CTEL Hong Kong Television Network Ltd. (MM)

As filed with the Securities and Exchange Commission on December 17, 2010

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

or

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended August 31, 2010

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      or                     

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number: 000-30354

City Telecom (H.K.) Limited

(Exact name of registrant as Specified in its Charter)

Hong Kong Special Administrative Region,
The People’s Republic of China
(Jurisdiction of Incorporation or Organization)

Level 39, Tower 1, Metroplaza
No. 223 Hing Fong Road
Kwai Chung, New Territories
Hong Kong
(Address of Principal Executive Offices)

Mr. Lai Ni Quiaque
12th Floor, Trans Asia Centre
No.18 Kin Hong Street
Kwai Chung, New Territories
Hong Kong

Telephone : (852) 3145 6068
Facsimile : (852) 2199 8445
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

		Name Of Each
		Exchange On Which
Title Of Each Class		Registered
American Depositary Shares, each representing 20 Ordinary Shares, par value HK$0.10 per share		The Nasdaq Stock Market LLC
Ordinary Shares, par value HK$0.10 per share*		The Nasdaq Stock Market LLC*

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

      Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as at the close of the period covered by the annual report: 764,997,344 Ordinary Shares, par value HK$0.10 per share

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o       No þ

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o       No þ

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o       No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

US GAAP o		International Financial Reporting Standards as issued þ		Other o
		by the International Accounting Standards Board

     If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has selected to follow.

Item 17 o       Item 18 o

     If this report is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

*      Not for trading, but only in connection with the registration of the American Depositary Shares

 

 

Contents

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

Use of defined and technical terms

Except as otherwise indicated by the context, references in this annual report to:

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

Currency translation

     We publish our consolidated financial statements in Hong Kong dollars. In this annual report, references to “Hong Kong dollars” or “HK$” are to the currency of Hong Kong, and references to “U.S. dollars” or “US$” are to the currency of the United States. This annual report contains translations of Hong Kong dollar amounts into U.S. dollar amounts, solely for your convenience. Unless otherwise indicated, the translations have been made at US$1.00 = HK$7.7781, which was the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on August 31, 2010. On December 10, 2010 the exchange rate was US$1.00 = HK$7.7737. You should not construe these translations as representations that the Hong Kong dollar amounts actually represent such U.S. dollar amounts or could have been or could be converted into U.S. dollars at the rates indicated or at any other rates.

Note regarding forward-looking statements

     This annual report contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. These include statements with respect to City Telecom and our plans, strategies and beliefs and other statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “intend”, “estimate”, “continue”, “plan”, “predict”, “project” or other similar words. The statements are based on management’s assumptions and beliefs in light of the information currently available to us.

     These assumptions involve risks and uncertainties which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Potential risks and uncertainties include, without limitation:

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

     When considering such forward-looking statements, you should keep in mind the factors described in Item 3 “Key information — risk factors” and other cautionary statements appearing in Item 5 “Operating and financial review and prospects” of this annual report. Such risk factors and statements describe circumstances that could cause actual results to differ materially from those contained in any forward-looking statement.

Special note on our financial information presented in this annual report

     Our consolidated financial statements as of and for the years ended August 31, 2008, 2009 and 2010 included in this annual report on Form 20-F have been prepared in accordance with IFRSs as issued by the International Accounting Standards Board, or the IASB. Pursuant to the requirement under IFRS 1: First-Time Adoption of International Financial Reporting Standards, or IFRS 1, the date of our transition to IFRS was September 1, 2007, which is the beginning of the earliest period for which we have presented full comparative information in our consolidated financial statements in our annual report for the year ended August 31, 2009. With due regard to our accounting policies in previous periods and the requirements of IFRS 1, we have concluded that no adjustments were required to the amounts reported under HKFRSs as at September 1, 2007 or in respect of the year ended August 31, 2008.

     In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission, or the SEC, which became effective on March 4, 2008, we are not required to provide a reconciliation to generally accepted accounting principles in the United States, or U.S. GAAP.

PART I

ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3 KEY INFORMATION

           A. Selected financial data

City Telecom’s historical financial information

     The following table presents the selected consolidated financial data and operating data of City Telecom as of and for the years ended August 31, 2008, 2009 and 2010. The selected financial data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements included elsewhere in this annual report, the accompanying notes thereto and Item 5 “Operating and financial review and prospects”. As disclosed above under “Special note on our financial information presented in this annual report”, our consolidated financial statements as of and for the years ended August 31, 2008, 2009 and 2010 have been prepared and presented in accordance with IFRSs.

Selected consolidated statement of operations data:

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

Selected consolidated balance sheet data:

		As of August 31,
		2008				2009				2010				2010
		HK$				HK$				HK$				US$
		(Amounts in thousands)
Total assets			2,093,410				1,790,408				2,251,549				289,473
Long-term debt and other liabilities			(683,242	)			(162,586	)			(134,860	)			(17,338	)
Finance lease obligations			(376	)			(732	)			(605	)			(78	)
Other liabilities			(377,185	)			(398,563	)			(427,545	)			(54,969	)
Total liabilities			(1,060,803	)			(561,881	)			(563,010	)			(72,385	)
Net assets			1,032,607				1,228,527				1,688,539				217,088
Share capital			65,062				66,418				76,500				9,835
Share premium			670,717				681,208				1,074,997				138,208
Reserves			296,828				480,901				537,042				69,045
Total shareholders’ equity			1,032,607				1,228,527				1,688,539				217,088

Other financial data:

		For the year ended August 31,
		2008				2009				2010				2010
		HK$				HK$				HK$				US$
		(Amounts in thousands)
EBITDA (note 3)			377,964				508,058				469,437				60,354
Net cash inflow from operating activities			381,991				536,771				485,340				62,398
Net cash outflow from investing activities			(147,750	)			(176,488	)			(306,254	)			(39,374	)
Net cash outflow from financing activities			(345,978	)			(561,292	)			178,307				22,924
Capital expenditures (note 4)			211,684				286,734				344,844				44,335

     As a measure of our operating performance or liquidity, we believe that the most directly comparable measure to EBITDA is net cash provided by operating activities. The following table reconciles our net cash inflow from operating activities, the most directly comparable financial measure calculated and presented in accordance with IFRSs, to our definition of EBITDA on a consolidated basis for the years ended 2008, 2009 and 2010.

		For the year ended August 31,
		2008				2009				2010				2010
		HK$				HK$				HK$				US$
		(Amounts in thousands)
EBITDA			377,964				508,058				469,437				60,354
Depreciation and amortization			(210,051	)			(206,241	)			(199,029	)			(25,588	)
Interest expense, net			(59,541	)			(50,258	)			(10,863	)			(1,397	)
Income taxes benefit/(expense)			16,818				(38,730	)			(42,679	)			(5,487	)
Net income			125,190				212,829				216,866				27,882
Depreciation and amortization			210,051				206,241				199,029				25,588
Amortization of deferred expenditure			33,777				53,160				48,621				6,251
Income taxes (benefit)/expense			(16,818	)			38,730				42,679				5,487
Interest income			(15,596	)			(4,869	)			(11,372	)			(1,462	)
Interest element of finance lease			34				27				42				5
Interest, amortization and exchange difference on senior notes			72,640				49,214				6,069				780
Interest on other borrowings			3,428				885				3,260				419
Amortization of upfront cost on bank loan			—				—				192				25
Interest expense on bank loan			—				—				1,379				177
Change in fair value of derivative financial instruments			—				—				11,293				1,452
Realized gain on long term bank deposit			(1,185	)			—				—				—

		For the year ended August 31,
		2008				2009				2010				2010
		HK$				HK$				HK$				US$
		(Amounts in thousands)
Loss/(gain) on disposal of fixed assets			1,431				1,016				(1,375	)			(177	)
Equity settled share-based transaction			4,204				4,768				5,347				687
Realized loss on derivatives financial instruments			1,039				—				—				—
Realized and unrealized gain on other financial assets			(3,284	)			(189	)			—				—
(Gain)/loss on extinguishment of senior notes			(2,582	)			(31,371	)			9,650				1,241
Taxation paid			(4,250	)			(1,732	)			(3,013	)			(387	)
Change in long term receivable and prepayments			1,346				(505	)			917				118
Change in working capital, net			(27,434	)			8,567				(44,244	)			(5,688	)
Net cash inflow from operating activities			381,991				536,771				485,340				62,398

      Operating data:

		As of and for the year ended August 31,
		2008				2009				2010
FTNS subscriptions:
- Broadband Internet access			316,000				391,000				526,000
- Local VoIP			329,000				382,000				431,000
- IP-TV			156,000				170,000				153,000
Total			801,000				943,000				1,110,000
Registered international telecommunications accounts (note 5)			2,336,000				2,383,000				2,445,000
IDD outgoing minutes (in thousands)			574,000				487,000				464,000

Selected Consolidated Statement of Operations Data:

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

		For the year ended August 31,
		2006				2007
		HK$				HK$
		(Amounts in thousands except per share data)
U.S. GAAP
Total operating revenue			1,134,876				1,141,270
Total operating expenses			(1,220,388	)			(1,048,695	)
Net (loss)/income			(142,062	)			28,865
Basic (loss)/earnings per share (cents)			(23.1	)			4.7
Diluted (loss)/earnings per share (cents) (note 1)			(23.1	)			4.6
Dividends declared per share (cents)			—				8.0
Weighted average number of shares			614,134				614,840
Diluted weighted average number of shares (note 2)			614,134				631,319

Selected Consolidated Balance Sheet Data:

		As of August 31,
		2006				2007
		HK$				HK$
		(Amounts in thousands)
HKFRS
Total assets			2,124,215				2,161,133
Debt			(948,027	)			(952,593	)
Finance lease obligation			(2,373	)			(1,210	)
Other liabilities			(282,161	)			(303,448	)
Total liabilities			(1,232,561	)			(1,257,251	)
Net assets employed			891,654				903,882
Share capital			61,417				61,650
Share premium			620,298				622,433
Reserves			209,939				219,799
Total shareholders’ equity			891,654				903,882

		As of August 31,
		2006				2007
		HK$				HK$
		(Amounts in thousands)
U.S. GAAP
Total assets			2,154,305				2,189,086
Total liabilities			(1,257,034	)			(1,279,587	)
Net shareholders’ equity			897,271				909,499

Other Financial Data:

		For the year ended August 31,
		2006 (note 6)				2007
		HK$				HK$
		(Amounts in thousands)
HKFRS
EBITDA (note 3)			195,417				353,827
Net cash provided by operating activities			184,151				383,999
Net cash (used in)/provided by investing activities			(492,742	)			114,053
Net cash used in financing activities			(86,432	)			(109,504	)
Capital expenditures (note 4)			322,935				132,250

     As a measure of our operating performance or liquidity, we believe that the most directly comparable measure to EBITDA is net cash provided by operating activities. The following table reconciles our net cash provided by operating activities under HKFRS to our definition of EBITDA on a consolidated basis for each of fiscal 2006 and 2007.

		For the year ended August 31
		2006				2007
		HK$				HK$
		(Amounts in thousands)
EBITDA (note 3)			195,417				353,827
Depreciation and amortization			(276,464	)			(258,103	)
Interest expense, net			(68,259	)			(64,833	)
Income taxes credit/(expense)			7,244				(2,026	)
Net (loss)/income			(142,062	)			28,865
Depreciation and amortization			276,464				258,103
Impairment loss on investment property			1,131				—
Amortization of deferred expenditure			13,973				15,580
Income taxes (credit)/expense			(7,244	)			2,026
Interest income			(20,378	)			(22,671	)
Interest, amortization and exchange difference on senior notes			86,664				89,879
Other borrowing costs			1,919				(739	)
Loss on disposal of fixed assets			9,621				1,714
Equity settled share-based transaction			6,823				5,727
Realized and unrealized loss on derivatives financial instruments			125				806
Unrealized gain on other investments			(668	)			(1,887	)
Taxation paid			(2,532	)			(2,171	)
Change in long term receivable			567				5,600
Change in working capital, net			(40,252	)			3,167
Net cash flow provided by operating activities			184,151				383,999

Operating Data:

		As of and for the year ended August 31,
		2006				2007
FTNS Subscriptions:
Broadband Internet Access			220,000				247,000
Local VoIP			281,000				308,000
IP-TV			116,000				128,000
Total			617,000				683,000
Registered international telecommunications accounts (note 5)			2,201,963				2,331,000
IDD outgoing minutes (in thousands)			788,000				659,000

As previously

reported in

As previously

2006 Hong Kong

reported in 2005 Hong

As reported

statutory

As reported

Kong statutory

in 2005 Form

financial

in 2006

financial statements

20-F

statements

Form 20-F

HK$

HK$

HK$

HK$

(Amounts in thousands except per share data)

Total operating revenue

1,137,356

1,162,059

1,159,579

1,134,876

Provision for doubtful debts

(60,563

)

(35,445

)

7,668

(17,450

)

Net loss after tax

(206,352

)

(156,531

)

(92,241

)

(142,062

)

Loss per share — basic and diluted

(33.6) cents

(25.5) cents

(15.0) cents

(23.1) cents

Exchange rate information

     The Hong Kong dollar is freely convertible into other currencies (including the U.S. dollar). Since 1983, the Hong Kong dollar has been officially linked to the U.S. dollar and the current rate is US$1.00 to HK$7.80. Despite the efforts of the Hong Kong Monetary Authority, or HKMA, to keep the official exchange rate stable, the market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be influenced by the forces of supply and demand in the foreign exchange markets. Furthermore, the official exchange rate is itself subject to fluctuations and can be reset in circumstances where the secondary foreign exchange markets move beyond the HKMA’s ability to back the official rate with foreign reserves.

     Exchange rates between the Hong Kong dollar and other currencies are influenced by the rate between the U.S. dollar and the Hong Kong dollar.

     The following table sets forth the average, high, low and period-end exchange rate between the Hong Kong dollar and the U.S. dollar (in Hong Kong dollars per U.S. dollar) for the fiscal periods indicated:

		Average				High				Low				Period-end
		(note)
		HK$				HK$				HK$				HK$
Fiscal 2006			7.7601				7.7796				7.7506				7.7767
Fiscal 2007			7.8029				7.8289				7.7665				7.7968
Fiscal 2008			7.7915				7.8159				7.7497				7.8036
Fiscal 2009			7.7550				7.8094				7.7495				7.7505
Fiscal 2010			7.7646				7.8040				7.7495				7.7781
June 2010			7.7880				7.8040				7.7690				7.7865
July 2010			7.7753				7.7962				7.7651				7.7672
August 2010			7.7702				7.7788				7.7605				7.7781
September 2010			7.7643				7.7738				7.7561				7.7599
October 2010			7.7580				7.7642				7.7513				7.7513
November 2010			7.7547				7.7656				7.7506				7.7649
December 2010 (through December 10, 2010)			7.7666				7.7737				7.7612				7.7737

B. Capitalization and indebtedness

Not applicable.

C. Reasons for the offer and use of proceeds

Not applicable

D. Risk factors

      You should carefully consider the risks described below and other information contained in this annual report before making an investment decision. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. If they do, our business, financial condition or results of operations could be materially adversely affected.

Risks relating to our business and operations

      In light of the intense competition in our target markets, we cannot assure you that our revenues and net profit will continue to grow.

     We derive our total revenues from our FTNS business and our IDD business. Our FTNS business primarily consists of broadband Internet access, local VoIP, IP-TV and corporate data services, while our IDD business primarily consists of direct dial, international calling cards and mobile call forwarding services. Our total revenues increased by 6.5% to HK$1,574.7 million in fiscal 2010 from HK$1,478.2 million in fiscal 2009, and our net profit increased by 1.9% to HK$216.9 million in fiscal 2010 from HK$212.8 million in fiscal 2009. The increase in net profit in fiscal 2010 was primarily due to increased contribution from our FTNS business and finance cost savings of HK$32.9 million as a result of repurchase and redemption of our outstanding 10-year senior notes.

     Although revenue from our FTNS business increased by 10.2% in fiscal 2010, we cannot assure you that we will be able to maintain such revenue and profit growth. The increase in revenue of our FTNS business was primarily due to an increase in our broadband subscription base of 34.5%, driven by our marketing program between November 2009 to August 2010, which lowered by approximately 50.0% our symmetric 100Mbps service to HK$99 per month, including a Member-Get-Member promotion at this price for both the referee and referrer. Effective from September 1, 2010, we terminated such marketing program and increased the price of our residential broadband service plan from HK$99 per month to HK$169 per month. We cannot assure you whether our revenues and net profit will continue to grow as a result of such price increase due to intense competition in our industry. The growth of our subscription base will depend on our ability to continue to expand our network coverage and operate in a highly competitive market.

     Further, revenue from our IDD business decreased by 11.6% in fiscal 2010. The decrease was primarily due to a decrease in the total number of airtime minutes by 4.7% and a decrease in our tariff rate that we are able to charge our customers. On our IDD service, our strategy is to focus on cash flow rather than market share. Due to increasing competition, we expect our IDD business will continue to experience pressure on tariff rates and to contribute to a smaller portion of our revenue and net profit over time.

     Our ability to continue to grow our total revenues and net profit in the rapidly evolving telecommunications industry depends on many factors, including our ability to accurately identify and respond to demand for new services, success in developing new services on a timely basis, quality and cost competitiveness of our services, effectiveness of our sales and marketing efforts, and the number and nature of competitors in a given market segment. The global economic uncertainty has resulted in decreased consumer confidence and overall slower economic activity, which may dampen the demand for broadband services or affect our customers’ ability to continue with existing services. We cannot assure you that we can maintain the current level of revenue growth and profitability.

      Given the pace of change in the telecommunications industry and the characteristics of our target markets, we cannot assure you that our FTNS business will continue to be profitable.

     The main target market for our FTNS business is Hong Kong. The Hong Kong telecommunications industry is highly competitive. The intense competition could result in price reductions, reduced gross margins or loss of market share, any of which could adversely affect our future growth and profitability. We expect competition to continue to increase for the following reasons:

	•		Increasing liberalization of the telecommunications industry in Hong Kong may continue to attract new local and foreign entrants and broaden the variety of telecommunications services available in the market, thereby increasing the overall level of competition in our industry.
	•		The Hong Kong government may continue to issue new wireless and wire-line FTNS Licenses. For instance, 291 PNETS Licenses had been issued in Hong Kong as of October 31, 2010 for the provision of “external telecommunications services” (as defined in the Telecommunications Authority’s Determination as of December 30, 1998). Some of these licenses are held by subsidiaries of major foreign telecommunications providers, which have competitive advantages over us due to their global presence and size.
	•		Around December 31, 2007, Television Broadcasts Limited and Asia Television Limited, commonly known as TVB and ATV, respectively, the only two licensed domestic free television programme broadcasters in Hong Kong, launched their digital terrestrial television services and have since broadened such services to cover an increasingly large percentage of the viewing public in Hong Kong. As of December 14, 2010, their services offered a total of 11 free channels in both standard and high definition. This improvement in the quality of free television may result in a reduction in the number of subscribers for pay-television services.

     As some of our main competitors have longer operating histories and others are subsidiaries of large business conglomerates, they may have greater financial, technical, marketing and other resources; a more sophisticated infrastructure; better brand recognition; and a larger subscription base and may be able to devote more human and financial resources to research and development, network improvement and marketing than we can. Our competitive position varies significantly by service type because each service is characterized by a different market. If we cannot compete effectively in a major market, our business, operating results and financial condition could be adversely affected.

      Our services may become obsolete if we cannot address the changing needs of our customers.

     The telecommunications industry is characterized by rapidly changing technology and industry standards, evolving subscriber needs and the changing nature of services with increasingly short life cycles. We cannot assure you that we will be able to respond successfully to technological advances and stay ahead of the evolving industry standards, for the following reasons:

	•		To compete successfully, we must constantly increase the diversity and sophistication of the services we offer and upgrade our telecommunications technologies. We may be required to make substantial capital expenditures and may not be successful in modifying our network infrastructure in a timely and cost-effective manner in response to these changes.
	•		New technology, such as the possible development of 4G wireless data networks as a substitute for fiber-based services, or other trends in the telecommunications industry, could have an adverse effect on the services we currently offer. For example, traditional fixed line home telephones are being replaced by mobile telephones and/or VoIP services. Technology substitution from global VoIP providers, some of which offer free PC-to-PC based international calls, is also becoming more prevalent. Increased adoption of such competing technology may lead to a decline in our revenues.
	•		Changing our services in response to market demand may require the adoption of new technologies that could render many of the technologies that we are currently implementing less competitive or obsolete. We may also need to gain access to related or enabling technologies in order to integrate the new technology with our existing technology. Our new services may contain design flaws or other defects when first introduced to the market.

     If we cannot offer the new services demanded by our customers in a timely manner, our business, operating results or financial condition could be adversely affected.

      The development of our Next Generation Network requires significant capital expenditures, which may not be available on terms satisfactory to us or may impose a burden on our other business activities.

     Our business is capital intensive. We need to continue to devote substantial resources in infrastructure construction and upgrade to provide consistent and high quality services. In particular, because we deliver our fixed telecommunications network services through our self-owned Next Generation Network, we have made, and will continue to make, capital investments in the expansion and upgrade of this network and the development of various telecommunications services. We incurred total capital expenditures of approximately HK$344.8 million in fiscal 2010.

     We expect to incur capital expenditures ranging from approximately HK$320 million to HK$350 million in 2011, a large majority of which will be spent on the continued expansion and upgrade of our network. While we intend to fund such expenditures by using our currently available cash as well as cash flow from operations, we may not have adequate capital to fund our projected capital expenditures. Our ability to fund operating and capital expenditures depends significantly on our ability to generate cash from operations. In fiscal 2010, we generated cash from operating activities of HK$485.3 million. However, we cannot assure you that we will be able to sustain our operations in order to generate sufficient cash flows to meet our future requirements. Our ability to generate cash from operations is subject to general economic, financial, industry, legal and other factors and conditions, many of which are outside our control. In particular, our operations are subject to price and demand volatility in the telecommunications industry.

     If we cannot finance our operations and capital expenditure using cash generated from operations, we may be required to, among other things, incur additional debt, reduce capital expenditures, sell assets, or raise equity. The global economic uncertainty has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and volatility in the capital markets. Although we have sufficient cash to meet our anticipated cash needs for at least the next 12 months, the current market conditions may affect our ability to obtain further financing to support our network expansion in the future. Any failure to do so will negatively impact our business and slow down our network deployment, in that we may not be able to continue expanding our network infrastructure to cover substantial area of the Hong Kong territory. Additional debt or equity financing may not be available, and debt financing, if available, may involve restrictions on our investing, financing and operating activities.

      If any of our new services are not successful, our operating results could be adversely affected.

     New telecommunications services are introduced by our competitors from time to time. If we do not anticipate these changes and rapidly adopt new and innovative services in response, we may not be able to fully capture the opportunities in the market. Development of new services, however, exposes us to the following risks:

•

Developing new telecommunications services can be complex. We may not be able to adapt the new services effectively, promptly and economically to meet customer demand.

	•		In developing new services, we are required to continue to make significant investments in our network infrastructure in order to support these services. If we exceed our budgeted capital expenditure and cannot meet the additional capital requirements in time through operating cash flows and planned financings, we may have to delay the project.
	•		Any of our new services may not be commercially successful. The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or, to the extent that we are required under the applicable accounting standards to recognize a charge for the impairment of assets. Any impairment charges could materially adversely affect our financial condition and the results of our operations.

     Specifically, we cannot assure you that any services enabled by upgrading and expanding our Next Generation Network will provide us with an acceptable rate of return. This would depend on our ability to accurately identify and respond to emerging consumer trends and demand. We cannot assure you that we can generate satisfactory investment returns on any new service.

      We may need to improve our internal controls over financial reporting and our independent auditors may not be able to attest to their effectiveness.

     The United States Securities and Exchange Commission, or the SEC, as required by Section 404(a) of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. Effective from September 21, 2010, the SEC adopted amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act, as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 404(c) provides that Section 404(b) of the Sarbanes-Oxley Act shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer. During fiscal 2010, we became an accelerated filer. Therefore, we are required to have an independent registered public accounting firm to attest to and report on the effectiveness of our internal controls over financial reporting starting from fiscal 2010.

     We have evaluated our internal controls surrounding the financial reporting process for the current fiscal period so that management can attest to the effectiveness of these controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. We have implemented appropriate steps to strengthen the internal controls. However, we may identify conditions that could result in significant deficiencies or material weaknesses in the future. As a result, we could experience a negative reaction in the financial markets and incur additional costs in improving the condition of our internal controls. For a detailed discussion of controls and procedures, see Item 15 “Controls and procedures.”

     Notwithstanding our efforts, our management may subsequently conclude that our internal controls over financial reporting are not effective. Further, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. If we do not successfully design and implement changes to our internal controls and management systems, or if we fail to maintain the adequacy of these controls as such standards are modified or amended from time to time, we may not be able to comply with Section 404(a) of the Sarbanes-Oxley Act. This could subject us to regulatory scrutiny and penalties that may result in a loss of public confidence in our management, which could, among other things, adversely affect our customer and vendor confidence, stock price and our ability to raise additional capital and operate our business as projected.

      If we cannot manage the growth in our FTNS business, the quality of our services and our operating results could be adversely affected.

     We have been pursuing an aggressive strategy in growing our FTNS business. As part of this strategy, we intend to continue to expand and invest in our Next Generation Network infrastructure to support our range of broadband Internet access, local VoIP, IP-TV and corporate data services. The deployment of these projects has resulted and will result in significant demands on our systems and controls and may impact our administrative, operational and financial resources. These projects will also place significant demands on us to maintain the quality of our services to ensure that our brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of our services.

     Our ability to manage the growth in our FTNS business will depend upon our ability to:

	•		improve our existing operational, administrative and technological systems and our financial and management controls;
	•		enhance our infrastructure to support the expansion;
	•		develop effective marketing plans;
	•		control operational costs and maintain effective quality controls; and
	•		offer competitive prices to customers for our services.

     Our failure to achieve any of the above in an efficient manner and at a pace consistent with the growth of our FTNS business could have an adverse effect on the quality of our services and increase our costs of operation.

      We depend on certain key personnel, and our business and growth prospects may be disrupted by the loss of their services.

     Our future success is dependent upon the continued service of our key executives and Talents (All individuals employed by the Group, including directors of the Company are defined as “Talents” hereafter). While we have employment agreements with members of our senior management, we cannot assure you that we will be able to retain these senior management. If one or more of our key personnel were unable or unwilling to continue in their present positions, or if they joined a competitor or formed a competing company, or if they shifted their focus away from Hong Kong operations, we may not be able to replace them easily, our business may be significantly disrupted and our financial condition and results of operations may be materially adversely affected. Furthermore, as our industry is characterized by high demand and increased competition for Talents, we may need to offer higher compensation and other benefits in order to attract and retain key personnel in the future. We cannot assure you that we will be able to attract and retain the key personnel that we will need to achieve our business objectives.

      Our ability to further expand the coverage of our Next Generation Network may be limited by the physical limitations or our ability to obtain access rights in certain buildings .

     Our Next Generation Network has the capability of providing value-added broadband services and content that combine voice, data and images with increased efficiency and flexibility. As part of our strategy to grow our FTNS business, we plan to increase the coverage of our Next Generation Network from the current number of 1.77 million residential homes pass as of August 31, 2010 to our target of 2.0 million residential homes pass by the end of 2011. To connect our Next Generation Network to a new physical site, we need to install fibre-to-the-home or fibre-to-the-building with Category-5e copper wiring, which we refer to as “in-building wiring”. Our expansion plan may be hindered because the installation of in-building wiring is subject to the following constraints:

	•		Because at least one of our competitors has already installed in-building wiring in virtually all buildings and many buildings have limited physical space for additional in-building wiring, other FTNS providers, including us, may encounter a bottleneck when installing our own in-building wiring;
	•		Some single-owner commercial buildings may grant rights of access to our competitors while barring us from installing our own in-building wiring; and
	•		Certain developers may have affiliations with our competitors and may attempt to delay or inhibit our wiring installations.

     We may be unable to capitalize on any economy of scale benefits if we fail to expand our network coverage at our projected rate. Our growth opportunities will also be limited as a result.

      Internet security concerns could adversely affect our Internet access services.

     To remain competitive, we must continue to upgrade our broadband Internet access, local VoIP, IP-TV and corporate data services. Computer viruses, break-ins and other inappropriate or unauthorized uses of our Next Generation Network could affect the provision of our full suite of Internet Protocol services and have the following effects on our FTNS business:

	•		interruption, delays or cessation in services to our customers;
	•		a threat to the security of confidential information stored in the computer system of our customers; and
	•		illegal viewing or download of our contents.

     To protect our business from computer viruses and other harmful attacks, we may need to incur significant costs to protect us against the threat of security breaches or to alleviate problems caused by such breaches. We intend to continue to strengthen our network security to alleviate these problems. Our efforts, however, may cause interruptions, delays or cessations of our services, and our customers may stop using our service or assert claims against us as a result.

      We may be unable to further expand the scope of our Internet access services unless we obtain additional network capacity.

     Our ability to transition from time to time to more advanced technologies for faster Internet access is critical to our sustainable competitiveness. Because our Next Generation Network has limited capacity, our ability to expand the network bandwidth on a timely basis is subject to the following factors:

	•		the expansion and development of our own international telecommunications facilities;
	•		the availability of leased capacity from third party carriers at favorable rates; and
	•		the possible termination or cancellation of our existing contracts.

     If we fail to increase the capacity of our international bandwidth, our ability to increase our market share and revenue in the Internet access market segment will be limited.

      Natural disasters and other disruptive regional events could damage our network and adversely affect our business and operating results.

     Our network is vulnerable to damage or cessation of operations from fire, earthquakes, severe storms, heavy rainfall, power loss, telecommunications failures, network software flaws, vandalism, transmission cable cuts and other catastrophic events. We may experience failures or shut downs relating to individual points of presence or even catastrophic failure of our entire network. Any sustained failure of our network, our servers, or any link in the delivery chain, whether from operational disruption, natural disaster or otherwise, could have a material adverse effect on our business, financial condition and results of operations.

      The loss of key suppliers or their failure to deliver equipment on a timely basis could negatively impact our business.

     We rely on third parties for the supply of network equipment. Further, because an IP set-top-box must be installed in order to access our IP-TV services, we must have an adequate supply of such installation equipment on hand for delivery to our customers in a timely manner.

     We purchase all of our IP set-top boxes and other equipment from our suppliers on a purchase order basis and have no long-term contracts. If our suppliers are unable to supply us with these products in a timely manner or the costs of these products increase due to unforeseen causes, this could negatively impact our operating results, especially if we are unable to spread the costs over a larger subscription base or effectively pass the additional costs on to our subscribers.

      Because we rely on third parties in delivering services through our Next Generation Network, our operating results could be adversely affected if their services are not timely or do not meet our standards.

     We depend on third parties for the ongoing maintenance and repair of our Next Generation Network. Further, although our Next Generation Network is operated essentially as an independent network, a small portion of it is connected to the network of other providers under interconnection agreements. We are also dependent on certain Hong Kong rail transport providers to maintain and provide us with access to their infrastructure to support the proper functioning of our equipment and fiber-based backbone. If these third parties fail to respond or are untimely in their response to our maintenance and repair needs, our customers may experience interruptions or variations in the quality of our fixed telecommunications network services. Any service interruptions or variations could adversely affect our operating results and our ability to retain or add new customers.

Risks relating to the regulatory, political and economic environment

      Regulatory reforms and currently contemplated regulatory initiatives in the telecommunications industry may adversely affect us.

     The Hong Kong telecommunications industry is undergoing continuous regulatory reform. Our business and results of operations may be adversely affected by changes in the telecommunications regulations, especially in the following areas:

	•		In July 2004, a new provision of the Telecommunications Ordinance came into force. This anti-competition provision specifically regulates the conduct of all carrier licensees (in particular merger and acquisition transactions) in the Hong Kong telecommunications industry by giving the Telecommunications Authority the power to review the conducts and transactions concerning carrier licensees and to take appropriate actions if it determines that the transaction would, or is likely to, prevent or substantially lessen competition in a telecommunications market. The Telecommunications Authority has the power under this provision to conduct an investigation into any questionable transaction. It might consent to the transaction (unconditionally or subject to any conditions it deems appropriate) or reject the transaction outright. The decision of the Telecommunications Authority will take into account whether the transaction will adversely affect the public interest and benefit. This provision may have an adverse effect on our ability to grow our business through mergers and acquisitions.
	•		We offer local VoIP services through our Next Generation Network under HKBN’s FTNS License. Following the conclusion of a public consultation on the regulation of Internet Protocol Telephony Services, the Telecommunications Authority issued a statement on June 20, 2005, setting out its views and decisions on the regulatory and licensing framework for the provision of VoIP services, including the creation of a licensing framework, conformance to the existing system of assigning telephone numbers, imposition of interconnection charges and establishing guidelines with respect to the quality of services.

	•		We offer fixed but not mobile telecommunications network services. The Telecommunications Authority has implemented a new fixed-mobile convergence licensing practice by way of the UC License. The UC License regime, which began on August 1, 2008, seeks to replace the existing four classes of carrier licenses for the provision of fixed and mobile services with a simple license. Going forward the UC License will be the only carrier license to be issued for the provision of fixed, mobile and/or converged services. Existing carrier licenses will remain effective until their expiry date. Licensees can choose to apply to convert their existing licenses to UC Licenses before then or apply for a UC License upon expiry. This regulatory change, together with the development of new technologies, may further accelerate the convergence of fixed and mobile telecommunications services, resulting in more structural competition between fixed-line and mobile telecommunications operators. As we do not have a mobile license, and are not currently authorized to provide mobile services, our ability to compete may be hindered by our inability to offer such services independently.
	•		We provide our IP-TV services over our Next Generation Network under HKBN’s FTNS License. The Hong Kong government has indicated that because our IP-TV services are carried over the Internet, we are exempted under the Broadcasting Ordinance from the requirement to obtain a domestic pay-television programme service license. However, the government’s Communications and Technology Branch has informed us that the government is considering a review of the broadcasting regulatory regime and may introduce changes to the existing regulatory framework, including the existing exemption in the Broadcasting Ordinance. However, we cannot predict whether the government may require us to obtain a pay-television programme service license in the future.

      We require licenses from the Telecommunications Authority to provide our services. If one of these licenses is revoked or not renewed or there are substantial changes in its terms and conditions, we may be unable to deliver the services authorized by that license.

     We require licenses from the Telecommunications Authority to provide our fixed telecommunications network and international telecommunications services. Our business operations therefore are susceptible to the following changes in the regulatory environment in particular:

	•		Our ability to adjust the tariffs for different services are governed by the terms and conditions of the relevant licenses. The licenses, however, are issued under different regulatory frameworks. The differences in regulatory structure for these licenses may constrain our flexibility to respond to market conditions, competition or cost structure.
	•		We have been granted a waiver by the Telecommunications Authority to comply with the tariff restrictions contained in HKBN’s FTNS License. If the waiver is revoked, our ability to adjust the tariffs for our fixed telecommunication network services, including our offer of discounts to subscribers from time to time, will be restricted.
	•		Our PNETS License is subject to the Telecommunications Authority’s annual renewal. On October 19, 2009, the Telecommunications Authority announced the replacement of the PNETS License by a new class of Services-Based Operator License, Class 3 Modified Services-Based Operator License. On November 10, 2009, the PNETS License of City Telecom was replaced by a Class 3 Modified Services-Based Operator License. It is noted that the PNETS License of HKBN would also be replaced by a Class 3 Modified Services-Based Operator License on December 7, 2009 through the renewal procedure. HKBN’s FTNS License was initially granted in 2000 for a term of 15 years and may be renewed for such further period not exceeding 15 years at the discretion of the Telecommunications Authority.
	•		The Telecommunications Authority’s failure to renew or its revocation of any of these licenses or its amendment of any of the terms and conditions contained in such licenses for any reason would prohibit us from continuing to offer the services authorized by those licenses, which would have a significant adverse impact on our revenues and profitability. In addition, there may be future changes in Hong Kong’s telecommunications regulations or policies that would require us to obtain additional licenses, which could have an adverse impact on our operations.

Our international telecommunications revenues may be adversely affected by increases in carrier charges in China.

     In China, tariffs for all domestic and international long distance services offered through public switched telephone networks, leased lines and data services are jointly set by the Ministry of Information Industry of the PRC and the State Development Planning Commission. Certain tariffs payable by us to our carrier partners are based, among other things, on the tariffs set by these agencies with respect to the calls our subscribers make to persons in China. In fiscal 2010, approximately 79% of our international call traffic volume was to China. We cannot predict the timing, likelihood or magnitude of any tariff adjustments that may be imposed by the Ministry of Information Industry of the PRC and the State Development Planning Commission, nor can we predict the extent or potential impact upon our business of any future tariff increases. Such increases may lead to a decrease in traffic, reduce our revenues and adversely affect our business and results of operations. In addition, if we are unable to effectively manage the increased network costs, the profit margins of our IDD business could be adversely affected.

      As approximately 50% of our Talents are located in Guangzhou, China, changes in Chinese labor or business laws may significantly affect our operations and our ability to serve our Hong Kong based customers.

     Our call center in Guangzhou employs over 1,600 Talents and is an important resource to us. We are therefore significantly affected by the laws and regulations governing foreign companies with operations in China. As the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may lead to restrictions on our ability to hire and retain our Talents in China, which could impact our ability to provide services to our Hong Kong-based customers.

      Currency fluctuations of the Hong Kong dollar, our functional currency, may increase our operating costs and long term liability.

     We are exposed to a certain amount of foreign exchange risk because our revenues are predominantly denominated in Hong Kong dollars, while a major portion of our operating costs are denominated in U.S. dollars, Renminbi or other foreign currencies. Our foreign currency-denominated expenses primarily consist of the following:

	•		A major portion of our operating costs of interconnection charges payable to overseas carriers for the delivery of our international calls. Substantially all of these interconnection charges are denominated in U.S. dollars or other foreign currencies.
	•		The equipment and hardware we purchase for the expansion of our Next Generation Network constitutes a large portion of our capital expenditures and is also denominated in U.S. dollars.
	•		Expenses incurred for the operation of our call center located in Guangzhou, China are denominated exclusively in Renminbi, the official currency of the People’s Republic of China. These include salaries paid to our personnel as well as various operating expenses that we incur to maintain our operations.

     Since October 17, 1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of HK$7.80 per US$1.00. We, however, cannot assure you the link will be maintained in the future. Any depreciation of the Hong Kong dollar against the U.S. dollar, Renminbi or other currencies would increase our operating costs, including our debt servicing costs, make our capital expenditure plans more expensive, and adversely affect our profitability.

     The Renminbi is presently pegged to a basket of currencies, and there remains significant international pressure on the PRC government to further liberalize its currency policy. This could result in a further and more significant appreciation in the value of the Renminbi against the Hong Kong dollar, which would increase the cost of operating our call center.

      Our Chairman and Vice Chairman have significant ownership interest in the company. We cannot assure you that our Chairman and Vice Chairman will not engage in any transactions that lead to conflicts of interest resulting from their ownership interests .

     Our Chairman and Vice Chairman each have an indirect ownership interest in the Company through Top Group International Limited (“Top Group”), which, as of December 14, 2010, held approximately 44.22% of the Company’s shares, of which 42.12% and 27.06% was owned by our Chairman and Vice Chairman, respectively. Top Group International Limited is a special purpose vehicle incorporated in the British Virgin Islands. Its board of directors consists of Mr. Wong and Mr. Cheung. Mr. Wong and Mr. Cheung have entered into a voting agreement pursuant to which they agreed to vote the 339,814,284 shares held by Top Group International Limited, the 7,145,289 shares held by Mr. Wong individually, and the 42,286,159 shares held by Mr. Cheung individually, collectively as a group. We cannot make assurances that our Chairman or Vice Chairman will not take actions that may not be in the best interests of our other shareholders.

Item 4 Information on the Company

      A. History and development of the Company

     The legal and commercial name of the Company is City Telecom (H.K.) Limited. The Company was incorporated on May 19, 1992 under the Hong Kong Companies Ordinance and is a limited liability company. Our registered office is located at Level 39, Tower 1, Metroplaza, No. 223 Hing Fong Road, Kwai Chung, New Territories, Hong Kong, telephone (852) 3145-6888. Our agent for U.S. federal securities laws purposes is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.

     We began offering international telecommunications services in September 1992. In our early stage of development, we focused on increasing our subscription base and amount of international traffic, and on building the CTI brand name as a low cost provider of international telecommunications services. In addition to our operations in Hong Kong, we also provide international telecommunications and Internet access services in Canada through two telecommunications companies in Canada, City Telecom Inc. and City Telecom (B.C.) Inc. We acquired our interests in these companies in December 1998 as part of our efforts to increase our market share of the telecommunications traffic between Canada and Hong Kong.

     In January 1999, we became the first company in Hong Kong to obtain the first PNETS License. The license gives us the right to offer international telecommunications services using international simple resale and has had a significant positive impact on our international telecommunications revenues. We incorporated HKBN in Hong Kong in August 1999 and launched our broadband Internet access services in March 2000. In addition, we began providing local VoIP services in April 2002, IP-TV services in August 2003, and corporate data services in July 2004 using our Next Generation Network. The network has the capability of providing value-added broadband services and content that combine voice, data and images with increased efficiency and flexibility.

     We believe that one of the cornerstones of our success has been our ability to quickly expand our service offerings when changes in regulation or technology have provided us with an opportunity to do so. Some of the key events in our history and development include the following:

	•		In October 2006, our Liu Xiang “Be Ahead of Yourself” marketing campaign won the “Certificate of Excellence” of HKMA/TVB Awards for Marketing Excellence 2006.
	•		In February 2007, we launched our “bb50 and bb200” symmetric residential broadband service supported by “SDU” personalized customer care service.

	•		In June 2007, we were awarded “Best Retention Strategies” at the Hong Kong HR Awards 2007.
	•		In July 2007, we were awarded “Integrated Support Team” of the year at the Asia Pacific Customer Service Consortium Customer Relationship Excellence Awards.
	•		In September 2007, we launched “Fibre-To-The-Home” residential broadband service, “FibreHome100”, “FibreHome200” and “FibreHome1000”. As the same time, we upgraded our entry level service broadband Internet access from 10 Mbps to 25 Mbps.
	•		In January 2008, we began to offer our “Dual Mode High Definition Terrestrial TV Receiver and IPTV Set-Top Box” to all of our customers in Hong Kong.
	•		In February 2008, we were awarded contract for the provision of payphone service at the Hong Kong International Airport.
	•		In September 2008, we launched the National Geographic Channel’s first ever Interactive Channel.
	•		In June 2009, we launched the first Online Broadband Service Registration Platform in Hong Kong.
	•		In November 2009, we accepted the Innovation in Recruitment award and Champion of HR award at the Hong Kong HRM Awards 2009.
	•		In December 2009, we shattered the one-million mark for Fixed Telecommunications Network Services subscriptions.
	•		In March 2010, we launched our “bb100” symmetric broadband and WiFi services at Hong Kong International Airport.
	•		In April 2010, we launched our 1Gbps symmetric residential broadband service at HK$199 per month.

B. Business overview

Principal Activities

     We are a Hong Kong-based provider of residential and corporate fixed telecommunications network and international telecommunications services. We specialize in the residential mass market and small-to-medium corporate and enterprise market segments. The majority of our revenues are derived from business conducted in Hong Kong.

     We derive our revenues from two business segments: FTNS and IDD. A breakdown of our revenues is as follows:

		For the year ended August 31,
		2008				2009				2010
		HK$				HK$				HK$
		(Amounts in thousands)
Revenue
FTNS business			1,011,038				1,230,880				1,356,098
IDD business			291,943				247,359				218,589
Total operating revenue			1,302,981				1,478,239				1,574,687

•

FTNS business. Our FTNS business involves the provision of fixed telecommunications network services through our self-owned Next Generation Network. Such services include the following:

	•		high-speed broadband Internet access services at symmetric upstream and downstream access speeds of 25 Mbps to 1000 Mbps;
	•		fixed line local telephony services using VoIP technology;
	•		pay television services consisting of more than 110 channels, including self-produced news, children’s program, international drama, movies and documentary and local interest programming, using our IP platform; and
	•		corporate data services, including the provision of dedicated bandwidth to corporate customers.

			As of August 31, 2010, we had a total of approximately 1,110,000 subscriptions for our fixed telecommunications network services, consisting of 526,000 broadband Internet access, 431,000 local VoIP and 153,000 IP-TV services subscriptions.
	•		IDD business. Our IDD business involves the provision of international telecommunications services. Such services include direct dial services, international calling cards and mobile call forwarding services in Hong Kong and Canada. As of August 31, 2010, the customer base for our total international telecommunications services consisted of approximately 2.4 million registered accounts.

Strategy and Competitive Strengths

     Our strategy is to market multiple fixed telecommunications network services by capitalizing on the new in-building blockwiring we have done on a mass scale for our Next Generation Network and will focus on growing our market share, increasing our network coverage and introducing new services through our IP platform. We believe that our success will continue to depend on our ability to capitalize on our focus on the residential mass and small-to-medium corporate and enterprise market segments, our leading-edge Next Generation Network, and our first mover advantage in the fixed line telecommunications market, which has a high entry barrier.

     We believe that our demonstrated success is primarily due to our ability to capitalize on the following key strengths:

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

Recent Development

     On December 31, 2009, we submitted an application for the domestic free television programme service license in Hong Kong to the Broadcasting Authority. If granted, such license would allow us to provide free television programme services in Hong Kong. We expect the cumulative investment amount to be approximately HK$210 million before we are able to generate positive cash flow from such services. We completed a public offering of our American depositary shares, or ADSs, in April 2010 and expect to use a portion of the net proceeds of this offering to fund such services.

Our Services

Fixed telecommunications network services

     We offer our fixed telecommunications network services through our Next Generation Network. The high capacity of our fiber-based backbone has enabled us to offer a suite of services on a single IP network platform. These services include our broadband Internet access, local VoIP, IP-TV and corporate data services. Our strategy is to leverage our broadband subscription base to up-sell our other fixed telecommunications network services such as local VoIP and IP-TV.

     The table below shows the profile the subscriptions of our fixed telecommunications network services over the past three years:

		As of August 31,
		2008				2009				2010
Broadband Internet access			316,000				391,000				526,000
Local VoIP			329,000				382,000				431,000
IP-TV			156,000				170,000				153,000
Total FTNS subscriptions			801,000				943,000				1,110,000

Broadband Internet Access

	•		Scope of service. Our broadband Internet access services in Hong Kong are offered through HKBN. We currently offer our residential and corporate customers broadband Internet access speeds of up to 1000 Mbps, but the majority of our customers currently have access speeds of 100 Mbps. We also offer Fiber-to-the-Home, or FTTH, broadband service for 100 Mbps, 200 Mbps and 1000 Mbps. Rather than using Category-5e copper wiring for the last mile, optical fiber is used in FTTH broadband service. Currently, all of our broadband Internet access packages include free e-mail and for additional charges, offer customers for a variety of value added services, such as “bbWatch,” a full-screen IP-TV service that is viewed with a desktop or laptop computer; “bbWi-Fi”, a service in which subscribers can have wireless Internet access through more than 2,000 hotspots; and “Game.hkbn.net”, a game point portal that sells various game providers’ cards and merchandises. We frequently alter our promotions in response to changing market conditions or as a way of attracting additional subscribers.
	•		Pricing. We currently offer broadband service for bb100 and FibreHome1000 at monthly fees ranging from HK$169 to HK$199 for unlimited service access. On August 19, 2010, we announced to the public that effective from September 1, 2010, we ended the promotional rate at HK$99 per month. By paying HK$199 per month, customers can choose 100 Mbps triple play service or HK$199 per month for 1000Mbps broadband Internet access service. Our strategy is to change from subscriber growth to revenue growth with a reasonable and acceptable pricing to our customers.
			In addition to the residential packages described above, we have also developed broadband and Metronet private network service plans that target corporate customers. We offer prepackaged plans that provide access at speeds of up to 1000 Mbps. Corporate customers that subscribe to prepackaged plans pay fixed monthly subscription fees ranging from HK$128 to HK$200,000 depending on bandwidth or solution selected. Our prepackaged plans include on-site training, on-site maintenance support, high capacity data transfer and e-mail services.
	•		Competition. There have been many new entrants to the Internet access business, but our main competitors are PCCW-HKT, i-Cable and HGC. PCCW-HKT has been offering broadband Internet access services since May 1998 and mainly uses asymmetric digital subscriber line technology, or ADSL, over its telephone network to provide asymmetric Internet access at speeds up to 6 Mbps/8 Mbps downstream and 640 Kbps/800 Kbps upstream. In November 2007, PCCW-HKT announced the provision of 100 Mbps and 1000 Mbps fiber direct broadband Internet access service to two-thirds of Hong Kong’s households. i-Cable began providing broadband Internet access services in March 2000 using its hybrid fiber coaxial network that provides symmetric typical access speeds up to 8 Mbps shared by a cluster of buildings. HGC predominantly uses VDSL technology and typically provides access speeds up to 100 Mbps.
			Our main competitors have been in operation longer and may have greater market presence, brand recognition and more financial, technical and personnel resources. In addition, they may have greater network coverage in terms of number of homes pass.
	•		Market share. We had approximately 526,000 broadband Internet access subscriptions as at August 31, 2010, which represented a market share of approximately 25% with respect to the total number of broadband Internet access subscribers in Hong Kong.

Local VoIP

•

Scope of service. We offer our on-network local VoIP services in Hong Kong by installing IP-based voice switching equipment in locations covered by our Next Generation Network. Voice signals are transmitted through our Ethernet network by the VoIP switches installed in the subscriber’s building. The quality of our local VoIP service is comparable to traditional fixed line local telephony services, and customers are able to use their existing telephone equipment. In addition, with portability of fixed line numbers, fixed line telephony subscribers switching to our local VoIP services are able to retain their existing local telephone number.

			We also offer hardware-based off-network local VoIP services, or “Broadband Phone” services, via the broadband network of other operators. In October 2005, we launched our global software-based VoIP services under the brand “2b”. This service is primarily targeted at the overseas Chinese community, which we believe will enable us to access a wider addressable market with higher tariff compared to the Hong Kong market. For HK$98 per month, “2b” provides broadband users around the world with a standard Hong Kong 8-digit fixed line number to make and receive unlimited calls to/from Hong Kong. Moreover, we offer a full range of value added services, including call waiting, voice mail and conference call features.
	•		Pricing. We currently charge from HK$68 to HK$118 per month, on standalone basis, for our on-network local VoIP services depending on the service plan, and we offer a full range of value added services, including call waiting, caller display and conference call services. The majority of our new local VoIP is included in our triple play service offered at HK$199 per month for voice, IP-TV and broadband.
	•		Competition. PCCW-HKT is the incumbent and largest fixed telecommunications network operator in Hong Kong. Based on public information, PCCW-HKT had a market share of approximately 70% with respect to local telephony services as of June 30, 2010. The remainder of the market is shared among ourselves and three other alternative carriers: HGC, New World and Wharf T&T. The principal basis of competition for local telephony is price and brand name recognition. PCCW-HKT has the highest brand name recognition, but we and the other operators are contending by offering competitively priced local telephony services that provide comparable quality to PCCW-HKT.
	•		Market share. As of August 31, 2010, we had 431,000 local VoIP subscriptions. Our market share with respect to local residential and business telephony services was approximately 10% as of August 31, 2010.

IP-TV

	•		Scope of service. Our IP-TV services began in August 2003 and include the provision of standard definition and high definition video via our Next Generation Network to an IP set-top-box connected to the subscriber’s television set. In May 2007, we renamed our IP-TV services as “bbTV”. “bbTV” currently consists of more than 110 channels, including a self-produced 24-hour news channel and kids education and development channels and turnaround channels from various international content providers. Since the launch of our IP-TV services in August 2003, we have progressively adjusted our content offerings and valued added components of the services. We consider our IP-TV to be an incremental component of our broadband and VoIP service offerings, rather than a large standalone business.
	•		Pricing. We currently charge our IP-TV service together with our broadband and VoIP services at HK$199 per month for this subscription-based pay television service. Because of the scalability of our Next Generation Network infrastructure, the current cost of adding IP-TV services to an existing broadband Internet access or local VoIP subscriber is small.
	•		Competition. Our two main competitors in the pay-television business are i-Cable and PCCW-HKT. The pay-television services of i-Cable and PCCW-HKT include a significant amount of exclusive contents, such as Barclays Premier League Football until June 2013, HBO, Cinemax, ESPN and others. We target a different market than these competitors by offering a wide spectrum of content line-up and attractive pricing, both of which we consider critical for successful penetration in the residential mass market. We have also strengthened our English language contents over the past year to increase our competitiveness by adding Disney Channels, Discovery Channels, National Geographic, AXN, Bloomberg and other channels.
			TVB and ATV are indirect competitors of our pay-TV services. TVB and ATV account for a substantial proportion of Hong Kong’s television viewership and we market our services as supplemental to theirs. Because TVB and ATV offer primarily subscription-free television services supported by advertising revenues, we expect that their programming is designed to attract the widest possible audience. In contrast, we and the other pay-TV operators rely on monthly subscription fees for most of our revenues. Other competitors include satellite TV operators, such as Star TV, as well as potential competition from direct-to-home broadcasters and broadcasters using digital terrestrial delivery methods.
	•		Market share . As of August 31, 2010, we had 153,000 IP-TV subscriptions, representing approximately 7% of the total pay-television subscription base in Hong Kong.

International telecommunications services

•

Scope of services. We began providing international telecommunications services in 1992 and were among the first companies to be granted a PNETS License. Our international telecommunications services are offered to our FTNS business customers via our Next Generation Network and to other carriers’ customers via indirect access. Indirect access allows any pre-registered telecom user in Hong Kong to access our services via our two primary access codes “1666” and “0030”. By dialing our access code, our registered customers can access any destination in the world through our network, by paying us a usage charge.

We have greatly expanded our range of services over the years to include a variety of international direct dial services at competitive rates. We believe that our ability to deliver a range of calling plans with varying features that cater to different customer needs has been one of the key factors of our success. We market our international telecommunications services under the IDD 1666 and IDD 0030 brand names. These two brands provide us with flexibility in our marketing strategies. The primary international telecommunications services that we currently offer our customers are the following:

Service		Description
IDD 1666		Provides subscribers with international direct dial using the access code 1666 in Hong Kong.
IDD 0030		Provides subscribers with international direct dial using the access code 0030 in Hong Kong.
Mobile call forwarding services		Allows call forwarding of Hong Kong mobile numbers to any overseas telephone number so that subscribers can receive calls while in overseas.

	•		Pricing. We charge our IDD 1666 and IDD 0030 users a per minute tariff rate that varies according to the destination of the call and the calling prefix, with discounts depending on the time of day or day of the week when the call is placed as well as monthly plans. To maintain our market share in a market segment with increasingly intense competition, we have significantly reduced some of our international telecommunications rates and introduce new marketing and promotional offers from time to time. To offset the effects of these price reductions, we have taken steps to reduce our cost base, such as using our relatively large traffic volume to negotiate lower prices from our international partners, establishing a call center in Guangzhou to provide customer service and back office support services, and developing our own international telecommunications infrastructure. Our employment of two separate brand names, IDD 1666 and IDD 0030, also provide us with flexibility in our marketing strategies.
	•		Competition. PCCW-HKT, HGC, New World, and Wharf T&T are our main competitors in the international telecommunications business. As in previous years, we experienced fierce price competition in Hong Kong during fiscal 2010. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2011 .
			Further, technology substitution from global VoIP providers such as Skype, which offers free PC-to-PC based international calls, is becoming more prevalent.
	•		Market share. We experienced a reduction in total traffic volume of 15.2% to 487 million minutes in fiscal 2009 and a further reduction of 4.7% to 464 million minutes in fiscal 2010. The continuing reduction in traffic volume was mainly due to intense competition as some of our integrated competitors offered free or very low cost international direct dial minutes as a customer incentive to gain local fixed line and mobile market share.

Our network infrastructure

      Fixed telecommunications network

     Our fixed telecommunications network services are delivered over our self-owned Next Generation Network, which allows us to deliver multiple services, including the triple play service of voice, broadband and IP-TV. The coverage of our Next Generation Network is concentrated in Hong Kong’s most densely populated areas, characterized by high-rise apartment buildings with multiple apartments on each floor. The network currently covers approximately 1.77 million residential homes pass, representing approximately 80% of Hong Kong’s total households and also 1,430 commercial buildings. We plan to extend the coverage of our Next Generation Network to 2.0 million residential homes pass, representing approximately 90% of Hong Kong’s population, and to 1,800 commercial buildings by the end of 2011. As we expand the reach and coverage of our Next Generation Network, we plan to continue introducing new services.

     Our Next Generation Network is deployed using Metro Ethernet technology. Metro Ethernet technology is highly cost-effective when access is to be provided to a large number of users in a single building or cluster of buildings and is typically used in commercial buildings in metropolitan areas in other geographical markets. Our Ethernet infrastructure is a system of Category-5e copper wiring that connects our subscribers’ premises to our local area network, or LAN, switches within a residential or commercial building. By keeping our Category-5e copper distance to less than 100 meters we are able to deliver bandwidth of up to 1000Mbps to our subscribers.

     The first step in expanding the reach of our fixed telecommunications network infrastructure is to select buildings that we believe will provide sufficient economic returns to justify our investment based on several factors, including population density, proximity of the building to our existing fiber loop and our projected ability to sell services. We then perform a site visit to analyze the feasibility of installing our Ethernet technology. Once we are satisfied with the prospects of a particular building, we must obtain access rights from the building’s management, which may take several weeks or months. After receiving the required access rights, we employ a combination of our full-time Talents and contractors to begin installation of our in-building Ethernet. The length of time required for the installation process depends on the size and structural features of the building and can be completed in as little as three weeks or take several months. As we install our in-building Ethernet infrastructure we simultaneously connect the building to our fiber-based backbone.

     Unlike many of our competitors, which use multiple platforms to provide comparable services, all of our fixed telecommunications network services are offered through a single IP platform. In addition, unlike many new entrants to the industry, we operate an “end-to-end” network that extends from our IP network hub sites and our switching centers in Hong Kong to our subscribers’ premises. All the buildings covered by us are served by our self-owned infrastructure.

     In November 2007, we have been collaborating with one of the largest network solution providers for the deployment of our Next Generation Network using GPON technology. As the reach of GPON is considerably more than 100 meters, it can be a more cost effective solution to expand our Next Generation Network than our Ethernet setup for lower density deployments.

     We incurred capital expenditures of approximately HK$286.7 million in fiscal 2009 and HK$344.8 million in fiscal 2010, substantially all of which were made in connection with the construction and upgrade of our infrastructure for the provision of fixed telecommunications network services. In fiscal 2011, we plan to further incur total capital expenditures about HK$320 million to HK$350 million per year.

      International telecommunications network

     Our international telecommunications network consists of a system of switches, self-owned and leased backbone capacity, interconnection arrangements and undersea cables for the transmission of long distance calls.

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

Sales and marketing

     We advertise our products and services through our “Fibre Shops”, “on-the-street” marketing kiosks, telemarketing and direct mailing, as well as through Chinese language television, radio, print media and on the Internet.

     As of August 31, 2010, we had 20 “Fibre Shops” and a customer service center. We have planned to open more shops in the future. We believe these shops can offer our customers convenient access to our wide range of services.

     We have an extensive sales network in Hong Kong. Our senior marketing personnel closely oversee our sales network to ensure that a consistent image is presented by all of our sales representatives in promoting City Telecom and HKBN. We provide commission based incentives to our residential sales force for our fixed telecommunications network services and international telecommunications services.

     We have a sales division responsible for coordinating our corporate marketing and sales efforts. We believe our dedicated corporate and small-to-medium enterprise sales force is one of the largest sales forces targeted at corporate users of telecommunications and Internet services in Hong Kong. In addition, our dedicated corporate Talents designs marketing and sales promotions specifically tailored to address the concerns of business users. This division also organizes seminars for current and prospective customers to promote new products and services and to raise the public awareness of our various corporate offerings.

Maintenance and monitoring

     To ensure reliability of our fixed telecommunications network, we continue to maintain our monitoring system, which involves:

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

     Once a network fault is detected by our control room, we will either rectify the problem remotely or dispatch field Talents to that location should physical interaction be required. After the problem has been resolved, we will continue to monitor network performance as well as track customer service feedback until we are assured of the fault being fully rectified.

Research and development activities

     As of August 31, 2010, our research and development department in Hong Kong consisted of approximately 21 Talents experienced in systems design, engineering, telecommunications and computer programming. Our research and development department is primarily responsible for assessing and adapting the technology that we employ in upgrading and expanding our Next Generation Network. To identify and develop new market opportunities, our research and development department evaluates new services offered by telecommunications and Internet companies in the United States and elsewhere and works closely with our marketing department for product development. Our research and development expenditures were approximately HK$9.6 million, HK$10.8 million and HK$11.2 million for fiscal 2008, 2009 and 2010, respectively.

Customer service

     We believe that excellent customer service and support is essential to our building and retaining of a large and loyal subscription base. We therefore have committed considerable personnel and financial resources to establishing a reliable and accessible customer service system.

     Our customer service department provides integrated support to subscribers of FTNS business and IDD business. We provide a hotline to handle complaints, subscription applications and queries relating to account balances, pricing, billing, service and technical information. Complaints and in-depth queries from subscribers that cannot be immediately remedied or answered are forwarded to a customer care team, which is responsible for answering such complaints and queries. We also have a dedicated customer service team to provide service to our corporate subscribers, which includes access to a highly skilled technical team that may go to the customer site for trouble shooting and repairs.

     Our centralized customer service call center is located in Guangzhou, which provides our customer service and back office support services at that location. This enables us to lower our operating costs while continuing to increase our customer service capabilities. As of August 31, 2010, our Guangzhou customer service facility had 1,620 Talents.

Billing and collection

     Our credit and collection team is responsible for securing prompt payment from subscribers. Invoices are issued on a monthly or quarterly basis with a specified payment due date. A variety of payment methods are made available to our subscribers, including cash, check, credit card,

payment by telephone service, automatic transfer from subscribers’ bank accounts or through Internet banking. Our bad debts expense represented approximately 1.1%, 0.8% and 0.9% of our revenue for each of fiscal 2008, 2009 and 2010, respectively.

     We maintain tight collection procedures, including periodic reminder notices, and impose a charge of HK$10 or a fee of 1.5% to 2.5% per month on outstanding overdue amount for late payment. We have the right to charge the outstanding overdue amount to the subscriber’s pre-registered credit card account for any amount overdue or if applicable, deduct such amount from the subscriber’s application deposit. Moreover, we generally suspend an account when amount overdue is not settled within our prescribed period. If payment is still not settled after we suspend the account, further recovery actions including court proceedings and/or the use of collection agencies will be taken.

Seasonality

     Our operations are not subject to significant seasonal fluctuations generally. Our IDD business typically experiences a slight decrease in revenue during the second quarter of each fiscal year (i.e. December through February) in connection with the Christmas holiday and Chinese New Year holiday. We do not believe that seasonality has had a material effect on our business, financial condition or results of operations.

Environmental matters

     Since our date of incorporation, we have not violated any environmental laws, ordinances or regulations, and believe that all of our operations comply fully with applicable environmental laws.

Intellectual property rights

     We have registered our trademarks with the Trademarks Registry of the Intellectual Property Department in Hong Kong. We have no other material intellectual property.

C. Regulatory framework

      The following is a brief summary of the Hong Kong laws and regulations that currently materially affect our business. This section does not purport to be a comprehensive summary of all present and proposed regulations and legislation relating to the industries in which we operate.

     As a provider of broadband Internet access, local VoIP, IP-TV and international telecommunications services in Hong Kong, our operations are subject to the Telecommunications Ordinance and the Broadcasting Ordinance and their respective subsidiary legislation, regulations and codes of practice. The Telecommunications Ordinance provides the legislative and regulatory framework for the provision of telecommunications services and facilities in Hong Kong. The Broadcasting Ordinance governs the content and scope of television programming and the licensing of television broadcasters.

     Our primary regulator is the Telecommunications Authority, whose responsibility and functions include regulating and licensing telecommunications network services and regulating the telecommunications markets in Hong Kong, including the issuance of non-exclusive licenses; the determination of terms of interconnection; promotion of fair competition in the telecommunications sector; management of the frequency spectrum; development of technical standards and customer equipment testing; protection of consumer interests; and the control and administration of the Hong Kong numbering plans (including allocation of numbers or codes). The Telecommunications Authority is also responsible for the administration of the Telecommunications Ordinance. We are also regulated by the Broadcasting Authority, which administers the Broadcasting Ordinance and makes recommendations to the Chief Executive-in-Council on applications for broadcasting licenses, as well as on the renewal, suspension and revocation of licenses.

Telecommunications industry

      Licensing

     It is unlawful to establish or maintain any means of telecommunications, or possess, use or deal with telecommunications apparatus in Hong Kong without a license. The Telecommunications Authority has the authority to grant licenses for all means of telecommunications services and facilities in Hong Kong, including the provision of fixed wireline, public mobile telephone, Internet and satellite services. Furthermore, the Telecommunications Authority has the authority to require a licensee to comply with the terms of its license and any applicable legislation or regulations or codes of practice, and to suspend or revoke licenses to enforce the Telecommunications Ordinance or other rules or regulations or codes of practice to protect the public interest.

     Prior to August 1, 2008 the operation of fixed and mobile services were regulated separately under four types of carrier license. Further, a number of other types of licenses permitted a licensee to establish facilities or services of a similar kind.

     However, in recognition of the convergence of fixed and mobile services enabling voice, data and multimedia applications to be provided over common core networks, delivered through a range of wireline and wireless customer access networks and which will be accessible from common end-user devices irrespective of whether the users are at fixed locations or on the move with the result that is becoming more difficult to classify a service as a “fixed” or “mobile”, amendment legislation has been passed to create a single UC License encompassing both fixed and mobile carrier services. The UC License regime came into operation on August 1, 2008. After that date the Telecommunications Authority

will not issue any further fixed or mobile carrier licenses (save for a Mobile Carrier License which the Telecommunications Authority had already committed to grant to the successful bidder of the spectrum in the 850 MHz band to provide CDMA2000 service). Instead the UC License is the only carrier license to be issued for the provision of fixed, mobile and/or converged services. In the meantime, existing fixed and mobile licenses continue to be effective until their expiry date. License holders may convert existing fixed or mobile licenses into UC Licenses before their expiry on a voluntary basis or apply for UC Licenses upon the expiry of existing fixed or mobile licenses.

      General Licensing Requirements

     Generally, a licensee is required to be a company incorporated in Hong Kong (which can be wholly owned by a foreign company) or a foreign company registered in Hong Kong. Currently, there is no foreign ownership restriction on the holder of a telecommunications license under the current regulatory regime.

     Non-compliance with the Telecommunications Ordinance, any subsidiary legislation made pursuant to it, any of the license conditions or any direction issued by the Telecommunications Authority by a telecommunications licensee, could result in the revocation or suspension of the relevant license. The Telecommunications Ordinance contains a set of provisions setting forth the procedural steps which the Telecommunications Authority must adhere to prior to revoking or suspending any telecommunications licenses. In addition, the Chief Executive in Council has the authority, at the recommendation of the Telecommunications Authority, to revoke a telecommunications license at any time if it is in the public interest to do so.

      Public Non-Exclusive Telecommunications Services License

     A PNETS License is used by the Telecommunications Authority to cover the provision of a number of different telecommunications services where the service provider provides the service to the public using the network of a licensed carrier or by establishing or maintaining transmission facilities within the boundary of a building or property. In practice, the PNETS License is also used as a “sweep-up” license category, where a license is required by virtue of the Telecommunications Ordinance but none of the existing categories are applicable to the means of telecommunications or telecommunications service for which the license is required. With effect from November 30, 2009, the Telecommunications Authority no longer issue PNETS License to service-based providers using the network of a licensed carrier. As a replacement, all PNETS License will be gradually replaced by the modified Services-Based Operator License, i.e. Class 3 Services-Based Operator License. Holder of Class 1 & 2 Services-Based Operator License is allowed to provide Internet Protocol based telephony services making use of Hong Kong telephone numbers, while Class 3 Services-Based Operator is not allowed. Existing PNETS License will remain in force until their next anniversary date when they would be replaced by the Class 3 Services-Based Operator License.

     A Class 3 Services-Based Operator License has a validity period of 12 months and is renewable at the discretion of the Telecommunications Authority on an annual basis upon the payment of a prescribed annual fee, which is currently set at HK$750. Where radio communications apparatus is used, there is an additional variable component calculated by reference to the number of base stations and mobile stations involved.

     Since the expiry of PNETS License in December 2009, the Telecommunications Authority granted us a Class 3 Services-Based operator License. The Class 3 Services-Based Operator License presently gives us the right to provide calling card services, international simple resale services for facsimile and data services, virtual private network services and external telecommunications services over the external telecommunications facilities of other licensed external facilities providers, the scope of service under the Class 3 Services-Based operator License is similar to the PNETS License previously granted to us by the Telecommunications Authority. HKBN also holds a PNETS IVANS License, which was issued to us in December 1993. This PNETS IVANS License allows us to act as an Internet Service Provider.

     Under the terms of the Class 3 Services-Based Operator License, PNETS ETS and PNETS IVANS Licenses, we and IDD1600 Company Limited, or IDD1600, our wholly owned subsidiary, are required to comply with certain license conditions relating to technical and reporting matters.

      FTNS License

     A FTNS License authorizes the licensee, among other things:

•		to provide a public fixed telecommunications network service, covering internal services or external services, or both; and
•		to establish and maintain a fixed telecommunications network, which may be wireline-based or wireless-based (Wi-Fi spectrum included), or a combination of both.

     A FTNS License is valid for a period of 15 years and is renewable for a further period of not exceeding 15 years at the Telecommunications Authority’s discretion. The amount of license fee payable by a holder of a FTNS License comprises (i) a fixed annual amount of HK$1.0 million; (ii) a variable amount calculated on the basis of the number of customer connections (which is currently set at HK$700 for each 100 customer connections); and (iii) a variable fee calculated by reference to the radio spectrum assigned and used by the license holder.

     HKBN currently holds a FTNS License, which was issued to it in February 2000 initially for the operation of a local fixed wireless network. This FTNS License has been subsequently amended three times and presently, HKBN is authorized to operate both local fixed telecommunications networks (wireline and wireless based) and external telecommunications facilities.

      Interconnection

     The Telecommunications Authority divides interconnection into two main types. The first type is “Type I Interconnection”, which is interconnection between network gateways, such as tandem exchanges, local exchanges or dedicated interconnection gateways, which allow end users on different networks to “communicate” with each other. The second type is “Type II Interconnection”, which is a connection to a fixed carrier’s network at points of the customer access network level (more often referred to as local access or local loop unbundling) allowing the end customer requesting the interconnection to use the customer access network of the fixed carrier to obtain FTNS. The Telecommunications Authority introduced the Type II interconnection policy in 1995 that the fixed carriers have obligation to provide Type II interconnection at regulated terms and conditions.

     On July 6, 2004 the Hong Kong Government announced that the mandatory Type II Interconnection policy applicable to telephone exchanges for individual buildings covered by such exchanges, would be gradually withdrawn on a building-by-building basis, applying to buildings already connected to at least two self-built customer access networks, such withdrawal to be fully implemented by a final sunset date of June 30, 2008. After that time, mandatory Type II Interconnection will be maintained only in buildings for which it is technically not feasible or economically not viable for an operator to roll out its customer access network.

     On July 3, 2008, the Telecommunications Authority issued a statement to confirm that the mandatory Type II Interconnection policy has been successfully withdrawn as from July 1, 2008 as well as to set out the issues to be followed up after its withdrawal. After this date, interconnection terms including charges will be determined by commercial negotiation between carriers.

     On April 27, 2009, the Telecommunications Authority issued a statement on “Carrier-to-Carrier Charging Principles (For Fixed Carrier Interconnections) providing guidance on carrier-to-carrier charging principles for fixed carrier interconnections that the Telecommunication Authority will rely on when making determination for interconnection between fixed telecommunications networks in Hong Kong.

      Competition provisions

      Regulation of anti-competitive conduct

     Although Hong Kong has never had a general competition code, historically, holders of FTNS Licenses are prohibited from engaging in anti-competitive conduct, abusing its dominant position in a telecommunications market, or engaging in any discriminatory conduct by certain competition-related license conditions contained in the FTNS Licenses issued by the Telecommunications Authority. In June 2000, the competition provisions of the Telecommunications Ordinance became operational and, as from that time, anti-competitive conduct was prohibited by legislation as well as under the relevant license conditions.

     The Telecommunications Ordinance provides an appeal mechanism by the establishment of a Telecommunications (Competition Provisions) Appeal Board. A person or a licensee aggrieved by a decision made by the Telecommunications Authority relating to the competition provisions may appeal to the Board. Additionally, a third party suffering loss or damage from breach of such competition provisions may bring an action for damages or seek other appropriate remedies against the offending licensee.

      Control on mergers and acquisitions

     If the Telecommunications Authority determines that the relevant merger and acquisition activity has, or is likely to have, the effect of preventing or substantially lessening competition in a telecommunications market, the Telecommunications Authority is empowered to direct a carrier licensee to take such actions, such as the complete or partial divestiture of the relevant parties’ interests in the merged entity, as the Telecommunications Authority considers necessary, to eliminate or avoid any anti-competitive effect. However, the Telecommunications Authority may not issue such a direction if it takes the view that the public benefit of the merger and acquisition outweighs any detriment caused by a reduction in competition. Any decision made or direction issued by the Telecommunications Authority under the merger and acquisition provision is subject to appeal to the Telecommunications (Competition Provisions) Appeal Board.

     The regulatory regime on mergers and acquisitions only applies to carrier licensees, which includes HKBN as a holder of a FTNS License, which is regarded as a carrier license for the purpose of the Telecommunications Ordinance.

      Consumer protection

     The Telecommunications Ordinance also contains a statutory provision that is primarily aimed at protecting consumers. This provision prohibits a licensee from engaging in any misleading or deceptive conduct.

     The Telecommunications Authority has taken an active role in enforcing this prohibition and has developed voluntary codes to assist in this respect. For instance, in February 2010, the Telecommunications Authority issued a “Code of Practice for Communications Service Contracts” (the “Code”) which supersedes the “Code of Practice for the Service Contracts for the Provision of Public Telecommunications Services” issued in November 2004. The Code is a voluntary scheme intended to heighten customer satisfaction levels by improving the provisions used in communications customer contracts The Code sets out guidelines on, among other things, the style, format and structure of written contracts, the expiry of term contract, termination of contract etc. Besides, the Code requires that the contracts to provide a cooling-off period of not less than seven days during which the customers my cancel the contract without incurring any payment liability or any other obligation whatsoever. The Code is applicable to all providers of communications service which include the supply of telecommunications and ancillary services and customer equipment, as well as the supply of content services delivered through telecommunications. Service providers pledging compliance with the Code shall publish on their respective website their pledges to the Code and report about their compliance status

on annual or bi-annual basis as they may decide. In the meantime, the Telecommunications Authority and providers of communications service are reviewing the Code, and the majority of providers, including HKBN, is not pledging compliance with the Code.

     Apart from the Telecommunications Ordinance, like any company carrying on business in Hong Kong, telecommunications operators are required to comply with applicable Hong Kong consumer protection laws, for example, the Sale of Goods Ordinance (Cap 26), Control of Exemption Ordinance (Cap 71), Supply of Services (Implied Terms) Ordinance (Cap 457), the Unconscionable Contracts Ordinance (Cap 458) , Personal Data (Privacy) Ordinance (Cap 486), and the Unsolicited Electronic Messages Ordinance (Cap 593).

      Regulation of pricing

     Currently, the pricing of both FTNS and public non-exclusive external telecommunications services in Hong Kong is regulated by license conditions. However, the regulatory frameworks of each type of services are different.

     All Services-Based Operator License and PNETS Licenses contain license conditions requiring the licensees to publish their tariffs and to charge no more than the published tariffs.

     Similarly, holders of FTNS Licenses are prohibited by license conditions from charging more than their published tariffs for their services. The FTNS License conditions prohibit licensees from offering discounts to their published tariffs and require the licensees to seek approval from the Telecommunications Authority in connection with (i) any revision of published tariffs, (ii) tariffs for any new services or products or (iii) tariffs for any trial services. However, the Telecommunications Authority may grant a waiver of the application of any or all of these restrictions in relation to a relevant telecommunications market if, in the opinion of the Telecommunications Authority, the licensee is not “dominant” in such market. This is known as an ex ante regime.

     HKBN has been granted a waiver from all the tariff revision prohibitions contained in its FTNS License and is able to provide discounts and revise its tariffs in all the FTNS markets.

      Universal service contribution and local access charge

     Under the current regulatory regime, PCCW-HKT has a universal service obligation to provide good, efficient and continuous basic telecommunications services at reasonable cost on a non-discriminatory basis to all persons in Hong Kong. To compensate PCCW-HKT for the expenses of this obligation, certain licensees are required to contribute to such cost, which is referred to as the universal service contribution.

     On June 8, 2007, the Telecommunications Authority issued a Statement entitled “Review of the Regulatory Framework for Universal Service Arrangement”, which announced the new universal service contribution arrangement for funding the cost of Universal Service Obligation. Commencing from May 1, 2009, the USC sharing arrangement based on external traffic volume has been migrated to that based on the number of all telephone numbers allocated which may be assigned to customer for voice services, non-voice services or both voice and non-voice services. Under the new arrangement, local fixed carrier license, local fixed telecommunications network service licensee, mobile carrier licensee, unified carrier licensee authorized to provide local fixed or mobile services, mobile virtual network operator licensee and services-based operator licensee authorized to provide Class 1 or 2 services are the USC contributing parties. In respect of the above, HKBN as a local fixed telecommunications network service licensee is classified as a USC contributing party and is required to pay USC under the new regime.

     The level of USC is determined by the Telecommunications Authority and is reviewed periodically based on actual cost and revenue and on a customer-by-customer basis. The average rate has declined over the past several years. In accordance with a statement dated April 27, 2010 issued by the Telecommunications Authority, the level for the period from July 1, 2008 to April 30, 2009 is confirmed to be zero cent per minute and the Telecommunications Authority decided that USC contributing parties are not required to pay provisional USC from May 1, 2009 onward until a further review of the USC.

     Additionally, providers of external telecommunications services, such as holders of Class 3 Services-Based Operator License and PNETS ETS Licenses, including ourselves and IDD1600, are required to pay a local access charge, or LAC, to the local network operators whose network facilities holders of PNETS ETS Licenses use to transmit calls to and from their customers’ sites. The level of the LAC is calculated on a per-minute basis and its arrangement is based on the statement dated November 25, 1998 issued by the Telecommunications Authority. Recently, based on the conclusion from the statement dated April 27, 2007 issued by the Telecommunications Authority, the Telecommunications Authority will not, for the time being, proceed with the complete deregulation of the LAC.

      Fixed mobile interconnection charge

     In June 2007, the Telecommunications Authority determined the FMIC rates for HKBN, which is a Fixed Network Operator, with one of its Mobile Network Operators, China Resources Peoples Telephone Company Limited, or Peoples, at a rate of HK4.8 cents per occupancy minute for interconnection from April 1, 2002 to August 31, 2002, HK4.22 cents per occupancy minute for interconnection from September 1, 2002 to August 31, 2003 and HK2.89 cents per occupancy minute for interconnection from September 1, 2004 to August 31, 2004. In February 2008, HKBN requested Telecommunication Authority to make a new determination with four Mobile Network Operators on the rate of FMIC payable by these Mobile Network Operators for mobile interconnection service. In September 2008 the Telecommunications Authority indicated that it accepted HKBN’s request for determination. On May 28, 2010, the Telecommunications Authority issued its decision on the determination which set out the rates of mobile interconnection charges payable by the mobile operators under dispute. Based on this determination, the Group adjusted its revenue related to mobile interconnection charges and interest income during the year ended August 31, 2010. For details, please refer to note 2 (b) of our consolidated financial statements.

     Fixed Mobile Interconnection Charge, or FMIC, is an interconnection charge for circuit-switched traffic between a Fixed Network Operator and a Mobile Network Operator. The Telecommunications Authority has indicated in its statement published on April 27, 2007, that it will de-regulate the existing FMIC arrangement with effect from April 27, 2009. When this occurs the Fixed and Mobile Network Operators would have to adopt a more market driven approach in that parties are expected bilaterally to negotiate a commercially agreed FMIC without the Telecommunications Authority’s intervention.

     Since the deregulation of FMIC arrangement on April 27, 2009, HKBN reached agreements with some of the mobile operators on the settlement arrangements of FMIC. As of December 14, 2010, the discussion with remaining mobile operators on FMIC is still in progress.

      Television broadcasting industry

     At present, Hong Kong has two licensed domestic free television programme broadcasters, TVB and ATV, providing free-to-air broadcasting services. In addition, there are also three licensed domestic pay-TV broadcasters, namely Hong Kong Cable Television Limited, PCCW Media Limited and TVB Pay Vision Limited (formerly known as Galaxy Satellite Broadcasting Limited). HKBN provides TV services over the Internet under its FTNS License, while Star TV continues to provide its services through satellite means under its satellite television uplink and downlink license.

      Licensing

     It is unlawful to offer any “television programme service” in Hong Kong without a license. “Television programme service” is broadly defined to mean the provision of television programmes for transmission by telecommunications that are readily accessible to the general public in or outside Hong Kong or to persons in 2 or more specified premises simultaneously or on demand, whether on a point-to-point or a point-to-multipoint basis. The Broadcasting Ordinance exempts certain categories of television programme services from the current licensing regime, including television programme services provided on the service commonly known as the “Internet”. The Broadcasting Ordinance itself, however, does not contain a definition of “Internet”.

     The Secretary for Commerce, Industry and Technology has indicated that on the condition that HKBN continues to provide its service on the platform currently deployed by HKBN, the Government does not dispute that HKBN’s service is provided on the “Internet” and is thus exempt. On this basis, HKBN does not require to obtain a pay-television broadcasting license and provides IP-TV services under its FTNS License.

      Cross media ownership restrictions

     As with other television regulatory regimes, there are detailed cross-media ownership restrictions in the Broadcasting Ordinance. The restrictions are only applicable to domestic free and domestic pay television programme service licenses.

     The Broadcasting Ordinance essentially provides that a company which is either a “disqualified person” or has a “disqualified person” exercising control over it will not be eligible to be granted a broadcasting license unless it discloses the disqualification in its license application. “Disqualified person” includes, for example, a company which is an existing domestic free or domestic pay television programme licensee; an advertising agent; a sound broadcasting licensee; or a proprietor of newspaper printed or produced in Hong Kong.

     Generally, a disqualified person who has complied with the disclosure requirement may apply for a broadcasting license. The Broadcasting Ordinance provides that the Chief Executive in Council may grant a broadcasting license to a company, including a disqualified person or to a company which has a disqualified person exercising control, over it or to a disqualified person in which another disqualified person exercises control subject to such conditions as the Chief Executive in Council sees fit.

      Foreign ownership restrictions

     In addition to the cross-media ownership restrictions outlined above, the Broadcasting Ordinance also imposes restrictions on foreign ownership of a holder of a domestic free television programme service license. The restrictions do not prohibit the ownership of any voting shares in a domestic free television programme service licensee but rather take the form of prohibiting the exercise of any voting rights attached to such voting shares.

      Competition provisions

     The Broadcasting Ordinance also contains competition provisions, which are aimed at prohibiting a licensee from engaging in “anti-competitive conduct” and a licensee who is in a dominant position from abusing its position. “Anti-competitive conduct” is defined as conduct that has the purpose or effect of preventing, distorting or substantially restricting competition in a television programme service market.

     The Broadcasting Ordinance provides that a breach of any of the competition statutory provisions may lead to the relevant contractual provisions in an agreement being regarded as void.

     Unlike the regulatory regime for the telecommunications industry, there is no equivalent of a specialized competition appeal board for the television broadcasting industry. A licensee aggrieved by a decision made by the Broadcasting Authority, may appeal by way of petition to the Chief Executive in Council.

      Program standards and advertising standards

     A broadcasting licensee is required to comply with the program standards and the advertising standards published by the Broadcasting Authority. The latest program standards and the advertising standards were both issued on December 12, 2008.

D. Organizational structure

     The following chart sets forth our principal subsidiaries as of December 14, 2010:

The jurisdiction of incorporation and our ownership percentage of each these subsidiaries as of December 14, 2010 were as follows:

				Percentage of interest
				held by City Telecom
		Jurisdiction of		Direct				Indirect
Name		incorporation		%				%
963673 Ontario Limited		Canada			—				100
Attitude Holdings Limited		British Virgin Islands			—				100
Automedia Holdings Limited		British Virgin Islands			100				—
BBTV Company Limited		Hong Kong			—				100
City Telecom (B.C.) Inc.		Canada			—				100
City Telecom (Canada) Inc.		Canada			—				100
City Telecom (Toronto) Inc.		Canada			—				100
City Telecom (U.S.A.) Inc.		United States of America			—				100
City Telecom (Vancouver) Inc.		Canada			—				100
City Telecom Inc.		Canada			—				100
City Telecom International Limited		British Virgin Islands			100				—
Credibility Holdings Limited		British Virgin Islands			100				—
CTI Guangzhou Customer Services Co. Ltd. (note)		People’s Republic of China			100				—
CTI International Limited		Hong Kong			—				100
CTI Marketing Company Limited		Hong Kong			—				100
Excel Billion Profits Limited		Hong Kong			—				100
Global Courier Company Limited		Hong Kong			—				100
Golden Trinity Holdings Limited		British Virgin Islands			100				—
Hong Kong Broadband Digital TV Limited		Hong Kong			—				100
Hong Kong Broadband Network Limited		Hong Kong			—				100
Hong Kong Broadband Phone Limited		Hong Kong			—				100
Hong Kong Broadband Television Company Limited		Hong Kong			—				100
Hong Kong Television Network Limited		Hong Kong			—				100
IDD1600 Company Limited		Hong Kong			—				100
SGBN Singapore Broadband Network Pte. Limited		Singapore			100				—
Warwick Gold Enterprises Limited		Hong Kong			—				100

E. Property, plant and equipment

     For the provision of fixed telecommunication network services, we own, or control through long-term leases, equipment consisting of switching, transmission and power equipment and connecting lines comprised of in-building wiring, fiber-based backbone, wireless and leased wire-line backbone and other support structures, conduits and similar items that comprise our Next Generation Network. The majority of the fiber-based backbone connecting our services are under public road, highways and streets. In Hong Kong, we owned an aggregate of 161,000 square feet predominately for self use as of August 31, 2010.

     For the provision of international telecommunications services, we own three switching systems in Hong Kong and two in Canada (one in Vancouver and the other in Toronto). We have invested and have rights to dedicated capacity in two undersea cables, the Japan-U.S. cable and the APCN 2 cable, for use as international transmission facilities, both of which were completed and have been operational since May 2002.

     In addition, we have leased properties in Hong Kong for 20 retail shops and for a 3,500 square feet customer service center in Mongkok, Kowloon, Hong Kong.

     We rely on suppliers to provide equipment, underground cables and other necessary components for the construction and upgrade of our Next Generation Network, and for our VoIP equipment. In order for new subscribers to be able to access our IP-TV services, we must install an

IP set-top-box in their homes. We must have an adequate supply of such installation equipment on hand to respond to new customer subscriptions in a timely manner. We purchase all of our IP set-top boxes and other equipment from our suppliers on a purchase order basis and have no long-term contracts. If our suppliers are unable to supply us with these products in a timely manner or the costs of these products increase due to unforeseen causes, this could negatively impact our operating results, especially if we are unable to acquire new subscribers or effectively appropriate our costs on to our customers.

Item 5 Operating and financial review and prospects

      You should read the following discussion together with the rest of this annual report, including the consolidated financial statements and related notes included elsewhere in this annual report. The results discussed below are not necessarily indicative of the results to be expected in any future periods.

Overview

     We are a provider of residential and corporate fixed telecommunications network services in Hong Kong. We offer our customers an integrated suite of broadband Internet access, local VoIP, IP-TV and corporate data services through our self-owned Next Generation Network. Our network covered 1.77 million residential homes pass as of August 31, 2010, representing approximately 80% of the total households in Hong Kong, and is concentrated in Hong Kong’s most densely populated areas, which reduces our cost of network deployment per home pass. As of August 31, 2010, our FTNS business had a subscription base of approximately 1,110,000 subscriptions. In addition, we offer a variety of international telecommunications services, including direct dial services, international calling cards and mobile call forwarding services, in Hong Kong. As of August 31, 2010, our IDD business had a subscription base of approximately 2.4 million registered accounts.

A. Factors affecting our results of operations

Our revenues

     Our revenues are derived from two business segments: our FTNS business and our IDD business. Our FTNS business primarily consists of broadband Internet access, local VoIP, IP-TV and corporate data services, while our IDD business primarily consists of direct dial services, international calling cards and mobile call forwarding services.

•

FTNS business. Revenues from our FTNS business primarily consist of monthly service charges payable by our subscribers and interconnection charges payable by other telecommunications operators.

	•		Monthly service charges. We charge our subscribers a monthly service charge, which generally varies by the number and nature of the fixed telecommunications network services subscribed. Our strategy is to market additional services to our subscribers by leveraging our broadband Internet access subscription base of 526,000 as of August 31, 2010 and the scalability of our Next Generation Network.
	•		Interconnection charges. We offer fixed telecommunications network services through our self-owned Next Generation Network. Under the terms of HKBN’s fixed telecommunications network services license, we are required to provide interconnection services to other network operators, including mobile network operators.

•

IDD business. Substantially all of revenues from our IDD business consists of tariffs, which generally varies by the destination of the call and the calling prefix, with discounts depending on the time of the day or day of the week when the call is placed.

Our operating expenses

     Our operating expenses consist of network costs and other operating expenses.

	•		Network costs. Network costs vary according to either our network capacity or our traffic volume. Such costs mainly include leased line rentals, program fees and production costs for our IP-TV services and interconnection charges payable to other local fixed network operators and international bandwidth providers. Network costs do not include depreciation charge, which is included in other operating expenses.
	•		Other operating expenses . Other operating expenses mainly consist of Talent costs, advertising and marketing expenses, depreciation of owned fixed assets.

	•		Talent costs . Salaries and related costs incurred for services rendered by Talents.
	•		Advertising and marketing expenses. Due to our efforts in promoting our FTNS services, our advertising and marketing expenses incurred in connection with subscription acquisition activities have been relatively high. We expect that we will be required to continue to invest significant financial and human resources in our sales and marketing efforts as we strive to build our subscription base and to enhance our brand value.

•

Depreciation. Depreciation is calculated to write off the cost of fixed assets less their estimated residual value, if any, using straight line method over their estimated useful lives. We expect that we will continue to invest in our Next Generation Network to expand our network coverage. In addition, any technological advancement or obsolescence might affect the estimated useful lives of our fixed assets.

Critical accounting policies

      The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with IFRSs for the fiscal years ended August 31, 2008, 2009 and 2010. Our significant accounting policies are more fully described in note 1 to our consolidated financial statements.

     The preparation of our consolidated financial statements in conformity with IFRSs requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments including those related to fixed assets, provision for doubtful accounts, deferred taxes, USC charges and certain revenue items. We base our estimates and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates as facts, circumstances and conditions change. The estimates and underlying assumptions are reviewed on an ongoing basis. Changes to accounting estimates are recognized in the period in which the estimate is changed if the change affects only that period or in the period of the change and future periods if the change affects both current and future periods.

     Our accounting policies have been developed over many years as the telecommunications industry and generally accepted accounting principles have evolved. As our financial statements are prepared under IFRSs, our accounting policies are necessarily compliant with all aspects of IFRSs. IFRSs are based on a “substance over form” conceptual framework that requires us to look through the legal interpretation of an arrangement or transaction to its underlying purpose and to reflect it in our consolidated financial statements on that basis.

     The following are the most significant accounting estimates and judgments we apply in producing our consolidated financial statements.

Revenue recognition

     Revenue for the provision of telecommunications services is recognized when an arrangement exists, service is rendered, fee is fixed or determinable and collectability is probable. Revenue received in advance is deferred and recognized as revenue on a straight-line basis over the stated period of time in the subscriber agreement.

     A portion of revenue from our FTNS business is derived from network interconnection charges. Network interconnection charges are recorded as revenue based on usage of our fixed telecommunications network by mobile and other fixed telecommunications network operators. The determination of the rates on mobile interconnection charges at which revenue is recognized involved significant estimates by management. Significant changes in management estimates may result in material revenue adjustments.

     Prior to April 27, 2009, mobile network operators were obliged to pay interconnection charges to us in accordance with the charging principles promulgated by the Telecommunications Authority. Because certain local mobile network operators disagreed with the level of charges computed by us, certain amount of the mobile interconnection charges billed by us had not been collected as of December 14, 2010. We recognize revenue related to mobile interconnection charges at amounts we believe to be realizable after consideration of the uncertainty regarding the timing and amount of the ultimate collection of amounts due. Specifically:

	•		The amount recognized for fiscal 2004 and before was determined using the available rates under the then-existing calculation model (fully distributed cost model) for interconnection service between fixed and mobile operators, which are based on historical cost data of PCCW-HKT Telephone Limited. In May 2004, the Telecommunications Authority confirmed that mobile network operators are obliged to pay interconnection charges to us in accordance with the charging principles promulgated by the Telecommunications Authority. A number of mobile network operators, however, disputed the basis of our calculation. In August 2004, we requested the Telecommunications Authority to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile network operators to us and the effective date of the determined mobile interconnection charges.
	•		The amount recognized in fiscal 2005 reflected a discount from the amounts billed which was determined based on our assessment of the range of likely outcomes of the 2004 Determination. In November 2005, we entered into contractual agreements with one of the mobile network operators who agreed to pay interim mobile interconnection charges at a rate based on PCCW-HKT’s published fully distributed cost model of HK$0.0436 per occupancy minute until the Telecommunications Authority issued its final ruling.
	•		The amount recognized in fiscal 2006 was based on the preliminary rates published by the Telecommunications Authority in March 2006 as we awaited a final ruling by the Telecommunications Authority on the 2004 Determination.

	•		The amount recognized in fiscal 2007 was based on the 2004 Determination issued by the Telecommunications Authority in June 2007, which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by us for the period from April 1, 2002 to August 31, 2004.
	•		The amount recognized in fiscal 2008 was based also on the 2004 Determination issued by the Telecommunications Authority in June 2007. In February 2008, we requested the Telecommunications Authority to make a new determination with four mobile operators on the rates of mobile interconnection charge and interest thereon. We subsequently entered into contractual agreements with some of these mobile operators, which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from April 1, 2002 to August 31, 2004 and with respect to the period after August 31, 2004 at the interim rates stated in the agreements, which will be adjusted based on further determination to be issued by the Telecommunications Authority.
	•		The amount recognized in fiscal 2009 and before was based on the 2004 Determination issued by the Telecommunications Authority in June 2007 which set out the rates of mobile interconnection charge payable by the mobile operators under dispute for interconnection services provided by us for the period from April 1, 2002 to August 31, 2004. In September 2008, the Telecommunications Authority indicated that it accepted our request for determination on the rate of mobile interconnection charge for the period from April 1, 2002 to April 26, 2009 payable by the mobile operators that have not reached contractual agreements with us, and the rate for period from September 1, 2004 to April 26, 2009 payable by those mobile operators that have reached contractual agreements with us and the interest thereon (the “2008 Determination”). On November 25, 2009, the Telecommunications Authority issued a Preliminary Analysis in relation to the 2008 Determination for the parties’ comments.
	•		In May 2010, the Telecommunications Authority issued its decision on the 2008 Determination, which set out the rates of mobile interconnection charges payable by the mobile operators involved in the dispute. Based on such decision on the 2008 Determination, we reversed approximately HK$19.7 million revenue related to mobile interconnection charges and recognized approximately HK$10.1 million interest income in fiscal 2010.

     For a discussion of our revenue recognition of mobile interconnection charges, please refer to note 2(b) to our consolidated financial statements. Actual amounts realized could be different from our estimate.

Useful lives of fixed assets

     We estimate the useful lives of fixed assets in order to determine the amount of depreciation expense to be recorded. The useful life of an asset is estimated at the time the asset is acquired based on historical experience, the expected usage, wear and tear of the asset, as well as technical obsolescence arising from changes in the market demands or service output of the asset. Changes in technology or industry conditions may cause the estimated period of use or the value of these assets to change. We perform periodic reviews to confirm the appropriateness of estimated economic useful lives for each class of fixed assets. For the three years ended August 31, 2010, there were no changes in the useful lives of our fixed assets.

Impairment of fixed assets

     Under IFRSs, if a triggering event occurs indicating that the carrying amount of an asset may not be recoverable, a new assessment of the carrying amount of that asset is required. Triggering events include significant adverse changes in the market value of an asset, changes in the business or regulatory environment, or certain legal events. The interpretation of such events requires judgment from the management with respect to whether such an event has occurred and whether management feels that reassessment of the carrying value of the asset is required. If an event occurs that could affect the carrying value of the asset and management does not identify it as a triggering event and identify the asset as impaired, future operations could be adversely affected if this asset is subsequently written off or sold for less than its carrying value due to sudden downturns in the business environment.

     Upon the occurrence of triggering events, the carrying amounts of fixed assets are reviewed to assess whether their recoverable amounts have declined below their carrying amounts. Under IFRSs, the recoverable amount 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 assets. Where the 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. cash-generating-unit). Where the recoverable amount of fixed and other long-lived assets is less than their carrying value, an impairment loss is recognized to write down the assets to their recoverable amount, which is based on the fair value less costs to sell or value in use.

     Estimation of cash flows arising from future use of the asset requires careful analysis regarding what we expect to recover from its future use. This includes consideration of our target market share and subscription base, market competition, future changes to our cost structure and technological change. In addition, the residual value of the asset on disposal requires judgment, as the estimated fair value of the asset at the time of disposal could change in response to market conditions and changes in expected use of the asset prior to disposal. Changes in the estimate of cash flows arising from expected future use of the asset or its residual value on disposal — based on changes in market conditions, changes in the use of assets, management plan, foreseeable technological changes or otherwise — could significantly change the calculation of the fair value or recoverable amount of the asset and the resulting impairment loss. This in turn could significantly affect the results of our operations.

     For the three years ended August 31, 2010, no impairment fixed assets have been recognized.

Accounts receivable

     Under IFRSs, provision is made against accounts receivable to the extent they are considered to be doubtful. This provision requires judgment regarding the collectability of certain receivables both as they are incurred and as they age. We assess bad debt provision by type of customers, namely residential, corporate and carrier, based on past experience of recovery of old receivables, the aging of the accounts receivable balance and historical write-off experience. Certain receivables may be initially identified as collectible, yet subsequently become uncollectible and result in a subsequent write-off of the related receivable to the consolidated statement of operations. Changes in the collectability of accounts receivable for which provisions are not made could affect our future results of operations.

     Included in the accounts receivable balance (net of allowance for doubtful debts) were receivables for mobile interconnection charges of HK$64.4 million, HK$68.8 million and HK$39.8 million as of August 31, 2008, 2009 and 2010, respectively. The balance represented mobile interconnection charges we billed to the local mobile network operators, and some of these charges had not been collected.

     Changes in the allowance for doubtful debts consist of:

		For the year ended August 31,
		2008				2009				2010
		HK$				HK$				HK$
		(Amounts in thousands)
Balance at beginning of the year			22,392				11,944				3,160
Additions charged to expense			14,293				12,103				14,742
Write-off			(24,741	)			(20,887	)			(12,079	)
Balance at the end of the year			11,944				3,160				5,823

Deferred taxation

     We recognized deferred tax assets for all deductible temporary differences and operating loss carry forwards to the extent it is probable that future taxable profits will be available against which the asset can be utilized. In assessing whether a deferred tax asset is expected to be utilized in the foreseeable future, our management considers all available evidence, including projected future taxable profit by taking into consideration of the effect of our capital expenditures and other plans, such as the existing network capacity, technological changes, future market trends and projected fixed network coverage.

     The recognition of deferred tax assets requires judgment regarding the results of future operations, including the assumption that there will be sufficient future operations to allow us to utilize the related deferred tax asset. Our management projects future taxable income by considering all available information, including tax planning strategies, historical taxable incomes, and the expiration period of the unused tax losses carry forwards of each of the Company and its subsidiaries. During the year ended August 31, 2008, taking into consideration of the current results of operations, our management assessed that it was probable that sufficient future taxable profits would be generated to utilize the unused tax losses of HK$159.6 million, which resulted in the recognition of deferred tax assets of HK$26.3 million. As at August 31, 2008, 2009 and 2010, we had not recognized deferred tax assets in respect of unused tax losses of HK$9.5 million, HK$8.2 million and HK$8.2 million respectively, because it was not probable that future taxable profits could be generated to utilize the tax losses. All tax losses are subject to agreement with local tax authorities. Any changes in the estimate of future operations could change the recognition of our deferred tax assets, which could significantly affect our results of operations.

USC charges

     Our management makes their best estimates for the universal service contribution charges, or USC, payable to PCCW-HKT in order to fund the network development costs incurred by PCCW-HKT in remote areas in Hong Kong. Such estimated costs are included as part of our costs of rendering services. The estimate is made based on the provisional rates announced by the Telecommunications Authority and is effective up to the date of the release of our consolidated financial statements. The Telecommunications Authority periodically reviews the actual costs incurred by PCCW-HKT in the development and adjusts the amounts owed to PCCW-HKT, or to be refunded by it, to the respective USC contributing parties, including us. Accordingly, the estimate made by our management for a financial year is subject to changes based on the

revisions published by the Telecommunications Authority up to the date prior to the release of our consolidated financial statements. We adjust such differences as an addition to, or reduction of, the corresponding costs of services in that particular reporting period.

     Any sum received in advance from PCCW-HKT as an estimated refund of USC on a provisional basis, which is subject to the final confirmation and determination of the Telecommunications Authority, is recorded in other payables and accrued charges in our balance sheet.

Operating Results

     The following table sets forth, for the years indicated, a summary of our results of operations.

		For the year ended August 31,
		2008				2009				2010				2010
		HK$				HK$				HK$				US$
		(Amounts in thousands)
Revenue
FTNS business			1,011,038				1,230,880				1,356,098				174,348
IDD business			291,943				247,359				218,589				28,103
			1,302,981				1,478,239				1,574,687				202,451
Network costs			(178,367	)			(175,129	)			(195,292	)			(25,108	)
Other operating expenses			(966,094	)			(1,037,964	)			(1,105,604	)			(142,143	)
Other income, net			24,989				41,540				7,989				1,028
Finance costs			(75,137	)			(55,127	)			(22,235	)			(2,859	)
Profit before taxation			108,372				251,559				259,545				33,369
Income taxes benefit/(expense)			16,818				(38,730	)			(42,679	)			(5,487	)
Net income			125,190				212,829				216,866				27,882