial TV Receiver and IPTV Set-Top-Box
FEBRUARY
HKBN awarded contract for the provision of payphone service at the Hong Kong International Airport
City Telecom (H.K.) Limited Annual Report 2009
06
CHAIRMAN’S STATEMENT
OUR 100Mbps and 1000Mbps BROADBAND SERVICES WILL CONTINUE TO LEAD THE MARKET IN THE
NEXT FEW YEARS.
Dear Fellow Shareholders,
2009 marks the 10th anniversary of the incorporation of Hong Kong Broadband Network Limited (HKBN), our wholly owned
subsidiary for the Fixed Telecommunications Network Service business.
Proud of HKBN
We knew from day one it was going to be a difficult road ahead, but did not expect it was going to be this difficult. This
may explain why, despite the deregulation of fixed telecom markets around the world over the past decade, only a few alternative operators have successfully put pressure on the incumbents. Just as I shared with the audience at the Geneva ITU
conference in October 2009, we are so proud of HKBN that while customers switch from the incumbent over to us, they actually need to pay up to 100% more for our better value service. It is no longer about low prices, but about relative value in
terms of BETTER bandwidth and BETTER customer service.
Our Big, Hairy, Audacious Goal (BHAG)
In the past 10 years of competition in the fixed telecom market in Hong Kong, some operators have given up and left, some
have slowed down or even stopped their investments, but we remain persistent to our principle from day one, i.e. to build our network entirely end-to-end and with the latest technology without any reliance on the incumbent’s network capacity.
This is the only way to achieve our 10-year Big, Hairy, Audacious Goal (BHAG) of becoming the largest IP provider in Hong Kong by 2016. We are not aiming at providing better service than the incumbent, but also services that they cannot match with
the legacy network.
BETTER Bandwidth
With 1.62 million homes pass today and target to reach 2.0 million homes pass by end 2011, I believe we are the
only operator who can provide up to 1000Mbps broadband service on a mass scale on our current passive fibre infrastructure. Although some other operators also claim that they have extensive fibre coverage, their fibre is predominately laid only to
the equipment room, typically on the ground floor of a multi dwelling building. For the majority of cases, to provide 100Mbps or 1000Mbps fibre service, there are still case-by-case obstacles to overcome before they reach the home in a multi
dwelling building. Substantial engineering work is still required to provide 100Mbps and 1000Mbps fibre service on a mass scale basis.
I am very confident that our 100Mbps and 1000Mbps broadband services will continue to lead the market in the next few years. From our market intelligence, we know that our competitors are mainly using the second generation
of xDSL technology, e.g. ADSL2+ or VDSL2 to boost the speed of their legacy telephone lines to the upper limit. However, whereas our competitors are on a linear improvement path, we can upgrade our fibre based
City Telecom (H.K.) Limited Annual Report 2009
CHAIRMAN’S STATEMENT 07
services logarithmically from 100Mbps to 1000Mbps on our existing
passive fibre infrastructure which existing technology cannot accomplish using legacy telephone lines.
BETTER
Customer Service
Nowadays, customers are not just paying for our broadband Internet access but also for our
superior customer services. We are pioneering the mass implementation of “Priority Banking” account management for our telecommunications business. Our teams are structured on a vertical basis, from on-site technicians, salesman to
customer service officer, etc, in order to provide a “one-responsibility” contact point for our customers. Each team’s compensation pool is directly proportional to the revenue generated from their group of customers over their
service lifetime. This strategy ensures our frontline talents are directly responsive and responsible to customers’ inquiries and complaints, giving their best efforts in keeping our customers happy. So far, the strategy has been very
successful, with customers willing to spend more and maintaining the monthly churn rate of our broadband customers at well below 1.0% per month.
There is an old Chinese saying, “When life is good, prepare for the worst” (). So, what are the nightmares for us?
A. LTE (Long Term Evolution 4G) wireless data technology as a substitute for fibre;
B. The incumbent building a brand new fibre network replicating ours; and
C. Price war.
A. LTE (4G) wireless data technology as a substitute for fibre:
Personally, I am using three different High Speed Downlink Packet Access (HSDPA, 3.5G) mobile data services. While I enjoy the convenience of mobility that allows Internet access anywhere, at the same time I have to be very patient.
I think they are very effective training tools on developing patience, especially for those like me, whom have little of it.
Our discussions with wireless vendors and test results indicate that LTE (4G) enabled service might be commercially available as early as 2011 but unless there is a direct line of sight, close proximity and limited concurrent users,
it would still be very difficult for this technology to achieve performance that is competitive to fibre based 100Mbps. Furthermore, wireless’ inherit high level of latency is a major disadvantage in its ability to serve the vast market of
Internet gamers, where millisecond lags can be the difference between virtual life and death.
08
CHAIRMAN’S STATEMENT
B. The incumbent building a brand new fibre network replicating ours:
I noticed that the incumbent is upgrading its network by using second generation xDSL such as ADSL2+ and VDSL2. For them, I
think this is the “right” thing to do now, but not a long term solution to their fundamental legacy network problem. I am glad to see they are putting in resources on the xDSL upgrade path instead of a real Fibre-To-The-Home (FTTH)
network. The only fear I have is when they make a sudden revolutionary change and upgrade their infrastructure to FTTH, but even so, this process would take at least 3 years to catch up with our 10-year ahead start network infrastructure.
C. Price war:
The most possible and realistic threat would be “Price War” at mass scale. However, since there are significant competitive edges in technology, we have already proven in the
past 2 years that we could take more than 140,000 new subscribers from our competitors even in a hostile price environment with mature growth rates. This will eventually leave our competitors with no choice but to rage a price war at mass scale, as
their customer loss continues to a critical level.
Industry Outlook
Rather than waiting for our competitors to initiate, we have gone on the attack to lead the market into a price war, with our
Member-Get-Member (MGM) series of marketing programs, including our “AWESOME SPEED. FOR EVERYONE” campaign launched on 1 November 2009. Our MGM is planned with far-seeing intelligence and with the sole aim to increase our subscriber
numbers significantly by leveraging our exceptional word of mouth, i.e. our happy customers are our best sales channel. With these MGM programs, we expect our total revenue will grow only slightly, albeit at incrementally lower
Average Revenue Per User. It is our objective to collapse the market price to an affordable level which makes price
irrelevant, such that customers can focus on our unmatched superior service experience. When price becomes irrelevant, even if our competitors further reduce their prices, their legacy offerings will not be considered by customers.
We are prepared to continue this kind of aggressive marketing programs until we hit our 10-year BHAG, preferably accelerating
achievement before 2016. We do not see how our competitors could “copy” our marketing offers, as we believe we are the only operator to provide genuine 100Mbps broadband service on a mass scale as supported by our exceptional “word of
mouth” standing amongst our existing customers.
Dominating the Market
With the unique advantage of our unmatched 100Mbps broadband service, we can either harvest from our investment by making
more profits today with moderate increment in subscriber numbers and thereby giving time for the incumbent to react, or we can slam shut the window by assertively dominating the market. I picked the latter as our strategy for the next 3 years, as
this is the best path towards accelerating our BHAG achievement.
Our Passion and Mission
The aim of HKBN is not merely to defeat the incumbent, but to develop a genuine FTTH network for the people of Hong Kong,
maintaining Hong Kong’s value of freedom to access global information in the region for the coming decade.
The establishment of HKBN is not purely for commercial reasons. We have the mission and duty to elevate and maintain Hong Kong as the preeminent “Free Information Hub” in the region. Since I do not see our competitors doing
this effectively, and even though I do not want to (because I think we can make more money in the short term by selling our current assets), we have to continue this mission until we reached our BHAG.
City Telecom (H.K.) Limited Annual Report 2009
CHAIRMAN’S STATEMENT 09
Change of Dividend Payout Ratio
I am struggling to balance between the interests of my common shareholders and that of the public. However, in the long run,
I am confident that the benefits and rewards to shareholders will be substantial when HKBN achieves our BHAG.
I ask my fellow shareholders to be patient with us for a few years. Starting from this year, our management team has much more confidence because of:
A. Growing gap of our leading technology over other competitors;
B. Large existing subscription base of 943,000 service accounts with far majority being on 24 months service contracts leading to stable cash flow; and
C. Increasing take-up of low latency and high bandwidth demanding applications which drives growing acceptance of 100Mbps service among the general public.
Based on the improving cash flow stability from above and our net cash balance sheet, we proposed to increase our dividend
payout ratio, from ~30% of “adjusted free cash flow”, defined as (EBITDA-Capex-Net Interest) to 50%-75%. By reference to the closing stock price of HK$2.57/share as of 4 November 2009, the total dividend for FY2009 is HK19 cents per
ordinary share (FY2008: HK6 cents per ordinary share), and the dividend yield is 7.4%.
For FY2010 Guidance
For FY2010 guidance, we are aiming to deliver on 4 key metrics:
•accelerate our broadband subscription growth from 391,000 as of 31 August 2009 to exceed 500,000 subscriptions by
31 August 2010;
•mild revenue growth;
•flat core EBITDA; and
•capital expenditure of HK$300-350 million.
Wong Wai Kay, Ricky
Chairman
Hong Kong, 5 November 2009
10
MANAGEMENT’S DISCUSSION AND ANALYSIS
WE ACHIEVED AN ASSERTIVE STEP TOWARDS BIG, HAIRY, AUDACIOUS GOAL.
Financial Review
City Telecom achieved another assertive year of progress in FY2009. Our four key business parameters: 1) subscribers, 2) turnover, 3) EBITDA and 4) adjusted free cash flow, all reported
exceptional results. The Group is now in our third year of positive adjusted free cash flow and by year end had arrived at a net cash position aided by buying back and cancelling a portion of our 10-year senior notes at below par during the year.
For the year ended 31 August 2009, the Group’s turnover grew 13.4% year-on-year to HK$1,478.2
million, due primarily to assertive expansion in our Fixed Telecommunications Network Service (FTNS) business. FTNS revenues in FY2009 increased by 21.8% to HK$1,230.9 million and now represent 83.3% of the Group’s turnover. The increase in
FTNS turnover was driven by industry leading growth in subscriptions which more than offset a mild decline in average revenue per user. For our International Telecommunications Service (IDD) business, we continue to see a decline of 15.3%
year-on-year to HK$247.3 million as we phase down our exposure to this segment.
City Telecom (H.K.) Limited
Annual Report 2009
MANAGEMENT’S DISCUSSION AND ANALYSIS 11
The FTNS business is our core focus with
increasing significance to the Group’s financial performance given its high incremental margins and secured 24-month service contracts. We believe our comprehensive fibre presence and our superior service culture provides material competitive
advantage which delivered growth in an overall matured market and against recessionary economic headwind. As a result, our EBITDA grew by 34.4% to HK$508.1 million year-on-year, with EBITDA margin up 5.4% to 34.4%. The EBITDA is inclusive of a net
gain on extinguishment of 10-year senior notes of HK$31.4 million, arising from the below par buyback through tender offers in April 2009 and July 2009, totalling in a cancellation of US$68.0 million (approximately HK$527.0 million) 10-year senior
notes during the year ended 31 August 2009. Whilst our net interest expense has fallen by 15.5% to HK$50.3 million for this year, the full year impact of interest savings will only be realised next financial year.
Although the taxation expenses increased to HK$38.8 million primarily from non-cash deferred taxation of HK$37.1 million, the
underlying net profit attributable to our shareholders increased significantly to HK$212.8 million from HK$125.2 million in FY2008, an increment of 70.0% with basic earnings per share of HK32.4 cents (FY2008: HK19.7 cents).
Liquidity and Capital Resources
The Group strengthened our financial position during the year under review. As of 31 August 2009, the Group had cash at bank and in hand of HK$221.1 million (31 August 2008: HK$421.6
million) and outstanding borrowing of HK$163.3 million (31 August 2008: HK$683.6 million), which led the Group to a net cash position. Furthermore, for additional reserve financial flexibility, as of 31 August 2009, the Group had total
unutilised banking facility and revolving loan facility of HK$197.2 million. Our long term liability consists mainly of our outstanding 10-year senior notes which amounted to HK$162.6 million (31 August 2008: HK$683.2 million).
12
MANAGEMENT’S DISCUSSION AND ANALYSIS
The debt maturity profiles of the Group as at 31 August 2009
and 31 August 2008 were as follows:
2009 2008
HK$’000 HK$’000
Repayable within one year 202 121
Repayable in
the second year 197 129
Repayable in the third to fifth year 263 126
Repayable after the fifth year 162,656 683,242
Total 163,318 683,618
As at 31 August 2009,
all outstanding borrowings bear fixed interest rate and are denominated in United States dollars or Hong Kong dollars. As the Group was in net cash position as of 31 August 2009, no net gearing ratio is presented. For the year ended
31 August 2008, the Group’s net gearing ratio is 0.25 times which is calculated as below:
2008
HK$’000
Net Debt (note)
262,008
Net Assets
1,032,607
Net Gearing (times)
0.25
Note: Net debt is total long term debt and other liabilities and obligations under finance leases less cash at bank and in hand, but excluded pledged bank deposits.
MANAGEMENT’S DISCUSSION AND ANALYSIS 13
During the year under review, we accelerated our
network rollout by 140,000 homes pass to 1.62 million and remain committed to reaching 2.0 million homes pass by end 2011. As part of this expansion, we will cover higher income areas such as Taikoo Shing, Happy Valley and Mid Levels. Our
capital expenditure for this year was HK$286.7 million, higher than the same period last year of HK$211.7 million but well within our “capital expenditure below EBITDA policy”, and within our previous guidance of HK$650 million for
FY2009-FY2010. During the year, the Group has generated adjusted free cash flow of HK$171.1 million (FY2008: HK$106.7 million), which is defined as EBITDA minus capital expenditure minus net finance costs.
The on-going capital expenditure on our network development will be met by internally generated cash flow and unutilised
banking facility and revolving loan facility. Our capital expenditure outlook for FY2010–FY2011 is expected to be about HK$300-350 million per year in order to reach our network expansion target towards 2.0 million residential homes
pass by end 2011, representing approximately 90% of the total 2.3 million homes in Hong Kong. After achieving 2.0 million homes pass, we expect maintenance capital expenditure to stabilize at below 10% of turnover.
Charge on Group Assets
As at 31 August 2009, the Group had pledged deposits of HK$15.0 million for securing bank facilities of equivalent amount for issuing bank guarantees, letter of credits, hedging
arrangements, bank loan and overdraft facilities (31 August 2008: HK$87.3 million). As of 31 August 2009, the Group has utilised HK$7.8 million (31 August 2008: HK$29.9 million) banking facilities subjected to pledged deposits, primarily for
providing bank guarantees to suppliers and to utility vendors in lieu of payment of utility deposits.
Exchange
Rates
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 United States dollar has remained close to the current pegged rate of HKD7.80 = USD1.00 since 1983, management does not expect significant foreign exchange
gains or losses between the two currencies.
The Group is also exposed to a certain amount of foreign exchange
risk based on fluctuations between the Hong Kong dollars and the Renminbi arising from our operations in the PRC. In order to limit this foreign currency risk exposure, the Group maintains Renminbi cash balance that approximates two to three
months’ of operating Renminbi cash flow requirements.
Contingent Liabilities
As at 31 August 2009, the Group had total contingent liabilities in respect of bank guarantees provided to suppliers of
HK$2.5 million (31 August 2008: HK$24.6 million) and to utility vendors in lieu of payment of utility deposits of HK$5.3 million (31 August 2008: HK$5.3 million).
Save as disclosed above, there are no material contingent liabilities or off-balance-sheet obligations.
14
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS REVIEW
Fixed Telecommunications Network Services (FTNS)
Three years into our 10-year BHAG to become the largest IP service provider in Hong Kong by 2016, we are well on track. The
main progresses made in FY2009 were:
1. We grew our end-to-end fibre network by 140,000 to 1.62 million
homes pass as of 31 August 2009, which provide us with sizable coverage for subscription base expansion in coming years. For customers within our homes pass, we can typically offer symmetric 100Mbps service within 48 hours of service
application.
2. Our marketing campaign conveying the message of “HKBN’s fibre is available in all 18
Districts of Hong Kong” during the year strengthened our brand due to its unique
18 Mini Television
Commercials within one campaign approach.
3. Traditionally, we have relied on mobile kiosks and our Guangzhou
call centre as our primary distribution channels. During FY2009, we expanded our physical shops presence from 3 locations to 15 locations and also introduced our on-line registration platform.
By assertively taking market share, we grew our total broadband, voice and IP-TV subscription by 17.7% to 943,000
subscriptions as of 31 August 2009, despite a global recessionary environment.
On broadband, we achieved
a market leading growth of 75,000 additions to 391,000 subscriptions, with our 23.7% year-on-year growth rate far exceeding the industry growth rate of approximately 2.8% to 2.0 million subscriptions. During the six months to 31 August
2009, we added 41,000 subscriptions versus 3,000 additional broadband access lines by the incumbent for the six months to 30 June 2009. During the year, we made a forceful decision to focus on our subscription growth rather than ARPU growth
such that our new contract and contract renewal ARPU fell to HK$182 per month in August 2009, compared with HK$191 per month in August 2008.
On local telephony, despite a matured and gradually declining overall market, we secured industry leading growth of 53,000 subscriptions to 382,000 subscriptions as of 31 August 2009
by taking market share.
City Telecom (H.K.) Limited Annual Report 2009
MANAGEMENT’S DISCUSSION AND ANALYSIS 15
On IP-TV, we enhanced and refined our channel
portfolio and now offer over 80 channels. During the year ended 31 August 2009, we have added Nat Geo Challenge – the first interactive channel by National Geographic, Animax Gokujou Taiketsu by Animax, Sony Entertainment Television, Hunan
TV World Channel and a high definition channel-LUXE TV to our suite of channels. Our expanded channel offerings have enabled us to expand our subscription base by 14,000 to 170,000 subscriptions as of 31 August 2009. While our IP-TV is
positioned as ancillary service to our broadband and local telephony services, we will continue to review and enrich our TV channels under prudent costs management.
International Telecom Services (IDD)
IDD service
revenue, which contributed only 16.7% of the Group’s turnover, showed a decline as a result of intensive competition from traditional IDD service and other Voice-Over-IP (VoIP) calling options. Our IDD traffic volume fell by 15.2% from
574 million minutes in FY2008 to 487 million minutes in FY2009. On IDD service, our strategy is to focus on cash flow and profitability rather than market share.
PROSPECTS
The encouraging results of FY2009
reflected the continuing growth of our FTNS business. After 10 years of heavy investing, we have now laid a strong foundation for future sustainable growth.
Our peak capital expenditure spending was completed three to five years ago, mainly funded by our 10-year senior notes of US$125 million issued in January 2005. We are now in the final
stage of our long term homes pass target of 2.0 million by end 2011. Our EBITDA margin expansion is due to the increased
contribution from high incremental margin FTNS business, and the improving mix from higher cost acquisition to lower cost retention. We are now harvesting sufficient positive free cash flow to pay for sustainable future growth and to
pay for dividends.
DIVIDEND
The increase in our adjusted free cash flow payout from around 30% in FY2008 to 75% in FY2009 reflects the growing portion of our business with 24-month service contracts, controllable
capital expenditure and net cash balance sheet. As such, the Board is recommending a final dividend of HK16 cents per ordinary share (FY2008: HK2 cents per ordinary share) and this will bring the total dividend in respect of FY2009 to HK19 cents per
ordinary share (FY2008: HK6 cents per ordinary share), an increase of 216.7% over FY2008. Going forward, our dividend payout ratio will maintain in the range of 50%-75% of our adjusted free cash flow.
EMPLOYEE REMUNERATION
Including the directors of the Group, as of 31 August 2009, the Group had 3,173 permanent full-time employees versus 3,051 as of 31 August 2008. The total employee related cost
was HK$546.6 million in FY2009 versus HK$471.8 million in FY2008 which was mainly due to ramping up our resources for network expansion and business growth.
The Group provides remuneration package consisting of basic salary, bonus and other benefits. Bonus payments are discretionary and dependent on both the Group’s performance as well as
individual and team performances. The Group also provides comprehensive medical insurance coverage, competitive retirement benefits schemes, talent training programs and operates share option schemes.
City Telecom (H.K.) Limited Annual Report 2009
16
PRODUCTS
AT A GLANCE
OUR COMPANY HAS INVESTED LOTS OF EFFORTS IN PROVIDING CUSTOMERS WITH DIVERSIFIED SERVICES.
BROADBAND SERVICE
With our fibre network, users
can experience 25Mbps, 50Mbps, 100Mbps, 200Mbps and 1000Mbps broadband services with symmetric upload and download speeds.
bb25 Mbps bb50 Mbps bb100 Mbps bb200 Mbps bb1000 Mbps
bbMAX
Maximize The Power Of bb
bbMAX provides comprehensive value-added services to our users, including:
bbWI-FI bbWATCH bbDRIVE
“bbWI-FI” – We have hotspots all over Hong
Kong, which allow users to go online easily with their electronic devices.
“bbWATCH” – Allow
users to enjoy dedicated splendid TV programmes provided by HKBN’s bbTV through their personal computer.
“bbDRIVE” – Provide online virtual storage up to 10GB, user-friendly interface and limitless volume file transfer; Users can also back-up their important documents/files safely with bbDrive.
City Telecom (H.K.) Limited Annual Report 2009
PRODUCTS AT A GLANCE 17
bbGUARD
bbMAINT
getFAXEASY
FAX
“bbGUARD” – Filter away problematic and spam virus emails at the server before reaching your email in-box.
“bbMAINT” – Provide one stop solution to our users in order to help them solve their
non-network technical problems.
“getFAXEASY” – A service for receipt of fax via a designated
email to your personal computer. We will also provide user a “Fax to Email” personal fax number in order to enhance user privacy.
IP TV SERVICE
bbTV HK BROADBAND
bbTV service now delivers over 80 TV channels, mainly in Chinese language, including 24-hour news channel, movies, animation,
Chinese opera, financial news, international news, and entertainment as well as interactive channels, such as stock quote, ringtone download & interactive quiz.
TELEPHONY SERVICE
HOMETEL
HKBN has been providing good quality of HOMETEL service to Hong Kong people since 2002. We also provide 14 different
value-added services to our users.
2b 2ND GENERATION BROADBAND PHONE
2b
2b 2ND GENERATION BROADBAND PHONE is a new telephone service and its reliability is as good as traditional fixed line telephone service. 2b enables you to make and receive phone calls from Hong Kong (either home telephones, office
telephone or mobile phones) through the Internet wherever you are in Hong Kong or overseas.
IDD
Our international direct calling services, IDD1666 & IDD0030, ensure good quality and instant connection to
overseas.
City Telecom (H.K.) Limited Annual Report 2009
18
RETAIL EXPANSION
Despite the grim economic outlook, HKBN grew its retail presence from 3 to 15 “Fibre
Shops” across Hong Kong. We have invested more than HK$7 million and recruited 40 new talents. This allows non-HKBN customers to experience our service firsthand at these easily accessible “experience zones” and to enlarge the overall
HKBN engagement among Hong Kong Internet users.
City Telecom (H.K.) Limited Annual Report 2009
PARTNERSHIP EXPANSION 19
To transport our real world fibre advantage into the virtual space,
we partnered with 8 leading Massively Multiplayer Online Role Playing Game developers in the Greater China Region, forging a powerhouse in Internet-based gaming experience and establishing HKBN as the Best Choice of Internet Service Provider for
gamers.
City Telecom (H.K.) Limited Annual Report 2009
20
TALENT ENGAGEMENT
Our Company, unlike most ordinary companies that manage according to an annual operating
plan, aims at achieving our 10-year BHAG. With a 10-year runway, we have much more scope in investing and developing our talents, with enough runway to afford 2 to 3 years to gain speed before taking off. For example, in 2009 we enjoyed the benefits
of our early batch of 5 senior executives who graduated this year with eMBAs from The Chinese University of Hong Kong and Kellogg-HKUST. Our fibre advantage may be replicated with financial resources and effort, but our talent culture is much more
difficult to replicate.
• “Customer-In” rather than “Company-Out” Management
Structure
While most companies have management structures optimized for efficiency, we optimized our
management structure to benefit our customers. Traditionally, companies are structured on a horizontal basis by functional specialty, i.e. with reporting lines such as network development, customer service, sales, etc, as per below.
“Company-Out” Horizontal Management Structure
TRADITIONAL HORIZONTAL MODEL IS HOSTILE TO CUSTOMER EXPERIENCE
Customers Experience
Director of Customer Services
Director of Sales
Director of Network Maintenance
Director of Network Development
Customers
however, interact on a vertical basis across many horizontal functional layers. As such, there is often a lack of accountability under a horizontal structure. For example, a sales complaint often ends up with customer service, which does not feel
responsible for the problem. Further worsening the problem is that key performance indicators are often in direct conflict with positive customer experience, i.e. reducing the mean conversation time on a customer service call is unlikely to result
in a one-call solution to a customer’s problems.
At CTI Group, we evolved into a “Customer-In”
vertical management structure 2 years ago dividing Hong Kong into 5 distinct districts, each with a “Mini-CEO” directly responsible for every customer’s life-time relationship, as per figure below. We offer high customer intimacy as
each Mini-CEO is responsible for only about 500,000 addressable households. Among our 5 Mini-CEOs, we benchmark internally to crush competition externally. Every month, we improve by sharing the best practices and discarding the bad ones. The result
is that in the past 2 years, our residential broadband service secured leading growth in the industry, charged a price premium to our competitors, and kept our customer churn rate below 1% per month.
“Customer-In” Vertical Management Structure
NEW VERTICAL MODEL OPTIMIZED FOR CUSTOMER ENGAGEMENT
Customers Experience
HONGKONG ISLAND
KOWLOON EAST
KOWLOON WEST
NEW TERRITORIES EAST
NEW TERRITORIES WEST
City Telecom (H.K.) Limited Annual Report 2009
TALENT
ENGAGEMENT 21
WE EVOLVED INTO A “CUSTOMER-IN” VERTICAL MANAGEMENT STRUCTURE BY DIVIDING HONG KONG
INTO 5 DISTINCT DISTRICTS WITH 5 “MINI-CEOS”.
NEW TERRITORIES WEST
Mini-CEO: Annie Chan
KOWLOON WEST
Mini-CEO: Mikron Ng
HONG KONG ISLAND
Mini-CEO: Ben Hui
NEW TERRITORIES EAST
Mini-CEO: Kennis Tsang
KOWLOON EAST
Mini-CEO: Elinor Shiu
• CXO of the Future – Developing our CEO, CFO, CTO in 15-20 years’ time
Our “CXO of the Future” Management Trainee Program is designed to attract the very best fresh graduates from
throughout the world and groom them to be our future CEO, CFO, CTO, etc, in 15-20 years’ time. During the 18-month immersion program, we require our “CXO of the Future” Management Trainees to pass CFA Level 1, complete a 21km
“marathon” and read 36 management books. In return, we offer them full exposure of our complete business process, personal mentorship by a management committee executive and one-month shadowing with our CEO as executive Personal Assistant.
During 2009, we received 400 applications for this position and employed only 3.
Poster of “CXO of
Future” Management Trainee Program, 2009
City Telecom (H.K.) Limited Annual Report 2009
22
TALENT ENGAGEMENT
• “Talent Infinity” Program
“Talent-infinity” means unleashing the potential of our management talents and groom them to become multi-skilled
business entrepreneurs. Since 2006, we partnered with 15 talents with accumulative amount of more than $2.7 million invested. Moving forward, we will continue to raise the standard of our executives and proactively partner with our talents to
achieve these higher standards.
• “PowerBar” Program
On a selective basis, we transfer our talents to other positions allowing them to gain wider experience. Talents are expected
to adapt to the new situation and deal with new business challenges, in turn enriching their abilities and bringing values to the Company.
• “Life • Program • Exploration” Program
This pioneer program is tailor-made for talents, helping them pursue their own dreams or seek professional advice in achieving self-actualization. During the year, 250 talents participated in the program, which included training
workshops. A total of 113 initiated individual conversation with the psychological counselling consultant.
City Telecom (H.K.) Limited Annual Report 2009
CORPORATE SOCIAL RESPONSIBILITY 23
OUR COMPANY BELIEVES ONLY THROUGH LOVE, CONCERN AND DIRECT
ACTIONS CAN WE BUILD A HARMONIOUS SOCIETY. WE DELIVER THE GREATEST WARMTH TO THE DISADVANTAGED THROUGH DIRECT ACTIONS.
Working with Crossroads Foundation, we launched our “Gift of Sight” initiative targeting to collect 10,000 old spectacles via our talents and customers for the underprivileged in Mainland China and other developing
countries.
HKBN partnered with Hong Kong Children & Youth Services in
September 2009 and collected about 100 boxes of mooncakes from talents for distribution to new immigrants and elderly living
in Kwai Chung.
Our Volunteers Team, established in 2007, regularly organized various services for different
targets in the community. Our talents were also involved in “Cleaning for the Elderly” service during Chinese New Year.
Our Volunteers Team always supported services organized by non-government organizations, and talents participated in a party for the elderly on Senior Citizen Day.
24
PROFILE OF DIRECTORS AND SENIOR MANAGEMENT
EXECUTIVE DIRECTORS
Mr. WONG Wai Kay, Ricky
Chairman
Mr. CHEUNG Chi Kin, Paul
Vice Chairman
Mr. YEUNG Chu Kwong, William
Chief Executive
Officer
Executive Directors
Mr. WONG Wai Kay, Ricky, aged 47, is the co-founder and Chairman of the Group. He is responsible for our overall strategic planning and management. Mr. Wong has over 20 years’
experience in the telecommunications and computer industries. He had worked at a major US-listed computer company as a marketing representative and was responsible for marketing and distribution of computer products in Hong Kong from 1985 to 1989.
He was also a co-founder and director of a company principally engaged in import and distribution of computer systems in Canada prior to co-founding of the Group. Mr. Wong holds a Bachelor’s Degree in Science and a Master of Business
Administration Degree (Executive MBA Programme) from The Chinese University of Hong Kong. He is a first cousin of Mr. Cheung Chi Kin, Paul, the Vice Chairman of the Group. Currently, Mr. Wong is a member of Zhejiang Committee, Chinese People’s
Political Consultative Conference, an independent non-executive director of Bossini International Holdings Limited, a member of the Board of Trustees, United College, The Chinese University of Hong Kong and a member of the executive committee of the
Digital Solidarity Fund of Hong Kong Council of Social Service.
Mr. CHEUNG Chi Kin, Paul, aged 52, is the
co-founder and Vice Chairman of the Group. Mr. Cheung is responsible for overall strategic planning and management of the Group. Prior to that, Mr. Cheung was appointed as the Chief Executive Officer and was responsible for our day-to-day operations
and technological research, development and support activities. Mr. Cheung has more than 28 years’ experience in the telecommunications and computer industries. He had worked in companies engaged in application software development and computer
consultancy prior to co-founding of the Group. Mr. Cheung graduated with a Diploma of Advanced Programming and System Concepts Design from Herzing Institute, Canada. Mr. Cheung is a first cousin of Mr. Wong Wai Kay, Ricky, the
Chairman of the Group.
Mr. YEUNG Chu Kwong, William, aged 48, was appointed as the Executive Director and
Chief Executive Officer of the Group in November 2008 with the responsibilities for developing corporate strategies and overseeing the operations of the entire Group. Before that, Mr. Yeung joined the Group as Chief Operating Officer in October
2005. He was in charge of our Customer Engagement Department overseeing customer relationship management and was also in charge of our Network Development Department. Mr. Yeung has more than 18 years’ experience in the telecommunications
industry. Prior to joining the Group, Mr. Yeung was the Director of Customers Division in Smartone-Vodafone, the General Manager of Personal Communications and Retail Division in Tricom Telecom Limited, and was also an Inspector of Police in the
Hong Kong Police Force. Mr. Yeung holds a Bachelor of Arts Degree from Hong Kong Baptist University, a Master of Business Administration
City Telecom (H.K.) Limited Annual Report 2009
PROFILE
OF DIRECTORS AND SENIOR MANAGEMENT 25
EXECUTIVE DIRECTORS
NON-EXECUTIVE DIRECTOR
Mr. LAI Ni Quiaque
Chief Financial Officer,
Company Secretary & Head of Talent Engagement
Dr. CHENG Mo Chi, Moses
Degree from University of Strathclyde, UK and a Master of Science Degree in Electronic Commerce and Internet Computing from
The University of Hong Kong. He is also a graduate of the Senior Executive Program of the Columbia University Graduate School of Business in New York.
Mr. LAI Ni Quiaque, aged 39, is Chief Financial Officer, Company Secretary and Head of Talent Engagement. Mr. Lai joined the Group in May 2004. Mr. Lai has extensive experience in
telecommunications industry, research and finance, being highly rated in this field. Prior to joining the Group, Mr. Lai was a Director and Head of Asia Telecom Research for Credit Suisse and was involved in global fund raisings for a wide range of
Asian Telecom carriers such as China Mobile, China Telecom, China Unicom, China Netcom, SK Telecom, PCCW, Telekom Malaysia, etc. Before that, Mr. Lai held positions with Hongkong Telecom and Kleinwort Benson Securities (Asia). Mr. Lai holds a
Bachelor of Commerce degree from the University of Western Australia and an Executive Master of Business Administration Degree from Kellogg-HKUST. Mr. Lai is a Fellow member of HKICPA and CPA Australia and is a Member of the Hong Kong Institute of
Directors. Mr. Lai has also been appointed as a member of the Remuneration Committee of the Company.
Non-executive Director
Dr. Cheng Mo Chi, Moses, aged 59, was appointed as an Independent
Non-executive Director of the Group since 17 June 1997 and has been re-designated as a Non-executive Director of the Group with effect from 30 September 2004. Dr. Cheng has also been appointed as a member of the Remuneration Committee of the
Company. Dr. Cheng is a practising solicitor and the senior partner of Messrs. P.C. Woo & Co.. Dr. Cheng was, a member of the Legislative Council of Hong Kong. He is the Founder Chairman of the Hong Kong Institute of Directors of which he is now
the Honorary President and Chairman Emeritus. Dr. Cheng currently holds directorships in K. Wah International Holdings Limited, China COSCO Holdings Company Limited, China Mobile Limited, China Resources Enterprise, Limited, Towngas China Company
Limited, Hong Kong Exchanges and Clearing Limited, Kader Holdings Company Limited, Liu Chong Hing Investment Limited, Guangdong Investment Limited and Tian An China Investments Company Limited, all being public listed companies in Hong Kong. His
other directorships in public listed companies in the last 3 years include Beijing Capital International Airport Company Limited, Galaxy Entertainment Group Limited and Shui On Construction and Materials Limited, all being public listed companies in
Hong Kong. He is also an independent non-executive director of ARA Assets Management Limited, a company whose shares are listed on Singapore Exchange Limited, and an independent director of ARA Assets Management (Singapore) Limited, which manages
Fortune Real Estate Investment Trust, a real estate investment trust listed on Singapore Exchange Limited.
City Telecom (H.K.) Limited Annual Report 2009
26
PROFILE OF DIRECTORS AND SENIOR MANAGEMENT
INDEPENDENT NON-EXECUTIVE DIRECTORS
Mr. LEE Hon Ying, John
Dr. CHAN Kin Man
Mr. PEH Jefferson Tun Lu
Independent Non-executive Directors
Mr. LEE Hon Ying, John, aged 63, is the managing director of Cyber Networks Consultants Company in Hong Kong. He was the
Regional Director, Asia Pacific of Northrop Grumman-Canada, Ltd. He was previously the director of network services of Digital Equipment (HK) Limited and prior to that, worked for Cable & Wireless HKT and Hong Kong Telecom. He is a chartered
engineer and a member of each of Institution of Engineering and Technology, the United Kingdom, and the Hong Kong Institution of Engineers and the Hong Kong Computer Society. He received a Master’s Degree in Information System from The Hong
Kong Polytechnic University in 1992. In addition, he is the Territory Vice-president of the Society of St. Vincent de Paul of Asia and Oceania, which is an international charity body. He is the Commission member of Catholic Diocese of Hong Kong
Diocesan for Hospital Pastoral Care. Mr. Lee has been a Director of the Group since June 1997. Mr. Lee is also the chairman of the Audit Committee and Remuneration Committee of the Company.
Dr. CHAN Kin Man, aged 50, is Director of Centre for Civil Society Studies and Associate Professor of the Department of
Sociology of The Chinese University of Hong Kong. He received a Bachelor of Social Science Degree from The Chinese University of Hong Kong in 1983 and a Doctor of Philosophy Degree from Yale University in the U.S. in 1995. Dr. Chan has been a
Director of the Group since June 1997. Dr. Chan has also been appointed as a member of the Audit Committee and Remuneration Committee of the Company.
Mr. PEH Jefferson Tun Lu, aged 50, is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a Certified Practicing Accountant of CPA Australia. Mr.
Peh holds a Master Degree in Business from the University of Technology, Sydney. He has over 27 years of experience in finance, accounting and management from listed and private companies in Hong Kong and Australia. Mr. Peh has been a Director of
the Group since September 2004. Mr. Peh has also been appointed as a member of the Audit Committee and Remuneration Committee of the Company.
City Telecom (H.K.) Limited Annual Report 2009
PROFILE
OF DIRECTORS AND SENIOR MANAGEMENT 27
SENIOR MANAGEMENT
Mr. CHONG Kin Chun, John
Managing Director of Corporate Division
Mr. LO
Sui Lun
Director of Corporate Affairs Department
Dr. TAM Ming Chit
Chief Technology Officer
Ms. TO Wai Bing
Managing Director of Business Development
Senior Management
Mr. CHONG Kin Chun, John, aged 47, is the Managing Director of the Corporate Division of the Group. He is responsible for sales, servicing and network expansion development of the
Group’s international telecommunications services and fixed telecommunications network services for business and corporate customers. Mr. Chong joined the Group in February 1996 and holds a Bachelor’s Degree in Arts from The University of
Hong Kong. Mr. Chong worked as a general manager overseeing product management and the sales force of a listed telecommunications products company in Hong Kong from 1987 to 1996.
Mr. LO Sui Lun, aged 45, is the Director of Corporate Affairs Department of the Group. He is primarily responsible for
regulatory and carrier relations matters of the Group. In addition, Mr. Lo is also responsible for overseeing the legal and company secretarial functions of the Group. Before taking up his current position, Mr. Lo was in charge of regulatory,
carrier business, international business, network operation and network development for Hong Kong Broadband Network Limited, the wholly-owned subsidiary of the Company. Mr. Lo joined the Group in September 1998. Prior to that, Mr. Lo worked for PCCW
(formerly known as “Hong Kong Telecom”) for 9 years, gaining experience in network planning and undersea cable investment. Mr. Lo holds a Bachelor’s Degree in Sciences in Electronics from The Chinese University of Hong Kong and a
Master’s Degree in Business Administration from the University of Strathclyde, U.K.
Dr. TAM Ming Chit,
aged 43, is Chief Technology Officer of the Group. He is responsible for the Group’s network, information system development and operations including broadband networking, IPTV, wireless applications, as well as VoIP networks. Prior to joining
the Group in 2008, Dr. Tam held various technical positions in various institutions in Hong Kong and overseas, such as Alcatel-Lucent, Citibank and SRA. He has over 16 years of operational experience in the information technologies and telecom
industry. Dr. Tam holds a Bachelor of Science (Hons) in Computer Science from Imperial College, University of London, U.K. and a Doctor of Philosophy in Computer Science from the University of Pennsylvania, U.S.A.
Ms. TO Wai Bing, aged 47, is the Managing Director of Business Development of the Group. Ms. To is also in charge of
International Business Department, Carrier Business Department and Pay TV Department. She is responsible for the control of cost of services, sales of carrier business, development of Pay TV business, explore and secure business partnerships to
strengthen the Group’s business operations and development. Before joining the Group, Ms. To had worked in the Hong Kong Telecom Group for 16 years after graduating from The Hong Kong Polytechnic University with a Diploma in Electronic
Engineering and subsequently a Higher Certificate in Electronic Engineering. Ms. To rejoined the Group in May 2007 after her previous service with the Group from September 1998 to July 2006.
City Telecom (H.K.) Limited Annual Report 2009
Financial Information
we are on the right track of achieving the big, hairy, audacious goal
even though the road ahead is tough.
Financial Information
29 Corporate Governance Report
37 Report of the Directors
46 Independent
Auditor’s Report
47 Consolidated Income Statement
48 Balance Sheet
50 Consolidated Statement of Changes in Equity
51
Consolidated Cash Flow Statement
52 Notes to the Financial Statements
99 Five-Year Financial Summary
100 Corporate Information
CORPORATE GOVERNANCE REPORT 29
The Board of Directors (the “Board”) of the Company
is pleased to present the Corporate Governance Report of the Company for the year ended 31 August 2009.
COMMITMENT TO CORPORATE GOVERNANCE
The Board recognises the importance of corporate governance
and have made continued efforts to enhance its management structures and internal control procedures.
The
Company has applied the principles in and complied with the code provisions of the Code on Corporate Governance Practices (the “Code”) set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong
Kong Limited (the “Listing Rules”) throughout the year ended 31 August 2009.
Directors’
Securities Transactions
The Company has adopted the Model Code for Securities Transactions by Directors of
Listed Issuers (the “Model Code”) contained in Appendix 10 to the Listing Rules as the code of conduct for securities transactions by Directors of the Company (the “Company Code”).
Having made specific enquiry with the Directors, all of the Directors confirmed that they have complied with the required
standard as set out in the Company Code throughout the year ended 31 August 2009.
THE BOARD
(i) Responsibilities
The Board has overall responsibility for the Company, which includes establishing the strategic direction of the Company, setting the long-term objectives of the Company, monitoring the
performance of management, protecting and maximizing the interests of the Company and its shareholders, reviewing, considering and approving the annual budget, management results and performance update against annual budget, together with business
reports from the management. The Board has focused on making board policy decisions and has delegated the responsibility for the implementation of business strategy and management of the day-to-day operations of the Company’s business to the
management.
All Directors have full and timely access to all relevant information as well as advice and
services of the Company Secretary, with a view to ensure that Board procedures and all applicable rules and regulations are followed. Upon making request to the Board, all Directors may obtain independent professional advice at the Company’s
expense for carrying out their functions.
(ii) Board Composition
As at the date of this annual report, the Board consists of eight Directors, including four Executive Directors, one
Non-executive Director and three Independent Non-executive Directors. The Board believes that the balance between Executive and Non-Executive Directors is reasonable and adequate to provide sufficient checks and balances that safeguard the interests
of shareholders and the Company.
During the year ended 31 August 2009, the following changes in the
composition of the Board of the Company took place:
(i) Mr. Yeung Chu Kwong, William was appointed as an
Executive Director and Chief Executive Officer with effect from 1 November 2008.
(ii) Mr. Cheung Chi
Kin, Paul resigned as the Chief Executive Officer and was appointed as the Vice Chairman with effect from 1 November 2008.
Mr. Wong Wai Kay, Ricky, Chairman of the Company, is a first cousin of Mr. Cheung Chi Kin, Paul, Vice Chairman of the Company. Save as disclosed above, there are no financial, business, family, other material and
relevant relationships among members of the Board as at the date of this annual report.
City Telecom (H.K.)
Limited Annual Report 2009
30
CORPORATE GOVERNANCE REPORT
(iii) Appointment, re-election and removal of directors
Nominations for members to the Board result from consultations among the Chairman, Chief Executive Officer and other
Directors as the Board considers appropriate.
Pursuant to the Articles of Association of the Company, any
director appointed by the Board to fill a casual vacancy or as an addition to the existing Board shall hold office only until the next following general meeting of the Company, and shall be eligible for re-election. Every director, including
non-executive directors, are subject to retirement by rotation at least once every three years. One-third of the directors must retire from office at each annual general meeting and their re-election is subject to the approval of shareholders of the
Company.
In compliance with the provisions of the Articles of Association of the Company, Mr. Lai Ni
Quiaque, Dr. Cheng Mo Chi, Moses and Dr. Chan Kin Man shall retire by rotation at the coming 2009 Annual General Meeting and, being eligible, will offer themselves for re-election.
(iv) Chairman and Chief Executive Officer
As at the date of this annual report, the Chairman and the Chief Executive Officer of the Company are Mr. Wong Wai Kay, Ricky and Mr. Yeung Chu Kwong, William respectively. The
roles of the Chairman and the Chief Executive Officer are segregated. We believe this segregation of duties helps to provide check and balances as well as provides for balance of power and authority.
(v) Non-executive Director and Independent Non-executive Directors
The terms of office of the Non-executive Director and all Independent Non-executive Directors have been fixed for a specific
term of one year. They are subject to retirement by rotation and re-election at the Company’s annual general meeting in accordance with the Articles and Association of the Company.
During the year ended 31 August 2009, the Board at all times met the requirements of the Listing Rules relating to the
appointment of at least three Independent Non-executive Directors with at least one of them possessing appropriate professional qualifications or accounting or related financial management expertise.
The appointment of Independent Non-executive Directors strictly adheres to the guidelines for assessing independence set out
in Rule 3.13 of the Listing Rules. The Company has received written confirmation of their independence from each of the Independent Non-executive Directors and considers them to be independent of the Company and free of any relationship that could
materially interfere with the exercise of their independent judgments.
(vi) Number of Meetings and
Directors’ Attendance
The Board meets from time to time, and on no less than four times a year, to
discuss and exchange ideas on the affairs of the Company. During the year ended 31 August 2009, the Board held seven meetings to approve interim and final results announcement, financial reports, to recommend or declare dividends and to discuss
significant issues and general operations of the Company. Individual attendance records of each Director at the respective Board and committee meetings are set out in the table on page 32 of this annual report.
(vii) Practices and Conduct of Meetings
Notices of regular Board meetings together with all relevant information and reports prepared by management are given to all Directors at least 14 days before the meetings. For other Board
and Board Committee meetings, reasonable notice is given. The Company Secretary is responsible to take and keep minutes of all Board and committee meetings. Draft version of minutes is circulated to the Directors for comment within a reasonable time
after each meeting and the final version of which is sent to all Directors for their records and is open for Directors’ inspection.
(viii) Training for Directors
In case there is
any newly appointed Director, he/she will be provided with an induction course so as to ensure that he/she has appropriate understanding of the business and operations of the Company and that he/she is fully aware of his/her responsibilities and
obligations under the Listing Rules and the relevant regulatory requirements.
There are also arrangements in
place to provide continuing briefings and professional development to the Directors’ whenever necessary.
To assist their continuous professional development, the Company Secretary recommends Directors to attend relevant seminars and courses.
The costs for such training are borne by the Company.
City Telecom (H.K.) Limited Annual Report 2009
CORPORATE GOVERNANCE REPORT 31
BOARD COMMITTEES
The Board has set up two board committees, namely, the Audit Committee and the Remuneration Committee (collectively the
“Board Committees”), for overseeing particular aspects of the Company’s affairs.
The Board
Committees are provided with sufficient resources to discharge their duties and, upon reasonable request, are able to seek independent professional advice in appropriate circumstances, at the Company’s expenses.
(i) Audit Committee
The Board established the Audit Committee in March 1999 and has set out details of its overall objectives, authority, roles and responsibilities.
The Audit Committee comprises Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu, who are
Independent Non-executive Directors and one of whom possess the appropriate professional qualifications or accounting or related financial management expertise as required under Rule 3.10(2) of the Listing Rules. Mr. Lee Hon Ying, John is the
Chairman of the Audit Committee. The Audit Committee is provided with sufficient resources to discharge its duties.
The major roles and functions of the Audit Committee are set out clearly in the Audit Committee Charter which is made available on the website of the Company at www.ctigroup.com.hk. The Audit Committee is responsible for, inter alia,
overseeing the accounting and financial reporting processes of the Group and including the audits of the Group’s financial statements on behalf of the Board of Directors. The Audit Committee also reviews and discusses the internal audit plans
and reports of the audit activities, examinations and results thereof of the Internal Audit Department of the Company.
The Audit Committee held four meetings during the year ended 31 August 2009. Following is a summary of works performed by the Audit Committee during the year ended 31 August 2009: –
(i) Reviewed the Company’s financial statements for the year ended 31 August 2008 and for the six months ended
28 February 2009;
(ii) Reviewed the internal audit progress, especially on the compliance of the
Sarbanes-Oxley Act;
(iii) Reviewed the external auditor’s report on the review of the Company’s
interim financial report for the six months ended 28 February 2009 and the Company’s audited consolidated financial statements for the year ended 31 August 2008; and
(iv) Pre-approved the audit and non-audit services provided by the Company’s external auditor.
(ii) Remuneration Committee
The Board established the Remuneration Committee in August 2001.
The Remuneration Committee comprises six members, namely Mr. Lee Hon Ying, John, Dr. Chan Kin Man, Mr. Peh Jefferson Tun Lu, Dr. Cheng Mo Chi, Moses, Mr. Lai Ni Quiaque and Ms. Choy Mei Yuk, Mimi.
Mr. Lee Hon Ying, John is the Chairman of the Remuneration Committee. The Remuneration Committee is provided with sufficient resources to discharge its duties. The Remuneration Committee’s objectives are as follows:
(i) Establish a formal, fair and transparent procedure for developing policy and structure of all remuneration of directors
and senior management;
(ii) Review and consider the Company’s policy for remuneration of directors and
senior management; and
(iii) Recommend the remuneration packages of non-executive directors (including
independent non-executive directors).
The role and authorities of the Remuneration Committee, including code
provision B.1.3 of the Code, were clearly set out in its terms of reference which are available at the Company’s website at www.ctigroup.com.hk.
City Telecom (H.K.) Limited Annual Report 2009
32
CORPORATE GOVERNANCE REPORT
The Remuneration Committee held one meeting during the year ended 31 August
2009. Following is a summary of works performed by the Remuneration Committee during the year ended 31 August 2009: –
(i) Reviewed and approved the proposed discretionary performance bonuses for the management committee members;
(ii) Review and approved the remuneration packages for management committee members; and
(iii) Review and approved the remuneration for the Directors.
ATTENDANCE RECORDS AT THE
BOARD AND COMMITTEES MEETINGS
The attendance records of the individual Directors at the Board, audit committee
and remuneration committee meetings for the year ended 31 August 2009 are set out in the following table:
Meetings Attended/Held
Board meeting
Audit Committee meeting
Remuneration Committee meeting
Executive
Directors:
Mr. Wong Wai Kay, Ricky (Chairman)
Mr. Cheung Chi Kin, Paul (Vice Chairman)
Mr. Yeung Chu Kwong, William^ (Chief Executive Officer)
Mr. Lai Ni Quiaque# (Chief Financial Officer)
Non-Executive Director:
Dr. Cheng Mo Chi, Moses#
Independent Non-Executive Directors:
Mr. Lee
Hon Ying, John*#
Dr. Chan Kin Man*#
Mr. Peh Jefferson Tun Lu*#
Director, Talent Management:
Ms. Choy Mei
Yuk, Mimi#
7/7
7/7
7/7
7/7
7/7
7/7
7/7
7/7
N/A
N/A
N/A
N/A
N/A
N/A
4/4
4/4
4/4
N/A
N/A
N/A
N/A
1/1
1/1
1/1
1/1
1/1
1/1
* Audit Committee Member
# Remuneration Committee Member
^ Mr. Yeung Chu Kwong, William was appointed as an Executive Director with effect from 1 November 2008
DIRECTORS’ RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS
The Directors acknowledge their responsibility for the preparation of the financial statements of the Group for the year
ended 31 August 2009 which give a true and fair view of the state of affairs of the Company and of the Group on a going concern basis in accordance with the statutory requirements and applicable accounting standards.
The statement of the auditor of the Company about their reporting responsibilities and opinion on the financial statements of
the Company for the year ended 31 August 2009 is set out in the Independent Auditor’s Report on page 46 of this annual report.
City Telecom (H.K.) Limited Annual Report 2009
CORPORATE GOVERNANCE REPORT 33
DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE AND
INDEMNITY
The Company has purchased insurance to cover the Directors’ and Officers’ liability. The
insurance policy contains the following separate insurance contracts: Directors’ and Officers’ Liability Contract; Company Reimbursement Contract; and Legal Representation Expenses Contract. Throughout the financial year 2009, no claim has
been made against the directors and officers.
AUDITORS’ REMUNERATION
KPMG has been re-appointed as the independent auditors of the Company by the shareholders of the Company at the last annual
general meeting.
For the year ended 31 August 2009, the auditors of the Company received approximately
HK$2,980,000 for audit services (2008: HK$3,191,000) and HK$Nil for non-audit services (2008: Nil).
The
statement of the responsibilities of the independent auditor with respect to the 2009 financial statements is set out in the Independent Auditor’s Report on page 46 of the 2009 Annual Report.
INTERNAL CONTROL
Internal Control System
The Board is responsible
for overseeing and reviewing the effectiveness of the Group’s internal control system, which adopts a top-down risk-based approach to continuously improve the control system in an effective and timely manner. The internal control system
comprises a well-defined organizational structure with operating policies and procedures, lines of responsibility and delegated authority, in order to:
Assist the achievement of business objectives
Safeguard assets against unauthorized use or disposition
Ensure the reliability and integrity
of financial, operating and managerial information for internal use or for publication
Ensure compliance with
relevant legislation and regulations
Ensure resources are managed in an economical, efficient, and effective
manner
The system is designed to provide reasonable assurance, not absolute assurance against material
misstatements, losses and fraud.
Internal Audit Function
Internal Audit Department is independent from other functions in the Group. By using a risk-and-control methodology, the
internal audit function conducts on-going reviews to ensure internal control system continues to work satisfactorily and effectively. The audit plan is prepared and submitted to the Audit Committee for approval annually. According to the audit plan,
Internal Audit Department reviews the management’s control regarding reliability of financial information, operations and procedures of various departments through systematic audit procedures to ensure the internal controls are effective and in
compliance with applicable laws and regulations. In addition to the audit plan, special projects and investigations are carried out on an ad hoc basis upon request by senior management or the Audit Committee.
During the course of audit, Internal Audit Department has unrestricted access to all departments, assets, records, data
files, computer programs, property and personnel information of the Group. Upon completion of the audits, the key control deficiencies and corresponding recommendations are discussed and agreed with related department heads. Management’s
responses are documented in the internal audit report and follow-up procedures are then performed to ensure the corresponding actions are properly implemented and the audit findings are resolved. To preserve independence, Internal Audit Department
reports directly to the Chairman and Audit Committee. Significant audit findings and corrective action plans are reported on a regular basis. In addition, copies of internal audit reports are sent to the Chief Executive Officer, Chief Financial
Officer and external auditors for attention.
City Telecom (H.K.) Limited Annual Report 2009
34
CORPORATE GOVERNANCE REPORT
Internal Control Framework
The Group continues to improve its comprehensive internal control and risk management regime with reference to the COSO
framework (The Committee of Sponsoring Organizations of the Treadway Commission), which is illustrated below:
Control Environment
Members of the Board and Management Committee who have access to
price-sensitive and specific information are bound by the Model Code for Securities Transactions by Directors of Listed Issuers
Code of Business Conduct and Ethics, which is applicable to the Directors, management and all other employees of the Group, is adopted to promote honest and ethical conducts. Employee handbook is distributed to all employees
and made available on the Company’s website
Corruption and Conflicts of Interest Policy is established to
ensure reputation of the Group is not to be tarnished by employees’ dishonesty or corruption, and integrity and effectiveness of the Group as a whole is maintained. All senior management and staff who are engaged in procurement decisions are
required to complete “Form of Declaration of Conflicts of Interest”.
Whistleblower policy is
established to facilitate the reporting of any improper activities relating to fraud, questionable accounting or internal control matters
Corporate Social Responsibility Report was launched in 2008 to demonstrate the Group’s active embracement of Corporate Citizenship. During the year, the Company successfully
registered as a Carbon Audit • Green Partner of the Environment Protection Department to support reduction of greenhouse gas emissions
Company highly invests on staff development and such investment is applicable to all levels. Programs include EMBA/university degree sponsorships, corporate visits, staff exchange program
and education partnerships
Risk Assessment
Regular meetings are held where relevant department heads or representatives report and address risks regarding changes in
market conditions, regulatory framework, customer needs and other matters. Management would discuss proper reaction to the identified risks to mitigate the possibility of loss
Self-Assessment Questionnaires are issued to business units for completion as a basis for evaluating the general system
control environment and risks
Risk Management Workshop is arranged during the year for managerial staff which
helps to advance the quality and depth of risk assessment, by enhancing knowledge on risk identification, measurement and management
Control Activities
During the year, “Work Improvement Team” program is
launched to motivate colleagues at all levels to generate ideas on improving work efficiency and cost effectiveness, which helps to cultivate our core value of continuous change and improvement
Our in-house Safety Officer promotes awareness in occupational safety and health issues within the Company and ensures
statutory obligations are met. Through risk assessment, inspection, and training, reasonable practical measures are placed for ensuring activities are carried out in a safe and efficient manner
Remuneration Committee is established to ensure there is a fair and transparent procedures for developing policy and
structure of all remuneration of the Directors and senior management
Engagement of independent professionals
and provision of appropriate trainings are used to ensure compliance with applicable laws and regulations
External consultants are engaged to provide advisory services as the Directors consider appropriate
Information and Communication
Staff meetings are arranged twice a year to review and summarize
the Company’s performance and communicate management’s forward looking objectives regarding the Company’s future development
Monthly management meetings are live broadcast to all members of the Company and are made available on the Intranet for sharing City Telecom (H.K.) Limited Annual Report 2009
CORPORATE GOVERNANCE REPORT 35
Round table meeting provides a platform for all levels of staff
to communicate directly with senior management
A monthly video is produced by Learning and Development
Department to provide most current updates and achievements of the Company
In 2009, Internal Audit Department
produced a monthly video to share with all staff about the global best practices, security issues, knowledge on common Hong Kong ordinances and demonstrate how such controls can improve operational performance
Information technology is used to build an automatic control in our computer systems
Monitoring
Capital and operating expenditures are under overall budget control. The annual budget and business plan are prepared by the respective department and submitted to the Management Committee for approval before adoption
A quarterly review of the Group’s financial performance is performed by the Board
Monthly management reports on the financial results and key operating statistics of each business segment are reviewed by the
Executive Directors. Regular meetings are held with senior management of each business unit to review the actual performance against target
Control Effectiveness
We have complied with the
code provisions on internal controls as set out in the Code on Corporate Governance Practices. For the year under review, the Directors have conducted a review of the effectiveness of the Group’s internal control system and consider that such
system is reasonably effective and adequate. The review covers all material controls including financial, operational and compliance controls and risk management functions. We have not identified any significant control deficiencies that would cast
a material impact on financial performance. The Board had also considered the resources, qualifications, and experience of accounting and financial report function as adequate. Sufficient training and budget are provided for the continuous
development of accounting and finance function.
Compliance with Sarbanes Oxley Act 2002
Being a Company listed on the Nasdaq Stock Market in the U.S., we are bound by the provision of the U.S. Sarbanes-Oxley Act
2002 (the “SOX Act”), which is a legislation seeking to enhance the transparency and accountability of the companies in the areas of corporate governance and financial reporting. Section 404(a) of the SOX Act requires management of
the Group to carry out assessment on the effectiveness of the Group’s internal control procedures over financial reporting. Upon completion, the management’s conclusion of the internal control effectiveness is stated in the annual report
on Form 20-F.
The establishment and maintenance of internal control over financial report is the
responsibility of management. With the assistance of Internal Audit Department and external consultants, management of the Group organizes and conducts a comprehensive assessment of internal control over financial reporting based on control criteria
as set out in the COSO framework. As of the date of this annual report, management is not aware of any instances of material weaknesses on its internal control over financial reporting and considered the Group’s disclosure control and
procedures are effective in providing reasonable assurance on all material information.
COMPANY POLICIES
The Group has adopted a number of company policies including Company Policies and Procedures, Code of Business
Conduct and Ethics and individual departmental charters to ensure good corporate governance practices and high standard of business conducts and ethics of the Group. The Group will conduct and review regularly an evaluation of the adequacy of these
Company policies.
COMMUNICATION WITH SHAREHOLDERS
The Board is committed to providing clear and full information on the Group to its shareholders through the publication of
notices, announcements, circulars, interim and annual reports. The Company maintains a website at www.ctigroup.com.hk where the Company’s announcements, circulars, notices, financial reports, business developments, corporate governance
practices and other information are posted.
During the year ended 31 August 2009, the Board confirmed
that there were no significant changes made in the Company’s Articles of Association.
City Telecom (H.K.)
Limited Annual Report 2009
36
CORPORATE GOVERNANCE REPORT
INVESTOR ENGAGEMENT (IE) AND PUBLIC RELATIONS
During the year, we upgraded from reactive Investor Relations to proactive Investor Engagement. To engage our shareholders
and potential investors, the IE team has been actively communicating the company’s position to address different concerns raised by shareholder/potential investors throughout the year. These activities were important especially during the
current global economic downturn. City Telecom stock has increased by more than 150% from the 12 months to 5 November 2009, outperforming its local indices, 45% increase in Hang Seng Index and 25% increase in NASDAQ Composite.
250% City Telecom
200% Hang Seng Index
NASDAQ Composite
100%
50%
0%
-50%
Nov-08 Feb-09 May-09 Aug-09 Nov-09
Source: Yahoo! Finance
The key mission of the IE team is to provide an accurate picture of the Company’s performance, strategy and culture on how we plan to achieve our BHAG. We continue to engage in
investor meetings and industry conference across Asia, Europe and USA. Furthermore, we have engaged Elite Investor Relations to further extend our potential shareholder base in order to be prepared to support the future growth of the company. The
below table shows various public conferences and meetings that the IE team and other company representatives participated in around the world.
Participation in Investor Meetings and Industry Conferences
Date Activities Speaker Position Venue
2009
NOV
Brean Murray, Carret & Co. – 2009 China Growth Investor Engagement Tour (9 to 27 November) Innovative Talent Management Telecoms World India 2009 FTTH Middle East Conference 2009 Carrier Ethernet World APAC
Congress
OCT
HR Strategies Building Bridges to Success by HR Magazine ITU Telecom World 2009
SEPT
Leading Change Through Innovation by
Hewlett-Packard
Susquehanna Financial Group’s Third Annual Beijing Management Summit
Rodman & Renshaw Annual Global Investment Conference, Asia Track
Investor Engagement Tour (2 to 18 September)
JUN
Goldman Sachs Telco & Internet Corp
Day 2009 Learning Network Day 2009 by AIESEC CommunicAsia 2009 Summit
Innovation by HK Observatory
MAY
The 4th Annual FTTHCAP Conference 2009
MAR
The 12th Credit Suisse Asian Investment Conference 2009
2008
NOV
DigiWorld Summit 2008 Broadband World Australia 2008
SEP
Asian Telecom Tour by Citigroup, HK
2008 FTTH Conference & Expo
NiQ Lai NiQ Lai Mimi Choy Daniel Lo Alice Wong Henry Yeung
NiQ Lai Ricky Wong William Alice Wong
NiQ Lai
NiQ Lai
NiQ Lai Alvis Chan Ricky Wong William NiQ Lai NiQ Lai
Alice Wong Henry Yeung
NiQ Lai Mike Ng
CFO CFO
Director, Talent Management Manager, Finance Financial Controller Senior Manager, Network Development (Local Network) CFO
Chairman CEO Financial Controller
CFO
CFO
CFO
Manager, Talent Management Chairman CEO
CFO CFO
Financial Controller Senior Manager, Network Development (Local Network) CFO
Senior Manager, International Business
New York, USA USA and Europe Manila, Philippines New Delhi, India Amman, Middle East Kuala Lumpur, Malaysia
Hong Kong Geneva, Switzerland Hong Kong Beijing, PRC
New York, USA
Hong Kong, Singapore and USA
Hong Kong Hong Kong Singapore Hong Kong Melbourne, Australia Hong Kong
Montpellier, France Sydney, Australia
Hong Kong Nashville, Tennessee, USA
City Telecom
(H.K.) Limited Annual Report 2009
REPORT
OF THE DIRECTORS 37
The Directors have pleasure in submitting their annual report together with the audited
financial statements for the year ended 31 August 2009.
PRINCIPAL ACTIVITIES AND GEOGRAPHICAL ANALYSIS OF
OPERATIONS
The principal activities of City Telecom (H.K.) Limited (the “Company”) and its
subsidiaries (collectively referred to as the “Group”) are the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada.
An analysis of the Group’s performance for the year by business and geographical segments is set out in note 2 to the
financial statements.
RESULTS AND APPROPRIATIONS
The results of the Group for the year is set out in the consolidated income statement on page 47 of this annual report.
RESERVES
Movements in the reserves of the Group and the Company during the year are set out in note 21 to the financial statements.
An interim dividend of HK3 cents per ordinary share in cash (2008: HK4 cents per ordinary share with a scrip dividend option)
and a final dividend in respect of the previous financial year of HK2 cents per ordinary share with a scrip dividend option were paid on 26 June 2009 and 25 February 2009 respectively.
At a board meeting held on 5 November 2009, the Directors have recommended to pay a final dividend of HK16 cents per
ordinary share in cash. Subject to the approval of the shareholders at the forthcoming Annual General Meeting, the final dividend will be distributed on or about 30 December 2009 to shareholders whose names appear on the register of members of
the Company as at the close of business on 18 December 2009.
The Register of Members of ordinary shares
of the Company will be closed from 16 December 2009 to 18 December 2009 (both dates inclusive), during which period, no transfer of ordinary shares will be registered. In order to qualify for the proposed final dividend, all properly
completed transfer forms accompanied by the relevant share certificates must be lodged with the Company’s share registrar not later than 4:30 p.m. on 15 December 2009.
DONATIONS
Charitable and other donations made by the Group during the year amounted to HK$547,000 (2008: HK$295,000).
FIXED ASSETS
Details of the movements in fixed assets of the Group are set out in
note 13 to the financial statements.
SHARE CAPITAL AND SHARE OPTIONS
Details of the movements in share capital and share options of the Company are set out in note 21 to the financial
statements.
DISTRIBUTABLE RESERVES
Distributable reserves of the Company as at 31 August 2009, calculated in accordance with section 79B of the Hong Kong
Companies Ordinance, amounted to approximately HK$153,788,000 (2008: HK$159,400,000).
City Telecom (H.K.)
Limited Annual Report 2009
38
REPORT OF THE DIRECTORS
FIVE-YEAR FINANCIAL SUMMARY
A summary of the results of the assets and liabilities of the Group for the last five financial years is set out on page 99
of this annual report.
PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES
During the year ended 31 August 2009, the Company bought back a total principal value of US$67,990,000 of the
Company’s 8.75% 10-year Senior Notes due 2015 which are listed on Singapore Exchange Securities Trading Limited. Details of the buybacks are as follows:
Month
April 2009 (note)
July 2009 (note)
Principal value
US$
16,928,000
51,062,000
67,990,000
Total consideration paid
US$
13,634,658
51,504,196
65,138,854
Note: Total consideration paid included transaction cost and accrued
interest.
During the year ended 31 August 2009, the Company repurchased 70,000 ordinary shares on The
Stock Exchange of Hong Kong Limited. All the repurchased shares were subsequently cancelled. Details of the repurchase are as follows:–
Month
August 2009
Number of ordinary shares
70,000
Highest price paid per share
HK$
1.92
Lowest price paid per share
HK$
1.91
Total consideration paid
HK$
134,197
Save as disclosed above, during the year ended 31 August 2009, the
Company has not redeemed any of its listed securities. In addition, neither the Company nor any of its subsidiaries has purchased or sold any of the Company’s listed securities.
GROUP’S BORROWINGS
The Group’s borrowings as at 31 August 2009 are repayable in the following periods:
On demand or not exceeding one year
More than one
year but not exceeding two years
More than two years
2009 HK$’000
202
197
162,919
163,318
2008 HK$’000
121
129
683,368
683,618
City Telecom (H.K.) Limited Annual Report 2009
REPORT
OF THE DIRECTORS 39
DIRECTORS
The Directors during the year and up to the date of this annual report were:
Executive Directors
Mr. Wong Wai Kay, Ricky
(Chairman)
Mr. Cheung Chi Kin, Paul (note i) (Vice Chairman)
Mr. Yeung Chu Kwong, William (note ii) (Chief Executive Officer) Mr. Lai Ni Quiaque * (Chief Financial Officer)
Non-executive Director
Dr. Cheng Mo Chi, Moses *
Independent
non-executive Directors
Mr. Lee Hon Ying, John # * Dr. Chan Kin Man # * Mr. Peh Jefferson Tun
Lu # *
# Audit Committee members
* Remuneration Committee members Notes:
(i)
Mr. Cheung Chi Kin, Paul resigned as the Chief Executive Officer and was appointed as the Vice Chairman with effect from 1 November 2008.
(ii) Mr. Yeung Chu Kwong, William was appointed as an Executive Director and Chief Executive Officer with effect from 1 November 2008.
In accordance with Articles 96 and 99 of the Company’s Articles of Association, Mr. Lai Ni Quiaque, Dr. Cheng
Mo Chi, Moses and Dr. Chan Kin Man shall retire by rotation and, being eligible, offer themselves for re-election at the forthcoming annual general meeting.
The Company received confirmation of independence from each of the independent non-executive directors pursuant to Rule 3.13 of the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited (the “Listing Rules”) and the Company still considers the independent non-executive directors to be independent.
DIRECTORS’ SERVICE CONTRACTS
None of the
directors has a service contract with the Company or any of its subsidiaries which is not determinable by the employing company within one year without payment of compensation other than statutory compensation.
DIRECTORS’ INTERESTS IN CONTRACTS OF SIGNIFICANCE
No contract of significance in relation to the Group’s business to which the Company or any of its subsidiaries was a
party and in which a Director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.
BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT
Brief biographical details of the Directors and senior management are set out on pages 24 to 27 of this annual report.
City Telecom (H.K.) Limited Annual Report 2009
40
REPORT OF THE DIRECTORS
DIRECTORS’ INTERESTS IN SHARES AND UNDERLYING SHARES
Directors’ interests or short positions in shares and in share options
At 31 August 2009, the interests or short positions of the Company’s Directors, chief executive and their
associates in the shares and underlying shares of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)), as recorded in the register maintained by the Company
required to be kept under Section 352 of the SFO or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) pursuant to the Model Code were as follows:
Long position in ordinary shares and underlying shares of the Company
Name of Director
Interest in shares
Personal interests
Corporate interests
Family interests
Total interests in shares
Interests in underlying shares pursuant to share options
Aggregate interests
Approximate percentage interests in the Company’s issued share capital
Note (1)
Mr. Wong Wai Kay, Ricky
1,076,588
339,814,284
Note (2)(i)
–
340,890,872
14,160,305
355,051,177
53.46%
Mr. Cheung Chi Kin, Paul
11,293,119
24,924,339
Note (2)(ii)
–
36,217,458
14,160,305
50,377,763
7.58%
Mr. Yeung Chu Kwong, William
3,000,000
–
–
3,000,000
7,062,956
10,062,956
1.52%
Mr. Lai Ni Quiaque
–
–
10,392,506
Note (3)
10,392,506
8,067,690
18,460,196
2.78%
Notes:
(1) This percentage is based on 664,179,970 ordinary shares of the Company
issued as at 31 August 2009.
(2) The corporate interests of Mr. Wong Wai Kay, Ricky and
Mr. Cheung Chi Kin, Paul arise through their respective interests in the following companies:
(i)
339,814,284 shares are held by Top Group International Limited (“Top Group”) which is 42.12% owned by Mr. Wong Wai Kay, Ricky; the interests of Top Group in the Company is also disclosed under the section “Substantial
Shareholders” of this annual report.
(ii) 24,924,339 shares are held by Worship Limited which is 50%
owned by Mr. Cheung Chi Kin, Paul.
(3) 10,392,506 shares are jointly owned by Mr. Lai Ni Quiaque and
his spouse.
Details of the Directors’ interests in share options granted by the Company are set out on
page 42 of this annual report.
Save as disclosed above, as at 31 August 2009, none of the Directors or
chief executive (including their spouse and children under 18 years of age) of the Company had any interests or short positions in the shares, underlying shares and derivative to ordinary shares of the Company and its associated corporations (within
the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code.
City Telecom (H.K.) Limited Annual Report 2009
REPORT
OF THE DIRECTORS 41
SHARE OPTION SCHEMES
The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by shareholders of
the Company on 23 December 2002 which 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.
A summary of the 2002 Share Option Scheme operated by the Company is as follows:
(1) Purpose
To grant share options to the eligible participants as incentives and rewards for their contribution to the Company or its subsidiaries.
(2) Eligible participants
Eligible participants
include employees, executives or officers (including executive, non-executive and independent non-executive directors) of the Company or any of its subsidiaries, suppliers and professional advisers of the Group.
(3) The total number of shares available for issue
The total number of shares which may be issued upon exercise of options to be granted under the scheme shall not exceed 10%
of the shares in issue as at the date of adoption of the 2002 Share Option Scheme on 23 December 2002 (i.e. 50,302,066 shares). Such limit was refreshed by the shareholders in the general meeting held on 29 December 2004 and
24 December 2007 respectively so that the total number of shares which may be issued shall be 10% of the shares in issue as at the date of the said general meeting (i.e. 61,407,340 shares and 62,704,840 shares respectively). As at the date of
this annual report, the number of shares available for issue in respect thereof is 50,619,336 shares, representing approximately 7.62% of the issued share capital of the Company as at the date of this annual report.
The shares which may be issued upon exercise of all outstanding options to be granted and yet to be exercised under the 2002
Share Option Scheme and any other share option scheme(s) of the Company at any time shall not exceed 30% of the shares in issue from time to time. No options shall be granted under any scheme(s) of the Company or any of its subsidiaries if this will
result in the 30% limit being exceeded.
(4) The maximum entitlement of each participant under the 2002 Share
Option Scheme
The total number of shares shall be issued upon exercise of the options granted under the 2002
Share Option Scheme and any other share option scheme(s) of the Company (including exercised, cancelled and outstanding options) to each participant in any 12-month period up to and including the date of grant shall not exceed 1% of the shares in
issue as at the date of grant.
Any further grant of options in excess of this 1% limit shall be subject to the
issue of a circular by the Company and the approval of the shareholders of the Company in general meeting with such grantee and his associates abstaining from voting and/or other requirements prescribed under the Listing Rules from time to time.
(5) The period within which the shares must be taken up under an option
The period during which an option may be exercised will be determined by the board of directors at its absolute discretion
and no option may be exercised more than 10 years from the date of grant.
(6) The minimum period for which an
option must be held before it can be exercised
The board of directors is empowered to impose, at its
discretion, any minimum period that an option must be held at the time of grant of any particular option.
(7)
The amount payable on application or acceptance of the option and the period within which payments or calls must or may be made or loans for such purposes must be paid
Acceptance of the option must be made within 30 days after the date of offer and HK$1.00 must be paid as a consideration for the grant of option.
City Telecom (H.K.) Limited Annual Report 2009
42
REPORT OF THE DIRECTORS
(8) The basis of determining the exercise price
The board of directors shall determine the exercise price of each option offered but in any event shall not be less than the
highest of: (a) the official closing price of the shares of the Company on the date of offer as quoted in the Stock Exchange quotation sheet; (b) the average of the closing price of the shares of the Company for the 5 business days
immediately preceding the date of offer as quoted in the Stock Exchange quotation sheet; and (c) the nominal value of the shares of the Company.
(9) The remaining life of the 2002 Share Option Scheme
The 2002 Share Option Scheme is valid and effective from 23 December 2002, being the date of adoption, and shall end on the tenth anniversary of such date (both days inclusive).
(10) Details of the share options granted under the 2002 Share Option Scheme as at 31 August 2009 are as follows:
Date of grant
Exercise price HK$ (Note 1)
Balance as at
1 September 2008
Options granted during the year
Vesting period
Exercise period
Adjustment to number of options
for 2008 Final Dividend (Note 1)
Options exercised during the year (Note 4)
Options cancelled/ lapsed during the year (Note 5)
Balance as at 31 August 2009
Closing price immediately before the date on which the options were granted HK$
Directors
Mr. Wong Wai Kay, Ricky
5 January 2005
1.5224
8,053,478
–
5 January 2005 to 31 December 2006
5 January 2005 to 20 October 2014
38,126
–
–
8,091,604
1.53
22 May 2006
0.6523
6,040,108
–
22 May 2006 to 21 May 2009
22 May 2007 to 21 May 2016
28,593
–
–
6,068,701
0.64
Mr. Cheung Chi Kin, Paul
5 January 2005
1.5224
8,053,478
–
5 January 2005 to 31 December 2006
5 January 2005 to 20 October 2014
38,126
–
–
8,091,604
1.53
22 May 2006
0.6523
6,040,108
–
22 May 2006 to 21 May 2009
22 May 2007 to 21 May 2016
28,593
–
–
6,068,701
0.64
Mr. Yeung Chu Kwong, William
22 May 2006
0.6523
1,013,369
–
22 May 2006 to 21 May 2009
22 May 2007 to 21 May 2016
4,796
–
–
1,018,165
0.64
6 February 2008
1.7568
6,016,309
–
(Note 2)
(Note 2)
28,482
–
–
6,044,791
1.99
Mr. Lai Ni Quiaque
22 May 2006
0.6523
2,013,369
–
22 May 2006 to 21 May 2009
22 May 2007 to 21 May 2016
9,530
–
–
2,022,899
0.64
11 February 2008
1.8660
6,016,309
–
(Note 3)
(Note 3)
28,482
–
–
6,044,791
1.86
City Telecom (H.K.) Limited Annual Report 2009
REPORT
OF THE DIRECTORS 43
Date of grant
Exercise price HK$ (Note 1)
Balance as at 1 September 2008
Options
granted during the year
Vesting period
Exercise period
Adjustment to number of options for 2008 Final Dividend (Note 1)
Options exercised during the year (Note 4)
Options cancelled/ lapsed during the year (Note 5)
Balance as at 31 August options were 2009
Closing price immediately before the date on which the granted HK$
Employees under continuous employment contacts Employees
21 October 2004
1.5224
7,571,582
–
21 October 2004 to 31 December 2006
1 January 2005 to 20 October 2014
35,130
546,184
151,001
6,909,527
1.53
22 May 2006
0.6523
7,280,601
–
22 May 2006 to 21 May 2009
22 May 2007 to 21 May 2016
33,854
869,821
30,201
6,414,433
0.64
3 August 2006
0.7018
40,349
–
3 August 2006 to 2 August 2009
3 August 2007 to 2 August 2016
191
–
–
40,540
0.69
22 November 2006
0.7216
135,902
–
22 November 2006 to 14 November 2009
15 November 2007 to 14 November 2016
643
–
–
136,545
0.75
15 February 2008
1.7568
1,002,718
–
(Note 2)
(Note 2)
4,747
–
–
1,007,465
1.79
11 March 2008
1.8164
300,816
–
11 March 2008 to 10 March 2011
11 March 2008 to 23 December 2012
1,424
–
302,240
–
1.80
2 May 2008
1.7866
1,002,718
–
(Note 2)
(Note 2)
4,747
–
–
1,007,465
1.72
Total
60,581,214
–
285,464
1,416,005
483,442
58,967,231
Notes:
1. As a result of allotment of 12,212,142 new shares to shareholders of the Company who elected to receive the 2008 Final Dividend in shares on 25 February 2009, the exercise price of and the number of share subject to
the 60,299,426 share options outstanding on 19 December 2008 (being the Record Date for determining the entitlement of 2008 Final Dividend) were adjusted pursuant to the 2002 Share Option Scheme with effect from 25 February 2009. The
closing price per ordinary share immediately before the date of the grant of the share options was HK$0.88.
2.
The exercise of the share options is subject to certain conditions that must be achieved by the grantee. The share options shall be exercised not later than 23 December 2012.
3. The exercise of the share options is subject to the performance of the Company’s shares. The share options shall be
exercised not later than 23 December 2012.
4. During the year ended 31 August 2009, 1,416,005 share
options were exercised and the weighted average closing price of shares of the Company immediately before the dates of exercise was HK$0.99 per ordinary share.
5. During the year ended 31 August 2009, a total of 483,442 share options were lapsed and no options cancelled.
City Telecom (H.K.) Limited Annual Report 2009
44
REPORT OF THE DIRECTORS
(11) In determining the value of the share options granted prior to 31 August 2009,
the Black-Scholes option pricing model (the “Black-Scholes Model”) has been used except for the share options granted on 11 February 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.
Effective from 1 September 2005, upon the adoption of Hong Kong Financial Reporting Standard 2 Share-based payment, the Group
recognises the fair value of share options as an expense in the income statement over the vesting period, or as an asset, if the cost qualifies for recognition as an asset. The fair value of the share options is measured at the date of grant.
Both the Black-Scholes Model and Monte Carlo Model, applied for the determination of the estimated value of
the options granted under 2002 Share Option Scheme require input of highly subjective assumptions, including the expected stock volatility. As the Company’s share options have characteristics significantly different from those of traded
options, changes in subjective inputs may materially affect the estimated fair value of the options granted.
DIRECTORS’ RIGHTS TO ACQUIRE SHARES OR DEBENTURES
Save as disclosed under the section
“Share Option Schemes” in this annual report, at no time during the year was the Company or any of its subsidiaries a party to any arrangements to enable the directors and/or the chief executive of the Company to acquire benefits by means
of the acquisition of shares in, or debentures of, the Company or any other body corporate.
SUBSTANTIAL
SHAREHOLDERS
At 31 August 2009, the interests or short positions of the persons, other than the directors or
chief executive of the Company, in the shares and underlying shares of the Company as recorded in the register maintained by the Company required to be kept under Section 336 of the SFO were as follows:
Name
Interests in shares in long positions
Percentage interests (Note)
Top Group International Limited
339,814,284
51.16%
Note: This percentage is based on 664,179,970 shares of the Company issued as at 31 August 2009.
Save as disclosed above, as at 31 August 2009, the Company had not been notified of any persons (other than directors and
chief executive of the Company) having any interest or short positions in the shares and underlying shares of the Company as recorded in the register required to be kept under Section 336 of the SFO.
MANAGEMENT CONTRACTS
No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year.
City Telecom (H.K.) Limited Annual Report 2009
REPORT
OF THE DIRECTORS 45
MAJOR CUSTOMERS AND SUPPLIERS
The aggregate percentage of turnover for the year attributable to the Group’s five largest customers is less than 30% of
total turnover for the year and therefore no disclosure with regard to major customers are made. The percentage of purchases for the year attributable to the Group’s major suppliers are as follows:
2009 %
2008 %
Purchases
– the largest supplier
24
30
– five largest suppliers combined
57
63
None of the directors, any of their associates or shareholders (which to the best knowledge of the directors, own more than
5% of the Company’s issued share capital) had a beneficial interest in the major customers or suppliers noted above.
SUFFICIENCY OF PUBLIC FLOAT
On the basis of information that is publicly available to the
Company and within the knowledge of the directors of the Company, as at the date of this annual report, the Company has maintained a sufficient public float of more than 25 percent of the Company’s issued shares as required under the Listing
Rules during the year ended 31 August 2009.
CORPORATE GOVERNANCE
Corporate Governance practices adopted by the Company are set out in the Corporate Governance Report on pages 29 to 36 of
this annual report.
AUDITORS
The financial statements have been audited by KPMG who shall retire, and being eligible, offer themselves for re-appointment at the forthcoming annual general meeting of the Company.
On behalf of the Board
Wong Wai Kay, Ricky
Chairman
Hong Kong, 5 November 2009
City Telecom (H.K.) Limited Annual Report 2009
46
INDEPENDENT AUDITOR’S REPORT
KPMG
Independent auditor’s report to the shareholders of City Telecom (H.K.) Limited
(Incorporated in Hong Kong with limited liability)
We have audited the consolidated financial
statements of City Telecom (H.K.) Limited (the “Company”) set out on pages 47 to 98, which comprise the consolidated and Company balance sheets as at 31 August 2009, and the consolidated income statement, the consolidated statement of
changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with International Financial Reporting Standards issued by the International Accounting
Standards Board, Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control
relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates
that are reasonable in the circumstances.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to
you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified
Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
OPINION
In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of
the Group as at 31 August 2009 and of the Group’s profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and Hong Kong Financial Reporting Standards and have been properly prepared in
accordance with the Hong Kong Companies Ordinance.
KPMG
Certified Public Accountants
8th Floor, Prince’s Building
10 Chater Road
Central, Hong Kong
5 November 2009
City Telecom (H.K.) Limited Annual Report 2009
CONSOLIDATED INCOME STATEMENT 47
for the year ended 31 August 2009 (Expressed in Hong Kong
dollars)
2009 2008
Note HK$’000 HK$’000
Turnover 2
1,478,239 1,302,981
Network costs 3(175,129)(178,367)
Other operating expenses 4(a)(1,037,964)(966,094)
Other revenues 4(b) 41,540 24,989
Finance costs 4(c)(55,127)(75,137)
Profit before
taxation 4 251,559 108,372
Income tax (expense)/benefit 5 (38,730) 16,818
Profit attributable to shareholders 6 212,829 125,190
Dividends 7 126,173 38,614
Basic earnings per share 8 HK32.4 cents HK19.7 cents
Diluted earnings per share 8 HK31.8 cents HK19.0 cents
The notes on pages 52 to 98 form part
of these financial statements.
City Telecom (H.K.) Limited Annual Report 2009
48
Balance sheet
as at 31 August 2009
(Expressed in Hong Kong
dollars)
The Group
The Company
2009 2008 2009 2008
Note HK$’000 HK$’000 HK$’000 HK$’000
Non-current assets
Goodwill 12 1,066 1,066 – –
Fixed
assets 13 1,302,380 1,231,399 74,688 87,483
Investments in subsidiaries 14 – – 957,712 1,383,812
Long term receivable and prepayment 6,091 5,586 – –
Deferred expenditure 16 12,786 15,391 – –
Deferred tax assets 22 – 26,335 – –
1,322,323 1,279,777 1,032,400 1,471,295
Current assets
Accounts receivable 17 120,192
140,283 9,220 11,418
Other receivables, deposits and prepayments 17 69,765 82,726 3,393 3,378
Deferred expenditure 16 36,674 40,704 – –
Other financial assets 15 – 27,997 – 27,997
Pledged bank deposits 28 15,038 87,319 15,038 87,319
Cash at bank and in hand 18 221,052 421,610 119,419 90,386
462,721 800,639 147,070 220,498
Current liabilities
Amounts due to subsidiaries
– – 10,830 10,830
Accounts payable 19 37,555 52,324 20,484 26,440
Other payables and accrued charges 19 206,487 178,114 23,530 17,831
Deposits received 16,385 16,264 7,886 7,943
Current portion – deferred service revenue 20 115,070 110,449 10,848 11,172
Tax payable 1,993 2,103 356 356
Current portion
– obligations under finance leases 23 202 121 193 112
377,692 359,375 74,127 74,684
Net current assets 85,029 441,264 72,943 145,814
Total assets less current liabilities 1,407,352 1,721,041 1,105,343 1,617,109
The notes on pages 52 to 98 form part of these financial statements.
City Telecom (H.K.) Limited Annual Report 2009
49
Balance sheet
as at 31 August 2009
(Expressed in Hong Kong
dollars)
The Group The Company
2009 2008 2009 2008
Note HK$’000
HK$’000 HK$’000 HK$’000
Non-current liabilities
Deferred tax liabilities 22 15,709 4,937 7,047 4,937
Long-term deferred service revenue 20 – – 10,535 14,500
Long-term debt and other liabilities 23 163,116 683,497 163,108 683,480
178,825 688,434 180,690 702,917
Net assets 1,228,527 1,032,607 924,653 914,192
Capital and reserves
Share capital 21 66,418 65,062 66,418 65,062
Reserves 21 1,162,109 967,545 858,235 849,130
Total equity attributable to equity shareholders of
the Company 1,228,527 1,032,607 924,653 914,192
Approved and authorised for issue by the board
of directors on 5 November 2009.
Wong Wai Kay, Ricky Cheung Chi Kin, Paul
Director Director
The notes on pages 52 to 98 form part of these financial statements.
City Telecom (H.K.) Limited Annual Report 2009
50
Consolidated statement of changes in equity
for the year ended 31 August 2009
(Expressed in Hong Kong dollars)
2009 2008
Note HK$’000 HK$’000
Total equity as at beginning of the year 1,032,607 903,882
Net profit recognised directly in equity:
Exchange adjustments on translation of the financial
statements of subsidiaries 70 1,619
Net profit for the year 212,829 125,190
Total recognised profit for the year 212,899 126,809
Dividends paid in respect of the current year(19,904)(11,371)
Dividends paid in respect of the previous year(3,108)(5,915)
(23,012)(17,286)
Movements in equity arising from capital transactions:
Repurchase and cancellation of ordinary shares(134) –
Equity settled share-based
transactions 11 4,768 4,204
Shares issued upon exercise of options 1,399 14,998
6,033 19,202
Total equity as at the end of the year 1,228,527 1,032,607
The notes on pages 52 to 98 form part of these financial statements.
City Telecom (H.K.)
Limited Annual Report 2009
51
Consolidated cash flow statement
for the year ended 31 August 2009
(Expressed
in Hong Kong dollars)
2009 2008
Note HK$’000 HK$’000
Net cash inflow
from operations 24(a) 537,618 382,813
Hong Kong profits tax recovered – 42
Overseas tax paid (1,732) (4,292)
Net cash inflow from operating activities 535,886 378,563
Investing activities
Increase in pledged bank deposits 72,281 –
Interest received 4,869 15,596
Purchases of fixed assets (289,938) (189,903)
Net
proceeds from maturity of investment in debt securities 28,051 3,900
Net proceeds from redemption of long-term
bank deposit – 15,600
Proceeds from disposal of fixed assets 8,249 7,057
Net cash outflow from investing activities (176,488) (147,750)
Net cash inflow before financing activities 359,398 230,813
Financing activities
Repurchase of ordinary shares (134) –
Proceeds from issuance of new shares 24(b) 1,399 14,998
Repayment of capital element of
finance leases 24(b) (138) (834)
Interest element of finance leases (27) (34)
Interest paid on 10-year senior notes (52,670) (70,010)
Repurchase of 10-year senior notes 24(b) (485,829) (269,399)
Dividends paid (23,008) (17,271)
Net cash outflow from financing activities (560,407) (342,550)
Decrease in cash at bank and in hand (201,009) (111,737)
Cash at bank and in hand at 1
September 421,610 532,894
Effect of foreign exchange rate changes 451 453
Cash at bank and in hand at 31 August 221,052 421,610
The notes on pages 52 to 98 form part of these financial statements.
City Telecom (H.K.) Limited Annual Report 2009
52
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES
(a) Statement of compliance
These financial
statements have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”), which collective term includes all applicable
individual International Financial Reporting Standards, International Accounting Standards (“IASs”) and Interpretations issued by the IASB. As Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all
applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and accounting principles
generally accepted in Hong Kong, are derived from and consistent with IFRSs, these financial statements also comply with HKFRSs and the requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable
disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. A summary of the significant accounting policies adopted by the Group is set out below.
Although HKFRSs have been fully converged with IFRSs in all material respects since 1 January 2005, these financial
statements are the first published financial statements in which the Group makes an explicit and unreserved statement of compliance with IFRSs. Therefore, in preparing these financial statements management has given due consideration to the
requirements of IFRS 1, First-time Adoption of International Financial Reporting Standards. For this purpose the date of the Group’s transition to IFRSs was determined to be 1 September 2007, being the beginning of the earliest period for
which the Group presents full comparative information in these financial statements.
With due regard to the
Group’s accounting policies in previous periods and the requirements of IFRS 1, management has concluded that no adjustments to the amounts reported under HKFRSs as at the date of transition to IFRSs, or in respect of the year ended
31 August 2008, were required in order to enable the Group to make an explicit and unreserved statement of compliance with IFRSs in the first IFRS financial statements which included these amounts as comparatives. Accordingly, these financial
statements continue to include a statement of compliance with HKFRSs as well as including for the first time a statement of compliance with IFRSs, without adjustment to the Group’s and the Company’s financial position, financial
performance or cash flows either at the date of transition to IFRSs or at the end of latest period presented in accordance with HKFRSs.
The IASB has issued a number of new or revised IFRSs that are first effective or available for early adoption for the current accounting period of the Group and the Company. The equivalent new or revised HKFRSs consequently
issued by HKICPA as a result of these developments have the same effective date as those issued by the IASB and are in all material respects identical to the pronouncements issued by the IASB. However, none of these developments are relevant to the
Group’s or the Company’s operations.
The Group has not applied any new standard or interpretation
that is not yet effective for the current accounting period (see note 32).
(b) Basis of preparation of the
financial statements
The consolidated financial statements for the year ended 31 August 2009 comprise
City Telecom (H.K.) Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”).
The measurement basis used in the preparation of the financial statements is the historical cost basis except that certain financial assets are stated at their fair values or amortised costs as explained in the accounting
policies set out below (see notes 1(j), 1(k) and 1(r)).
The preparation of financial statements in conformity
with IFRSs and HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the
revision affects both current and future periods.
Judgements made by management in the application of IFRSs
and HKFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 31.
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 53
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) Subsidiaries and controlled entities
Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.
(d) Group accounting
(i) Consolidation
An investment in a subsidiary
is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases.
Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group
transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.
In the Company’s balance sheet, an investment in a subsidiary is stated at cost less impairment losses (see note 1(i)), unless the investment is classified as held for sale or included in a disposal group that is
classified as held for sale.
(ii) Translation of foreign currencies
Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and
liabilities denominated in foreign currencies are translated at exchange rates ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in profit or loss.
For consolidation purposes, the balance sheets of foreign subsidiaries are translated at the rates of exchange ruling at the
balance sheet date whilst the income statement is translated at an average rate for the year. Exchange differences are dealt with as a movement in reserves.
(e) Goodwill
Goodwill represents the excess of
the cost of a business combination or an investment in an associate or a jointly controlled entity over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities.
Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is
tested annually for impairment (see note 1(i)). In respect of associates or jointly controlled entities, the carrying amount of goodwill is included in the carrying amount of the interest in the associate or jointly controlled entity.
Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and
contingent liabilities over the cost of a business combination or an investment in an associate or a jointly controlled entity is recognised immediately in profit or loss.
On disposal of a cash generating unit, an associate or a jointly controlled entity during the year, any attributable amount of goodwill is included in the calculation of the profit or loss
on disposal.
(f) Investment property
Investment properties are land and/or buildings which are owned and held to earn rental income and/or for capital
appreciation.
Investment properties are stated in the balance sheet at cost less accumulated depreciation (see
note 1(g)) and impairment losses (see note 1(i)) if any. Any gain or loss arising from the retirement or disposal of an investment property is recognised in the income statement. Rental income from investment property is accounted for in accordance
with the accounting policy as set out in note 1(t)(v).
City Telecom (H.K.) Limited Annual Report 2009
54
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Fixed assets
Fixed assets are stated at cost
less accumulated depreciation and accumulated impairment losses.
Depreciation is calculated to write off the
cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:
– Buildings situated on leasehold land are depreciated over the shorter of the unexpired term of lease and their estimated useful lives of 50 years
– Furniture, fixtures and fittings 4 years
– Telecommunications, computer and office equipment 4 years – 20 years
– Motor vehicles 4 years
– Leasehold
improvements are depreciated over the shorter of the unexpired term of the leases and their estimated useful lives.
Where the parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an
asset and its residual value, if any, are reviewed annually.
Major costs incurred in restoring fixed assets to
their normal working condition are charged to profit or loss. Major improvements are capitalised and depreciated over their expected useful lives to the Group.
The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in profit or loss on the
date of disposal.
(h) Assets held under leases
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the
arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of
whether the arrangement takes the legal form of a lease.
(i) Classification of assets leased to the Group
Assets that are held by Group under leases which transfer to the Group substantially all the risks and rewards
of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases.
Land held for own use under an operating lease for which its fair value cannot be measured separately from the fair value of
a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease (see note 1(h)(iii)).
(ii) Finance leases
Where the Group acquired the use of assets under finance leases, the amounts representing the fair value of the leased asset or, if lower, the present value of the minimum lease payments
of such assets, are included in fixed assets with the corresponding liabilities, net of finance charges, recorded as obligations under finance leases. Depreciation and impairment losses are accounted for in accordance with the accounting policy as
set out in note 1(g) and note 1(i). Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the
obligations for each accounting period.
(iii) Operating leases
Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as
operating leases. Receipts and payments made under operating leases net of any incentives received by/from the lessor are credited/charged to profit or loss on a straight-line basis over the lease periods.
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 55
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) Impairment of assets
(i) Impairment of
investments in debt and equity securities, accounts receivable and other receivables
Investments in debt and
equity securities and other current and non-current receivables that are stated at cost or amortised cost or are classified as available-for-sale securities are reviewed at each balance sheet date to determine whether there is objective evidence of
impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events:
– significant financial difficulty of the debtor;
– a breach of contract, such as a default or delinquency in interest or principal payments;
– it becoming probable that a debtor will enter bankruptcy or other financial reorganisation; and
– a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.
If any such evidence exists, any impairment loss is determined and recognised as follows:
– For unquoted equity securities and current and non-current receivables that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future
cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for current and non-current receivables that are carried at cost are reversed if in a subsequent
period the amount of the impairment loss decreases. Impairment losses for equity securities are not reversed.
– For financial assets carried at amortised 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 amortised cost share similar risk
characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with
credit risk characteristics similar to the collective group.
If in a subsequent period the amount of an
impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the
asset’s carrying amount exceeding that would have been determined had no impairment loss been recognised in prior years.
– For available-for-sale securities, the cumulative loss that has been recognised directly in equity is removed from equity and is recognised in profit or loss. The amount of the cumulative loss that is recognised in profit or
loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in profit or loss.
Impairment losses recognised in profit or loss in respect of available-for-sale equity securities are not reversed through
profit or loss. Any subsequent increase in the fair value of such assets is recognised 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 and loss.
Impairment losses are written off
against the corresponding assets directly, except for impairment losses recognised in respect of accounts receivable, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an
allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against accounts receivable and any amounts held in the allowance account relating to that debt are reversed. Subsequent
recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or
loss.
City Telecom (H.K.) Limited Annual Report 2009
56
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) Impairment of assets (continued)
(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 recognised no longer exists or may have decreased:
– fixed assets;
– investment property;
– investments in
subsidiaries; and
– goodwill.
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 recognised in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment
losses recognised 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
In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss
in respect of goodwill is 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 recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.
City Telecom (H.K.) Limited Annual Report 2009
57
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) Other financial assets
The Group and the Company account for investments in debt and
equity securities, other than investments in subsidiaries are as follows:
Financial assets held for trading
and those designated as at fair value through profit or loss at inception are accounted for at fair value. Such financial assets are initially stated at fair value and are classified as current assets, if they are expected to be realised within 12
months. At each balance sheet date the fair value of the financial assets is remeasured, with any resultant gain or loss being recognised in profit or loss. The net gain or loss recognised in profit or loss does not include any interest earned on
these investments. Interest income is recognised in accordance with the policies set out in note 1(t)(iv).
Held-to-maturity securities are dated debt securities that the Group or the Company has the positive ability and intent to hold to maturity. Such securities are initially recognised in the balance sheet at fair value plus transaction
costs. Subsequently, they are stated in the balance sheet at amortised cost less impairment losses (see note 1(i)(i)).
Financial assets 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 recognised at fair value plus transaction costs. At each balance sheet date the fair value of the assets is remeasured, with any resultant gain or loss recognised directly in equity, except for impairment losses (see note 1(i)(i)) and, in
the case of monetary items such as debt securities, foreign exchange gains and losses, which are recognised directly in profit or loss. Where these investments are interest-bearing, interest calculated using the effective interest method is
recognised in profit or loss. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in profit or loss.
Investments are recognised on the date the Company commits to purchase the investments. Investments are derecognised when:
(i) the contractual rights to the cash flows from the investment securities expire; or
(ii) the Company transfers the contractual rights to receive the cash flows of the investment securities.
(k) Derivative financial instruments
Derivative financial instruments that are not designated or do not qualify as hedges are recognised initially at fair value. At each balance sheet date the fair value of the derivative
financial instruments is remeasured. The gain or loss on remeasurement to fair value is charged immediately to profit or loss.
(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 amortised on a straight-line basis over the period of the underlying service subscription agreements.
(m) Accounts receivable
Accounts receivable and other receivables are initially recognised at fair value and thereafter stated at amortised cost less allowance for impairment of doubtful debts (see note 1(i)(i)),
except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment of doubtful debts (see
note 1(i)(i)).
(n) 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 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 28).
City Telecom (H.K.) Limited Annual Report 2009
58
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o) Financial guarantees issued, provisions and contingent liabilities
(i) Financial guarantees issued
Financial guarantees are contracts that require the
issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a
debt instrument.
Where the Group issues a financial guarantee, the fair value of the guarantee (being the
transaction price, unless the fair value can otherwise be reliably estimated) is initially recognised as deferred income within trade and other payables. Where consideration is received or receivable for the issuance of the guarantee, the
consideration is recognised in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognised in profit or loss on initial recognition of any
deferred income.
The amount of the guarantee initially recognised as deferred income is amortised in profit or
loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognised in accordance with note 1(o)(ii) if and when (i) it becomes probable that the holder of the guarantee will call upon the
Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognised, less accumulated
amortisation.
(ii) Other provisions and contingent liabilities
Provisions are recognised for other liabilities of uncertain timing or amount when the Group or the Company 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.
(p) Employee benefits
(i) Employee leave entitlements
Employee
entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance
sheet date.
Employee entitlements to sick leave and maternity or paternity leave are not recognised until the
time of leave.
(ii) Profit sharing and bonus plans
Provisions for profit sharing and bonus plans are recognised 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 profit or loss. The Group’s contributions are reduced by contributions forfeited by those employees
who leave the scheme prior to vesting fully in the contributions.
The assets of the scheme are held in an
independently administered fund that is separated from the Group’s assets.
City Telecom (H.K.) Limited
Annual Report 2009
59
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (p) Employee benefits (continued)
(iv) Share-based payments
The fair value of share
options granted to employees is recognised as an employee cost with a corresponding increase in capital reserve within equity. The fair value is measured at grant date using the Black-Scholes option pricing model or Monte Carlo model, taking into
account the terms and conditions upon which the options were granted. Where the 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 recognised in prior years is charged/credited to profit or loss, unless the original employee expenses qualify for recognition as
an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognised as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve)
except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The amount related to share options expense is recorded in the capital reserve until either the option is exercised
or the option expires.
(q) Deferred taxation
Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the financial statements. Taxation rates enacted or substantively enacted at the balance sheet date are used to measure deferred tax assets and liabilities.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against
which the temporary differences can be utilised.
Deferred taxation is provided on temporary differences
arising 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.
(r) Senior notes
Long-term debt, representing senior notes, is recognised initially at fair value less incidental costs of issuance. Subsequent to initial recognition, the senior notes are stated at
amortised cost with the difference between amortised cost and redemption value recognised in profit or loss over the period of borrowings using the effective interest method.
(s) Trade and other payables
Trade and other payables are initially recognised at fair value. Except for financial guarantee liabilities measured in accordance with note 1(o), trade and other payables are subsequently
stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
(t) Revenue recognition
(i) Revenue for the provision of international telecommunications and
fixed telecommunications network services is recognised, when an arrangement exists, service is rendered, the fee is fixed or determinable, and collectibility is probable.
(ii) Tariff-free period granted to subscribers of fixed telecommunications network services are recognised in profit or loss rateably over the term of the service subscription agreement.
Unbilled revenue represents revenue recognised in accordance with the requirement in note 1(t)(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 recognised as
revenue on a straight-line basis over the related service period.
(iv) Interest income is recognised as it
accrues using the effective interest method.
(v) Rental income receivable under operating leases is recognised
in profit or loss in equal instalments over the periods covered by the lease term. Lease incentives granted are recognised in profit or loss as an integral part of the aggregate net lease payments receivable.
City Telecom (H.K.) Limited Annual Report 2009
60
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(u) Borrowing costs
Borrowing costs that are
directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset.
All other borrowing costs are charged to profit or loss in the year in which they are incurred.
(v) Segment reporting
In accordance with the Group’s internal financial reporting, the Group has determined that the primary reporting format is business segment and secondary reporting format is
geographical segment.
Segment assets consist primarily of goodwill, fixed assets, receivables and cash.
Segment liabilities comprise operating liabilities and exclude items such as taxation and certain corporate borrowings. Capital expenditure comprises additions to 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.
(w) 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 goods or services received, adjusted by the amount of any cash or cash
equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services rendered, adjusted by the amount of any cash or cash equivalents
transferred.
(x) Related parties
For the purposes of these financial statements, a party is considered to be related to the Group if:
(i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and
operating policy decisions, or has joint control over the Group;
(ii) the Group and the party are subject to
common control;
(iii) the party is an associate of the Group or a joint venture in which the Group is a
venturer;
(iv) the party is a member of key management personnel of the Group or the Group’s parent, or a
close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;
(v) the party is a close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or
(vi) the party is a post-employment benefit plan which is for the benefit of employees of the Group or of any entity that is
a related party of the Group.
Close family members of an individual are those family members who may be
expected to influence, or be influenced by, that individual in their dealings with the entity.
City Telecom
(H.K.) Limited Annual Report 2009
61
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
2 TURNOVER AND SEGMENT INFORMATION
The Group is
principally engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada. Revenues recognised during the year are as follows:
2009 2008
HK$’000 HK$’000
Turnover
International tele- communications services 247,359 291,943
Fixed tele- communications network services (note 2(c)) 1,230,880 1,011,038
1,478,239 1,302,981
(a) Primary reporting format - business segments
The Group is organised on a worldwide basis into two business segments:
- International
telecommunications : provision of international long distance calls services
- Fixed telecommunications
network : provision of dial up and broadband Internet access services, local voice-over-IP services, IP-TV services and corporate data services
The Group’s inter-segment transactions mainly consist of provision of leased lines services. These transactions were entered into on similar terms as those contracted with third
parties.
2009
International tele- communications services HK$’000
Fixed tele- communications network services HK$’000
Elimination HK$’000
Group HK$’000
Turnover
- External sales 247,359 1,230,880 -
1,478,239
- Inter-segment sales 5,669 19,784 (25,453) -
253,028 1,250,664 (25,453) 1,478,239
Segment results 61,631 203,515 265,146
Other
revenues 41,540
Finance costs (55,127)
Profit before taxation 251,559
Income tax expense (38,730)
Net profit 212,829
City Telecom (H.K.) Limited Annual Report 2009
62
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
2 TURNOVER AND SEGMENT INFORMATION (CONTINUED)
(a) Primary reporting format - business segments (continued)
2008
International tele- communications services HK$’000
Fixed tele- communications network services HK$’000
Elimination HK$’000
Group HK$’000
Turnover
- External sales 291,943 1,011,038 - 1,302,981
- Inter-segment sales 5,692 22,680 (28,372) -
297,635 1,033,718 (28,372) 1,302,981
Segment results 63,225 95,295 158,520
Other revenues 24,989
Finance costs (75,137)
Profit before taxation
108,372
Income tax benefit 16,818
Net profit 125,190
2009
International tele- communications services
HK$’000
Fixed tele- communications network services HK$’000
Group HK$’000
Segment assets 297,516 1,487,528 1,785,044
Segment liabilities 81,194 295,035 376,229
Unallocated liabilities 180,288
Total liabilities 556,517
Capital expenditure incurred during the year 1,820 284,914 286,734
Depreciation for the year 15,154 191,087 206,241
2008
International tele- communications services HK$’000
Fixed tele- communications network services HK$’000
Group HK$’000
Segment assets 426,781 1,627,300 2,054,081
Unallocated assets 26,335
Total assets 2,080,416
Segment liabilities 80,756 276,771 357,527
Unallocated liabilities 690,282
Total liabilities
1,047,809
Capital expenditure incurred during the year 4,293 207,391 211,684
Depreciation for the year 19,587 190,464 210,051
City Telecom (H.K.) Limited Annual Report 2009
63
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
2 TURNOVER AND SEGMENT INFORMATION (CONTINUED)
(b) Secondary reporting format - geographical segments
The Group’s two business
segments are managed in two main geographical areas:
- Hong Kong
- Canada
In disclosing information on the basis of geographical segments, turnover and segment results are disclosed based on the geographical location of customers. Total assets and capital expenditure are disclosed based on the
geographical location of the assets.
There were no sales between the geographical segments.
2009
Turnover HK$’000
Segment results HK$’000
Total assets HK$’000
Capital expenditure HK$’000
Hong Kong
1,461,715 264,859 1,768,643 286,193
Canada 16,524 287 16,401 541
1,478,239 265,146 1,785,044 286,734
2008
Turnover HK$’000
Segment results HK$’000
Total assets HK$’000
Capital expenditure
HK$’000
Hong Kong 1,281,069 157,485 2,040,496 211,482
Canada 21,912 1,035 13,585 202
1,302,981 158,520 2,054,081 211,684
Unallocated
assets 26,335
Total assets 2,080,416
City Telecom (H.K.) Limited Annual Report 2009
64
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
2 TURNOVER AND SEGMENT INFORMATION (CONTINUED)
(c) Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Company, is a Fixed Telecommunications Network Services (“FTNS”) licensee and
provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the Telecommunication Authority (“TA”) and interconnection services have been
provided, HKBN has been billing mobile operators for the interconnection services provided to them and recognising revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts to be collected. In prior
years, majority of the mobile operators rejected HKBN’s demand for payment of the mobile interconnection charges. As a result of non-payment by certain mobile operators, in 2004, the Group requested the TA to make a determination (the
“2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile operators (“mobile operator under dispute”) to HKBN; and the effective date of the determined mobile interconnection charges.
In June 2007, TA issued the 2004 Determination which set out the rates of mobile interconnection charge
payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from 1 April 2002 to 31 August 2004 and the mobile operator under dispute paid mobile interconnection charge for the relevant period
accordingly.
Subsequent to June 2007, HKBN entered into contractual agreements with several mobile operators
which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from 1 April 2002 to 31 August 2004 and with respect to the period after 31 August 2004 at the interim rate stated in the contractual
agreements. The interim rate is subject to adjustment based on further determination to be issued by the TA.
In February 2008, since certain mobile operators had still not yet settled their mobile interconnection charges for interconnection services provided by HKBN, HKBN requested TA to make a new determination on the rate of mobile
interconnection charge and interest thereon with the four mobile operators.
In September 2008, TA indicated
that it accepted HKBN’s request for determination on the rate of mobile interconnection charges for the period from 1 April 2002 to 26 April 2009 payable by the mobile operators that have not reached contractual agreements with HKBN,
and the rate for the period from 1 September 2004 to 26 April 2009 payable by those mobile operators that have reached contractual agreements with HKBN, and the interest rate thereon (the “2008 Determination”). As at
31 August 2009, the 2008 Determination is still in progress.
For the year ended 31 August 2009, the
Group recognised revenue related to mobile interconnection charges of HK$20,558,000 (2008: HK$29,568,000) representing the amount of mobile interconnection charges management expects to collect.
City Telecom (H.K.) Limited Annual Report 2009
65
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
3 NETWORK COSTS
Network costs mainly include
interconnection charges paid to local and overseas carriers, leased line rentals, program fees, and production costs for the IP-TV service, and do not include depreciation charge which is included in other operating expenses.
The Group estimates the Universal Services Contributions (“USC”) payable to PCCW-HKT to fund the costs of network
development in remote areas in Hong Kong and includes such estimated costs as part of the network costs. TA periodically reviews that actual costs of such developments and revises the amounts owed to PCCW-HKT or to be refunded by PCCW-HKT to the USC
contributing parties.
On 28 December 2007, TA issued a statement (the “2007 TA Statement”) on
the USC and confirmed the actual contribution level for the period from 1 January 2005 to 30 June 2007. Based on the 2007 TA Statement, HK$7,617,000 was recorded as a reduction against the network costs of the Group for the year ended
31 August 2008.
On 8 April 2009, TA issued a statement (the “2009 TA Statement”) on the
USC and confirmed the actual contribution level for the period from 1 July 2007 to 30 June 2008. Based on the 2009 TA Statement, no additional payment or refund of USC from PCCW-HKT was required.
The actual contribution level for the period subsequent to 30 June 2008 has not yet been confirmed by TA.
4 PROFIT BEFORE TAXATION
Profit before taxation is arrived at after charging/(crediting) the following:
(a) Other operating expenses
2009 2008
HK$’000 HK$’000
Advertising and marketing expenses 299,794 307,743
Amortisation of deferred expenditure (note 16) 53,160 33,777
Auditors’ remuneration 3,455
3,687
Depreciation of owned fixed assets 205,624 209,464
Depreciation of fixed assets held under finance lease 617 587
Operating lease charges in respect of land and buildings 17,010 13,296
Operating lease charges in respect of equipment 42 50
Provision for doubtful debts (note 17(b)) 12,103 14,293
Loss on disposal of fixed assets 1,016 1,431
Staff costs (note 4(d)) 302,279 247,460
Others
142,864 134,306
1,037,964 966,094
(b) Other revenues
2009 2008
HK$’000 HK$’000
Interest income(4,869)(15,596)
Other income (note)(36,671)(9,393)
(41,540)(24,989)
Note: Included in other income was gain on extinguishment of the 10-year
senior notes of HK$31,371,000 (2008: HK$2,582,000) for the year ended 31 August 2009.
City Telecom (H.K.)
Limited Annual Report 2009
66
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
4 PROFIT BEFORE TAXATION (CONTINUED)
(c) Finance costs
2009 2008
HK$’000 HK$’000
Interest element of finance leases 27 34
Interest
on 10-year senior notes 52,670 70,010
Amortisation of incidental issuance costs 1,545 1,665
Other borrowing cost 885 3,428
55,127 75,137
(d) Staff costs
2009 2008
HK$’000 HK$’000
Wages and salaries 278,905 226,097
Provision for annual leave 613 2,642
Equity settled share-based transaction 4,768 4,114
Retirement benefit costs - defined contribution plans (note 9) 34,614 29,738
Less: staff costs
capitalised as fixed assets (16,621)(15,131)
302,279 247,460
Staff costs include directors’ emoluments and research and development cost of HK$10,824,000 (2008: HK$9,593,000) but
exclude staff costs of HK$13,461,000 (2008: HK$14,482,000) recorded in network costs and HK$214,272,000 (2008: HK$194,724,000) recorded in advertising and marketing expenses.
(e) Other items
2009 2008
HK$’000 HK$’000
Gain on extinguishment of 10-year senior notes (note 23(a))(31,371)(2,582)
Net exchange gain(3,038)(1,923)
Realised and unrealised gain on other financial assets (189)(3,284)
Realised loss on derivative financial instruments - 1,039
Realised gain on long-term
bank deposit - (1,185)
City Telecom (H.K.) Limited Annual Report 2009
67
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
5 INCOME TAX (EXPENSE)/BENEFIT
Hong Kong profits
tax has been provided at the rate of 16.5% (2008: 16.5%) on the estimated assessable profit for the year. Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the income tax rates prevailing in the
overseas countries in which the Group operates.
The amount of income tax (expense)/ benefit in the
consolidated income statement represents:
2009 2008
HK$’000 HK$’000
Current taxation:
- Hong Kong profits tax - (391)
- Overseas taxation (1,622) (1,929)
- Under-provision of overseas taxation in prior years - (2,552)
Deferred taxation:
- Origination and reversal of temporary differences (note 22) (37,108) (4,645)
- Recognition of previous unrecognized tax losses (note 22) - 26,335
Income tax (expense)/ benefit (38,730) 16,818
The Group’s income tax
(expense)/benefit differs from the theoretical amount that would arise using profits before taxation at applicable tax rates as follows:
2009 2008
HK$’000 HK$’000
Profit before taxation 251,559 108,372
Notional tax on profit before taxation, calculated at the prevailing tax rates applicable to profit in the countries concerned (42,240) (18,927)
Effect of non-taxable income 1,466 3,452
Effect of gain on extinguishment of 10-year senior notes not subject to taxation 5,176 426
Effect of non-deductible expenses (3,648) (6,353)
Effect of recognition of prior year unrecognised tax losses (note) - 26,335
Effect of
utilisation of prior year unrecognised tax losses 518 12,013
Under-provision in prior years - (2,552)
Effect of share based paymnt - 2,324
Effect of tax losses not recognised - (74)
Others (2) 174
Income tax (expense)/benefit
(38,730) 16,818
Note: Management projects future taxable income by considering all available information,
including tax planning strategies, historical taxable income, and the expiration period of the unused tax losses carry forwards of each of the Company and its subsidiaries. During the year ended 31 August 2008, taking into consideration of the
results of operations, management assessed that it is probable that sufficient future taxable profits will be generated to utilise the unused tax losses of HK$159,606,000 which resulted in the recognition of deferred tax assets of HK$26,335,000.
6 PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The profit attributable to shareholders is dealt with in the financial statements of the Company to the extent of
HK$27,440,000 (2008: HK$17,037,000).
City Telecom (H.K.) Limited Annual Report 2009
68
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
7 DIVIDENDS
(a) Dividends payable to equity shareholders of the Company attributable to the year:
2009 2008
HK$’000 HK$’000
Interim dividend declared and paid of HK3 cents per
ordinary share (2008: HK4 cents per ordinary share) 19,904 25,602
Final dividend proposed after the balance sheet date,
of HK16 cents per ordinary share (2008: HK2 cents
per ordinary share) 106,269 13,012
126,173 38,614
The final dividend proposed after
the balance sheet date has not been recognised as a liability at the balance sheet date.
(b) Dividends
attributable to the previous financial year, approved and paid during the year:
2009 2008
HK$’000 HK$’000
Final dividend in respect of the financial year ended
31 August 2008, approved and paid of HK2 cents per
ordinary share (2008: HK4 cents per
ordinary share
in respect of the financial year ended 31 August 2007) 13,014 25,082
During the year ended 31 August 2009, a scrip dividend option was offered to all shareholders excluding shareholders
with registered addresses outside Hong Kong who were entitled to the final dividend in respect of the financial year ended 31 August 2008. 12,212,142 shares were issued during the year ended 31 August 2009 to the shareholders who had
elected to received all or part of their entitlement to dividends in the form of scrip.
8 EARNINGS PER SHARE
2009 2008
HK$’000 HK$’000
Profit attributable to
shareholders 212,829 125,190
Weighted average number of ordinary shares
2009 2008
Number of shares Number of shares
’000 ’000
Issued ordinary shares at the beginning of the year 650,622 616,503
Effect of scrip dividend issued 6,256 7,353
Effect of share options exercised 329 10,159
Effect of shares repurchased and cancelled (6) -
Weighted average number of ordinary shares at
the end of the year (basic) 657,201 634,015
Incremental shares from assumed exercise of share options 11,183
23,982
Weighted average number of ordinary shares at the end of the year (diluted) 668,384 657,997
Basic earnings per share HK32.4 cents HK19.7 cents
Diluted earnings per share HK31.8 cents HK19.0 cents
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 69
(Expressed in Hong Kong dollars)
9 RETIREMENT BENEFIT COSTS
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$1,000 per month as a mandatory contribution. Employer’s mandatory contributions are 100% vested in the employees as soon as they are paid to the MPF Scheme. Senior employees may also elect to join a Mutual Voluntary Plan
(the “Mutual Plan”) in which both the Group and the employee, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the extent of contributions that would have been made under the ORSO Scheme.
Pursuant to the relevant regulations in People’s Republic of China (the “PRC”), the Group contributes to a
defined contribution retirement scheme organised by the local social security bureau for each employee of the subsidiary in PRC at the rate of 20% of a standard salary base as determined by the local social security bureau. The Group has no other
obligation to make payments in respect of retirement benefits of these employees.
The retirement schemes for
staff of the Group in other countries follow the local statutory requirements of the respective countries.
The
aggregate employer’s contributions, net of forfeited contributions, which have been dealt with in the consolidated income statement during the year are as follows:
2009 2008
HK$’000 HK$’000
Gross contributions 34,614 29,738
At 31 August 2009, there was no forfeited contribution available to offset future contributions by the Group to the ORSO Scheme (2008: Nil).
10 DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS (a) Directors’ remuneration
The remuneration of each director for the year ended 31 August 2009 is set out below:
Name of director
Fee
HK$’000
Salary
HK$’000
Discretionary
bonuses
HK$’000
Share-based
payment
HK$’000
Employer’s
contribution
to defined
contribution
scheme
HK$’000
Total
HK$’000
Wong Wai Kay, Ricky - 6,712 1,500 193 670 9,075
Cheung Chi Kin, Paul - 6,714 1,500 193 670 9,077
Yeung Chu Kwong, William - 7,049 1,000 1,764
456 10,269
Lai Ni Quiaque - 2,403 550 1,141 240 4,334
Cheng Mo Chi, Moses 160 - - - - 160
Lee Hon Ying, John 176 - - - - 176
Chan Kin Man
165 - - - - 165
Peh Jefferson Tun Lu 165 - - - - 165
Total 666 22,878 4,550 3,291 2,036 33,421
City Telecom (H.K.) Limited Annual Report 2009
70
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
10 DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS (CONTINUED) (a) Directors’ remuneration (continued)
The remuneration of each director for the year ended 31 August 2008 is set out below:
Name of director
Fee
HK$’000
Salary
HK$’000
Discretionary
bonuses
HK$’000
Share-based
payment
HK$’000
Employer’s
contribution
to defined
contribution
scheme
HK$’000
Total
HK$’000
Wong Wai Kay, Ricky - 6,482 1,054 558 648 8,742
Cheung Chi Kin, Paul - 6,482 1,054 558 648 8,742
Lai Ni Quiaque - 2,250 225 809 225 3,509
Cheng Mo Chi, Moses 152 - - - - 152
Lee Hon Ying, John 168 - - - - 168
Chan Kin Man 158 - - - - 158
Peh Jefferson Tun Lu
158 - - - - 158
Total 636 15,214 2,333 1,925 1,521 21,629
No director waived any emoluments in respect of the years ended 31 August 2008 and 2009.
The share-based payment represents the expenses determined based on the fair value of share options granted to certain
directors under the Company’s share option scheme. Fair value of share options is estimated in accordance with the Group’s significant accounting policies in note 1. The details of the share-based payment are disclosed in note 11.
(b) Five highest paid individuals
The five individuals whose emoluments were the highest in the Group for the year include four (2008: three) directors whose
emoluments are reflected in the analysis presented above. The emoluments payable to the remaining one (2008: two) individual during the year are as follows:
2009 2008
HK$’000 HK$’000
Basic salaries, other allowances and benefits in kind 2,515 8,512
Discretionary bonuses 150 1,137
Share-based payments 332 1,316
Retirement benefit
costs - defined contribution plans 106 589
3,103 11,554
The emoluments fell within the following band:
Number of individual
2009 2008
HK$2,500,001 - HK$3,000,000 - 1
HK$3,000,001 - HK$4,000,000 1 -
HK$9,000,001 -
HK$10,000,000 - 1
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 71
(Expressed in Hong Kong dollars)
11 EQUITY SETTLED SHARE-BASED TRANSACTIONS
The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by shareholders of the Company on 23 December 2002 whereby the directors may,
at their discretion, invite eligible participants to receive options to subscribe for shares subject to the terms and conditions stipulated therein.
(a) The terms and conditions of the options that existed during the year are as follows, whereby all options are settled by physical delivery of shares:
Number of option Vesting conditions Exercisable period
2002 Share Option Scheme
Options granted to directors:
- 5 January 2005
16,183,208 Condition 1 On or prior to 20 October 2014
- 22 May 2006 15,178,466 Condition 1 On or
prior to 21 May 2016
- 6 February 2008 6,044,791 Condition 3 On or prior to 23 December 2012
- 11 February 2008 6,044,791 Condition 2 On or prior to 23 December 2012
Options granted to employees:
- 21 October 2004 7,606,712 Condition 1 On or prior to 20 October 2014
- 22 May 2006 7,314,455 Condition 1 On or prior to 21 May 2016
- 3 August 2006 40,540 Condition 1 On or prior to 2 August 2016
-
22 November 2006 136,545 Condition 1 On or prior to 14 November 2016
- 15 February 2008
1,007,465 Condition 3 On or prior to 23 December 2012
- 11 March 2008 302,240 Condition 1 On or
prior to 23 December 2012
- 2 May 2008 1,007,465 Condition 3 On or prior to 23 December 2012
Total share options 60,866,678
The vesting conditions of the respective share option grant are as follows:
Condition 1
Options granted will be vested in one
year or evenly vested over a period of two to three years. Options are awarded without performance conditions and are exercisable provided the participants have remained employed by the end of respective vesting periods.
Condition 2
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 22 November 2007 to 21 November 2010. Options granted are vested
immediately or evenly over a period of three years from the date of fulfilment of the performance condition.
Condition 3
Vesting of the options is conditional upon the performance of the participants.
Options granted are vested over a period of three to four years from the date of fulfilment of the performance condition.
City Telecom (H.K.) Limited Annual Report 2009
72
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
11 EQUITY SETTLED SHARE-BASED TRANSACTIONS (CONTINUED)
(b) The number and weighted average exercise prices of share options are as follows:
2009 2008
Weighted average exercise price HK$ Number of options Weighted average exercise price HK$ Number of options
2002 Share Option Scheme
Outstanding at the beginning of the year 1.27 60,581,214
1.09 61,350,000
Adjustment to number of options
for 2007 Final Dividend (note (i)) - - 1.10 204,922
Adjustment to number of options
for 2008 Interim Dividend (note (ii)) - - 1.28 177,471
Adjustment to number of options
for 2008 Final Dividend (note (iii)) 1.27 285,464 - -
Granted during the year - - 1.84 18,300,000
Exercised during the year 0.99 (1,416,005) 1.07 (14,052,268)
Lapsed during the year 1.65 (483,442) 1.63 (5,398,911)
Outstanding at the end of the year 1.27 58,967,231 1.27 60,581,214
Exercisable at the end of the year 1.12 45,849,756 1.22 36,463,198
The options outstanding at 31 August 2009 had a weighted exercise price of HK$1.27 (2008: HK$1.27) and a weighted
average remaining contractual life of 5 years (2008: 7 years).
Notes:
(i) As a result of allotment of 11,227,213 new shares to shareholders who elected to receive the 2007 Final Dividend in
shares on 4 February 2008, the exercise price of and the number of share subject to the 51,805,000 share options outstanding on 21 December 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 4 February 2008. The closing price per ordinary share immediately before the date of the grant of the Options was HK$1.70.
(ii) As a result of allotment of 8,838,938 new shares to shareholders 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 share 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.
(iii) As a result of allotment of 12,212,142 new shares to shareholders who elected to receive the 2008 Final Dividend in
shares on 25 February 2009, the exercise price of and the number of share subject to the 60,299,426 share options outstanding on 19 December 2008 (being the Record Date for determining the entitlement of 2008 Final Dividend) were adjusted
pursuant to the 2002 Share Option Scheme with effect from 25 February 2009. The closing price per ordinary share immediately before the date of the grant of the Options was HK$0.88.
(c) Fair value of share options and assumptions
In determining the value of the share options granted, the Black-Scholes Model has been used except for the option granted on 11 February 2008 which has adopted the Monte Carlo Model.
Both models are one of the most generally accepted methodologies used to calculate the value of options. The variables of the models include expected life of the options, risk-free interest rate, expected volatility and expected dividend of the
shares of the Company.
Both models require input of highly subjective assumptions, including the expected
stock volatility. Since the Company’s share options have characteristics significantly different from those of traded options, changes in subjective inputs may materially affect the estimated fair value of the options granted.
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 73
(Expressed in Hong Kong dollars)
12 GOODWILL - GROUP
The Group
HK$’000
Cost and carrying amount:
At 31 August 2009/2008 1,066
Impairment
tests for cash-generating units containing goodwill
Goodwill is allocated to the Group’s cash-generating
units (“CGU”) identified according to country of operation and business segment as follows:
2009
2008
HK$’000 HK$’000
Fixed telecommunication network service segment 1,066 1,066
The recoverable amount of the CGU exceeds its carrying amount. The recoverable amount of the CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by
management covering a five-year period. Cash flows for the five-year period are estimated based on average growth rates of 15% and a pre-tax discount rate of 18%. Cash flows beyond the five year period are assumed to remain constant. The estimated
growth rates used are comparable to the growth rate for the industry.
The key assumption used in the
value-in-use calculation is the annual growth of the turnover of the fixed telecommunications network services, which is determined based on the past performance and management’s expectation for market development. The discount rate used is
pre-tax and reflects specific risks relating to the fixed telecommunication services segment.
Any adverse
change in the key assumption could reduce the recoverable amount below carrying amount.
City Telecom (H.K.)
Limited Annual Report 2009
74
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
13 FIXED ASSETS
Group
Telecom-munications,
Leasehold Furniture, computer
Investment land and Leasehold fixtures and office Motor
property buildings improvements and fittings equipment vehicles Total
HK$’000
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Cost:
At 1 September 2008 5,197 84,244 84,577 19,575 2,644,281 12,624 2,850,498
Additions - 6,667 16,663 416 262,796 192 286,734
Disposals - - (630) (30) (55,118) (43) (55,821)
Exchange adjustments - - (163) (76) (1,515) - (1,754)
At 31 August 2009 5,197 90,911 100,447 19,885 2,850,444 12,773 3,079,657
Accumulated
depreciation:
At 1 September 2008 2,205 10,727 61,269 15,596 1,522,739 6,563 1,619,099
Charge for the year 104 1,739 8,286 1,508 192,925 1,679 206,241
Disposals - - (294) (29) (46,214) (19) (46,556)
Exchange adjustments - - (159) (58) (1,290) - (1,507)
At 31 August 2009 2,309 12,466 69,102 17,017 1,668,160 8,223 1,777,277
Net book value:
At 31 August 2009 2,888 78,445 31,345 2,868 1,182,284 4,550 1,302,380
Cost:
At 1 September 2007 5,197 79,598 80,638 17,419 2,475,775 6,818 2,665,445
Additions - 4,646 2,469 2,189 196,230 6,150 211,684
Disposals - - - (478) (30,564) (344)
(31,386)
Exchange adjustments - - 1,470 445 2,840 - 4,755
At 31 August 2008 5,197 84,244 84,577 19,575 2,644,281 12,624 2,850,498
Accumulated depreciation:
At 1 September 2007 2,101 9,123 50,309 13,952 1,346,854 5,883 1,428,222
Charge for the year 104 1,604 9,626 1,617 196,198 902 210,051
Disposals - - - (286)
(22,390) (222) (22,898)
Exchange adjustments - - 1,334 313 2,077 - 3,724
At 31 August 2008 2,205 10,727 61,269 15,596 1,522,739 6,563 1,619,099
Net book value:
At 31 August 2008 2,992 73,517 23,308 3,979 1,121,542 6,061 1,231,399
City Telecom (H.K.) Limited Annual Report 2009
75
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
13 FIXED ASSETS (CONTINUED)
Company
Telecom-munications,
Furniture, computer
Investment Leasehold fixtures
and office Motor
property improvements and fittings equipment vehicles Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Cost:
At 1 September 2008 5,197 8,332 9,223 312,387 4,901 340,040
Additions - - 228 1,052 -
1,280
Disposals - - - (5,263) - (5,263)
At 31 August 2009 5,197 8,332 9,451 308,176 4,901 336,057
Accumulated depreciation:
At 1 September 2008 2,205 6,925 7,148 232,682 3,597 252,557
Charge for the year 104 738 587 12,333 309 14,071
Disposals - - - (5,259) - (5,259)
At 31 August 2009 2,309 7,663 7,735 239,756 3,906 261,369
Net book value:
At 31 August 2009 2,888 669 1,716 68,420 995 74,688
Cost:
At 1 September 2007 5,197 8,332 7,046 312,158 3,665 336,398
Additions - - 2,177 229 1,236 3,642
At 31 August 2008 5,197 8,332 9,223 312,387 4,901 340,040
Accumulated depreciation:
At 1 September 2007 2,101 6,199 6,802 217,704 3,391 236,197
Charge for the year 104 726 346 14,978 206 16,360
At 31 August 2008 2,205 6,925 7,148 232,682 3,597 252,557
Net book value:
At 31 August 2008 2,992 1,407 2,075 79,705 1,304 87,483
City Telecom (H.K.) Limited Annual Report 2009
76
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
13 FIXED ASSETS (CONTINUED)
(a) The Group’s total future aggregate lease income receivable under non-cancellable operating lease are as follows:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000
HK$’000 HK$’000
Leases in respect of investment property
which are receivable:
- Within 1 year 258 258 258 258
- After 1 year
but within 5 years - 258 - 258
258 516 258 516
Leases in respect of telecommunications facilities
and computer equipment which are receivable:
- Within 1 year 1,566 979 - -
- After 1 year but
within 5 years 1,071 292 - -
2,637 1,271 - -
2,895 1,787 258 516
(b) The net book value of interests in leasehold land and buildings and investment property situated in Hong Kong are analysed as
follows:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Leases of between 10 to 50 years 81,333 76,509 2,888 2,992
Representing:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Leasehold land and building carried at cost 78,445 73,517 - -
Investment property carried at cost less impairment loss 2,888 2,992 2,888 2,992
81,333 76,509 2,888 2,992
(c) In addition to the leasehold land and buildings classified as being held under a finance lease, the Group leases telecommunications, computer and office equipment under finance leases
expiring from one to six years. At the end of the lease term the Group has the option to purchase the equipment at a price deemed to be a bargain purchase option. None of the leases included contingent rental.
At 31 August 2009, the net book value of telecommunications, computer and office equipment under finance lease held by
the Group amounted to HK$1,289,000 (2008: HK$1,411,000).
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 77
(Expressed in Hong Kong dollars)
14 INVESTMENTS IN SUBSIDIARIES
The Company
2009 2008
HK$’000 HK$’000
Unlisted investments, at cost (note (a)) 51,791 51,791
Amounts due from subsidiaries (note (b)) 916,105 1,342,205
967,896 1,393,996
Less: Impairment loss (10,184) (10,184)
957,712 1,383,812
Notes:
(a) The following is a list of the principal subsidiaries which principally affected the results, assets or liabilities of
the Group at 31 August 2009:
Principal Particulars
Place of activities and place of issued Percentage of
Name incorporation of operations share capital interest held
Attitude Holdings Limited British Virgin Islands Inactive Ordinary 100
US$1
Automedia Holdings Limited British Virgin Islands Investment holding Ordinary * 100
in Hong Kong US$1
City Telecom (B.C.) Inc. # Canada Provision of international Common 100
telecommunications and Canadian dollar
dial-up internet access (“CAD”)
services in Canada 501,000
City Telecom (Canada)
Inc. # Canada Leasing and maintenance of Common 100
switching equipment and CAD100
provision of operational
services in Canada
City Telecom Inc. # Canada
Provision of international Common 100
telecommunications and CAD1,000
dial-up internet access
services in Canada
City Telecom International
British Virgin Islands Investment holding Ordinary * 100
Limited in Hong Kong US$5,294
Credibility Holdings Limited British Virgin Islands Investment holding Ordinary * 100
in Hong Kong US$1
CTI Guangzhou Customer PRC Provision of administrative Paid in capital of * 100
Services Co. Ltd. support services HK$8,000,000
(translated from the registered in the PRC
name in Chinese) #
CTI Marketing Company Limited Hong Kong Inactive Ordinary 100
HK$10,000
City Telecom (H.K.) Limited Annual Report 2009
78
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
14 INVESTMENTS IN SUBSIDIARIES (CONTINUED)
(a) (continued)
Principal Particulars
Place of activities and place of issued Percentage of
Name incorporation of operations share capital interest held
Golden Trinity Holdings Limited British Virgin Islands Investment holding Ordinary * 100
in Hong Kong US$1
Hong Kong Broadband Hong Kong Provision of international Ordinary 100
Network Limited telecommunications and HK$383,049
fixed telecommunications
network services in Hong Kong
IDD1600 Company Limited Hong Kong Provision of international Ordinary 100
telecommunications services HK$2
in Hong Kong
SGBN Singapore Broadband Singapore Inactive Ordinary * 100
Network Pte. Limited Singapore dollar
(“SG$”) 1
* Shares held directly by the
Company.
# Subsidiaries not audited by KPMG.
(b) Except for a loan to a subsidiary of HK$753,860,000 (2008: HK$753,860,000) which bears fixed interest of 9% per
annum, all the amounts due from subsidiaries are unsecured, interest-free and have no fixed terms of repayment.
15 OTHER FINANCIAL ASSETS
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Debt securities, at fair value and unlisted
outside Hong Kong - 27,997 - 27,997
Note: The balance as at 31 August 2008 was an investment in debt security with principal amount of US$3,000,000. During the
year ended 31 August 2009,
the debt security matured.
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 79
(Expressed in Hong Kong dollars)
16 DEFERRED EXPENDITURE
The Group
2009 2008
HK$’000 HK$’000
Balance as at the beginning of the year 56,095 21,367
Additions during the year 46,525 68,505
Less: amortisation charge for the year (note 4(a))
(53,160) (33,777)
49,460 56,095
Current portion (36,674) (40,704)
Balance as at
the end of the year 12,786 15,391
Deferred expenditure represents costs incurred to acquire subscribers of the
services offered by the Group, which is treated as customer acquisition costs and are amortised over the period of the underlying service subscription agreements.
17 ACCOUNTS RECEIVABLE, OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Accounts receivable 123,352 152,227 10,063 12,396
Less: Allowance for doubtful debts (3,160) (11,944) (843) (978)
120,192 140,283 9,220 11,418
Other receivables, deposits and prepayments 69,765 82,726 3,393 3,378
189,957 223,009 12,613 14,796
(a) Aging analysis
The aging analysis of accounts receivable is as follows:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000
HK$’000 HK$’000
Current - 30 days 32,427 45,462 3,065 4,233
31 - 60 days 13,663 17,507 3,885 4,783
61 - 90 days 3,953 7,249 773 886
Over 90 days
73,309 82,009 2,340 2,494
123,352 152,227 10,063 12,396
The majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with
receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted.
City Telecom (H.K.) Limited Annual Report 2009
80
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
17 ACCOUNTS RECEIVABLE, OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS (CONTINUED)
(b) Impairment of accounts receivable
Impairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the
impairment loss is written off against accounts receivable directly (see note 1(i)(i)).
The movement in the
allowance for doubtful debts during the year including both specific and collective loss components is as follows:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Balance as at the beginning of the year 11,944 22,392 978 921
Impairment loss recognised 12,103 14,293 935 954
Uncollectible amounts written off (20,887) (24,741) (1,070) (897)
Balance as at the end of the year 3,160 11,944 843 978
(c) Accounts receivable that are not impaired
The aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000
HK$’000 HK$’000
Neither past due nor impaired 32,427 45,462 3,065 4,233
0 – 30 past due 13,663 17,507 3,885 4,783
31 – 60 past due 3,953 7,249 773 886
Over 60
past due 70,149 70,065 1,497 1,516
120,192 140,283 9,220 11,418
Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history
of default.
The amounts over 60 days past due for the Group included receivable relating to mobile
interconnection charges of HK$68,802,000 as at 31 August 2009 (31 August 2008: HK$64,407,000) (see note 2(c)).
Other accounts receivable that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is
necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold collateral over these balances.
(d) Other receivables, deposits and prepayments
Other receivables, deposits and prepayments consist of deposits for purchase of fixed assets, rental deposit, interest receivable, unbilled revenue, prepayment and other receivables.
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 81
(Expressed in Hong Kong dollars)
18 CASH AT BANK AND IN HAND
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Time deposits with banks and other financial institutions 77,500 264,943 77,500 62,854
Cash at bank and in hand 143,552 156,667 41,919 27,532
Cash at bank and in hand in the balance sheet 221,052 421,610 119,419 90,386
19 ACCOUNTS PAYABLE, OTHER PAYABLES AND ACCRUED CHARGES
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000
HK$’000 HK$’000
Accounts payable 37,555 52,324 20,484 26,440
Other payables and accrued charges 206,487 178,114 23,530 17,831
244,042 230,438 44,014 44,271
(a) The aging analysis of the accounts payable was as follows:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Current – 30 days 12,621 18,802 3,096 4,952
31 – 60 days 1,778 4,025 756 2,072
61 – 90 days 189 8,334 47 7,992
Over 90 days
22,967 21,163 16,585 11,424
37,555 52,324 20,484 26,440
(b) Other payables and accrued charges
Other payables and accrued charges primarily consist of accrual for staff salaries and bonus, carrier fees and charges, payable for purchase of fixed assets, advertising and promotional
expenses as well as interest payable in respect of the 10-year senior notes.
20 DEFERRED SERVICE REVENUE
Deferred service revenue primarily includes service fees received from customers in advance for the
Company’s fixed telecommunications network services. Service fees received in advance is deferred and recognised as revenue on a straight-line basis over the related contract period.
City Telecom (H.K.) Limited Annual Report 2009
82
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
21 CAPITAL AND RESERVES
(a) Group
Share capital HK$’000
Share premium HK$’000
Capital reserve HK$’000
Capital redemption
reserve HK$’000
Retained profits HK$’000
Exchange reserve HK$’000
Total HK$’000
At 1 September 2008
65,062 670,717 19,013 – 275,025 2,790 1,032,607
Profit attributable to shareholders – – –
– 212,829 – 212,829
Dividend paid in respect of previous year – – – – (3,108)
– (3,108)
Shares issued in respect of scrip dividend of
previous year 1,221 8,685 – – (9,906) – –
Dividend paid in respect of current year – – – – (19,904) – (19,904)
Shares issued upon exercise of share option 142 1,806 (549) – – – 1,399
Equity settled share-based transactions – – 4,768 – – – 4,768
Exchange adjustments on translation of
the financial statements of subsidiaries – – – – – 70 70
Repurchase and cancellation of ordinary shares (7) – – 7 (134) – (134)
At 31 August 2009 66,418 681,208 23,232 7 454,802 2,860 1,228,527
Share capital HK$’000
Share premium HK$’000
Capital reserve HK$’000
Retained profits HK$’000
Capital redemption
reserve HK$’000
Exchange reserve HK$’000
Total HK$’000
At 1 September 2007 61,650 622,433 18,109 200,519 1,171 903,882
Profit attributable to shareholders – – – 125,190 – 125,190
Dividend paid in respect of previous year – – – (5,915) – (5,915)
Shares
issued in respect of scrip dividend of previous year 1,123 18,044 – (19,167) – –
Dividend paid
in respect of current year – – – (11,371) – (11,371)
Shares issued in respect of scrip
dividend of current year 884 13,347 – (14,231) – –
Shares issued upon exercise of share option
1,405 16,893 (3,300) – – 14,998
Equity settled share-based transactions – – 4,204 –
– 4,204
Exchange adjustments on translation of
the financial statements of subsidiaries – – – – 1,619 1,619
At 31 August 2008 65,062 670,717 19,013 275,025 2,790 1,032,607
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 83
(Expressed in Hong Kong dollars)
21 CAPITAL AND RESERVES (CONTINUED)
(b) Company
Capital
Share Share Capital redemption Retained
capital premium reserve reserve profits Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At
1 September 2008 65,062 670,717 19,013 – 159,400 914,192
Profit attributable to shareholders –
– – – 27,440 27,440
Dividend paid in respect of previous year – – – –
(3,108) (3,108)
Shares issued in respect of scrip dividend of previous year 1,221 8,685 – – (9,906)
–
Dividend paid in respect of current year – – – – (19,904) (19,904)
Shares issued upon exercise of share option 142 1,806 (549) – – 1,399
Equity settled share-based transactions – – 4,768 – – 4,768
Repurchase and cancellation of ordinary shares (7) – – 7 (134) (134)
At 31 August 2009 66,418 681,208 23,232 7 153,788 924,653
Share Share Capital Retained
capital premium reserve profits Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 September 2007
61,650 622,433 18,109 193,047 895,239
Profit attributable to shareholders – – – 17,037 17,037
Dividend paid in respect of previous year – – – (5,915) (5,915)
Shares issued in respect of scrip dividend of previous year 1,123 18,044 – (19,167) –
Dividend paid in respect of current year – – – (11,371) (11,371)
Shares issued in respect of scrip dividend of current year 884 13,347 – (14,231) –
Shares issued upon exercise of share option 1,405 16,893(3,300) – 14,998
Equity settled share-based transactions – – 4,204 – 4,204
At 31 August 2008 65,062 670,717 19,013 159,400 914,192
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 comprises the fair value of the actual or estimated number of unexercised share options
granted to employees of the Group that was recognised in accordance with the accounting policy adopted for share based payment in note 1(p).
(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 31 August 2009, CTI Guangzhou Customer Services Co Ltd (“CTIGZ”), a wholly-owned subsidiary of the Group, made appropriation to the statutory reserve of RMB510,000 (2008: RMB324,000). The accumulated
balance of the statutory reserve maintained at the CTIGZ as at 31 August 2009 was RMB1,415,000 (2008: RMB905,000). 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 1(d)(ii).
City Telecom (H.K.) Limited Annual Report 2009
84
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
21 CAPITAL AND RESERVES (CONTINUED)
(c) Share capital
2009 2008
No. of No. of
shares Amount shares Amount
HK$’000
HK$’000
Authorised:
Ordinary shares of HK$0.10 each 2,000,000,000 200,000 2,000,000,000 200,000
Issued and fully paid:
Ordinary shares of HK$0.10
each
At the beginning of the year 650,621,823 65,062 616,503,404 61,650
Shares issued in respect of scrip dividend of the previous year (note (i)) 12,212,142 1,221 11,227,213 1,123
Shares issued in respect of scrip dividend of the current year (note (ii)) – – 8,838,938 884
Shares issued upon exercise of share options (note (iii)) 1,416,005 142 14,052,268 1,405
Repurchase and cancellation of ordinary shares (70,000) (7) – –
At the end of the year 664,179,970 66,418 650,621,823 65,062
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote
per ordinary share at meetings of the Company. All ordinary shares rank equally with regard to the Company’s residual assets.
Notes:
(i) On 25 February 2009, the Company issued and allotted 12,212,142
ordinary shares to shareholders who elected to receive, the 2008 final dividend in shares pursuant to the scrip dividend scheme announced by the Company on 9 January 2009.
These shares rank pari passu with the existing shares of the Company in all respects.
On 4 February 2008, the Company issued and allotted 11,227,213 ordinary shares to shareholders who elected to receive,
the 2007 final dividend in shares pursuant to the scrip dividend scheme announced by the Company on 4 January 2008. These shares rank pari passu with the existing shares of the Company in all respects.
(ii) 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 shares pursuant to the scrip dividend scheme announced by the Company on 19 June 2008. These shares rank pari passu with the existing shares of the Company in all respects.
(iii) During the year ended 31 August 2009, 1,416,005 ordinary shares (2008: 14,052,268 ordinary shares) were issued at
a weighted average price of HK$0.99 per ordinary share (2008: HK$1.07 per ordinary share) to share option holders who had exercised their options. These shares so issued rank pari passu with the then existing ordinary shares in issue.
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 85
(Expressed in Hong Kong dollars)
21 CAPITAL AND RESERVES (CONTINUED)
(c) Share capital (continued)
(iv) The
movement of outstanding share options during the year was as follows:
Number of Adjustment to Number of
share options number of share options
outstanding at options for outstanding at
Exercise price 1 September 2008 final 31 August
Date of grant per share 2008 Granted dividend Exercised Lapsed 2009
(note (i))
21 October 2004 HK$1.5224 7,571,582 – 35,130 546,184 151,001 6,909,527
5 January 2005 HK$1.5224 16,106,956 – 76,252 – – 16,183,208
22 May 2006 HK$0.6523 22,387,555 – 105,366 869,821 30,201 21,592,899
3 August 2006 HK$0.7018 40,349 – 191 – – 40,540
22 November 2006 HK$0.7216 135,902 – 643 – – 136,545
6 February 2008 HK$1.7568 6,016,309 – 28,482 – – 6,044,791
11 February 2008 HK$1.8660 6,016,309 – 28,482 – – 6,044,791
15 February 2008 HK$1.7568 1,002,718 – 4,747 – – 1,007,465
11 March 2008 HK$1.8164 300,816 – 1,424 – 302,240 –
2 May 2008 HK$1.7866 1,002,718 – 4,747 – – 1,007,465
60,581,214 – 285,464 1,416,005 483,442 58,967,231
During the year ended 31 August 2009, no options were granted under the 2002 Share Option Scheme.
Each option entitles the holder to subscribe for one share of HK$0.10 each in the Company at a predetermined exercise price.
(d) Capital management
The Group’s primary objectives when managing capital are to maintain a reasonable capital structure, safeguard the Group’s ability to continue as a going concern, and to provide
returns for shareholders.
The Group manages the amount of capital in proportion to risk, and makes adjustments
to its capital structure through the amount of dividend payment to shareholders, issuance of scrip and new shares, and managing its debt portfolio in conjunction with cash flow requirements, taking into account its future financial obligations and
commitments.
The Group monitors its capital structure by reviewing its net debt to net asset gearing ratio.
For this purpose, the Group defines net debt as total loans less cash at bank and in hand and long-term bank deposits.
The net debt to net asset gearing ratio as at 31 August 2009 and 2008 are as follows:
The
Group
2009 2008
HK$’000 HK$’000
Unsecured
– 10-year senior notes due 2015 162,586 683,242
– Obligation under finance lease 732 376
Total loans 163,318 683,618
Less: Cash and bank
balances (221,052) (421,610)
Net (cash)/debt (57,734) 262,008
Net asset 1,228,527 1,032,607
Net debt to net asset gearing ratio – 0.25
The decrease in net debt to net asset gearing ratio is mainly due to the repurchase of the 10-year senior notes (see note 23(a)).
Neither the Company nor any of its subsidiaries are currently subject to externally imposed capital requirements.
City Telecom (H.K.) Limited Annual Report 2009
86
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
22 DEFERRED TAXATION
Deferred tax assets are recognised to the extent it is probable that future taxable profits will be generated against which the temporary differences can be utilised.
The components of deferred tax assets/(liabilities) recognised in the balance sheet and the movements are as follows:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000
HK$’000 HK$’000
Balance as at the beginning of the year 21,398 (291) (4,937) –
Exchange differences 1 (1) – –
Deferred taxation (charged)/credited to income statement
– relating to the origination and reversal of temporary differences
(note 5) (37,108)
(4,645) (2,110) (4,937)
– relating to the recognition of unrecognised tax losses in
prior years (note 5) – 26,335 – –
Balance as at the end of the year (15,709) 21,398 (7,047) (4,937)
As at 31 August 2009, the Group has not recognised deferred tax assets in respect of unused tax losses of HK$8,154,000 (2008:
HK$9,518,000) because it is not probable that future taxable profits can be generated to utilise the tax losses. All tax losses are subjected to agreement with local tax authorities.
The Group
2009 2008
HK$’000 HK$’000
After 5 years 2,455 3,810
No expiry date 5,699 5,708
8,154 9,518
The movement in deferred tax assets and liabilities (prior to offsetting of balances within the same taxation
jurisdiction) during the year is as follows:
The Group
Accelerated depreciation allowance
2009 2008
HK$’000 HK$’000
Deferred tax liabilities
At the beginning of the year (126,447) (134,910)
(Charged)/credited to consolidated income statement (5,326) 8,463
Exchange differences 7
–
At the end of the year (131,766) (126,447)
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 87
(Expressed in Hong Kong dollars)
22 DEFERRED TAXATION (CONTINUED)
The Group
Tax losses
2009 2008
HK$’000 HK$’000
Deferred tax assets
At the beginning of the year 147,845 134,619
(Charged)/credited to consolidated income statement (31,782) 13,227
Exchange differences (6) (1)
At the end of the year 116,057 147,845
The Company
Accelerated depreciation allowances
2009 2008
HK$’000 HK$’000
Deferred tax liabilities
At the beginning of the
year (8,745) (11,072)
Credited to the income statement 1,698 2,327
At the end of the year (7,047) (8,745)
The Company
Tax losses
2009 2008
HK$’000 HK$’000
Deferred tax assets
At the beginning of the year 3,808 11,072
Charged to the income statement (3,808) (7,264)
At the end of the year – 3,808
Deferred tax assets and deferred tax liabilities are
offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on the same
taxable entity. The following amounts, determined after appropriate offsetting, are shown in the balance sheet:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Deferred tax assets – 26,335 – –
Deferred tax liabilities (15,709) (4,937) (7,047) (4,937)
(15,709) 21,398 (7,047) (4,937)
City Telecom (H.K.) Limited Annual Report 2009
88
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
23 LONG-TERM DEBT AND OTHER LIABILITIES
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
10-year senior notes due 2015 (note (a)) 162,586 683,242 162,586 683,242
Obligations under finance leases (note (b)) 732 376 715 350
163,318 683,618 163,301 683,592
Current portion – obligations under finance leases (202) (121) (193) (112)
163,116 683,497 163,108 683,480
At 31 August
2009, the Group’s and the Company’s long-term debt and other liabilities were repayable as follows:
The Group The Company
2009 2008 2009 2008
HK$’000 HK$’000 HK$’000 HK$’000
Long-term debt and other liabilities, repayable:
– 10-year senior notes due 2015
– after the fifth year 162,586 683,242 162,586 683,242
Obligations under finance leases
– Within 1 year 202 121 193 112
– After 1 year but within 2 years 197 129 189 120
– After 2 years but within 5 years 263 126 263 118
– After 5 years 70 – 70 –
732 376 715 350
Less: Current portion –
obligations under finance leases (202) (121) (193) (112)
530 255 522 238
163,116 683,497 163,108 683,480
Notes:
(a) On 20 January 2005, the Company issued
unsecured 10-year senior fixed rates notes (the “10-year senior notes”) with a principle amount of US$125 million at an issue price equal to 100 per cent of the principal amount. The 10-year senior notes mature on 1 February 2015 and bear
interest at the fixed rate of 8.75% per annum payable semi-annually on 1 February and 1 August of each year, commencing 1 August 2005.
The 10-year senior notes are unconditionally and irrevocably guaranteed on a joint and several basis by the Company’s subsidiaries (other than CTI Guangzhou Customer Services Company Limited) as subsidiary guarantors.
During the year ended 31 August 2009, the Group repurchased a portion of the 10-year senior notes with a
cumulative principal value of US$67,990,000 through tender offers in April 2009 and July 2009. The total consideration paid including transaction cost and accrued interest was approximately US$65,139,000. The gain on extinguishment of the 10-year
senior notes was US$4,048,000 (equivalent to HK$31,371,000) which has been recorded in other revenues of the consolidated income statement.
As at 31 August 2009, the principal amount of the 10-year senior notes remaining in issue after the repurchase was US$21,363,000 (equivalent to HK$165,563,000). The amortised cost of the
10-year senior notes was US$20,979,000 (equivalent to HK$162,586,000) as at 31 August 2009.
The effective
interest rate of the 10-year senior notes for the year ended 31 August 2009 is 9.2% (2008: 9.2%) per annum.
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
89
23 LONG-TERM DEBT AND OTHER LIABILITIES (CONTINUED)
Notes: (continued)
(b) At 31 August 2009, the Group had obligations under finance leases repayable as follows:
The Group
2009 2008
Present value of the minimum lease payments HK$’000
Interest expense relating to future periods HK$’000
Total minimum lease payments HK$’000
Present value of the minimum lease payments HK$’000
Interest expense relating to future periods HK$’000
Total minimum lease payments
HK$’000
Within 1 year 202 35 237 121 21 142
After 1 year but within 2 years 197 22 219 129 13 142
After 2 years but within 5 years 263 30 293 126 4 130
After 5 years 70 1 71 – – –
530 53 583 255 17 272
732 88 820 376 38 414
At 31 August 2009, the Company had obligations under finance leases repayable as follows:
The Company
2009 2008
Present value of the minimum lease payments HK$’000
Interest expense relating to future periods HK$’000
Total minimum lease payments HK$’000
Present value of the minimum lease payments HK$’000
Interest expense relating to future periods HK$’000
Total minimum lease payments
HK$’000
Within 1 year 193 34 227 112 20 132
After 1 year but within 2 years 189 22 211 120 12 132
After 2 years but within 5 years 263 30 293 118 4 122
After 5 years 70 1 71 – – –
522 53 575 238 16 254
715 87 802 350 36 386
City Telecom (H.K.) Limited Annual Report 2009
90
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
24 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) Reconciliation of profit before taxation to net cash inflow from operations
2009 HK$’000 2008 HK$’000
Profit before taxation 251,559 108,372
Depreciation of owned fixed assets 205,624 209,464
Depreciation of fixed assets held under
finance lease 617 587
Amortisation of deferred expenditure 53,160 33,777
Interest income (4,869) (15,596)
Interest element of finance lease 27 34
Loss on
disposal of fixed assets 1,016 1,431
Realised and unrealised gain on other financial assets (189) (3,284)
Realised gain on long term bank deposit – (1,185)
Realised loss on derivative financial instrument – 1,039
Equity settled share-based transactions 4,768 4,204
Gain on extinguishment of 10-year senior notes (31,371) (2,582)
Interest, amortisation and exchange difference on 10-year senior notes 49,214 72,640
Net cash inflow before working capital changes 529,556 408,901
(Increase)/decrease in long-term receivable and prepayment (505) 1,346
Decrease in accounts receivable, other receivables, deposits and prepayments 33,052 6,914
Decrease in inventories – 477
Increase in deferred expenditure (46,525) (68,505)
Increase/(decrease) in accounts payable, other payables, accrued charges and deposits received 17,419 (12,567)
Increase in deferred services revenue 4,621 46,247
Net cash inflow from operations 537,618
382,813
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS 91
(Expressed in Hong Kong dollars)
24 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)
(b) Analysis of changes in financing during the year
Share capital (including share premium and capital reserve) HK$’000
Obligations under finance lease HK$’000
10-year senior notes HK$’000
Balance at
1 September 2007 702,192 1,210 952,593
Issue of new shares 14,998 – –
Share issued in respect of scrip dividend 33,398 – –
Repayment of capital element of finance lease – (834) –
Repurchase of 10-year senior notes – – (269,399)
Gain on extinguishment of 10-year senior notes – – (2,582)
Amortisation of incidental issuance costs – – 1,665
Equity settled share-based transactions 4,204 – –
Effect of foreign exchange rate changes – – 965
Balance at 31 August 2008 754,792 376 683,242
Balance at 1 September 2008 754,792 376 683,242
Issue of new shares 1,399 – –
Repurchase and cancellation of ordinary shares (7) – –
Share issued in respect of scrip dividend 9,906 – –
Purchase of fixed assets under
finance lease – 494 –
Repayment of capital element of finance lease – (138) –
Repurchase of 10-year senior notes – – (485,829)
Gain on extinguishment of 10-year senior notes – – (31,371)
Amortisation of incidental issuance costs – – 1,545
Equity settled share-based transactions 4,768 – –
Effect of foreign exchange rate changes – – (5,001)
Balance at 31 August 2009 770,858 732 162,586
City Telecom (H.K.) Limited Annual Report 2009
92
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
25 FINANCIAL INSTRUMENTS
Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Group’s business. These risks are limited by the Group’s financial management
policies and practices described below.
(a) Credit risk
The Group’s credit risk is primarily attributable to accounts receivable, 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 accounts receivable and other receivables, credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when
due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer locates. These receivables are due within 30 days from the date of billing.
Subscribers with receivables that are more than 3 months overdue are requested to settle all outstanding balances before any further credit is granted. The Group generally does not obtain collateral from customers.
The Group’s exposure to credit risk is influenced mainly by individual characteristics of each customer. The default
risk of the country in which customer locates also has an influence on credit risk but to a lesser extent. Concentrations of credit risk with respect to accounts receivable are limited due to the Group’s customer base being large and unrelated.
As such, management does not expect any significant losses of accounts receivable that have not been provided for by way of allowances as disclosed in note 17.
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 26, 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 26.
Further quantitative disclosures in respect of the Group’s exposure to credit risk
arising from accounts receivable are set out in note 17.
(b) Liquidity risk
The Company 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 Company’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
realisable 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 Company
aims to maintain flexibility in funding by maintaining committed credit lines available.
The following table
details the remaining contractual maturities at the balance sheet date of the Group’s and the Company’s financial liabilities, which are based on undiscounted cash flows (including interest) and the earliest date the Group and the Company
are required to pay.
Group
2009 2008
Carrying amount HK$’000
Total contractual undiscounted cash flow HK$’000
Within 1 year or on demand HK$’000
More than 1 year but less than 2 years HK$’000
More than 2 years but less than 5 years HK$’000
More than 5 years HK$’000
Carrying amount HK$’000
Total contractual undiscounted cash flow HK$’000
Within 1 year or on demand HK$’000
More than 1 year but less than 2 years HK$’000
More than 2 years but less than 5 years HK$’000
More than 5 years HK$’000
Current liabilities
Accounts payable 37,555
37,555 37,555 – – – 52,324 52,324 52,324 – – –
Other payables and accrued
charges 206,487 206,487 206,487 – – – 178,114 178,114 178,114 – – –
Deposits
received 16,385 16,385 16,385 – – – 16,264 16,264 16,264 – – –
Obligations under
finance leases 202 237 237 – – – 121 142 142 – – –
Tax payable 1,993 1,993 1,993
– – – 2,103 2,103 2,103 – – –
Non current liabilities
10-year senior rate 162,586 244,117 14,489 14,489 43,467 171,672 683,242 1,093,852 61,012 61,012 183,036 788,792
Obligation under finance leases 530 583 – 219 293 71 255 272 – 142 130 –
425,738 507,357 277,146 14,708 43,760 171,743 932,423 1,343,071 309,959 61,154 183,166 788,792
City Telecom (H.K.) Limited Annual Report 2009
93
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
25 FINANCIAL INSTRUMENTS (CONTINUED)
(b)
Liquidity risk (continued)
Company
2009 2008
Carrying amount HK$’000
Total contractual undiscounted cash flow HK$’000
Within 1 year or on demand HK$’000
More than 1 year but less than 2 years HK$’000
More than 2 years but less than 5 years HK$’000
More than 5 years HK$’000
Carrying amount HK$’000
Total contractual
undiscounted cash flow HK$’000
Within 1 year or on demand HK$’000
More than 1 year but less than 2 years HK$’000
More than 2 years but less than 5 years HK$’000
More than 5 years HK$’000
Current liabilities
Amount due to subsidiaries
10,830 10,830 10,830 – – – 10,830 10,830 10,830 – – –
Accounts payable 20,484
20,484 20,484 – – – 26,440 26,440 26,440 – – –
Other payables and
accrued charges 23,530 23,530 23,530 – – – 17,831 17,831 17,831 – – –
Deposits received 7,886 7,886 7,886 – – – 7,943 7,943 7,943 – – –
Obligations under finance leases 193 227 227 – – – 112 132 132 – – –
Tax payable 356 356 356 – – – 356 356 356 – – –
Non current liabilities
10-year senior rate 162,586 244,117 14,489 14,489 43,467 171,672 683,242 1,093,852 61,012 61,012 183,036 788,792
Obligation under finance leases 522 575 – 211 293 71 238 254 – 132 122 –
226,387 308,005 77,802 14,700 43,760 171,743 746,992 1,157,638 124,544 61,144 183,158 788,792
(c) Interest rate risk
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. 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 and the Company’s borrowings at the balance
sheet date.
The Group The Company
2009 2008 2009 2008
Effective interest rate % HK$’000
Effective
interest rate % HK$’000
Effective interest rate % HK$’000
Effective interest rate % HK$’000
Fixed rate borrowings:
10-year senior notes 9.2
162,586 9.2 683,242 9.2 162,586 9.2 683,242
Obligations under finance lease 5.6 732 6.8 376 5.6 715 6.8 350
163,318 683,618 163,301 683,592
(ii) Sensitivity analysis
Management determines
that the Group’s exposure of interest rate risk was not significant and hence no sensitivity analysis is prepared.
City Telecom (H.K.) Limited Annual Report 2009
94
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
25 FINANCIAL INSTRUMENTS (CONTINUED)
(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 United State dollar has remained close to the current pegged rate of HKD7.80 =
USD1.00 since 1983, management does not expect significant foreign exchange gains or losses between the two currencies.
The Group is also exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollars and the Renminbi arising from its operations in the PRC. In order to limit this foreign currency risk
exposure, the Group maintained Renminbi cash balance that approximate two to three months’ of operating cash flows.
(i) Exposure to currency risk
The following table details the Group’s and the
Company’s exposure at the balance sheet date to currency risk arising from recognised assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate.
Group
2009 2008
United States Dollars ’000
Japanese Yen ’000
Canadian Dollars ’000
United States Dollars
’000
Japanese Yen ’000
Canadian Dollars ’000
Cash at bank and in
hand and pledged bank deposits 11,599 696 282 22,330 1,099 176
Accounts payable (3,183) – – (2,500)
– –
Other payables and accrued charges (390) – – (3,390) – –
10-year senior notes (20,979) – – (87,483) – –
Overall net exposure (12,953) 696 282 (71,043) 1,099 176
Company
2009 2008
United States Dollars ’000
Renminbi ’000
Japanese Yen ’000
United States Dollars
’000
Renminbi ’000
Japanese Yen ’000
Amounts due from
subsidiaries 7 14,304 – 7 100,195 –
Cash at bank and in hand and pledged bank deposits 11,372 –
696 21,387 – 1,099
Amount due to a subsidiary (90) – – (90) – –
Accounts payable (1,780) – – (2,010) – –
Other payables and accrued charges (265) – – – – –
10-year senior notes (20,979) – – (87,483) – –
Overall net exposure (11,735) 14,304 696 (68,189) 100,195 1,099
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
95
25 FINANCIAL INSTRUMENTS (CONTINUED)
(d) Foreign currency risk (continued)
(ii) Sensitivity analysis
The Company’s foreign currency risk is mainly concentrated on the fluctuation of the Renminbi against the Hong Kong dollar. It is assumed that the pegged rate between the Hong Kong
dollar and the United States dollar would be materially unaffected by any changes in movement in value of the United States dollar against other currencies. The following table details the Company’s sensitivity to a 10% increase or decrease in
the Hong Kong dollar against the Renminbi. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the year end for a 10% change in foreign currency rates. A positive number
indicates an increase in profit for the year where the Renminbi strengthens against the Hong Kong dollar. For a 10% weakening of the Renminbi against the Hong Kong dollar, there would be an equal and opposite impact on the profit and the balance
below would be negative.
2009 HK$’000 2008 HK$’000
Renminbi 1,626 11,469
(e) Fair values
Except for the following
instruments, all financial instruments are carried at amounts not materially different from their fair values as at 31 August 2009 and 2008:
2009 2008
Carrying amount HK$’000 Fair value
HK$’000 Carrying amount HK$’000
Fair value HK$’000
The Group and the Company
10-year senior notes 162,586 157,285 683,242 672,236
(f) Estimation of fair values
Fair value of financial instruments is estimated as follows:
(i) The fair value of the 10-year senior notes is determined based on quoted market price.
(ii) Accounts receivable, other receivables, deposits and prepayments, pledged bank deposits, cash at bank and in hand,
accounts payable, and other payables and accrued charges are assumed to approximate their fair values as they can be realised or settled within twelve months after the balance sheet date.
City Telecom (H.K.) Limited Annual Report 2009
96
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
26 CONTINGENT LIABILITIES
The Group The Company
2009 HK$’000 2008 HK$’000 2009 HK$’000 2008 HK$’000
Bank guarantees provided to suppliers (notes 28(i) and (ii)) 2,490 24,671 2,490 24,568
Bank guarantee in lieu of payment of utility deposits (note 28(iii)) 5,272 5,272 – –
Corporate guarantee provided to a subsidiary for shared banking facility (note) – – 4,650 52,694
7,762 29,943 7,140 77,262
Note: Corporate guarantee provided to a subsidiary represented the maximum amount of contingent liabilities of the Company had the shared banking facility of HK$4,650,000 as at
31 August 2009 (2008: HK$52,694,000) been fully drawn. As at 31 August 2009, HK$7,762,000 (2008: HK$29,943,000) of the HK$15,038,000 (2008: HK$87,319,000) total banking facility (note 28(i)) was utilised by the Company and the subsidiary.
27 COMMITMENTS
(a) Capital commitments
The Group The Company
2009 HK$’000 2008 HK$’000 2009 HK$’000 2008 HK$’000
Purchase of telecommunications, computer and office equipment – contracted but not provided for 150,099 143,888 –
22
(b) Commitments under operating leases
At 31 August 2009 and 2008, the Group and the Company has future aggregate minimum lease payments under non-cancellable
operating leases as follows:
The Group The Company
2009 HK$’000 2008 HK$’000 2009 HK$’000 2008 HK$’000
Leases in respect of land and buildings which are payable:
– Within 1 year 21,387 16,472 – –
– After 1 year but within 5 years 13,802 11,645 – –
35,189 28,117 – –
Leases in respect of telecommunications facilities and computer equipment which are payable:
– Within 1 year 45,321 38,623 181 1,128
– After 1 year but within 5 years 9,600 12,876 – –
– After 5 years 6,271
7,384 – –
61,192 58,883 181 1,128
96,381 87,000 181 1,128
City Telecom (H.K.) Limited Annual Report 2009
NOTES
TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
97
27 COMMITMENTS (CONTINUED)
(c) Program fee commitments
The Group entered into several long-term agreements with program content providers for the rights to use certain program
contents in the Group’s IP-TV services. Minimum amounts of program fees to be paid by the Group are as follows:
2009 HK$’000 2008 HK$’000
Program fee in respect of program rights which are
payable:
– Within 1 year 9,094 6,583
– After 1 year but within 5 years 6,238 279
15,332 6,862
28 PLEDGE OF ASSETS
As at 31 August 2009,
the Group has pledged bank deposits of US$650,000 (equivalent to HK$5,038,000) and HK$10,000,000 as security for the following significant banking facilities:
(i) bank facility of US$650,000 (equivalent to HK$5,038,000) granted by a bank for issuance of bank guarantees to third party suppliers, letters of credit, short-term loan, overdraft,
foreign exchange and interest rate hedging arrangements. As of 31 August 2009, bank guarantees of HK$500,000 were issued against this bank facility (2008: HK$20,371,000);
(ii) bank guarantees of HK$1,990,000 (2008: HK$4,300,000) issued by the bank to third party suppliers of the Company and one
of its subsidiaries for payment of certain products and services procured by the Group from these third party suppliers; and
(iii) bank guarantees of HK$5,272,000 (2008: HK$5,272,000) issued by the bank to certain utility vendors of the Group in lieu of payment of utility deposits.
As at 31 August 2008, the Group had pledged bank deposits of US$9,900,000 (equivalent of HK$77,319,000) and
HK$10,000,000 as security of the above significant banking facilities.
29 MATERIAL RELATED PARTY TRANSACTIONS
In addition to the transactions and balances disclosed elsewhere in these financial statements, the Group
entered into the following material related party transactions.
Key management personnel remuneration
Remuneration for key management personnel, including amounts paid to the Company’s directors as disclosed
in note 10(a) and certain of the highest paid employees as disclosed in note 10(b), is as follows:
2009
HK$’000 2008 HK$’000
Short-term employee benefits 34,687 28,850
Post-employment benefits 2,614 2,425
Equity compensation benefits 4,071 3,664
41,372
34,939
City Telecom (H.K.) Limited Annual Report 2009
98
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Hong Kong dollars)
30 COMPARATIVE FIGURE
Certain comparative figures have been reclassified to conform with the current year’s presentation.
31 ACCOUNTING ESTIMATES AND JUDGEMENTS Key sources of estimation uncertainty
Notes 11 and 25 contain information about the assumptions and risk factors relating to fair value of share options and financial instruments. Other key sources of estimation uncertainty
are as follows:
Impairment loss for doubtful accounts
The Group maintains impairment loss for doubtful accounts based upon evaluation of the recoverability of the accounts
receivable and other receivables which takes into account the historical write-off experience and recovery rates. If the financial condition of the customers were to deteriorate, additional impairment may be required.
Depreciation
Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated
useful lives. The Group reviews the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical
experience with similar assets and takes into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
Deferred tax
At 31 August 2009, the Group has recognised a deferred tax asset in relation to tax losses carry forward as set out in note 22. The realisability of the deferred tax asset depends on
whether it is probable that future taxable profits will be available against which the asset can be utilised. In assessing the need to recognise a deferred tax asset, management consider all available evidence, including projected future taxable
income, tax planning strategies, historical taxable income, and the expiration periods of the tax losses. In cases where the actual future taxable profits are less than expected, a reversal of deferred tax asset may arise, which will be recognised
in the income statement for the period in which such a reversal takes place.
32 POSSIBLE IMPACT OF AMENDMENTS,
NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE YEAR ENDED 31 AUGUST 2009
Up to the
date of issue of these financial statements, the IASB has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended 31 August 2009 and which have not been adopted in these financial
statements.
The Group is in the process of making an assessment of what the impact of these amendments, new
standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of the following developments is unlikely to have significant impact on the Group’s results of operations and
financial position.
Effective for
accounting periods
beginning on or after
IAS 1 (Revised)
Presentation of financial statements 1 January 2009
IAS 23 (Revised) Borrowing costs 1 January 2009
IFRS 8 Operating segments 1 January 2009
City Telecom (H.K.) Limited Annual Report 2009
99
FIVE-YEAR FINANCIAL SUMMARY
(Expressed in Hong Kong dollars)
RESULTS, ASSETS
AND LIABILITIES
The following table summarises the consolidated results, assets and liabilities of the Group
for the five years ended 31 August 2009.
2009 2008 2007 2006 2005
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Results
Turnover 1,478,239 1,302,981 1,141,270 1,159,579 1,137,356
Profit/(loss) before
taxation 251,559 108,372 30,891(99,485) (220,042)
Income tax (expense)/benefit (38,730) 16,818 (2,026 ) 7,244
6,725
Profit/(loss) attributable to shareholders 212,829 125,190 28,865 (92,241 ) (213,317)
Assets
Goodwill 1,066 1,066 1,066 1,066 1,066
Fixed assets 1,302,380 1,231,399 1,237,223
1,367,234 1,336,543
Other financial assets – – 39,213 40,274 41,441
Derivative financial instruments – – 1,039 1,845 –
Long term receivable and prepayment 6,091 5,586 6,932 12,532 13,099
Deferred tax asset – 26,335 – – –
Deferred expenditure 49,460 56,095 21,367 12,445 21,131
Current assets 426,047 759,935 854,293 688,819 884,327
Total assets 1,785,044 2,080,416 2,161,133 2,124,215 2,297,607
Liabilities
Current liabilities 377,692 359,375 303,992 283,105 369,146
Non-current liabilities
178,825 688,434 953,259 949,456 957,828
Total liabilities 556,517 1,047,809 1,257,251 1,232,561 1,326,974
Net assets 1,228,527 1,032,607 903,882 891,654 970,633
City Telecom (H.K.) Limited Annual Report 2009
100
CORPORATE INFORMATION
FINANCIAL CALENDAR
Full-year Results
Announced on 5 November 2009
Annual General Meeting
18 December 2009
LISTING
City Telecom (H.K.) Limited’s shares are listed under the stock code “1137” on The Stock Exchange of Hong Kong Limited and in the form of American Depositary Receipts (each
representing 20 ordinary shares of the Company) on the Nasdaq Stock Market in U.S. under the ticker symbol “CTEL”.
Executive Directors
Mr. WONG Wai Kay, Ricky (Chairman) Mr. CHEUNG Chi Kin, Paul
(Vice Chairman)
Mr. YEUNG Chu Kwong, William (Chief Executive Officer) Mr. LAI Ni Quiaque3 (Chief
Financial Officer and Head of Talent Engagement)
Non-executive Director
Dr. CHENG Mo Chi, Moses3
Independent Non-executive Directors
Mr. LEE
Hon Ying, John2,4 Dr. CHAN Kin Man1,3 Mr. PEH Jefferson Tun Lu1,3
1 Members of Audit Committee
2 Chairman of Audit Committee
3 Members of Remuneration Committee
4 Chairman of
Remuneration Committee
Company Secretary
Mr. LAI Ni Quiaque
Authorised Representatives
Mr. WONG Wai Kay,
Ricky Mr. CHEUNG Chi Kin, Paul
Registered Office
Level 39, Tower 1, Metroplaza 223 Hing Fong Road
Kwai Chung, New Territories, Hong Kong
Legal Adviser to the Company as to U.S. and Hong Kong Laws
Jones Day
29th Floor, Edinburgh Tower The Landmark
15 Queen’s Road Central Hong Kong
Auditors
KPMG
Certified Public Accountants
8th Floor, Prince’s Building
10 Chater Road
Central, Hong Kong
Share Registrar
Computershare Hong Kong Investor Services Limited
46th Floor, Hopewell Centre 183 Queen’s Road East, Wanchai Hong Kong
American Depositary Bank
The Bank of New York Mellon Corporation
101
Barclay Street, 22nd Floor New York, NY 10286 USA
Principal Bankers
Citibank, N.A.
The Hongkong and Shanghai Banking Corporation Limited
Website
www.ctigroup.com.hk
City Telecom (H.K.) Limited Annual Report 2009
Concept and Design: Equity Financial Press Limited Website: www.equitygroup.com.hk
Where the
English and the Chinese texts conflict, the English text prevails
FSC
© Mixed Sources
Product group from well-managed
forests and other
controlled sources
www.fsc.org Cert no. SGS-COC-003677
©1996 Forest Stewardship Council
City
Telecom (H.K.) Limited
Level 39, Metroplaza Tower 1
No. 223 Hing Fong Road
Kwai Chung, N.T., Hong Kong
www.ctigroup.com.hk
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