- Annual and Transition Report (foreign private issuer) (20-F)

As filed with the Securities and Exchange Commission on December 21, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the year ended August 31, 2011

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

For the transition period from or

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:


Title Of Each Class		Name Of Each Exchange On Which 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 of the close of the period covered by the annual report: 771,911,853 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 ¨ No x

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 ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark 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 ¨ No ¨

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 ¨ Accelerated filer x Non-accelerated filer ¨

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

US GAAP ¨

International Financial Reporting Standards as issued x

by the International Accounting Standards Board

Other ¨

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 ¨ Item 18 ¨

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 ¨ No x

*	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			2
Note regarding forward-looking statements			3
Special note on our financial information presented in this annual report			4

PART I			5

ITEM 1	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		5
ITEM 2	OFFER STATISTICS AND EXPECTED TIMETABLE		5
ITEM 3	KEY INFORMATION		5
	A.	Selected financial data	5
	B.	Capitalization and indebtedness	11
	C.	Reasons for the offer and use of proceeds	12
	D.	Risk factors	12
ITEM 4	Information on the Company		19
	A.	History and development of the Company	19
	B.	Business overview	20
	C.	Regulatory framework	28
	D.	Organizational structure	35
	E.	Property, plant and equipment	36
ITEM 5	Operating and financial review and prospects		37
	A.	Operating results	37
	B.	Liquidity and capital resources	44
	C.	Research and development, patents and licenses	46
	D.	Trend information	46
	E.	Off-balance sheet arrangements	46
	F.	Tabular disclosure of contractual obligations	47
	G.	Safe Harbor	47
ITEM 6	Directors, senior management and employees		47
	A.	Directors and senior management	47
	B.	Compensation	50
	C.	Board practices	50
	D.	Employees	52
	E.	Share ownership	52
ITEM 7	Major shareholders and related party transaction		55
	A.	Major shareholders	55
	B.	Related party transactions	56
	C.	Interests of experts and counsel	56
ITEM 8	Financial information		56
	A.	Consolidated statements and other financial information	56
	B.	Significant changes	56
ITEM 9	The offer and listing		57
	A.	Offer and listing details	57
	B.	Plan of distribution	59
	C.	Markets	59
	D.	Selling shareholders	59
	E.	Dilution	59
	F.	Expenses of the issue	59
ITEM 10	Additional information		59
	A.	Share capital	59
	B.	Memorandum and Articles of Association	59
	C.	Material contracts	63
	D.	Exchange controls	63
	E.	Taxation	63
	F.	Dividends and paying agents	67
	G.	Statement by experts	67
	H.	Documents on display	67
	I.	Subsidiary information	67
ITEM 11	Quantitative and qualitative disclosures about market risk		68
ITEM 12	Description of securities other than equity securities		68
	A.	Debt securities	68
	B.	Warrants and rights	68
	C.	Other securities	68
	D.	American depositary shares	68


PART II			69

ITEM 13	Defaults, dividend arrearages and delinquencies		69
ITEM 14	Material modifications to the rights of security holders and use of proceeds		69
ITEM 15	Controls and procedures		69
	A.	Disclosure controls and procedures	69
	B.	Management’s report on internal control over financial reporting	69
	C.	Report of Independent Registered Public Accounting Firm	70
	D.	Changes in internal control over financial reporting	70
ITEM 16A	Audit committee financial expert		70
ITEM 16B	Code of ethics		71
ITEM 16C	Principal accountant fees and services		71
ITEM 16D	Exemptions from the listing standards for audit committees		71
ITEM 16E	Purchase of equity securities by the issuer and affiliated purchasers		71
ITEM 16F	Change in Registrant’s Certifying Accountant		71
ITEM 16G	Corporate Governance		72

PART III			72

ITEM 17	Financial statements		72
ITEM 18	Financial statements		72
ITEM 19	Exhibits		72

Use of defined and technical terms

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

•

“Android” are to the operating system for mobile devices produced by Google.

•

“Apple Device” are to the electronic devices designed and produced by Apple Inc. including iPhone and iPad.

•

“ADSL” are to the asymmetric digital subscriber line technology;

•

“Articles” are to the Company’s existing Memorandum and Articles;

•

“City Telecom” or the “Company” are to City Telecom (H.K.) Limited;

•

“Category 5e copper wiring” are to certain network cabling commonly used for Ethernet network;

•

“Ethernet” are to a family of computer networking technology for local area networks;

•

“fiscal year” or “fiscal” are to the Company’s fiscal year ended August 31 for the year referenced;

•

“FMIC” are to an interconnection charge for circuit-switched traffic between a fixed network operator and a mobile network operator.

•

“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;

•

“Hong Kong Companies Ordinance” are to Chapter 32 of the laws of Hong Kong;

•

“HKBA” or the “Hong Kong Broadcasting Authority” are to an independent statutory body established by the Hong Kong government for the regulation of the broadcasting industry in Hong Kong;

•

“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;

•

“HKMA” or “Hong Kong Monetary Authority” are to the government authority in Hong Kong responsible for maintaining monetary and banking stability in Hong Kong;

•

“HKSE Listing Rules” are to Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited;

•

“IDD business” are to our business segment in which we provide international direct dialing telecommunications services, including international long distance call services;

•

“IFRSs” are to International Financial Reporting Standards, as issued by the International Accounting Standards Board;

•

“Internet” are to the most common global system of interconnected computer networks with a standard protocol suite;

•

“IP” are to Internet Protocol, the most commonly used set of rules for dispatching data across the Internet;

•

“IP-TV services” are to pay-television services through Internet Protocol;

•

“ISR” or “international simple resale” are to a telecommunication methodology by which operators are allowed to pool traffic to a particular destination and send it down an international leased line, whereby such operator is able to charge its customers a per-minute fee while itself pays a lower fixed charged for leased line rental;

•

“Metro Ethernet” are to a computer network that covers a metropolitan area and that is based on the Ethernet standard;

•

“Mbps” are to megabits per second;

•

“Next Generation Network” are to our broadband packet-based fixed-line telecommunication network which utilizes Metro Ethernet and GPON technologies;

•

“OFTA” or the “Office of the Telecommunications Authority” are to an independent statutory body established by the Hong Kong government for the regulation of the telecommunications industry in Hong Kong;

•

“PNETS Licenses” are to licenses issued by the Hong Kong regulatory authorities for the public non-exclusive telecommunications services;

•

“Talents” are to all individuals employed by our Group including the directors of our Company;

•

“UC License” are to the Unified Carrier License issued by the Hong Kong regulatory authorities for fixed and mobile telecommunication services;

•

“USC” are to universal service contribution made to PCCW-HKT, a local carrier in Hong Kong, as specified in an arrangement established by OFTA of Hong Kong, in order to fund the network development costs for certain remote areas in Hong Kong;

•

“US GAAP” are to the Generally Accepted Accounting Principles in the United States;

•

“Video-On-Demand” are to systems which allow users to select and watch/listen to video or audio content on demand;

•

“VDSL” are to the very-high-bit-rate digital subscriber line technology; 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$7.7876, which was the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on August 31, 2011. On December 9, 2011 the exchange rate was US$1.00 = HK$7.7817. 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;

•

contrary to our telecommunications business with 19 years operational track record, our business expansion into multimedia production and free TV subject to license grant, is a new line of business for us, for which we lack direct experience, thereby making forecasting much more difficult; 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, 2010 and 2011 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 IFRSs was September 1, 2007, which is the beginning of the earliest period for which we 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 of 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 reconciliation to 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 selected historical financial data of our Company as of and for each of the years in the five-year period ended August 31, 2011. Except for amounts presented in U.S. dollars, the selected historical consolidated income statement data and other financial data for the years ended August 31, 2009, 2010 and 2011 and the selected historical consolidated balance sheet data as of August 31, 2010 and 2011 set forth below are derived from, should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements, including the related notes, included elsewhere in this annual report on Form 20-F. The selected historical consolidated income statement data for the years ended August 31, 2007 and 2008 and the selected historical consolidated balance sheet data as of August 31, 2007, 2008 and 2009 set forth below are derived from our audited consolidated financial statements that are not included in this annual report on Form 20-F. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board.

Selected consolidated income statement data:


	For the year ended August 31,
	2008			2009			2010			2011			2011
	HK$			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			1,484,324			190,601
- IDD business		291,943			247,359			218,589			197,134			25,314

Total operating revenue		1,302,981			1,478,239			1,574,687			1,681,458			215,915

Network costs and costs of sales:
- FTNS business		(103,524	)		(107,670	)		(144,347	)		(177,302	)		(22,767	)
- IDD business		(74,843	)		(67,459	)		(50,945	)		(35,013	)		(4,496	)

Total network costs and costs of sales		(178,367	)		(175,129	)		(195,292	)		(212,315	)		(27,263	)

Other operating expenses		(966,094	)		(1,037,964	)		(1,105,604	)		(1,097,164	)		(140,886	)

Interest expense, net		(59,541	)		(50,258	)		(10,863	)		(2,993	)		(384	)
Other income/(expense), net		9,393			36,671			(3,383	)		3,883			499
Income taxes benefit/(expense)		16,818			(38,730	)		(42,679	)		(58,954	)		(7,570	)

Net income		125,190			212,829			216,866			313,915			40,311

Basic earnings per share (cents)		19.7			32.4			30.7			40.8			5.2
Diluted earnings per share (cents) (note 1)		19.0			31.8			29.4			39.6			5.1
Dividends per share attributable to the year (cents)		6.0			19.0			20.0			30.0			3.9
Weighted average number of ordinary shares		634,015			657,201			706,605			768,807			768,807
Diluted weighted average number of ordinary shares (note 2)		657,997			668,384			736,616			792,799			792,799

Selected consolidated balance sheet data:


	As of August 31,
	2008 HK$			2009 HK$			2010 HK$			2011 HK$			2011 US$
	(Amounts in thousands)
Total assets		2,093,410			1,790,408			2,251,549			2,264,462			290,778

10-year senior notes due 2015		(683,242	)		(162,586	)		—			—			—
Long-term bank loan - unsecured		—			—			(123,567	)		—			—
Finance lease obligations – non-current portion		(255	)		(530	)		(393	)		(288	)		(37	)
Derivative financial instrument		—			—			(11,293	)		(11,564	)		(1,485	)
Finance lease obligations – current portion		(121	)		(202	)		(212	)		(105	)		(13	)
Other liabilities		(377,185	)		(398,563	)		(427,545	)		(455,124	)		(58,443	)

Total liabilities		(1,060,803	)		(561,881	)		(563,010	)		(467,081	)		(59,978	)

Net assets		1,032,607			1,228,527			1,688,539			1,797,381			230,800

Share capital		65,062			66,418			76,500			77,191			9,912
Share premium		670,717			681,208			1,074,997			1,083,495			139,131
Reserves		296,828			480,901			537,042			636,695			81,757

Total shareholders’ equity		1,032,607			1,228,527			1,688,539			1,797,381			230,800

Other financial data:


	For the year ended August 31,
	2008 HK$			2009 HK$			2010 HK$			2011 HK$			2011 US$
	(Amounts in thousands)
EBITDA (note 3)		377,964			508,058			469,437			594,059			76,283
Net cash inflow from operating activities		381,991			536,771			485,340			585,899			75,235
Net cash outflow from investing activities		(147,750	)		(176,488	)		(306,254	)		(414,189	)		(53,186	)
Net cash (outflow)/inflow from financing activities		(345,978	)		(561,292	)		178,307			(343,112	)		(44,059	)
Capital expenditures (note 4)		211,684			286,734			344,844			449,196			57,681

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, 2010 and 2011.


	For the year ended August 31,
	2008 HK$			2009 HK$			2010 HK$			2011 HK$			2011 US$
	(Amounts in thousands)
EBITDA		377,964			508,058			469,437			594,059			76,283
Depreciation and amortization		(210,051	)		(206,241	)		(199,029	)		(218,197	)		(28,018	)
Interest expense, net		(59,541	)		(50,258	)		(10,863	)		(2,993	)		(384	)
Income taxes benefit/(expense)		16,818			(38,730	)		(42,679	)		(58,954	)		(7,570	)

Net income		125,190			212,829			216,866			313,915			40,311
Depreciation and amortization		210,051			206,241			199,029			218,197			28,018
Amortization of deferred expenditure		33,777			53,160			48,621			37,873			4,863
Income taxes (benefit)/expense		(16,818	)		38,730			42,679			58,954			7,570
Interest income		(15,596	)		(4,869	)		(11,372	)		(3,366	)		(432	)
Interest element of finance lease		34			27			42			30			4
Interest, amortization and exchange difference on senior notes		72,640			49,214			6,069			—			—
Interest on other borrowings		3,428			885			3,260			3,473			446
Amortization of upfront cost on bank loan		—			—			192			182			23
Interest expense on bank loan		—			—			1,379			1,152			148
Change in fair value of derivative financial instruments		—			—			11,293			271			35


Write-off of upfront costs upon settlement of long-term bank loan	—		—		—		1,251		161
Realized gain on long term bank deposit	(1,185	)	—		—		—		—
Loss/(gain) on disposal of fixed assets	1,431		1,016		(1,375	)	1,008		129
Equity settled share-based transaction	4,204		4,768		5,347		4,652		597
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		—		—
Taxation paid	(4,250	)	(1,732	)	(3,013	)	(3,012	)	(387	)
Change in long term receivable and prepayments	1,346		(505	)	917		1,073		138
Change in working capital, net	(27,434	)	8,567		(44,244	)	(49,754	)	(6,389	)

Net cash inflow from operating activities	381,991		536,771		485,340		585,899		75,235

Operating data:


	As of and for the year ended August 31,
	2008		2009		2010		2011
FTNS subscriptions:
- Broadband Internet access		316,000		391,000		526,000		590,000
- Local VoIP		329,000		382,000		431,000		476,000
- IP-TV		156,000		170,000		153,000		181,000
Total		801,000		943,000		1,110,000		1,247,000
Registered international telecommunications accounts (note 5)		2,336,000		2,383,000		2,445,000		2,488,000
IDD outgoing minutes (in thousands)		574,000		487,000		464,000		412,000

Notes:

(1)	Diluted earnings per share is computed by dividing the net income by the diluted weighted average number of ordinary shares at the end of the year.

(2)	The diluted weighted average number of ordinary shares have been computed after adjusting for the effects of all dilutive potential ordinary shares.

(3)

EBITDA for any period means, without duplication, net income for such period, plus the following to the extent deducted in calculating such net income: interest expense, income taxes, depreciation and amortization expense (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period not included in the calculation), less interest income. EBITDA is not a measure of performance under IFRSs. We believe that EBITDA is an additional measure utilized by investors in determining a borrower’s ability to meet debt service requirements. However, EBITDA does not represent, and should not be used as a substitute for, net earnings or cash flows from operations as determined in accordance with IFRSs, and EBITDA is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. In addition, our definition of EBITDA may differ from that of other companies.

(4)	Capital expenditures represent additions to fixed assets and include non-cash transactions.

(5)	Registered accounts refer to international telecommunications customers that have a valid account. Account holders may or may not be active users of our services.

Selected Consolidated Income Statement:


	For the year ended August 31,
	2007 HK$
	(Amounts in thousands except per share data)
HKFRS

Revenues:
Fixed telecommunications network services		816,800
International telecommunications services		324,470

Total operating revenue		1,141,270

Network costs and costs of sales:
Fixed telecommunications network services		(103,795	)
International telecommunications services		(110,796	)

Total network costs and costs of sales		(214,591	)
Other operating expenses		(834,104	)

Income from operations		92,575
Interest expense, net		(64,833	)
Other income, net		3,149
Income taxes expense		(2,026	)

Net income		28,865
Basic earnings per share (cents)		4.7
Diluted earnings per share (cents) (note 1)		4.6
Dividends declared per share (cents)		8.0
Weighted average number of shares		614,840
Diluted weighted average number of shares (note 2)		631,319



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

Selected Consolidated Balance Sheet Data:


	As of August 31,
	2007 HK$
	(Amounts in thousands)
HKFRS
Total assets		2,161,133
Debt		(952,593	)
Finance lease obligation		(1,210	)
Other liabilities		(303,448	)

Total liabilities		(1,257,251	)

Net assets employed		903,882

Share capital		61,650
Share premium		622,433
Reserves		219,799

Total shareholders’ equity		903,882


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

Other Financial Data:


	For the year ended August 31,
	2007 HK$
	(Amounts in thousands)
HKFRS
EBITDA (note 3)		353,827
Net cash provided by operating activities		383,999
Net cash provided by investing activities		114,053
Net cash used in financing activities		(109,504	)
Capital expenditures (note 4)		132,250

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 fiscal 2007.


	For the year ended August 31 2007 HK$ (Amounts in thousands)
EBITDA (note 3)		353,827
Depreciation and amortization		(258,103	)
Interest expense, net		(64,833	)
Income taxes expense		(2,026	)

Net income		28,865
Depreciation and amortization		258,103
Amortization of deferred expenditure		15,580
Income taxes expense		2,026
Interest income		(22,671	)
Interest, amortization and exchange difference on senior notes		89,879
Other borrowing costs		(739	)
Loss on disposal of fixed assets		1,714
Equity settled share-based transaction		5,727
Realized and unrealized loss on derivatives financial instruments		806
Unrealized gain on other investments		(1,887	)
Taxation paid		(2,171	)
Change in long term receivable		5,600
Change in working capital, net		3,167

Net cash flow provided by operating activities		383,999

Operating Data:


	As of and for the year ended August 31,
	2007
FTNS Subscriptions:
Broadband Internet Access		247,000
Local VoIP		308,000
IP-TV		128,000

Total		683,000

Registered international telecommunications accounts (note 5)		2,331,000
IDD outgoing minutes (in thousands)		659,000

Notes:

(1)	Diluted earnings per share is computed by dividing the net income by the diluted weighted average number of ordinary shares at the end of the year.

(2)	The diluted weighted average number of shares have been computed after adjusting for the effects of all dilutive potential ordinary shares.

(3)

EBITDA for any period means, without duplication, net income for such period, plus the following to the extent deducted in calculating such net income: interest expense, income taxes, depreciation and amortization expense (excluding any such non cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period not included in the calculation), less interest income. EBITDA is not a measure of performance under HKFRS or U.S. GAAP. We believe that EBITDA is an additional measure utilized by investors in determining a borrower’s ability to meet debt service requirements. However, EBITDA does not represent, and should not be used as a substitute for, net earnings or cash flows from operations as determined in accordance with HKFRS or U.S. GAAP, and EBITDA is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. In addition, our definition of EBITDA may differ from that of other companies.

(4)	Capital expenditures represent additions to fixed assets and include non-cash transactions.

(5)	Registered accounts refer to international telecommunications customers that have a valid account. Account holders may or may not be active users of our services.

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 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 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
Fiscal 2011		7.7776		7.8087		7.7506		7.7876
June 2011		7.7850		7.7976		7.7767		7.7814
July 2011		7.7892		7.7964		7.7802		7.7942
August 2011		7.7965		7.8087		7.7876		7.7876
September 2011		7.7943		7.8040		7.7830		7.7840
October 2011		7.7774		7.7884		7.7634		7.7641
November 2011		7.7809		7.7957		7.7679		7.7730
December 2011 (through December 9, 2011)		7.7727		7.7817		7.7676		7.7817

Note:

The average rates on the last business day of each month during the relevant fiscal year period or the average rates for each business day during the relevant monthly period.

Source: For all periods prior to January 1, 2009, the exchange rate refers to noon buying rate as reported by the Federal Reserve Bank of New York. For periods beginning on or after January 1, 2009, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.

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 or any other events that has not been so identified 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 6.8% to HK$1,681.5 million in fiscal 2011 from HK$1,574.7 million in fiscal 2010, and our net profit increased by 44.8% to HK$313.9 million in fiscal 2011 from HK$216.9 million in fiscal 2010. The increase in net profit in fiscal 2011 was primarily due to increased contribution from our FTNS business and finance cost savings of HK$15.9 million as a result of the full year impact of the repurchase and redemption of our outstanding 10-year senior notes in fiscal 2010.

Although revenue from our FTNS business increased by 9.5% in fiscal 2011, 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 by 12.2% as a result of our “Member-Get-Member” marketing campaigns between November 2009 to August 2010, which reduced the price for our symmetric 100 Mbps service by half to HK$99 per month, in exchange for an enlarged customer base and a subsequent increase in the price for the same service following the termination of the “Member-Get-Member” marketing campaigns since September 1, 2010. 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 to operate in a highly competitive market.

Further, revenue from our IDD business decreased by 9.8% in fiscal 2011. The decrease was primarily due to a decrease in the total number of airtime minutes by 11.2%. 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, 270 PNETS Licenses had been issued in Hong Kong as of December 31, 2010 for the provision of “external telecommunications services” (as defined in OFTA’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 , financial resources 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 program 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 13, 2011, 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 and profitability.

•

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 and our multimedia production and distribution business 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$449.2 million in fiscal 2011 including HK$50.1 million for a parcel of land and related costs for constructing our multimedia production and distribution centre which is expected to be completed within 36 months.

Excluding our business expansion into multimedia production and free TV subject to licensing, we expect to incur capital expenditures ranging from approximately HK$320 million to HK$350 million in fiscal 2012, a large majority of which will be spent on the continued expansion and upgrade of our network. Once we achieved our 2.0 million homes pass target, we expect our core capital expenditure on the telecom business to turnover ratio gradually reduce to mid teens percentage of turnover in order to maintain our Next Generation Network. However, the telecom industry is exposed to rapidly evolving technology changes which may pose both opportunities and threats to us, for which we may need to respond with additional operating and capital expenditures. We do not have a specific plan to upgrade our network but expect to incur recurring investment for technology upgrade which could be covered by the turnover ratio referenced above. 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 2011, we generated cash from operating activities of HK$585.9 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 our projects.

•

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, 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 lose investor confidence in the reliability of our financial statements if we fail to achieve and maintain effective internal control over financial reporting, which in turn could harm our business and adversely affect the trading prices of our ADRs.

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 control over financial reporting is 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. 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 1.94 million residential homes pass as of August 31, 2011 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.

We cannot assure you that the license of domestic free television program service license will be granted to us and our new business in the provision of domestic free television program will generate revenue in short period of time or become profitable in long run

On December 31, 2009, we submitted an application for the domestic free television program service license in Hong Kong to the HKBA. If granted, such license would allow us to provide free television program services in Hong Kong. As of December 13, 2011, our application for such license is still pending. If granted, we will incur additional expense for program production before we can generate revenue. In addition, given that Television Broadcasts Limited has dominance in viewership, we cannot assure that we can generate revenue in a short period of time and become profitable in the long run.

If we cannot manage our business expansion in multimedia production, our operating results could be adversely affected.

We target to invest HK$600 million to build a multimedia center plus incur additional expenditure to produce drama series and a variety of TV contents for broadcasting in Hong Kong to generate advertising revenues within Hong Kong and for sale to international markets. Contrary to our telecommunications business with 19 years of operational track record, we lack direct experience in this new business.

Our ability to manage the expansion in the multimedia production business will depend on our ability to:

•

build our infrastructure on schedule and within budget;

•

manage to produce contents with good quality to our customers;

•

develop effective marketing channels in Hong Kong and international markets;

•

control operational costs and maintain effective quality controls; and

•

obtain the free television program service license for broadcasting in Hong Kong.

Our failure to achieve any of the above could increase our costs of operation and investments, thus affecting our operating results adversely.

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 OFTA 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. OFTA 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 OFTA 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, OFTA 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. OFTA 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 program service license. However, the Hong Kong 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. As a result, we cannot predict whether the government may require us to obtain a pay-television program service license in the future.

We require licenses from OFTA 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 OFTA 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 is 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 OFTA 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 OFTA’s annual renewal. On October 19, 2009, OFTA 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. On December 7, 2009, the PNETS License of HKBN was replaced by a Class 3 Modified Services-Based Operator License.

•

HKBN’s FTNS License was initially granted in 2000 for a term of 15 years and will expire in 2015. Since OFTA will no longer issue an FTNS License, HKBN will have to apply for a UC License for the provision of fixed telecommunications network services in 2015. However, the discretion whether a UC License will be granted to HKBN continues to rest with OFTA.

•

OFTA’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 2011, approximately 80% 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 1,500 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:

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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.

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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.

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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 our Company through Top Group International Limited, which, as of December 13, 2011, held approximately 43.98% 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 44,286,159 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 our Company is City Telecom (H.K.) Limited. We were 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 a PNETS License. This license gives us the right to offer international telecommunications services using ISR method 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:

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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.

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In February 2007, we launched our “bb50 and bb200” symmetric residential broadband service supported by our special duty unit (“SDU”), personalized customer care service.

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In June 2007, we were awarded “Best Retention Strategies” at the Hong Kong HRM Awards 2007.

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In July 2007, we were awarded “Integrated Support Team” of the year at the Asia Pacific Customer Service Consortium Customer Relationship Excellence Awards.

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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.

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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.

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In February 2008, we were awarded contract for the provision of payphone service at the Hong Kong International Airport.

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In September 2008, we launched the National Geographic Channel’s first ever interactive channel.

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In June 2009, we launched the first online broadband service registration platform in Hong Kong.

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In November 2009, we accepted the Innovation in Recruitment award and Champion of HR award at the Hong Kong HRM Awards 2009.

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In December 2009, we shattered the one-million mark for fixed telecommunications network services subscriptions.

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In March 2010, we launched our “bb100” symmetric broadband and WiFi services at Hong Kong International Airport.

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In April 2010, we launched our 1Gbps symmetric residential broadband service at HK$199 per month.

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In December 2010, we launched “Music One”, a high definition online music portal.

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,
	2009		2010		2011
	HK$		HK$		HK$
	(Amounts in thousands)
*Revenue*
FTNS business		1,230,880		1,356,098		1,484,324
IDD business		247,359		218,589		197,134

Total operating revenue		1,478,239		1,574,687		1,681,458

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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:

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high-speed broadband Internet access services at symmetric upstream and downstream access speeds of 25 Mbps to 1000 Mbps;

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fixed line local telephony services using VoIP technology;

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IP-TV services consisting of more than 110 channels, including self-produced news, children’s programs, international drama, movies and documentaries and local interest programming, using our IP platform; and

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corporate data services, including the provision of dedicated bandwidth to corporate customers.

As of August 31, 2011, we had a total of approximately 1,247,000 subscriptions for our fixed telecommunications network services, consisting of 590,000 broadband Internet access, 476,000 local VoIP and 181,000 IP-TV services subscriptions.

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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, 2011, the customer base for our total international telecommunications services consisted of approximately 2.5 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:

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Focus on the Residential Mass, Small-To-Medium Corporate and Enterprise Market Segments and Certain High Bandwidth Demand Organizations in the Hospitality, Education and Finance Sectors. We focus on offering high-bandwidth services to the residential mass, small-to-medium enterprise markets and high bandwidth demand organizations in the hospitality, education and finance sectors 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 content over the past year to increase our competitiveness by adding Disney Channels, Discovery Channels, National Geographic, AXN, Bloomberg and other channels. Such focus has enabled us to quickly grow our subscription base, and we believe this will help us to increase revenues for our services.

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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 100 Mbps to 1000 Mbps on our existing passive fiber infrastructure, which cannot be accomplished using legacy telephone lines.

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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 1.94 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 infrastructure.

Recent Development

Aiming to expand its foothold in free TV and multimedia production business, City Telecom establishes a World-class TV, Multimedia Production and Distribution Centre on the land granted by Hong Kong Science and Technology Parks Corporation at Tseung Kwan O Industrial Estate. It will produce drama series and a variety of TV contents, in order to support the development of the Group’s free TV and Multimedia Production Business and the demand and development of the Group’s business partners.

The multimedia centre will have a total estimated gross floor area of approximately 300,000 square feet which will take City Telecom an investment of HK$600 million. It is expected to operate in full gear in 2014. There will be a number of studios of which, the largest one will be sized at 15,000 square feet, exhibition centre for educational purpose, post-production suite with leading facilities and equipment to support Super High-definition and 3D production, as well as administration offices.

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,
	2009		2010		2011
Broadband Internet access		391,000		526,000		590,000
Local VoIP		382,000		431,000		476,000
IP-TV		170,000		153,000		181,000

Total FTNS subscriptions		943,000		1,110,000		1,247,000

Broadband Internet Access

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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, 500 Mbps and 1000 Mbps. Rather than using Category-5e copper wiring for the last mile, optical fiber is used in FTTH broadband service. Apart from fibre broadband service, most of our customers also choose an array of value added services such as MusicOne - an online High Definition Music Portal, bbWIFI — providing wireless Internet access through more than 5,500 hotspots , Game.hkbn.net” — a game point portal that sells various game providers’ cards and merchandises, 2b app — an app for Android and Apple Mobile Device to enjoy free calls between the app and HK fixed/mobile numbers.

We frequently alter our promotions in response to changing market conditions or as a way of attracting additional subscribers.

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Pricing. We currently offer broadband service plans, namely bb100, FibreHome500, bb1000 and FibreHome 1000 with speeds of 100 Mbps to 1000 Mbps, respectively, for both upload and download, catering to the needs of all users. The monthly fee ranges from HK$169 to HK$199 for unlimited service access. We frequently alter our promotions in response to changing market conditions as a way of attracting additional subscribers.

In addition to the residential packages described above, we have also developed broadband and Metro Ethernet 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$248 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.

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Competition. There have been new entrants to the Internet access business, but our main competitors are PCCW-HKT, i-Cable and HTHK. PCCW-HKT has been offering broadband Internet access services since May 1998. The incumbent now offers from 1.5Mbps to 1000 Mbps by using ADSL, VDSL and PON technology . PCCW-HKT announced their fiber network in HK covered 3,442 commercial buildings, 1.9M Homes with FTTB or which 1.26M Homes with FTTH. i-Cable also started to deploy 130Mbps downstream service on Hong Kong Islands. HTHK has 1.5M+ home passes. Maximum service speed is up to 1Gbps.

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.

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Market share. We had approximately 590,000 broadband Internet access subscriptions as of August 31, 2011, which represented a market share of approximately 27% with respect to the total number of broadband Internet access subscribers in Hong Kong.

Local VoIP

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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. To ride on the latest trend of smart phones and tablets, in November 2010, we further launched our 2b app for Apple and Android Devices, which offers greater convenience to users without the need of bringing a laptop or PC. It especially targets those frequent travelers who want to save the voice roaming charges between overseas and Hong Kong.

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Pricing. We currently charge from HK$68 to HK$118 per month on standalone basis or starting from HK$20 per month. Home Telephony service to be bundled with the subscription of our broadband Internet access services, 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.

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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 61.2% with respect to local telephony services as of June 30, 2011. The remainder of the market is shared among ourselves and three other alternative carriers: HGC, ,Wharf and Hong Kong Broadband Network Limited. 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.

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Market share. As of August 31, 2011, we had 476,000 local VoIP subscriptions. Our market share with respect to local residential and business telephony services was approximately 10% as of August 31, 2011.

IP-TV

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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 such as Sony Entertainment Channels, Disney Channels, Animax, Syfy, Universal and NatGeo, etc. Starting from October 2010, we have offered video-on-demand movies content for customers' selection. It provides the Hollywood movies by charging HK$10 to HK$25 per movie. Customers can enjoy unlimited views within 24 hours after choosing the movie. 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.

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Pricing. We currently bundle our IP-TV service together with our broadband and VoIP services at an additional fee starting from HK$50 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.

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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 content and Video-On-Demand contents by adding Disney Channels, Discovery Channels, National Geographic Channels, AXN, Universal Channel, Bloomberg, Mega Threater-on-demand with over 700 Hollywood and Asia movies and other channels over the past year to increase our competitiveness.

TVB and Asia Television Limited (“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.

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Market share . As of August 31, 2011, we had 181,000 IP-TV subscriptions, representing approximately 7% of the total pay-television subscription base in Hong Kong.

International telecommunications services

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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.

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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.

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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 2011. This competition drove down the average tariff rates per minute and we expect this price competition to continue in fiscal 2012.

Further, technology substitution from global VoIP providers such as Skype, which offers free PC-to-PC based international calls, is becoming more prevalent.

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Market share . We experienced a reduction in total traffic volume of 4.7% to 464 million minutes in fiscal 2010 and a further reduction of 11.2% to 412 million minutes in fiscal 2011. 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 1.94 million residential homes pass, representing approximately 80% of Hong Kong’s total households and also about 1,600 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 1000 Mbps 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.

Since 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$344.8 million in fiscal 2010 and HK$449.2 million in fiscal 2011, 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 2012, we plan to further incur total capital expenditures about HK$320 million to HK$350 million in our fixed telecommunications network service business.

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 and data.

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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.

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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.

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International telecommunications switching systems . We own four international telecommunications switching systems: two in Hong Kong and two in Canada, one in Vancouver and one in Toronto.

Our two 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 supplied by Nortel Networks Limited and compression units supplied by Cisco Systems, Inc. and ECI Telecom Ltd. These systems are programmed 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 two 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, 2011, we had 16 “Fibre Shops” and a customer service center. We believe these shops can offer our customers convenient access to our wide range of services. We continue to identify new locations to expand our sales network.

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, providing real-time service monitoring and maintenance services and supported by about 120 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, 2011, our research and development department in Hong Kong consisted of approximately 25 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$10.8 million, HK$11.2 million and HK$11.8 million for fiscal 2009, 2010 and 2011, 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, 2011, our Guangzhou customer service facility had 1,532 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 0.8%, 0.9% and 0.8% of our revenue for each of fiscal 2009, 2010 and 2011, 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 the 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 OFTA, 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 radio 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 OFTA is also responsible for the administration of the Telecommunications Ordinance. We are also regulated by HKBA, which administers the Broadcasting Ordinance and makes recommendations to the Chief Executive-in-Council of Hong Kong 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. OFTA 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, OFTA 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 unified carrier license (UC License) encompassing both fixed and mobile carrier services. The UC License regime came into operation on August 1, 2008. After that date OFTA will not issue any further fixed or mobile carrier licenses. 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 by a telecommunication licensee with the Telecommunications Ordinance, any subsidiary legislation made pursuant to it, any of the license conditions or any direction issued by OFTA, 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 OFTA must adhere to prior to revoking or suspending any telecommunications licenses. In addition, the Chief Executive of Hong Kong has the authority, at the recommendation of OFTA, 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 OFTA 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 OFTA no longer issue PNETS Licenses 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.

A Class 3 Services-Based Operator License has a validity period of 12 months and is renewable at the discretion of OFTA 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, OFTA 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, ISR 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 OFTA. HKBN also holds a Class 3 Services-Based Operator License, which was issued to us in December 2009. This Class 3 Services-Based Operator License allows us to act as an Internet service provider.

Under the terms of the Class 3 Services-Based Operator License, 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 OFTA’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

OFTA 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. OFTA introduced the Type II interconnection policy in 1995 under which 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. Since that time, mandatory Type II Interconnection was to 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, OFTA 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. Since that date, interconnection terms including charges have been determined by commercial negotiation between carriers.

On April 27, 2009, OFTA 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 OFTA 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 have been prohibited from engaging in anti-competitive conduct, abusing a 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 OFTA. 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 OFTA relating to the competition provisions may appeal to the Telecommunication (Competition Provisions) Appeal 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 OFTA 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, OFTA 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 OFTA considers necessary, to eliminate or avoid any anti-competitive effect. However, OFTA may not issue such a directive 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 OFTA 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.

OFTA has taken an active role in enforcing this prohibition and has developed voluntary codes to assist in this respect. For instance, in February 2010, OFTA 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. In addition, the Code requires that an unsolicited contract must provide a cooling-off period of not less than seven days during which the customers may 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 services. Service providers pledging compliance with the Code shall publish on their respective website their pledges to the Code. On December 21, 2010, the Code has been adopted by the Communications Association of Hong Kong and the majority of providers, including HKBN, has pledged 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 Clauses 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 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 or UC Licenses are prohibited by license conditions from charging more than their published tariffs for their services. The FTNS License/UC License conditions prohibit licensees from offering discounts to their published tariffs and require the licensees to seek approval from OFTA 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, OFTA 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 OFTA, 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 USC.

On June 8, 2007, OFTA issued a Statement entitled “Review of the Regulatory Framework for Universal Service Arrangement”, which announced the new USC 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 customers 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 regime that was introduced in 2009.

The level of USC is determined by OFTA 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 OFTA, the level for the period from July 1, 2008 to April 30, 2009 is confirmed to be zero cent per minute and OFTA decided that USC contributing parties are not required to pay provisional USC from May 1, 2009 onward until a further review of the USC. Until November 23, 2011, OFTA has not yet released further review of the USC.

Additionally, providers of external telecommunications services, such as holders of Class 3 Services-Based Operator License, including ourselves and IDD1600, are required to pay a local access charge, or LAC, to the local network operators whose network facilities holders of Class 3 Services-based Operator 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 OFTA. Since December 2009, OFTA is conducting a review on the LAC regime, for the time being, the existing LAC arrangement prevails.

Fixed mobile interconnection charge

In June 2007, OFTA 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 4.8 Hong Kong cents per occupancy minute for interconnection from April 1, 2002 to August 31, 2002, 4.22 Hong Kong cents per occupancy minute for interconnection from September 1, 2002 to August 31, 2003 and 2.89 Hong Kong cents per occupancy minute for interconnection from September 1, 2004 to August 31, 2004. In February 2008, HKBN requested OFTA 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 OFTA indicated that it accepted HKBN’s request for determination. On May 28, 2010, OFTA 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, we adjusted our 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. OFTA has indicated in its statement published on April 27, 2007, that it will deregulate 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 OFTA’s intervention.

Since the deregulation of FMIC arrangement on April 27, 2009, HKBN reached agreements with some of the mobile operators on the new settlement arrangements of FMIC. As of December 13, 2011, 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 program 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. Currently, the HKBA is processing applications for a domestic free television program service license from Fantastic Television Limited, HK Television and Entertainment Company Limited and us. As of December 13, 2011, the HKBA has not yet announced its decision for the aforesaid applications.

Licensing

It is unlawful to offer any “television program service” in Hong Kong without a license. “Television program service” is broadly defined to mean the provision of television programs 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 program services from the current licensing regime, including television program 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 Hong Kong government does not dispute that HKBN’s service is provided on the “Internet” and is thus exempt. On this basis, HKBN is not required to obtain a pay-television broadcasting license and continues to provide 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 program 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 program 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 of Hong Kong 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 of Hong Kong 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 program service license. The restrictions do not prohibit the ownership of any voting shares in a domestic free television program service licensee but rather take the form of prohibiting the exercise of any voting rights attached to such voting shares.

Upon receiving a domestic free television program service license, an unqualified voting controller of our Company will be subject to the restrictions under Section 20(1) of Schedule 1 to the Broadcasting Ordinance. According to Section 20(1) of Schedule 1 to the Broadcasting Ordinance, no unqualified voting controller may hold, acquire, or exercise or cause or permit to be exercised 2% or more of the total voting control of a domestic free television program service licensee without the prior approval of the HKBA. Section 20(3) of Schedule 1 to the Broadcasting Ordinance provides that the HKBA may, in respect of any unqualified voting controller who is in contravention of Section 20(1) of Schedule 1 to the Broadcasting Ordinance, direct such unqualified voting controller in question to cease any such contravening act, the unqualified voting controller will need to seek the requisite approval of the HKBA, if and when the license is granted to our Company. Our Company shall be required to notify the HKBA of the unqualified voting controller pursuant to the directions of the HKBA and sections 22 and 30 of Schedule 1 to the Broadcasting Ordinance

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 program 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 HKBA, may appeal by way of petition to the Chief Executive of Hong Kong.

Program standards and advertising standards

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

PRC Regulations

Corporate laws relating to foreign investment

The establishment, operation and management of corporate entities in China are governed by the Company Law of the PRC, or the Company Law, effective in 1994, as amended in 1999, 2004 and 2005, respectively. The Company Law is applicable to our PRC subsidiary CTI Guangzhou Customer Services Co. Ltd. unless the PRC laws on foreign investment have stipulated otherwise.

The establishment, approval, registered capital requirement and day-to-day operational matters of wholly foreign-owned enterprises, such as our PRC subsidiary, CTI Guangzhou Customer Services Co. Ltd., are regulated by the Wholly Foreign-owned Enterprise Law of the PRC effective in 1986, as amended in 2000, and the Implementation Rules of the Wholly Foreign-owned Enterprise Law of the PRC effective in 1990, as amended in 2001.

Foreign exchange

On August 29, 2008, the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises, or Circular 142, was promulgated by the State Administration of Foreign Exchange, or SAFE. Pursuant to Circular 142, the foreign currency capital of foreign-invested enterprises, after being converted to Renminbi, can only be used for doing business within the business scope approved by relevant governmental authorities, and shall not be used for domestic equity investment except as otherwise explicitly provided by laws and regulations. In addition, foreign-invested enterprises may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay Renminbi loans if they have not used the proceeds of such loans.

Income tax

In January 2008, the PRC Enterprise Income Tax Law took effect. The PRC Enterprise Income Tax Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, unless tax incentives are granted to special industries and projects. Under the PRC Enterprise Income Tax Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.

Labor and work safety in China

The Labor Law of the PRC, or the Labor Law, which was effective on January 1, 1995, provides basic protections for employees, e.g. employment contracts shall be concluded if labor relationships are to be established between employers and employees; employers cannot compel employees to work beyond the time limit and shall provide wages which are not lower than local standards on minimum wages to the employees punctually; employers shall establish and improve their systems for labor safety and sanitation and strictly abide by applicable PRC rules and standards on labor safety and sanitation; and female employees and juvenile employees are given special protection.

On June 29, 2007, the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. On September 18, 2008, the State Council further promulgated the Regulations on Implementation of the Labor Contract Law. Compared to the Labor Law, the Labor Contract Law and its implementing regulations impose more restrictions on employers and have been deemed to potentially increase labor costs for employers to terminate employment relationship with employees. Such restrictions include specific provisions related to fixed term employment contracts, temporary employment, probation, consultation with the labor union and employee assembly, employment without a contract, dismissal of employees, compensation upon termination and overtime work, and collective bargaining. According to the Labor Contract Law and its implementing regulations, an employer is obliged to sign an unlimited term employment contract with an employee if the employer intends to renew employment relationship with such employee after two consecutive fixed term employment contracts. The employer also has to pay a compensation fee to the employee if the employer terminates the unlimited term labor contract, unless an employee refuses to extend an expired employment contract under terms which are the same or more favorable than those in the expired contract. Compensation is also required when the labor contract expires. Further, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have worked more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on their length of service. Employees who waive such vacation time at the request of employers shall be compensated for three times their normal salaries for each waived vacation day.

The laws and regulations governing the labor relations and work safety also include:

•

the Work Safety Law of the PRC (2002);

•

the Regulation on Occupational Injury Insurance (2004);

•

the Interim Measures Concerning the Maternity Insurance (1995);

•

the Interim Regulations on the Collection and Payment of Social Insurance Premiums (1999) and its interim measures (1999); and

•

the Regulation on the Administration of Housing Fund (2002).

D.	Organizational structure

The following chart sets forth our principal subsidiaries as of December 13, 2011:

LOGO

Notes:

(1)	The other immediate subsidiary of City Telecom (H.K.) Limited is Golden Trinity Holdings Limited. Its immediate subsidiary is Attitude Holdings Limited.

(2)	Our Company has only registered its Chinese name. The English name is an unregistered translation.

(3)	The other immediate subsidiaries of Automedia Holdings Limited are CTI International Limited, BBTV Company Limited, City Telecom (U.S.A.) Inc., City Telecom (Vancouver) Inc. and City Telecom (Toronto) Inc.

(4)	The immediate subsidiaries of Hong Kong Broadband Network Limited are Excel Billion Profits Limited, Hong Kong Television Network Limited, Hong Kong Broadband Television Company Limited, Hong Kong Broadband Phone Limited and Hong Kong Broadband Digital TV Limited.

(5)	The immediate subsidiary of Hong Kong Media Production Company Limited is Leader Artiste Management Company Limited.

The jurisdiction of incorporation and our ownership percentage of each these subsidiaries as of December 13, 2011 were as follows:


		Percentage of interest held by City Telecom
Name	Jurisdiction of incorporation	Direct %		Indirect %
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
Best Intellect Limited	British Virgin Islands		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
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 Media Production Company Limited (formerly known as Global Courier Company Limited)	Hong Kong		—		100
Hong Kong Television Network Limited	Hong Kong		—		100
IDD1600 Company Limited	Hong Kong		—		100
Leader Artiste Management Company Limited	Hong Kong		—		51

Note: Our Company has only registered its Chinese name. The English name is an unregistered translation.

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 is 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, 2011.

For the provision of international telecommunications services, we own two 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 for 16 retail shops in Hong Kong and for a 3,500 square feet customer service center in Mongkok, 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.

A.	Operating results

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 1.94 million residential homes pass as of August 31, 2011, representing more than 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, 2011, our FTNS business had a subscription base of approximately 1,247,000 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, 2011, our IDD business had a subscription base of approximately 2.5 million registered accounts.

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 590,000 as of August 31, 2011 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 consist 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 costs of sales and other operating expenses.

•

Network costs and costs of sales . 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 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, 2010 and 2011. 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 preparing 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 the 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 OFTA. As certain local mobile network operators disagreed with the level of charges computed by us in the past, 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:

•

In August 2004, we requested OFTA 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 2008 was based also on the 2004 Determination issued by OFTA in June 2007. In February 2008, we requested OFTA 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 OFTA.

•

The amount recognized in fiscal 2009 and before was based on the 2004 Determination issued by OFTA 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, OFTA 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, OFTA issued a Preliminary Analysis in relation to the 2008 Determination for the parties’ comments.

•

In May 2010, OFTA 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, 2011, 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 fair value less costs of sales 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, and 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, 2011, no impairment of fixed assets has 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 income statement. 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$68.8 million, HK$39.8 million and less than HK$0.1 million as of August 31, 2009, 2010 and 2011, 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,
	2009 HK$			2010 HK$			2011 HK$			2011 US$
	(Amounts in thousands)
Balance at beginning of the year		11,944			3,160			5,823			748
Additions charged to expense		12,103			14,742			13,636			1,751
Write-off		(20,887	)		(12,079	)		(12,929	)		(1,660	)

Balance at the end of the year		3,160			5,823			6,530			839

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. 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 assets. Our management projects future taxable income by considering all available information, 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), tax planning strategies, historical taxable incomes, and the expiration period of the unused tax losses carry forwards of each of our Company and subsidiaries.

As of August 31, 2010 and 2011, we had not recognized deferred tax assets in respect of unused tax losses of HK$8.2 million and HK$8.1 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 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 OFTA and is effective up to the date of the release of our consolidated financial statements. OFTA 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 OFTA 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 OFTA, 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,
	2009			2010			2011			2011
	HK$			HK$			HK$			US$
	(Amounts in thousands)
Revenue
FTNS business		1,230,880			1,356,098			1,484,324			190,601
IDD business		247,359			218,589			197,134			25,314

		1,478,239			1,574,687			1,681,458			215,915

Network costs and costs of sales		(175,129	)		(195,292	)		(212,315	)		(27,263	)
Other operating expenses		(1,037,964	)		(1,105,604	)		(1,097,164	)		(140,886	)
Other income, net		41,540			7,989			7,249			931
Finance costs		(55,127	)		(22,235	)		(6,359	)		(817	)

Profit before taxation		251,559			259,545			372,869			47,880
Income taxes expense		(38,730	)		(42,679	)		(58,954	)		(7,570	)

Net income		212,829			216,866			313,915			40,310

Fiscal 2011 Compared to Fiscal 2010

Revenues. Revenues increased by 6.8% to HK$1,681.5 million in fiscal 2011 from HK$1,574.7 million in fiscal 2010, reflecting an increase in revenue from our FTNS business, the effects of which were partially offset by a decrease in revenue from our IDD business. Revenue contribution from our FTNS business increased to 88.3% in fiscal 2011 from 86.1% in fiscal 2010.

•

FTNS business . Revenues from our FTNS business increased by 9.5% to HK$1,484.3 million in fiscal 2011 from HK$1,356.1 million in fiscal 2010. The increase was primarily caused by an increase of 12.3% of our FTNS subscription base to 1,247,000 as of August 31, 2011 from 1,110,000 as of August 31, 2010.

•

Broadband Internet access . The subscription base for our Internet access services increased by 12.2%, to 590,000 as of August 31, 2011 from 526,000 as of August 31, 2010. During fiscal 2011, despite competitive market environment, we were able to maintain our growth while harvesting the record high broadband subscription growth that we achieved in fiscal 2010 pursuant to the “Member-Get-Member” marketing campaign.

•

Local VoIP . The subscription base for our local VoIP services increased by 10.4%, to 476,000 as of August 31, 2011 from 431,000 as of August 31, 2010, mainly due to improved branding that allowed us to increase sales of our VoIP services to subscribers of our Internet access services.

•

IP-TV . The subscription base for our IP-TV services increased by 18.3% to 181,000 subscriptions as of August 31, 2011 from 153,000 as of August 31, 2010 because we remained focused on offering mass value. We continued to enhance our channel variety so as to increase the content value to our customers. We currently offer more than 110 channels to our customers.

•

IDD business . Revenues from our IDD business decreased by 9.8% to HK$197.1 million in fiscal 2011 from HK$218.6 million in fiscal 2010. The decrease was primarily due to the reduction in IDD traffic volume and the decrease in the tariff rate we charged to our customers. Competition during fiscal 2011 intensified as some of our competitors offered international direct dial minutes for free or at significantly lower rates as a marketing incentive to gain local fixed line and mobile market shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, was also becoming more prevalent in Hong Kong.

Network costs and costs of sales. Network costs and costs of sales increased by 8.7% to HK$212.3 million in fiscal 2011 from HK$195.3 million in fiscal 2010 mainly due to the increase in the cost of purchasing international bandwidth as a result of the combined effect of the record growth in broadband subscription and the increasing demand of bandwidth from customers as well as the increase in program fees for IP-TV services to enhance the value of content to customers.

Other operating expenses. Other operating expenses decreased by 0.8% to HK$1,097.2 million in fiscal 2011 from HK$1,105.6 million in fiscal 2010 mainly due to the following:

Set forth below is a table summarizing the details of our other operating expenses in fiscal 2010 and 2011:


	For the year ended August 31,
	2010			2011			2011
	HK$			HK$			US$
	(Amounts in thousands)
Talent costs		(301,760	)		(311,355	)		(39,981	)
Advertising and marketing expenses		(372,727	)		(344,136	)		(44,190	)
Depreciation		(199,029	)		(218,197	)		(28,018	)
Others		(232,088	)		(223,476	)		(28,697	)

Other operating expenses		(1,105,604	)		(1,097,164	)		(140,886	)

•

Talent costs . Talent costs increased by 3.2% to HK$311.4 million in fiscal 2011 from HK$301.8 million in fiscal 2010.

•

Advertising and marketing expenses . Advertising and marketing expenses decreased by 7.7% to HK$344.1 million in fiscal 2011 from HK$372.7 million in fiscal 2010 due to a decrease in the scale of marketing campaign, especially lower mass media advertising costs after the cessation of the Member-Get-Member campaign in fiscal 2010.

•

Depreciation . Depreciation increased by 9.6% to HK$218.2 million in fiscal 2011 from HK$199.0 million in fiscal 2010 because of our acceleration in the expansion of our Next Generation Network.

Other income, net. Other income, net decreased to HK$7.2 million in fiscal 2011 from HK$8.0 million in fiscal 2010.

Finance costs. Finance costs decreased by 71.6% to HK$6.3 million in fiscal 2011 from HK$22.2 million in fiscal 2010. The decrease was mainly due to full year impact of the finance cost savings through repurchase and redemption of our 10-year senior notes in fiscal 2010.

Income tax expense. We recorded an income tax expense of HK$59.0 million, which included a non-cash deferred tax expenses of HK$55.3 million in fiscal 2011, compared to an income tax expense of HK$42.7 million in fiscal 2010, which included a non-cash deferred tax expenses of HK$40.1 million.

Net income. For the foregoing reasons, net income increased to HK$313.9 million in fiscal 2011 from HK$216.9 million in fiscal 2010. Net margin increased to 18.7% in fiscal 2011 from 13.8% in fiscal 2010.

Fiscal 2010 Compared to Fiscal 2009

Revenues. Revenues increased by 6.5% to HK$1,574.7 million in fiscal 2010 from HK$1,478.2 million in fiscal 2009, reflecting an increase in revenue from our FTNS business, the effects of which were partially offset by a decrease in revenue from our IDD business and the change in the regulatory regime of mobile interconnection charges summarized below. Revenue contribution from our FTNS business increased to 86.1% in fiscal 2010 from 83.3% in fiscal 2009.

•

FTNS business . Revenues from our FTNS business increased by 10.2% to HK$1,356.1 million in fiscal 2010 from HK$1,230.9 million in fiscal 2009. The increase was primarily caused by an increase of 17.7% of our FTNS subscription base to 1,110,000 as of August 31, 2010 from 943,000 as of August 31, 2009.

•

Broadband Internet access . The subscription base for our Internet access services increased by 34.5%, to 526,000 as of August 31, 2010 from 391,000 as of August 31, 2009. During fiscal 2010, we were able to have a record growth of 135,000 net additions through our Member-Get-Member marketing campaigns which reduced the price of our symmetric 100 Mbps broadband services by half to HK$99 per month if a customer introduces a new customer at HK$99 per month. Such marketing campaigns essentially allowed us to increase our revenues by converting one subscriber at HK$182 per month to two subscribers at a minimum rate of HK$99 per month.

•

Local VoIP . The subscription base for our local VoIP services increased by 12.8%, to 431,000 as of August 31, 2010 from 382,000 as of August 31, 2009, mainly due to improved branding that allowed us to increase sales of our VoIP services to subscribers of our Internet access services.

•

IP-TV . The subscription base for our IP-TV services decreased by 10.0% to 153,000 subscriptions as of August 31, 2010 from 170,000 as of August 31, 2009 because we proactively dropped certain free or low paying IP-TV subscribers and redeployed the set-top boxes to higher yielding customers. We continued to enhance our channel variety so as to increase the content value to our customers.

As a result of OFTA’s decision on the 2008 Determination in May 2010 as stated above, revenue of HK$19.7 million related to mobile interconnection charges was reversed in fiscal 2010. In addition, prior to April 26, 2009, the mobile network operators were required to pay interconnection charges for all calls originating to and from the mobile users. After April 26, 2009, the chargeability of interconnection charges is subject to commercial negotiation. With the withdrawal of regulatory guidance on FMIC in favor of mobile network operators on April 27, 2009, only an insignificant amount of revenue related to mobile interconnection charges was recognized.

•

IDD business . Revenues from our IDD business decreased by 11.6% to HK$218.6 million in fiscal 2010 from HK$247.4 million in fiscal 2009. The decrease was primarily due to the reduction in IDD traffic volume and the decrease in the tariff rate we charged to our customers. Competition during fiscal 2010 intensified as some of our competitors offered international direct dial minutes for free or at significantly lower rates as a marketing incentive to gain local fixed line and mobile market shares. Further, technology from global VoIP providers such as Skype, which offer free PC-to-PC based international calls, was becoming more prevalent.

Network costs. Network costs increased by 11.5% to HK$195.3 million in fiscal 2010 from HK$175.1 million in fiscal 2009 mainly due to the increase in the cost of purchasing international bandwidth as a result of the combined effect of the record growth in broadband subscription and the increasing demand of bandwidth from customers as well as the increase in program fees for IP-TV services to enhance the value of content to customers.

Other operating expenses. Other operating expenses increased by 6.5% to HK$1,105.6 million in fiscal 2010 from HK$1,038.0 million in fiscal 2009 mainly due to the following:

Set forth below is a table summarizing the details of our other operating expenses in fiscal 2009 and 2010:


	For the year ended August 31,
	2009			2010			2010
	HK$			HK$			US$
	(Amounts in thousands)
Talent costs		(302,279	)		(301,760	)		(38,796	)
Advertising and marketing expenses		(299,794	)		(372,727	)		(47,920	)
Depreciation		(206,241	)		(199,029	)		(25,588	)
Others		(229,650	)		(232,088	)		(29,839	)

Other operating expenses		(1,037,964	)		(1,105,604	)		(142,143	)

•

Talent costs . Talent costs decreased by 0.2% to HK$301.8 million in fiscal 2010 from HK$302.3 million in fiscal 2009.

•

Advertising and marketing expenses . Advertising and marketing expenses increased by 24.3% to HK$372.7 million in fiscal 2010 from HK$299.8 million in fiscal 2009. Our salaries and commissions for our sales and marketing Talents increased by HK$28.5 million due to our growth in broadband subscription base. Moreover, our marketing campaigns resulted in an increase in mass media advertising costs of HK$21.6 million and other advertising costs of HK$14.9 million. In addition, the expansion of our sales channels through opening new shops resulted in an increase of advertising and marketing related expenses of HK$7.9 million.

•

Depreciation . Depreciation decreased by 3.5% to HK$199.0 million in fiscal 2010 from HK$206.2 million in fiscal 2009. Notwithstanding our purchase of additional fixed assets for our network infrastructure as we increased the scale of operations in our FTNS business, a portion of our owned fixed assets were fully depreciated. As a result, we incurred lower depreciation expenses.

Other income, net. Other income, net decreased to HK$8.0 million in fiscal 2010 from HK$41.5 million in fiscal 2009. The decrease was mainly contributed by the loss on extinguishment of our 10-year senior notes of HK$9.7 million in fiscal 2010 compared to the gain on extinguishment of our 10-year senior notes of HK$31.4 million in fiscal 2009. The effect of which was partially offset by an increase in interest income of HK$10.1 million recognized in relation to mobile interconnection charges in fiscal 2010.

Finance costs. Finance costs decreased by 59.7% to HK$22.2 million in fiscal 2010 from HK$55.1 million in fiscal 2009. The decrease was mainly due to finance cost savings through repurchase and redemption of our 10-year senior notes and interest bearing bank borrowings at a lower interest rate. The effect of which was partially offset by the change in fair value of derivative financial instrument that we did not have in fiscal 2009.

Income tax expense. We recorded an income tax expense of HK$42.7 million, which included a non-cash deferred tax expenses of HK$40.1 million in fiscal 2010, compared to an income tax expense of HK$38.7 million in fiscal 2009, which included a non-cash deferred tax expenses of HK$37.1 million.

Net income. For the foregoing reasons, net income increased to HK$216.9 million in fiscal 2010 from HK$212.8 million in fiscal 2009. Net margin decreased to 13.8% in fiscal 2010 from 14.4% in fiscal 2009. The slight decrease in net margin was primarily due to a higher cost in acquiring new customers.

Recent accounting pronouncements

Recent issued but not yet effective accounting pronouncements under IFRSs have been included in note 31 to our consolidated financial statements.

B.	Liquidity and capital resources

We expect cash flow from operating activities to continue to be our principal source of liquidity. As of August 31, 2011, we had cash and bank balances of HK$409.0 million. Our day-to-day operations are also supported by HK$38.9 million banking facilities, of which HK$6.9 million was utilized as of August 31, 2011.

We believe that our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs, including working capital requirements, capital expenditures, repayment of our indebtedness when fall due and various contractual obligations, for at least the next 12 months. Our cash flows from operations, however, may decrease due to lower customer demand resulting from rapid technological changes, increasing competition resulting from new local and foreign entrants into the market, or our failure to obtain or renew the necessary telecommunication licenses. A decrease in our operating cash flow could adversely affect our ability to make planned capital expenditures, to comply with our obligations under various operating and capital leases and to repay amounts due under banking facilities.

Cash flow

The following table summarizes our cash flows for each of fiscal 2009, 2010 and 2011:


	For the year ended August 31,
	2009			2010			2011			2011
	HK$			HK$			HK$			US$
	(Amounts in thousands)
Net cash inflow from operating activities		536,771			485,340			585,899			75,235
Net cash outflow from investing activities		(176,488	)		(306,254	)		(414,189	)		(53,186	)
Net cash (outflow)/inflow from financing activities		(561,292	)		178,307			(343,112	)		(44,059	)

(Decrease)/increase in cash and cash equivalents		(201,009	)		357,393			(171,402	)		(22,010	)
Cash and cash equivalents, at the beginning of year		421,610			221,052			578,175			74,243
Effect of foreign exchange rate changes on cash		451			(270	)		1,358			174

Cash and cash equivalents, at the end of the year		221,052			578,175			408,131			52,407

Analysis of the balances of cash and cash equivalents
Cash at bank and in hand		226,416			588,665			408,976			52,516
Bank overdrafts — unsecured		(5,364	)		(10,490	)		(845	)		(109	)

		221,052			578,175			408,131			52,407

Operating activities

Our principal source of cash was cash generated from our FTNS business. Net cash inflow from operating activities decreased by 9.6% from HK$536.8 million in fiscal 2009 to HK$485.3 million in fiscal 2010, which was a reflection of a slight increase in our profit before taxation offsetting by lower cash receipt of receivables. Net cash inflow from operating activities increased 20.7% from HK$485.3 million in fiscal 2010 to HK$585.9 million in fiscal 2011, primarily reflecting the increase in our profit before taxation resulting from the continued expansion of our subscription base.

Investing activities

Net cash outflow from investing activities in fiscal 2011 was HK$414.2 million. The net cash outflow was mainly due to the purchase of fixed assets of HK$397.9 million for the development of our Next Generation Network and the purchase of land premium of HK$48.0 million for constructing a multimedia production and distribution centre.

Net cash outflow from investing activities in fiscal 2010 was HK$306.3 million. The net cash outflow was mainly due to our purchase of fixed assets in the amount of HK$349.1 million.

Net cash outflow from investing activities in fiscal 2009 was HK$176.5 million. The net cash outflow was mainly due to our purchase of fixed assets of HK$289.9 million, the effect of which were partially offset by an decrease in pledged bank deposits of HK$72.3 million and net proceeds from maturity of investment in debt securities of HK$28.1 million.

Financing activities

Net cash outflow from financing activities in fiscal 2011 was HK$343.1 million. The net cash outflow was mainly due to our repayment of our bank loan of HK$125 million and payment of cash dividends of HK$219.3 million.

Net cash inflow from financing activities in fiscal 2010 was HK$178.3 million. The net cash inflow was mainly due to the proceeds from the offering of new ordinary shares in the amount of HK$396.4 million and the proceeds from new bank loans of HK$163.4 million, which were partially offset by the repurchase and redemption of our 10-year senior notes of HK$172.4 million and dividend paid of HK$158.4 million.

Net cash outflow from financing activities in fiscal 2009 was HK$561.3 million. The net cash outflow was mainly due to our repurchase of 10-year senior notes for an aggregate consideration of HK$485.8 million (including transaction costs), payment of interest on the 10-year senior notes of HK$52.7 million and payment of cash dividends of HK$23.0 million.

Long-term Indebtedness

As of August 31, 2011, we had outstanding debt of HK$1.2 million.

Banking facilities

As of August 31, 2011, we had available banking facilities and revolving loan facility of HK$38.9 million, of which HK$6.9 million was utilized.

Capital expenditures

In order to further develop our Next Generation Network and continue to increase the scale of operations of our FTNS business, we plan to make a total capital expenditure ranging from approximately HK$320 million to HK$350 million in fiscal 2012 to further increase the coverage of our Next Generation Network. In addition, we plan to invest HK$600 million for a multimedia production and distribution centre within three years.

C.	Research and development, patents and licenses

We commit considerable resources to our research and development department in order to continuously improve our services and improve our market position. As of August 31, 2011, our research and development team consisted of approximately 25 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, the research and development team assesses new services offered by telecommunications and Internet companies in the United States and elsewhere and works closely with our marketing department. Our research and development expenditures were approximately HK$10.8 million, HK$11.2 million and HK$11.8 million for fiscal 2009, 2010 and 2011, respectively.

D.	Trend information

Revenue from our IDD business decreased by 9.8% to HK$197.2 million in fiscal 2011 from HK$218.6 million in fiscal 2010. The principal reason for this decrease was the intense competition, as our key competitors introduced highly aggressive price cuts. Partly as a result, the traffic volume of our IDD business decreased by 11.2% to 412.0 million minutes in fiscal 2011 from 464.0 million minutes in fiscal 2010. We expect competition will continue to increase in the future, creating further pressure on our volume and pricing.

Revenue from our FTNS business grew by 9.5% to HK$1,484.3 million in fiscal 2011 from HK$1,356.1 million in fiscal 2010. The principal reason for this increase was due to the broadband subscription growth of 12.2% to 590,000 subscription accounts as of August 31, 2011 from 526,000 subscription accounts as of August 31, 2010.

The global economic downturn has had a dampening effect on consumer sentiment and business activities across the globe in late 2008 and 2009 and the global economy continues to experience continued market volatility. The impact of the downturn on our operations has been limited because our FTNS and IDD services are “semi-utility” services. However, if the global economic downturn continues to experience significant volatility, demand for our services may be adversely affected.

E.	Off-balance sheet arrangements

Other than as described in note 27 to our Consolidated Financial Statements, we have not entered into any off-balance-sheet arrangements with any entities or individuals.

F.	Tabular disclosure of contractual obligations

The following table sets forth information regarding our aggregate payment obligations in future years of the contractual obligations and commercial commitments that we had as of August 31, 2011.


	Payments due by period
Contractual obligations	Total HK$		Within 1 year HK$		More than 1 year but within 3 years HK$		More than 3 years but within 5 years HK$		More than 5 years HK$
	(Amounts in thousands)
Capital expenditure items		141,432		141,432		—		—		—
Operating leases		131,935		90,979		33,315		4,430		3,211
Obligation under finance leases		435		125		238		72		—
Other current liabilities		257,099		257,099		—		—		—
Programming fees (IP-TV)		52,974		25,777		27,194		3		—

Total		583,875		515,412		60,747		4,505		3,211

Note:

The other current liabilities of HK$257.1 million was comprised of bank overdrafts — unsecured liabilities of HK$0.8 million, accounts payable of HK$17.4 million, other payables and accrued charges of HK$209.6 million, deposits received of HK$27.0 million and tax payable of HK$2.3 million. A detailed explanation of the nature of accounts payable and other payables and accrued charges is contained in Note 17 to the Company’s audited consolidated financial statements included in this Form
20-F.

G.	Safe Harbor

See “Note regarding forward-looking statements”.

ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.	Directors and senior management

Our board of directors consists of eight directors, three of whom, Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu, are independent non-executive directors and one of whom, Dr. Cheng Mo Chi, Moses, is a non-executive director. The remaining four, Mr. Wong Wai Kay, Ricky, Mr. Cheung Chi Kin, Paul, Mr. Yeung Chu Kwong, William and Mr. Lai Ni Quiaque, are executive directors.

The following table sets forth certain information concerning our directors and senior management as of December 13, 2011.


				Date joined City
Name	Age		Position	Telecom
Board of directors:
WONG Wai Kay, Ricky		50	Executive Director and Chairman		1992
CHEUNG Chi Kin, Paul		54	Executive Director and Vice Chairman		1992
YEUNG Chu Kwong, William		51	Executive Director and Chief Executive Officer		2005
LAI Ni Quiaque		42	Executive Director, Chief Financial Officer, Company Secretary and Head of Talent Engagement		2004
CHENG Mo Chi, Moses		61	Non-Executive Director		1997
LEE Hon Ying, John		65	Independent Non-Executive Director		1997
CHAN Kin Man		52	Independent Non-Executive Director		1997


PEH Jefferson Tun Lu	52	Independent Non-Executive Director	2004
Senior management:
CHONG Kin Chun, John	49	Managing Director of Corporate Division	1996
LO Sui Lun	47	Chief Technology Officer	1998
TO Wai Bing	49	Managing Director of Business Development	2007

Executive directors

Mr. WONG Wai Kay, Ricky, aged 50, is the co-founder and Chairman of the Group. He is responsible for our overall strategic planning and management. Mr. Wong has over 26 years’ experience in the telecommunications and computer industries. He had worked at a major US-listed computer company as a marketing representative and was responsible for marketing and distribution of computer products in Hong Kong from 1985 to 1989. He was also a co-founder and director of a company principally engaged in import and distribution of computer systems in Canada prior to co-founding of the Group. Mr. Wong holds a Bachelor’s Degree in Science and a Master of Business Administration Degree (Executive MBA Program) from The Chinese University of Hong Kong. He is a first cousin of Mr. Cheung Chi Kin, Paul, the Vice Chairman of the Group. Currently, Mr. Wong is a member of Zhejiang Committee, Chinese People’s Political Consultative Conference, a member of the Board of Trustees, United College, The Chinese University of Hong Kong and a member of the executive committee of the Digital Solidarity Fund of Hong Kong Council of Social Service.

Mr. CHEUNG Chi Kin, Paul, aged 54, is the co-founder and Vice Chairman of the Group. Mr. Cheung is responsible for overall strategic planning and management of the Group. Prior to that, Mr. Cheung was appointed as the Chief Executive Officer and was responsible for our day-to-day operations and technological research, development and support activities. Mr. Cheung has more than 30 years’ experience in the telecommunications and computer industries. He had worked in several companies engaged in application software development and computer consultancy prior to co-founding of the Group. Mr. Cheung graduated with a Diploma of Advanced Programming and System Concepts Design from Herzing Institute, Canada. Mr. Cheung is a first cousin of Mr. Wong Wai Kay, Ricky, the Chairman of the Group.

Mr. YEUNG Chu Kwong, William, aged 51, was appointed as the Executive Director and Chief Executive Officer of the Group in November 2008 with the responsibilities for developing corporate strategies and overseeing the operations of the Group. Before that, Mr. Yeung joined the Group as Chief Operating Officer in October 2005. He was in charge of the Customer Engagement Department overseeing customer relationship management and was also in charge of the Network Development Department. Mr. Yeung has more than 20 years’ experience in the telecommunications industry. Prior to joining the Group, Mr. Yeung was the Director of Customers Division in SmarTone-Vodafone, and was an Inspector of Police in the Hong Kong Police Force. Mr. Yeung holds a Bachelor of Arts Degree from Hong Kong Baptist University, a Master of Business Administration Degree from University of Strathclyde, U.K. and a Master of Science Degree in Electronic Commerce and Internet Computing from The University of Hong Kong. Mr. Yeung is also a graduate of the Senior Executive Program of the Columbia University Graduate School of Business in New York. In 2010, Mr. Yeung was awarded the “Champion of Human Resources” by the HRM Awards.

Mr. LAI Ni Quiaque, aged 42, is Chief Financial Officer, Company Secretary and Head of Talent Engagement. Mr. Lai joined the Group in May 2004 and has over 20 years of experience in telecommunications industry, research and finance. Prior to joining the Group, Mr. Lai was a highly rated analyst as Director and Head of Asia Telecom Research for Credit Suisse and was involved in numerous global fund raisings for a wide range of Asian Telecom carriers such as China Mobile, China Telecom, China Unicom, SK Telecom, PCCW, Telekom Malaysia, etc. Before that, Mr. Lai held positions with Hongkong Telecom (now known as PCCW) and Kleinwort Benson Securities (Asia). Mr. Lai holds a Bachelor of Commerce degree from the University of Western Australia and an Executive Master of Business Administration Degree from Kellogg-HKUST. Mr. Lai is a Fellow member of the Hong Kong Institute of Certified Public Accountants, or HKICPA and CPA Australia and is a Member of the Hong Kong Institute of Directors. In 2009, Mr. Lai was awarded the “Champion of Human Resources” by the HRM Awards, and in 2011 he was selected by Global Telecom Business Magazine as one of the Top 50 CFOs in the industry to watch. Mr. Lai has also been appointed as a member of the Remuneration Committee of the Company.

Non-executive director

Dr. CHENG Mo Chi, Moses, aged 61, was appointed as an Independent Non-executive Director of the Group on June 17, 1997 and has been re-designated as a Non-executive Director of the Group with effect from September 30, 2004. Dr. Cheng has also been appointed as a member of the Remuneration Committee of the Company. Dr. Cheng is a practicing solicitor and the senior partner of Messrs. P.C. Woo & Co. and was a member of the Legislative Council of Hong Kong. He is the Founder Chairman of the Hong Kong Institute of Directors of which he is now the Honorary President and Chairman Emeritus. Dr. Cheng currently holds directorships in K. Wah International Holdings Limited, China Mobile Limited, China Resources Enterprise, Limited, Towngas China Company Limited, Hong Kong Exchanges and Clearing Limited, Kader Holdings Company Limited, Liu Chong Hing Investment Limited, Guangdong Investment Limited and Tian An China Investments Company Limited, all of which are publicly listed companies in Hong Kong. Dr. Cheng is also an independent non-executive director of ARA Asset Management Limited, a company whose shares are listed on Singapore Exchange Limited. His other directorships in publicly listed companies in the last three years include China COSCO Holdings Company Limited and Galaxy Entertainment Group Limited, both of which are public listed companies in Hong Kong, and ARA Asset Management (Fortune) Limited which manages Fortune Real Estate Investment Trust, a real estate investment trust listed on the Singapore Stock Exchange.

Independent non-executive directors

Mr. LEE Hon Ying, John, aged 65, is the managing director of Cyber Networks Consultants Company in Hong Kong. He was the Regional Director, Asia Pacific of Northrop Grumman-Canada, Ltd. He was previously the director of network services of Digital Equipment (HK) Limited and prior to that, worked for Cable and Wireless (HK) Limited and Hong Kong Telecom. He is a chartered engineer and a member of Institution of Engineering and Technology, the United Kingdom, the Hong Kong Institution of Engineers and the Hong Kong Computer Society. He received a Master’s Degree in Information System from The Hong Kong Polytechnic University in 1992. In addition, he is the Vice President and Board Member of the Society of St. Vincent de Paul, Council General, which is an international charity body with its head office in Paris, France. He is the Commission member of Catholic Diocese of Hong Kong Diocesan for Hospital Pastoral Care. Mr. Lee has been a Director of the Group since June 1997. Mr. Lee has also been appointed as the chairman of the Audit Committee and Remuneration Committee of the Company.

Dr. CHAN Kin Man, aged 52, is Director of Centre for Civil Society Studies, Associate Director of Center for Entrepreneurship and Associate Professor of the Department of Sociology of The Chinese University of Hong Kong. He received a Bachelor of Social Science Degree from The Chinese University of Hong Kong in 1983 and a Doctor of Philosophy Degree from Yale University in the U.S. in 1995. Dr. Chan has been a Director of the Group since June 1997. Dr. Chan has also been appointed as a member of the Audit Committee and Remuneration Committee of the Company.

Mr. PEH Jefferson Tun Lu, aged 52, is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a Certified Practicing Accountant of CPA Australia. Mr. Peh holds a Master Degree in Business from the University of Technology, Sydney. He has over 29 years of experience in finance, accounting and management from listed and private companies in Hong Kong and Australia. Mr. Peh has been a Director of the Group since September 2004. Mr. Peh has also been appointed as a member of the Audit Committee and Remuneration Committee of the Company.

Senior management

Mr. CHONG Kin Chun, John, aged 49, is the Managing Director of the Corporate Division of the Group. He is responsible for sales, servicing and network expansion development of the Group’s international telecommunications services and fixed telecommunications network services for business, corporate and carrier customers. Mr. Chong joined the Group in February 1996 and holds a Bachelor’s Degree in Arts from The University of Hong Kong and a Master of Business Administration Degree (Executive MBA Program) from The Chinese University of Hong Kong. Mr. Chong worked as a general manager overseeing product management and the sales force of a listed telecommunications products company in Hong Kong from 1987 to 1996.

Mr. LO Sui Lun, aged 47, was appointed as the Chief Technology Officer of the Group in April 2011. He is responsible for the Group’s network, information system development and operations including broadband networking, wireless applications, VoIP networks, Pay TV operation and product development. He is also responsible for regulatory and carrier relations matters of the Group. Currently, he is in-charge of the Multimedia Production and Distribution Centre Project. Mr. Lo joined the Group in September 1998. Prior to that, Mr. Lo worked for PCCW (formerly known as “Hong Kong Telecom”) for nine years, gaining experience in network planning and undersea cable investment. Mr. Lo holds a Bachelor’s Degree in Sciences in Electronics from The Chinese University of Hong Kong and a Master’s Degree in Business Administration from University of Strathclyde, U.K.

Ms. TO Wai Bing, aged 49, is the Managing Director of Business Development of the Group. Ms. To is also in charge of International Business Department, Carrier Business Department and Pay TV Department. She is responsible for the control of cost of services, sales of carrier business, development of Pay TV business, explore and secure business partnerships to strengthen the Group’s business operations and development. Before joining the Group, Ms. To had worked in the Hong Kong Telecom Group for 16 years after graduating from The Hong Kong Polytechnic University with a Diploma in Electronic Engineering and subsequently a Higher Certificate in Electronic Engineering. Ms. To rejoined the Group in May 2007 after her previous service with the Group from September 1998 to July 2006.

B. Compensation

Directors’ and senior management’s compensation

Our directors and senior management receive compensation in the form of salaries, housing allowances, discretionary bonuses, other allowances and benefits in kind, including our contribution to the pension schemes for such individuals. We also granted share options to various directors and members of our senior management. For more information regarding share options granted to directors and members of our senior management, see Item 6 “Directors, senior management and employees — Share ownership” below in this annual report.

Our senior management and Talents are entitled to receive an annual discretionary bonus based on their individual performance and our financial performance during the year in question.

The aggregate amount of salaries or other compensation, housing allowances, other allowances and benefits in kind paid by us to our directors and senior management was approximately HK$40.6 million for fiscal 2011, compared with HK$46.1 million for fiscal 2010. The aggregate amount of contribution that we made to the retirement or similar benefits for our directors and members of our senior management was HK$2.6 million for fiscal 2011, compared with HK$2.7 million for fiscal 2010.

Except as discussed herein, no other payments have been paid or are payable, in respect of fiscal 2011, by us or any of our subsidiaries to our directors and senior management.

C.	Board practices

Service contracts

We entered into service agreements with our four executive directors, Messrs. Wong Wai Kay, Ricky, Cheung Chi Kin, Paul, Yeung Chu Kwong, William and Lai Ni Quiaque, respectively. These service agreements include non-competition clauses under which our executive directors agree not to compete with us in accordance with the terms and conditions therein and shall continue to be effective unless and until terminated by either party of the respective service agreements. None of the agreements provide for any benefits or compensation upon termination of employment.

“Controlled company” exemption

We are a “controlled company” within the meaning of Nasdaq Listing Rule 5615(c) and IM-5615-5. More than 50.0% of the voting power for the election of our directors is held by a group consisting of Top Group International Limited, Mr. Wong Wai Kay, Ricky and Mr. Cheung Chi Kin, Paul. Mr. Wong and Mr. Cheung are the controlling shareholders of Top Group International Limited and have entered into a voting agreement pursuant to which they agreed to vote all of the shares held by Top Group International Limited, representing 43.98% of the voting power, all of the shares held by Mr. Wong individually, representing 0.93% of the voting power, and all of the shares held by Mr. Cheung individually, representing 5.73% of the voting power, collectively as a group.

We have elected to rely on the exemption from the majority independent board requirement, as set forth in Nasdaq Listing Rule 5615(b), except for the requirements of subsection (b)(2), which pertain to executive sessions of independent directors, and from the requirement for independent director oversight of executive officer compensation and director nominations, as set forth in Nasdaq Listing Rules 5605(d) and 5605(e).

In accordance with the laws of Hong Kong, the nomination and remuneration of our directors are governed by our Articles Pursuant to our Articles, our directors are appointed by our shareholders in the annual general meeting, and our directors’ fees are recommended by the remuneration committee of our board of directors and determined by our shareholders at the annual general meeting.

Audit committee

Our board of directors established an audit committee in March 1999 to ensure the impartial supervision of our accounting and business operations. The audit committee is comprised of three independent non-executive directors, namely, Mr. Lee Hon Ying, John (the Chairman of the audit committee), Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu. Mr. Peh was appointed to the audit committee on September 1, 2004 and is a “financial expert” within the meaning of, and as required by the U.S. Sarbanes-Oxley Act of 2002.

The audit committee is governed by an audit committee charter, which was adopted by our board of directors in August 2004 and updated in November 2010. It is responsible for the following:

•

overseeing the accounting and financial reporting process of the Company and the audits of the Company’s consolidated financial statements on behalf of the board of directors; and

•

the appointment, compensation, retention and oversight of the work of the Company’s independent auditors (including resolution of disagreements between management and the auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company.

As provided in our audit committee charter, the audit committee is required to meet in person or telephonically at least twice a year and has the resources and authority appropriate to discharge its responsibilities as required by law, including the authority to engage independent counsel and other advisors as the audit committee deems necessary to carry out its duties.

The audit committee met four times in fiscal 2011. The major works performed by the committee from September 1, 2010 to August 31, 2011 included the following:

•

Reviewed our consolidated financial statements for the year ended August 31, 2010 and for the six months ended February 28, 2011;

•

Reviewed the internal audit progress, including procedures required for compliance with the Sarbanes-Oxley Act;

•

Reviewed the external auditor’s report on the review of our interim financial report for the six months ended February 28, 2011 and our audited consolidated financial statements for the year ended August 31, 2010; and

•

Pre-approved the audit and non-audit services provided by KPMG, our external auditor.

Remuneration committee

Our board of directors established a remuneration committee in August 2001 to oversee the Company’s remuneration packages for executive directors. Among others, each of our executive directors is entitled to receive an annual discretionary bonus of such amount as determined by the board of directors upon recommendation and approval by the remuneration committee. The remuneration committee is comprised of six members with three independent non-executive directors, Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu; the non-executive director, Dr. Cheng Mo Chi, Moses; Mr. Lai Ni Quiaque, the executive director, Chief Financial Officer, Company Secretary and Head of Talent Engagement and Ms. Choy Mei Yuk, Mimi, Director of Talent Management. The remuneration committee’s objectives are set out as follows:

•

Establish formal, fair and transparent procedures for developing policy and structure of all remuneration of directors and senior management;

•

Review and consider the Company’s policy for remuneration of directors and senior management;

•

Determine the remuneration packages of executive directors and senior management; and

•

Recommend the remuneration packages of non-executive directors (including independent non-executive directors).

The remuneration committee held one meeting during fiscal 2011. The major works performed by the committee from September 1, 2010 to August 31, 2011 included the following:

•

Reviewed and approved the discretionary performance bonus for the management committee members;

•

Reviewed and approved the remuneration packages for management committee members; and

•

Reviewed and approved the remuneration packages for the directors.

D.	Employees

The following table sets forth the number of our Talents by functional area as of August 31, 2011.


	Talents
Information technology and engineering		357
Sales and marketing, customer service and special duty unit (SDU)		2,365
General administration and others		358

Total		3,080

The following table sets forth the number of our Talents by geographical region as of August 31, 2011.


	Talents
Hong Kong		1,529
Guangzhou		1,532
Canada		19

Total		3,080

As of August 31, 2010 and 2011, we had 3,232 and 3,080 Talents, respectively.

E.	Share ownership

Share ownership

The following table sets forth the share ownership of our directors and senior management as of December 13, 2011.

Title of class

Identity of person

or Group

Number

of shares

beneficially

owned

(note 3)

Percentage

of shares

beneficially

owned (note 2)

Outstanding

share

options

Ordinary shares

Wong Wai Kay, Ricky

391,245,732

(note 1

)

50.64

8,091,604

Ordinary shares

Cheung Chi Kin, Paul

391,245,732

(note 1

)

50.64

6,091,604

Ordinary shares

Yeung Chu Kwong, William

2,306,000

Less than 1.0

11,542,956

Ordinary shares

Lai Ni Quiaque

12,415,405

1.61

6,044,791

Ordinary shares

Chong Kin Chun, John

2,199,089

Less than 1.0

2,022,900

Ordinary shares

Lo Sui Lun

175

Less than 1.0

Ordinary shares

To Wai Bing

Nil

302,239

Notes:

(1)

The 391,245,732 shares are held by a group consisting of Top Group International Limited, Mr. Wong Wai Kay, Ricky, our chairman, and Mr. Cheung Chi Kin, Paul, our vice chairman. 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 44,286,159 shares held by Mr. Cheung individually, collectively as a group. The registered address of Top Group International Limited is Akara Bldg, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Top Group International Limited has four shareholders: Mr. Wong, Mr. Cheung, Mr. Leung Ka Pak, and Mr. Yau Ming Yan, Andrew, and their equity interests are 42.12%, 27.06%, 21.00% and 9.82%, respectively.

(2)	Percentage ownership is based on 772,673,022 shares issued as of December 13, 2011.

(3)	Beneficial ownership is determined in accordance with the rules of the SEC.

The following table sets forth the share options for the details of the share options held by the directors and senior management of the Company as of December 13, 2011:


Directors	Date of grant	Exercise price HK$		Balance as of December 14, 2010		Options granted during the period		Exercise period	Options exercised during the period		Options cancelled/ lapsed during the period		Balance as of December 13, 2011
Mr. Wong Wai Kay, Ricky	January 5, 2005		1.5224		8,091,604		—	January 5, 2005 to October 20, 2014		—		—		8,091,604
Mr. Cheung Chi Kin, Paul	January 5, 2005		1.5224		8,091,604		—	January 5, 2005 to October 20, 2014		2,000,000		—		6,091,604
Mr. Yeung Chu Kwong, William	May 22, 2006		0.6523		165		—	May 22, 2007 to May 21, 2016		—		—		165
	February 6, 2008		1.7568		5,542,791		—	(note 1)		—		—		5,542,791
	February 5, 2010		4.2400		6,000,000		—	(note 2)		—		—		6,000,000
Mr. Lai Ni Quiaque	February 11, 2008		1.8660		6,044,791		—	(note 3)		—		—		6,044,791
Senior management
Mr. Chong Kin Chun, John	October 21, 2004		1.5224		2,022,900		—	January 1, 2005 to October 20, 2014		—		—		2,022,900
Mr. Lo Sui Lun	October 21, 2004		1.5224		505,726		—	January 1, 2005 to October 20, 2014		505,726		—		—
	May 22, 2006		0.6523		1,133,175		—	May 22, 2007 to May 21, 2016		1,133,175		—		—
Ms. To Wai Bing	February 15, 2008		1.7568		302,239		—	(note 4)		—		—		302,239

Notes:

(1)

The exercise of the options is subject to certain conditions that must be achieved by the grantee. A modification to the expiry date of the options granted to the grantee was approved by shareholders of the Company on December 21, 2010, upon which such options must be exercised not later than February 5, 2018.

(2)	The exercise of the options is subject to certain conditions that must be achieved by the grantee, including such options must be exercised not later than February 4, 2020.

(3)

The exercise of the options is subject to the performance of the Company’s share and certain conditions that must be achieved by the grantee. A modification to the expiry date of the options granted to the grantee was approved by shareholders of the Company on December 21, 2010, upon which such options must be exercise not later than February 10, 2018.

(4)	The exercise of the options is subject to certain conditions that must be advanced by the grantees, including such options must be exercised not later than December 23, 2012.

All shareholders own ordinary shares and enjoy the same voting rights with respect to each share.

Share Option Schemes

We adopted a second share option scheme, which we refer to as the 2002 Share Option Scheme, on December 23, 2002 and terminated the share option scheme adopted on July 12, 1997, which we refer to as the 1997 Share Option Scheme. Upon termination of the 1997 Share Option Scheme, no further options can be granted under the 1997 Share Option Scheme. Options granted under the 1997 Share Option Scheme that are not exercised lapsed automatically on July 12, 2007. Under the terms of the 2002 Share Option Scheme, our board of directors may, in its discretion from time to time, and subject to such conditions as the board may determine, within ten years beginning on December 23, 2002, grant any Talent or executive or officer of the Company or any of its subsidiaries (including executive, non-executive and independent non-executive directors of each of the abovementioned companies) and any suppliers or professional advisers who will or have provided services to the Company and/or its subsidiaries to subscribe for our ordinary shares.

The maximum number of ordinary shares which may be issued upon exercise of all options to be granted under our 2002 Share Option Scheme and any of our other share option scheme(s) must not exceed 10% of the ordinary shares in issue as of the date of approval or adoption of the scheme by the shareholders on December 23, 2002. Ordinary shares which would have been issuable pursuant to options which have lapsed in accordance with the terms of such share option schemes will not be counted for the purpose of the 10% limit. Such limit may be refreshed upon approval by shareholders and compliance with all requirements under the HKSE Listing Rules. Pursuant thereto, such limit was refreshed with the approval of our shareholders in our annual general meetings held on December 29, 2004 and December 24, 2007 respectively up to a maximum limit equal to 10% of our total number of issued shares as of the date of the said general meetings. Notwithstanding the foregoing, the number of ordinary shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under our 2002 Share Option Scheme and any of our other share option scheme(s) at any time shall not exceed 30% of the total number of ordinary shares in issue from time to time.

The total number of ordinary shares issued and which may be issued upon exercise in full of the options granted under our 2002 Share Option Scheme and any of our other share option scheme(s) (including exercised, cancelled and outstanding options) to each eligible participant in any 12-month period up to and including the date of grant shall not exceed 1% of the outstanding ordinary shares as of the date of grant. Any further grant of options in excess of this 1% limit must be approved by shareholders.

The subscription price for an ordinary share payable by a participant upon the exercise of any option granted under the 2002 Share Option Scheme will be determined by our board of directors in its absolute discretion, except that such price will not be less than the highest of (a) the closing price of the ordinary shares as stated in The Stock Exchange of Hong Kong Limited’s daily quotations sheet on the date of grant, which must be a business day; (b) the average of the closing prices of the ordinary shares as stated in The Stock Exchange of Hong Kong Limited’s daily quotations sheets for the five business days immediately preceding the date of grant; and (c) the nominal value of an ordinary share.

Any grant of options to any of our directors, chief executives or substantial shareholders or any of their respective associates (as defined in the HKSE Listing Rules) is required to be approved by our non-grantee independent non-executive directors. If we propose to grant options to a substantial shareholder or any of its independent non-executive directors, or their respective associates, which will result in the number of ordinary shares issued and to be issued upon exercise of options granted and to be granted under our 2002 Share Option Scheme and any of our other share option scheme(s) (including options exercised, cancelled and outstanding) to such person in the 12-month period up to and including the date of such grant (a) representing in aggregate over 0.1% of the outstanding ordinary shares; and (b) having an aggregate value in excess of HK$5 million, based on the closing price of the ordinary shares at the date of each grant, such further grant of options will be subject to approval by shareholders and all requirements under the HKSE Listing Rules.

A grant of options may not be made after a price sensitive event has occurred or a price sensitive matter has been the subject of a decision until such price sensitive information, including annual and interim results, has been made public.

The period during which an option may be exercised will be determined by our board of directors in its absolute discretion, except that no option may be exercised later than ten years from the date of grant. No option may be granted more than ten years after December 23, 2002. Subject to our earlier termination, the 2002 Share Option Scheme shall be valid and effective for a period of ten years after the date of adoption, that is, until December 23, 2012. In addition and to the extent not already exercised, an option will automatically lapse and not be exercisable upon the occurrence of any of the following events:

(a)

the expiry date relevant to that option;

(b)

one month following the date a grantee ceases to be an eligible participant for any reason other than death or termination of his relationship with us (or the relevant subsidiary, as the case may be) on any of the grounds specified in (g) below;

(c)

12 months, or such longer period as our board of directors may determine, following the death of a grantee whose relationship with us (or the relevant subsidiary, as the case may be) would not have been terminated on any of the grounds specified in (g) below;

(d)

21 days following the date an effective resolution is passed for our voluntary winding-up;

(e)

subject to (d) above, the date of commencement of such winding-up;

(f)

the date on which any compromise or arrangement between us and our members or creditors in connection with a scheme for our reconstruction or our amalgamation with any other company or companies becomes effective;

(g)

the date on which the grantee ceases to be an eligible participant by reason of the termination of his or her relationship with us or the relevant subsidiary on any one or more of the grounds of serious misconduct or breach, bankruptcy, insolvency, composition with his or her creditors or conviction of any criminal offence involving his or her integrity or honesty or, in the case of a grantee-Talent and if so determined by our board of directors, on any other common law, statutory or contractual ground on which an employer would be entitled to terminate such grantee’s employment;

(h)

14 days following the date a general offer (which has been made to shareholders by way of take-over offer, share repurchase offer or scheme of arrangement or otherwise in like manner) becomes, or is declared unconstitutional; and

(i)

the date on which we cancel the options by reason that the grantee in any way sells, transfers, charges, mortgages, encumbers or creates any interest in favor of any third party over or in relation to any of his or her options or attempt to do so.

As of December 13, 2011, a total number of 96,247,857 options were granted, 45,371,325 options were exercised, 14,532,018 options were lapsed and 36,344,514 options remain outstanding and unexercised. Total number of 45,249,001 options are available for issue as of December 13, 2011.

ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTION

A.	Major shareholders

The following table sets forth certain information regarding ownership of our ordinary shares as of December 13, 2011 by all persons who are known to us to own beneficially 5% or more of our ordinary shares.


Title of class	Identity of person or Group	beneficially owned (note 3)	Percentages of shares Beneficially owned (note 1) %
Ordinary shares	Wong Wai Kay, Ricky	391,245,732 (note 2)		50.64

Ordinary shares	Cheung Chi Kin, Paul	391,245,732 (note 2)		50.64

Ordinary shares	Top Group International Limited	391,245,732 (note 2)		50.64

Ordinary shares	Leung Ka Pak	339,814,284 (note 3)		43.98

Ordinary shares	Yau Ming Yan, Andrew	339,814,284 (note 3)		43.98

Ordinary shares	Jennison Associates LLC	62,123,760 (note 4)		8.04

Ordinary shares	Prudential Financial, Inc.	62,123,760 (note 5)		8.04

Notes:

(1)	Percentage ownership is based on 772,673,022 shares issued as of December 13, 2011.

(2)

The 391,245,732 shares are held by a group consisting of Top Group International Limited, Mr. Wong Wai Kay, Ricky, our chairman, and Mr. Cheung Chi Kin, Paul, our vice chairman, Top Group International Limited is a special purpose vehicle incorporated in the British Virgin Islands, and 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 44,286,159 shares held by Mr. Cheung individually, collectively as a group. The registered address of Top Group International Limited is Akara Bldg, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Top Group International Limited has four shareholders: Mr. Wong, Mr. Cheung, Mr. Leung Ka Pak, and Mr. Yau Ming Yan, Andrew(See Note (3) below), and their equity interests are 42.12%, 27.06%, 21.00% and 9.82%, respectively.

(3)

Mr. Leung Ka Pak and Mr. Yau Ming Yan, Andrew may be deemed to have beneficial ownership in the 339,814,284 shares held by Top Group International Limited. Each of them expressly disclaims any beneficial ownership in such shares except to the extent of their respective pecuniary interest therein. Mr. Leung was a director and the president of all of our subsidiaries in Canada (other than City Telecom (Canada) Inc.) and resigned as a director and president in October 2005. After Mr. Leung’s resignation, Mr. Yau became a director and the president of all of our subsidiaries in Canada (other than City Telecom (Canada) Inc.). He resigned as a director and president in July 2006.

(4)	Beneficial ownership calculation is based solely on a review of Form 2 filing made with the Hong Kong Stock Exchange on June 13, 2011.

(5)	Prudential Financial, Inc. indirectly owns 100% equity interests of Jennison Associates LLC, and therefore may be deemed to have voting and dispositive power over the shares held by Jennison Associates LLC.

(6)	Beneficial ownership is determined in accordance with the rules of the SEC.

As of December 13, 2011, there were 14 registered holders of 9,742,866 American Depositary Shares in the United States, consisting of 25.22% of our outstanding shares.

All shareholders own ordinary shares and enjoy the same voting rights with respect to each share.

Except as disclosed above, we are not directly or indirectly owned or controlled by any other person, corporation or foreign government.

We are not aware of any arrangement the operation of which may at a subsequent date result in a change of control of City Telecom.

B.	Related party transactions

For the period since the beginning of our preceding three financial years up to the date of this document, we were a party to the following related party transactions.

Contracts with our directors and senior management

All of our directors and senior management have employment service agreements with us. Certain of our directors and senior management receive housing allowances, pensions, bonuses and commissions. In addition, some of our directors are also senior management of City Telecom and these persons may also have the ability to make significant business decisions effecting our operations. See Item 6 “Directors and senior management” above of this annual report for details concerning these arrangements.

C.	Interests of experts and counsel

Not applicable.

ITEM 8 FINANCIAL INFORMATION

A.	Consolidated statements and other financial information

Financial statements

See pages F-1 — F-60 following Item 19.

Legal and regulatory proceedings

As of August 31, 2011, there were no legal or arbitration proceedings that have had in the recent past, or to our knowledge, may have, significant effects on our financial position or profitability.

Dividends

Unless the relevant provisions of the Hong Kong Companies Ordinance require otherwise, we may by ordinary resolution (being a resolution passed by a majority of our shareholders who attend and vote at a meeting of shareholders) from time to time declare dividends, but no dividend shall exceed the amount recommended by our board of directors. Our Articles contain provisions on apportioning dividends where shares are not or were not fully paid for during the period covered by the dividend.

Unless the relevant provisions of the Hong Kong Companies Ordinance require otherwise, our board of directors may pay such interim dividends as appears to them to be justified by our financial position and pay any dividend payable at a fixed rate at intervals decided upon by our board of directors, whatever our financial position, if the board of directors feels that this payment is justified.

Any dividend not claimed by a shareholder after a period of six years from the date when it was first due to be paid shall be forfeited and shall revert to us. The payment by our board of directors of any unclaimed dividend, interest or other sum payable on or in respect of a share into a separate account shall not make us responsible as a trustee for such sums.

For fiscal 2011, an interim dividend was declared at 15 Hong Kong cents per ordinary share. The total amount of HK$115,604,051.70 was paid as cash dividend on May 31, 2011.

A final dividend of 15 Hong Kong cents per ordinary share was proposed on November 8, 2011, which will be approved by shareholders in the annual general meeting to be held on December 16, 2011. The 2011 final dividend will be paid on or about January 10, 2012.

B.	Significant changes

None.

ITEM 9 THE OFFER AND LISTING

A.	Offer and listing details

Our ordinary shares have been listed under the number “1137” on The Stock Exchange of Hong Kong Limited, or the HKSE, since August 4, 1997. Our American depositary shares, each representing 20 ordinary shares, have been listed under the symbol “CTEL” on Nasdaq since November 3, 1999. Our 10-year senior notes were listed under the ISIN codes of US178677AA87 and USY16599AA30 on the Singapore Exchange Securities Trading Limited, or SGX-ST, on January 24, 2005. The 10-year senior notes were subsequently exchanged for registered notes with ISIN code US178677AB60 pursuant to a registration statement under the U.S. Securities Act of 1933 on June 24, 2005.

On December 4, 2009, we repurchased a portion of the 10-year senior notes with a cumulative principal amount of HK$11.6 million (US$1.5 million) from the open market. We paid a total consideration, including accrued interest, of approximately HK$12.1 million (US$1.6 million). On February 1, 2010, we redeemed the then outstanding 10-year senior notes with a cumulative principal amount of HK$153.9 million (US$19.9 million) at the redemption price equal to 104.375% of the principal amount. We paid a total consideration, including accrued interest, of approximately HK$167.6 million (US$21.6 million). As of August 31, 2010, all the 10-year senior notes has been repurchased and redeemed.

In April 2010, we offered an aggregate of 4,025,000 ADSs representing 80,500,000 ordinary shares at the offer price of US$13.00 per ADS. The proceeds we received, after deduction of underwriters’ discount but before deduction of offering expenses, amounted to US$49.8 million.

The price of our ordinary shares on the HKSE as of its close of trading on December 13, 2011 was HK$4.190 per share. The table below shows the high and low closing prices of the shares on the HKSE since listing.


	Price
		High			Low
			(In HK$	)
Annual Date

2006		0.830			0.570
2007		3.670			0.830
2008		2.170			0.750
2009		3.950			0.840
2010		6.770			3.690



Quarterly Data

2009

January to March		1.140			0.840
April to June		1.780			1.100
July to September		2.630			1.630
October to December		3.950			2.500

2010

January to March		6.210			3.800
April to June		6.770			4.420
July to September		5.200			3.690
October to December		6.200			4.800

2011

January to March		6.200			5.350
April to June		6.080			4.410
July to September		4.850			3.520
October to December (through December 13, 2011)		4.340			3.520



			Price
	High			Low
			(In HK$)
Monthly Data
2011

June		5.670			4.410
July		4.850			4.420
August		4.400			3.740
September		3.840			3.520
October		3.780			3.520
November		4.340			3.700
December (through December 13, 2011)		4.340			4.180

The price of our American depositary shares on Nasdaq as of its close of trading on December 13, 2011 was US$10.670 per American depositary share. The table below shows the high and low closing prices of the American depositary shares on Nasdaq since listing.


			Price
	High			Low
			(In US$)
Annual Date

2006		2.009			1.380
2007		10.750			2.010
2008		5.750			1.915
2009		10.300			2.000
2010		17.330			9.670

Quarterly Data
2009

January to March		2.870			2.000
April to June		4.650			2.870
July to September		7.023			4.050
October to December		10.300			6.610

2010

January to March		16.180			10.150
April to June		17.330			11.340
July to September		13.500			9.670
October to December		15.980			12.500

2011

January to March		15.780			13.730
April to June		15.300			11.360
July to September		12.040			9.220
October to December(through December 13, 2011)		11.170			9.080

Monthly Data
2011

June		14.260			11.360
July		12.040			11.000
August		11.180			9.450
September		9.720			9.220
October		9.670			9.080
November		11.170			9.370
December (through December 13, 2011)		10.800			10.620

B.	Plan of distribution

Not applicable.

C.	Markets

See Item 9A above.

D.	Selling shareholders

Not applicable.

E.	Dilution

Not applicable.

F.	Expenses of the issue

Not applicable.

ITEM 10 ADDITIONAL INFORMATION

A.	Share capital

Not applicable.

B.	Memorandum and Articles of Association

Described below is a summary of certain provisions of our existing Articles and, where relevant, the Hong Kong Companies Ordinance. As this is a summary, it does not contain all the information that may be important to you. You should therefore read our complete Articles if you would like additional information, which were filed with the U.S. Securities and Exchange Commission as an exhibit 1 to the annual report on Form 20-F for fiscal 2005 and is incorporated by reference herein.

General

City Telecom was incorporated in Hong Kong on May 19, 1992 under the Hong Kong Companies Ordinance. Clause 3 of the Memorandum of Association states that the Company’s objects are to carry on the business of telecommunications services in addition to various other related and unrelated business activities.

Directors’ interests

A director shall not vote on, or be counted in the quorum in relation to, any resolution of our board of directors in respect of any contract in which the director or any of his associate(s) (within the meaning of the HKSE Listing Rules) has a material interest. This prohibition shall not apply to the following:

(a)	the giving of any security or indemnity to him or his associates(s) in respect of money lent or obligations incurred or undertaken by him or any of them at the request of or for the benefit of the Company or any of its subsidiaries;

(b)

the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he or his associate(s) has himself/themselves assumed responsibility in whole or in part and whether alone or jointly under a guarantee or indemnity or by the giving of security;

(c)

any proposal concerning an offer of shares, debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase in which offer he or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting thereof;

(d)

any proposal concerning any other company in which he or his associate(s) is/are interested only, whether directly or indirectly, as an officer, executive or shareholder or in which he or his associate(s) is/are beneficially interested in shares of that Company, provided that he and any of his associate(s) are not in aggregate beneficially interested in five per cent or more of the issued shares of any class of such Company (or of any third company through which his interest or that of his associate(s) is derived) or of the voting rights;

(e)	any proposal or arrangement concerning the benefit of Talents of the Company or its subsidiaries, including the adoption, modification or operation of any Talents’ share scheme or any share incentive or share option scheme under which the director or his associate(s) may benefit;

(f)

any proposal or arrangement concerning the benefit of Talents of the Company or its subsidiaries, including the adoption, modification or operation of a pension fund or retirement, death or disability benefits scheme which relates both to directors (or his associate(s)) and Talents of the Company or any of its subsidiaries and does not provide in respect of any director or his associate(s), as such any privilege or advantage not generally accorded to the class of persons to which such scheme or fund relates; and

(g)	any contract or arrangement in which he or his associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company.

Additionally, there is no shareholding qualification required to be a director.

Dividends

In accordance with our Articles, we may by ordinary resolution (being a resolution passed by a majority of those votes cast by the shareholders who attend and vote at a general meeting) from time to time declare dividends, but no dividend shall exceed the amount recommended by our board of directors. Our Articles contain provisions on apportioning dividends according to the amounts paid up on the shares in respect of which dividend is paid under pro rata basis during the period covered by the dividend.

In accordance with our Articles, our board of directors may pay such interim dividends that appear to be justified by our financial position and may also pay any dividend payable at a fixed rate at intervals decided upon by our board of directors, whenever our financial position, in the opinion of our board of directors, justifies the payment.

In respect of any dividend proposed to be paid or declared, our board of directors may further propose and announce prior to or at the same time as the payment or declaration of such dividend either that:

(a)	such dividend be satisfied in whole or in part in the form of an allotment of shares to the shareholders, credited as being fully paid up, provided that all the shareholders entitled to receive the dividend will also be entitled to choose to receive the dividend (or a part of it) in cash; or

(b)	the shareholders entitled to such dividend are entitled to elect to receive an allotment of shares credited as fully paid up instead of the whole or part of the cash dividend our board of directors may decide upon.

Any general meeting declaring a dividend may, upon the recommendation of our board of directors, by ordinary resolution, direct that the dividend shall be met, wholly or partly, by the distribution of our assets.

Liquidation

Subject to the requirements under the Hong Kong Companies Ordinance, in the event of a members’ winding up, the liquidator may, with the sanction of a special resolution of the Company:

(a)	divide among the shareholders the whole or any part of the assets of the Company and set such value as the liquidator deems fair upon any property to be divided and determine how the division shall be carried out between the shareholders; or

(b)	vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator shall think fit, but no shareholder shall be compelled to accept any shares or other assets upon which there is any liability.

Annual and extraordinary general meeting of shareholders

The Hong Kong Companies Ordinance requires our board of directors to hold an annual general meeting of our shareholders once every year and not more than 15 months after our previous annual general meeting. The annual general meeting and any other general meeting of our shareholder held for the passing of a special resolution (being a resolution passed by not less than 75% of those votes cast by the shareholders who attend and vote at a general meeting) should be convened by not less than 21 clear days’ notice in writing. The notice shall specify the place, date and time of meeting and the general nature of the business to be transacted. An annual general meeting may be called by not less than 20 clear business days’ notice if it is agreed by all shareholders entitled to attend and vote at the meeting. The business of the annual general meeting will include:

(a)	the declaration and sanctioning of dividends;

(b)	the consideration and adoption of the accounts, balance sheet and reports of the directors and auditors and other documents required to be attached to the financial statements;

(c)	the appointment of directors in place of those retiring (by rotation or otherwise);

(d)	the appointment of auditors; and

(e)	the fixing of, or the determining of the method of fixing, the remuneration of the directors and of the auditors.

Our board of directors may convene an extraordinary general meeting (which is any general meeting of the shareholders other than the annual general meeting) whenever it thinks fit and must do so upon the request in writing of shareholders holding not less than one-twentieth of our paid-up capital carrying the right to vote at a general meeting. All extraordinary general meetings (other than those convened for the passing of a special resolution referred to above) should be convened by at not less than 10 clear business days’ notice in writing. Extraordinary general meetings may be called by less than 10 clear business days’ notice by a majority in number of the shareholders having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving that right.

Except as otherwise provided by our Articles, two shareholders present in person or by proxy and entitled to vote shall be a quorum for all purposes. Whilst no business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, the absence of a quorum shall not preclude the choice or appointment of a chairman which shall not be treated as part of the business of the meeting.

The Nasdaq marketplace rules also provide that a foreign private issuer such as us may be granted an exemption from such requirements if it follows the practice of its home country.

Restrictions on ownership of shares

There are no restrictions, either pursuant to our Articles or to the laws of Hong Kong, on the rights of non-residents of Hong Kong or foreign persons to hold or exercise voting rights with respect to our ordinary shares.

Voting rights

Any decisions that are made by the shareholders in a general meeting require the passing of either an ordinary or a special resolution at such meeting. The type of resolution required to be passed depends upon the provisions of the Hong Kong Companies Ordinance and our Articles as certain matters may only be decided by the passing of a special resolutions.

Unless any shares have special terms as to voting, on a show of hands every shareholder who is present in person at a general meeting, shall have one vote irrespective of the number of shares he holds and on a poll every shareholder who is present in person or by proxy shall have one vote for every share of which he is the holder. Our Articles set out the circumstances in which a poll can be demanded.

Pursuant to Rule 13.39(4) of the HKSE Listing Rules which became effective on January 1, 2009, any votes of the Shareholders at a general meeting must be taken by poll.

Any shareholder that is a recognized clearing house within the meaning of the Securities and Futures Ordinance of Hong Kong may authorize such person or persons as it thinks fit to act as its representative (or representatives) at any general meeting or at any separate meeting of any class of shareholders (if relevant). However, if more than one person is authorized, the authorization must specify the number and class of shares in respect of which each person is in fact authorized. The authorized person will be entitled to exercise the same power on behalf of the recognized clearing house as that clearing house (or its nominees) could exercise if it were an individual shareholder of the Company.

Issue of shares

Under the Companies Ordinance, our board of directors may, without the prior approval of the shareholders, offer to issue new shares to existing shareholders in proportion to their current shareholdings. Our board of directors may not issue new shares in any other way without the prior approval of the shareholders. Any such approval given in a general meeting shall continue in force until the earlier of: (1) the conclusion of the next annual general meeting; or (2) the expiration of the period within which the next annual general meeting is required by law to be held; or (3) when revoked or varied by an ordinary resolution of the shareholders in a general meeting. Where such shareholders’ approval is given, subject to the HKSE Listing Rules and any conditions attached to such approval, our unissued shares may be at the disposal of our board of directors, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the directors may decide.

Subject to the provisions of our Articles, any shareholder may transfer all or any of his shares by an instrument of transfer in the usual or common form or in such other form as our board of directors may accept and may approve. Such instrument may be signed by hand or, if the buyer or seller is a clearing house or its nominee(s), signed by hand or by a machine imprinted signature or by such other manner as our board of directors may approve from time to time.

The instrument of transfer of a share shall be executed by or on behalf of both the buyer and the seller of that share provided that our board of directors may dispense with the signing of the instrument of transfer by the buyer in any case which it thinks fit in its discretion to do so. Except as provided in the paragraph above, our board of directors may also decide, either generally or in any particular case, upon request by either the buyer or seller of shares to accept mechanically signed transfers. The seller shall be deemed to remain the holder of the share until the name of the buyer is entered into our register in respect of that share. All instruments of transfer, when registered, may be retained by us. Nothing in our Articles prevents our board of directors from recognizing a renunciation of the allotment or provisional allotment of any share by the person to whom the shares were to be allotted in favor of some other person.

Our board of directors may in its absolute discretion and without giving any reason, decline to register any transfer of any share which is not a fully paid share.

Our board of directors may also decline to register any transfer unless:

(a)	the instrument of transfer, duly stamped, is lodged with us accompanied by the certificate for the shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the seller to make the transfer;

(b)	such fee, not more than the maximum amount allowed by The Stock Exchange of Hong Kong Limited from time to time, as our board of directors may from time to time require is paid to us in respect of it;

(c)	the instrument of transfer is in respect of only one class of share;

(d)	in the case of a transfer of a share jointly held by two or more holders, the number of joint holders to whom the share is to be transferred does not exceed four; and

(e)	the shares concerned are free of any lien in favor of us.

If our board of directors declines to register a transfer of any share, it shall, within two months after the date on which the instrument of transfer was lodged, send to the buyer notice of the refusal.

Shareholders

In accordance with our Articles, only persons who are registered in our register of members are recognized by us as shareholders and absolute owners of the shares. The register of members may be closed by our board of directors at such times and for such periods as it may from time to time decide by giving notice in accordance with the HKSE Rules, but the register shall be closed in any year for not more than 30 days (excluding Sundays and public holidays) unless extended by ordinary resolution.

Variations of Rights of Shares

Subject to the Companies Ordinance, all or any of the rights for the time being attached to any class of shares for the time being issued may from time to time (whether or not the Company is being wound up) be varied with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of such shares.

C.	Material contracts

Other than such contracts as are described in our disclosure in Item 7 “Major shareholders and related party transactions — related party transactions”, we have not entered into any material contracts outside the ordinary course of our business within the two years preceding the date of this annual report.

D.	Exchange controls

The Basic Law of Hong Kong provides that the Hong Kong dollar will remain the legal tender in Hong Kong after July 1, 1997. The Basic Law also provides that no foreign exchange control policies will be applied in Hong Kong and that the Hong Kong dollar will be freely convertible. During the Asia regional economic crisis in 1998, however, the Hong Kong government intervened on several occasions in the foreign exchange market by purchasing the Hong Kong dollar and selling the U.S. dollar to support the value of the Hong Kong dollar.

There are no restrictions, either pursuant to our Articles, or pursuant to the laws of Hong Kong, on the rights of non-residents of Hong Kong or foreign persons to hold or exercise voting rights with respect to our ordinary shares, or export or import capital.

E.	Taxation

The following provides a general outline of the material tax considerations that may be relevant to a decision to own or dispose of our American depositary shares or shares but does not purport to deal with the tax consequences applicable to all categories of investors. Prospective investors should consult their own professional advisers on the Hong Kong, United States and overall tax implications of investing, holding or disposing the American depositary shares or shares under the laws of the countries in which they are liable to taxation. The discussion below is applicable to both U.S. and non-U.S. citizens as an investor.

Hong Kong Taxation

Tax on dividends

No tax is payable in Hong Kong by withholding or otherwise in respect of dividends paid by City Telecom.

Profits tax

No tax is imposed in Hong Kong in respect of gains from the sale of our shares and American depositary shares, unless all the following factors are present:

(i)	such profits are derived from or arise in Hong Kong;

(ii)	such profits are attributable to a trade, profession or business carried on in Hong Kong; and

(iii)

the property in question, such as shares and American depositary shares, are not capital assets of that trade, profession or business.

Taxable profits are subject to Hong Kong profits tax on corporations at the rate of 16.5% and on unincorporated businesses or individuals at the rate of 15%.

Profits from the sales of our shares, which are effected on the Hong Kong Stock Exchange, will be considered to be derived from or arising in Hong Kong. Such profits are taxable if the shares are not held as capital assets and the profits are attributable to a business, trade or profession carried out in Hong Kong.

Profits from the sales of our American depositary shares will be considered to be derived from or arising in Hong Kong if the relevant purchase or sales contracts are effected in Hong Kong. In the event that those persons dealing or trading in the American depositary shares are doing so as part of their trade, profession or business that is being carried out in Hong Kong and the shares are not capital assets of such trade of business, then such profits will be subject to Hong Kong profits tax. In any case of an exchange of any American depositary receipts evidencing American depositary shares for certificates representing shares, any profit gained on subsequent disposition of such shares will be the difference between the initial price of American depositary shares and the market value of such shares at the date of disposition.

Stamp duty

The sale and purchase of shares is subject to Hong Kong stamp duty which is payable by both the seller and purchase. Both seller and purchaser must pay stamp duty at a rate of 0.1% each, totaling 0.2%, of the total value of the greater of (i) the consideration paid or (ii) the market value of the shares on the Hong Kong Stock Exchange, or otherwise, on the date the contract note for the sale or purchase is executed. If, in the case of a sale or purchase of shares effected by a person who is not resident in Hong Kong, the stamp duty on either or both of the contract notes is not paid, the transferee will be liable to stamp the instrument of transfer and pay stamp duty on the instrument in an amount equal to the unpaid duty. If the instrument is not stamped before or within the time for stamping such instrument, a penalty of up to ten times the duty payable may be imposed. In addition, a fixed duty of HK$5.00 is currently payable on any instrument of transfer of shares.

In addition to the depositary’s charges, if any, the withdrawal of the shares upon the surrender of American depositary receipts evidencing American depositary shares, and the issuance of American depositary receipts evidencing American depositary shares upon the deposit of the shares, will be subject to Hong Kong stamp duty at the rate described above for sale and purchase transactions. In the event the withdrawal or deposit does not result in a change in the beneficial ownership of the shares under Hong Kong law, only the nominal fixed duty of HK$5.00 will be payable. Investors are not liable for stamp duty on the issuance of the American depositary shares upon the initial deposit of shares issued directly to the depositary or for the account of the depositary. No Hong Kong stamp duty is payable upon the transfer of American depositary receipts evidencing our American depositary shares if such American depositary receipts are not maintained on a register in Hong Kong.

Tax treaty

There is currently no reciprocal tax treaty between Hong Kong and the U.S. regarding withholding.

United States Taxation

Certain U.S. Federal Income Tax Considerations

The following is a summary of certain United States federal income tax considerations that are anticipated to be material to the purchase, ownership, and disposition of our shares or American depositary shares by U.S. Holders, as defined below. This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed U.S. Treasury regulations, published rulings and court decisions, all as in effect on the date hereof. These laws are all subject to change or different interpretation, possibly on a retroactive basis. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as investors subject to special tax rules including: partnerships, financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, tax-exempt organizations, and, except as described below, non-U.S. Holders, or to persons that will hold our shares or American depositary shares as part of a straddle, hedge, conversion, or constructive sale transaction for United States federal income tax purposes or that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any foreign, state, or local tax considerations. This summary assumes that investors will hold our shares or American depositary shares as “capital assets” (generally, property held for investment) under the Code.

Each prospective investor is urged to consult its own tax advisor regarding the United States federal, state, local, and foreign income and other tax considerations of the purchase, ownership, and disposition of our shares or American depositary shares.

For purposes of this summary, a U.S. Holder is a beneficial owner of shares or American depositary shares that is for United States federal income tax purposes:

•

an individual who is a citizen or resident of the United States;

•

a corporation, or other entity that is taxable as a corporation, created in or organized under the laws of the United States or any State or political subdivision thereof;

•

an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source;

•

a trust the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust; or

•

a trust that was in existence on August 20, 1996, was treated as a United States person, for United States federal income tax purposes, on the previous day, and elected to continue to be so treated.

If a partnership or other entity or arrangement treated as a partnership for United States federal income tax purposes holds our shares or American depositary receipts, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A U.S. Holder that is a partner in a partnership holding our shares or American depositary receipts is urged to consult its own tax advisor concerning the United States federal income tax consequences of purchasing, owning and disposing of our shares or American depositary receipts by the partnership.

A beneficial owner of our shares or American depositary shares that is not a U.S. Holder is referred to herein as a “Non-U.S. Holder.”

A foreign corporation will be treated as a “passive foreign investment company”, or “PFIC”, for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of “passive” income or 50% or more of the fair market value of its assets are “passive” for any taxable year. Based on our current and projected income, assets, and activities, we presently believe that we are not a PFIC in the current taxable year and do not anticipate becoming a PFIC in the future. The PFIC status of a foreign corporation for any taxable year, however, will not be determinable until after the end of that taxable year. Because the classification of certain of our assets for United States federal income tax purposes is uncertain, the PFIC rules are subject to administrative interpretation, and the relevant facts may change in the future, however, no assurance can be given that we are not or will not be treated as a PFIC. The discussion below under “U.S. Holders-Dividends” and “U.S. Holders-Sale or Other Disposition of Shares or American depositary shares,” assumes that we will not be subject to treatment as a PFIC for United States federal income tax purposes. If we were currently or were to become a PFIC, U.S. Holders would be subject to special rules and a variety of potentially adverse tax consequences under the Code. See “PFIC Considerations” below.

Dividends. Any cash distributions paid by us out of our earnings and profits, as determined under United States federal income tax rules, will be subject to tax as ordinary dividend income and will be includible in the gross income of a U.S. Holder upon actual or constructive receipt. Cash distributions paid by us in excess of our earnings and profits will be treated first as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in our shares or American depositary shares, and thereafter as gain from the sale or exchange of a capital asset. Dividends paid in Hong Kong dollars will be includible in income in a United States dollar amount based on the United States dollar to Hong Kong dollar “spot” exchange rate prevailing at the time of receipt of such dividends by the depositary, in the case of American depositary shares, or by the U.S. Holder, in the case of shares held directly by such U.S. Holder. U.S. Holders should consult their own tax advisors regarding the United States federal income tax treatment of any foreign currency gain or loss recognized on the subsequent conversion of Hong Kong dollars received as dividends to United States dollars. Dividends received on shares or American depositary shares will not be eligible for the dividends received deduction allowed to corporations.

Under current law, “qualified dividend income” received by an individual prior to January 1, 2013 is subject to United States federal income tax rates lower than those applicable to ordinary income. The maximum federal income tax rate on such qualifying dividends received by an individual is 15%. Based upon our existing and anticipated future operations and current assets, and the anticipation that our American depository shares are and will be listed on the NASDAQ, we believe that we are a “qualified foreign corporation” and that our dividends paid to U.S. Holders who are individuals will be eligible to be treated as “qualified dividend income”, provided that such Holders satisfy applicable holding period requirements with respect to the American depositary shares and other application requirements. Dividends paid by foreign corporations that are classified as PFICs are not “qualified dividend income”. See “PFIC Considerations” below.

Dividends received on shares or American depositary shares generally will be treated, for United States federal income tax purposes, as income from non-U.S. sources. Such non-U.S. source income generally will be “passive category income”, or in certain cases “general category income”, which is treated separately from other types of income for purposes of computing the U.S. foreign tax credit. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on shares or American depositary shares. U.S. Holders who do not elect to claim a U.S. foreign tax credit for foreign income tax withheld may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which the U.S. Holder elects to do so for all creditable foreign income taxes.

In addition, the United States Treasury has expressed concerns that parties to whom depositary shares are pre-released may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by the holders of American depositary shares. The analysis of the creditability of foreign withholding taxes could be affected by future actions that may be taken by the United States Treasury.

Sale or Other Disposition of Shares or American depositary shares. A U.S. Holder will recognize capital gain or loss upon the sale or other disposition of shares or American depositary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Holder’s adjusted tax basis in such shares or American depositary shares, as each is determined in U.S. dollars. Any such capital gain or loss will be long-term if the shares or American depositary shares have been held for more than one year and will generally be United States source gain or loss. Certain non-corporate U.S. Holders (including individuals) may qualify for preferential rates of United States federal income taxation in respect of long-term capital gains for taxable years beginning before January 1, 2013. The claim of a deduction in respect of a capital loss, for United States federal income tax purposes, may be subject to limitations. If a U.S. Holder receives Hong Kong dollars for any such disposition, such U.S. Holder should consult its own tax advisor regarding the United States federal income tax treatment of any foreign currency gain or loss recognized on the subsequent conversion of the Hong Kong dollars to United States dollars.

Medicare Tax

For taxable years beginning after December 31, 2012, a United States person that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax on the lesser of (1) the United States person’s “net investment income” for the relevant taxable year and (2) the excess of the United States person’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between US$125,000 and US$250,000, depending on the individual’s circumstances). A holder’s net investment income will generally include its gross dividend income and its net gains from the disposition of ADSs, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a United States person that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the ADSs.

PFIC considerations

If we were to be classified as a PFIC for any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a foreign company that does not distribute all of its earnings on a current basis. In such event, a U.S. Holder of the shares or American depositary shares may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sales of the shares or American depositary shares and (ii) any “excess distribution” paid on the shares or American depositary shares (generally, a distribution in excess of 125% of the average annual distributions paid by us in the three preceding taxable years). In addition, a U.S. Holder may be subject to an interest charge on such gain or excess distribution. Prospective investors are urged to consult their own tax advisors regarding the potential tax consequences to them if we are or do become a PFIC, as well as certain elections that may be available to them to mitigate such consequences.

Non-U.S. Holders

An investment in shares or American depositary shares by a Non-U.S. Holder will not give rise to any United States federal income tax consequences unless:

•

the dividends received or gain recognized on the sale of the shares or American depositary shares by such person is treated as effectively connected with the conduct of a trade or business by such person in the United States as determined under United States federal income tax law, and the dividends are attributable to a permanent establishment (or in the case of an individual, a fixed place of business) that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis. In such cases you generally will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. Holder, “effectively connected” dividends may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate, or

•

in the case of gains recognized on a sale of shares or American depositary shares by an individual, such individual is present in the United States for 183 days or more and certain other conditions are met. The non-U.S. Holder will be subject to United States federal income tax at a rate of 30% on the amount by which the U.S. — source capital gains exceed non-U.S. — source capital losses.

Backup withholding and information reporting

In general, information reporting requirements will apply to dividends on or the proceeds received on the sale, exchange or redemption of shares or American depositary shares paid within the United States (and, in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients, such as corporations, and backup withholding tax may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number (or otherwise establishes, in the manner provided by law, an exemption from backup withholding) or to report dividends required to be shown on the U.S. Holder’s United States federal income tax returns.

Backup withholding is not an additional income tax, and the amount of any backup withholding from a payment to a U.S. Holder will be allowed as credit against the U.S. Holder’s United States federal income tax liability provided that the appropriate returns are filed.

A non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status to the payer, under penalties of perjury, on IRS Form W-8BEN.

Information with Respect to Foreign Financial Assets

Under recently enacted legislation, individuals that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 in taxable years beginning after March 18, 2010 will generally be required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties and (iii) interests in foreign entities. U.S. holders that are individuals are urged to consult their tax advisors regarding the application of this legislation to their ownership of ADSs.

THE ABOVE DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY, DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE POTENTIAL TAX CONSIDERATIONS RELATING TO OUR SHARES OR AMERICAN DEPOSITARY RECEIPTS AND IS NOT INTENDED TO BE CONSTRUED AS TAX ADVICE. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES OR AMERICAN DEPOSITARY RECEIPTS, INCLUDING THE APPLICABILITY AND EFFECT OF ANY UNITED STATES FEDERAL, STATE, LOCAL OR NON-UNITED STATES TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAW.

F.	Dividends and paying agents

Not applicable.

G.	Statement by experts

Not applicable.

H.	Documents on display

We filed with Securities and Exchange Commission in Washington, D.C. a registration statement on Form F-1 (Registration No. 333-11012) under the Securities Act in connection with our global offering of American depositary shares in November 1999. The registration statement contains exhibits and schedules. For further information with respect to City Telecom and the American depositary shares, please refer to the registration statement and to the exhibits and schedules filed with the registration statement. In addition, whenever a reference is made in this annual report to a contract or other document of City Telecom, you should be aware that such reference is not necessarily complete and that you should refer to the exhibits and schedules that are a part of the registration statement for a copy of the contract or other document.

The Company’s registration statements may be inspected and copied, including exhibits and schedules, and the reports and other information as filed with the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934 at the public reference facilities maintained by the Securities and Exchange Commission at 100F Street NE, Washington, D.C. 20549. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 100F Street NE, Washington, D.C. 20549, at prescribed rates. Information may be obtained regarding the Washington D.C. Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the Internet at its website at http://www.sec.gov/.

I.	Subsidiary information

Not applicable.

ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk have been included in note 24 to our consolidated financial statements.

ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.	Debt securities

Not applicable.

B.	Warrants and rights

Not applicable.

C.	Other securities

Not applicable.

D.	American depositary shares

Fees and Expenses


Persons depositing ordinary shares or ADR holders must pay:		For:
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)		Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property


US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)		• Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates

US$0.02 (or less) per ADS		• Any cash distribution to our ADR holders

A fee equivalent to the fee that would be payable if securities distributed to our ADR holders had been ordinary shares and the ordinary shares had been deposited for issuance of ADSs		• Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADR holders

Registration or transfer fees		• Transfer and registration of ordinary shares on our ordinary share register to or from the name of the depositary or its agent when our ADR holders deposit or withdraw ordinary shares

Expenses of the depositary in converting foreign currency to U.S. dollars		• Whenever the depositary or the custodian receives foreign currency, by way of dividends or other distributions or the net proceeds from the sale of securities, property or rights, and if at the time of the receipt thereof the foreign currency so received can in the judgment of the depositary be converted on a reasonable basis into U.S. dollars and the resulting U.S. dollars transferred to the United States

Expenses of the depositary		• Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)

Taxes and other governmental charges the depositary or the custodian have to pay on any ADR or ordinary share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes		As necessary

Any charges incurred by the depositary or its agents for servicing the deposited securities		As necessary

Payment of Taxes

The ADR holder is required to pay all taxes and other governmental charges that may be payable in respect of any their ADSs, or the shares or other securities underlying their ADSs. The depositary may refuse to effect a transfer of any ADRs or refuse to effect the withdrawal of any securities underlying the ADRs while any such taxes and charges are outstanding. The depositary may deduct the amount of any taxes owed from any payments to our ADR holders. It may also sell deposited securities, by public or private sale, to pay any taxes owed. Our ADR holders will remain liable if the proceeds of the sale are not enough to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to our ADR holders any proceeds, or send to our ADR holders any property, remaining after it has paid the taxes.

Fees and Payments from the Depositary to Us

In fiscal year 2011, the Company had not received any payment from the depositary.

PART II

ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15 CONTROLS AND PROCEDURES

A.	Disclosure controls and procedures

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. As of the end of the period covered by this annual report, based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information the Company is required to disclose in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Subsequent to the date of their evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls.

B.	Management’s report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purpose in accordance with generally accepted accounting principles. Under Section 404(a) of the Sarbanes-Oxley Act of 2002, our management is required to include its assessment of the effectiveness of our internal control procedures over financial reporting in our annual report on Form 20-F beginning in the fiscal year ended August 31, 2009. With the assistance of Company’s internal audit department and external consultants, our management organized and conducted a comprehensive assessment of internal control over financial reporting based on the control criteria in COSO framework. Based on this assessment, the Directors believe that, as of August 31, 2011, the internal control over financial reporting is effective.

C.	Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of City Telecom (H.K.) Limited:

We have audited City Telecom (H.K.) Limited’s internal control over financial reporting as of August 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The management of City Telecom (H.K.) Limited is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the City Telecom (H.K.) Limited’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, City Telecom (H.K.) Limited maintained, in all material respects, effective internal control over financial reporting as of August 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of City Telecom (H.K.) Limited and its subsidiaries as of August 31, 2011 and 2010, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity, and consolidated cash flow statements for each of the years in the three-year period ended August 31, 2011, and our report dated December 19, 2011 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG

Hong Kong, China

December 19, 2011

D.	Changes in internal control over financial reporting

During fiscal 2011, the period covered by this annual report, no change has occurred in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 16A Audit committee financial expert

Our board of directors established an audit committee to ensure the impartial supervision of our accounting and business operations. The audit committee is comprised of three independent non-executive directors, namely, Mr. Lee Hon Ying, John, Dr. Chan Kin Man and Mr. Peh Jefferson Tun Lu. Mr. Peh was appointed to the audit committee on September 1, 2004 and is a “financial expert” within the meaning of, and as required by, the U.S. Sarbanes-Oxley Act of 2002.

ITEM 16B Code of ethics

All of our Talents, officers and directors are bound by our code of business ethics and conduct. We adopted our code of ethics and modified it following the passage of, and to comply with, the U.S. Sarbanes Oxley Act of 2002. Copies of our code of ethics are available for viewing on our website at http://www.ctigroup.com.hk and free of charge upon request made to our company secretary. We have never granted a waiver for non-compliance with the policies and procedures set forth in the code of ethics for any Talent of our Company or any of our subsidiaries.

ITEM 16C Principal accountant fees and services

The following table sets forth the remuneration that we paid to KPMG, our independent auditor in each of our previous two fiscal years.


Nature of the service	2011 HK$ million		2010 HK$ million
Audit fees		2.3		2.3
Audit-related fees		0.2		0.2
Non-audit services fees		—		0.3

Total		2.5		2.8

Audit fees

Audit fees are the aggregate fees billed by our independent auditors for the annual financial statement audit, subsidiary audits and other procedures required to be performed for the auditors to form an opinion on our consolidated financial statements.

Audit-related fees

Audit-related fees are the aggregate fees billed by our independent auditors for the review of our interim financial statements and review of reports for compliance with telecommunications regulations and debt obligations.

Non-audit services fees

Non-audit services fees are the aggregate fees billed by our independent auditors for the services provided for the ADS offering in April 2010.

Pre-approval polices

The engagement of KPMG and the services provided pursuant to such engagement were approved by our audit committee in accordance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X. The fees for all such services have been pre-approved by our audit committee. Our audit committee has satisfied itself that the provision of the above-stated non-audit services has not impaired the independence of KPMG.

ITEM 16D Exemptions from the listing standards for audit committees

Not applicable.

ITEM 16E Purchase of equity securities by the issuer and affiliated purchasers

By way of a general mandate granted to our directors, the maximum aggregate nominal amount of shares that may be purchased pursuant to a mandate corresponds to 10% of the aggregate nominal amount of our issued share capital at the date the mandate was granted. During the year ended August 31, 2011, we had not repurchased any of the ordinary shares on the HKSE.

ITEM 16F Change in Registrant’s Certifying Accountant

Not applicable.

ITEM 16G Corporate Governance

As our ordinary shares are listed on the HKSE and American depositary shares representing our ordinary shares are listed on the Nasdaq Global Market, we are subject to applicable Hong Kong laws and regulations, including the HKSE Listing Rules, and the Hong Kong Companies Ordinance, as well as applicable U.S. federal securities laws, including the Exchange Act and the Sarbanes-Oxley Act. In addition, we are subject to the corporate governance requirements imposed by Nasdaq to the extent they apply to foreign private issuers. Under Nasdaq Stock Market Rule 5615(a)(3), a foreign private issuer such as us may follow its home country corporate governance practices in lieu of certain of the Nasdaq Stock Market Rules corporate governance requirements. Our current corporate governance practices differ from Nasdaq corporate governance requirements for U.S. companies in certain respects, as summarized below:

•

Nasdaq Stock Market Rule 5605(b)(1) requires a Nasdaq listed company to have a board of directors consisting of a majority of independent members, In this regard we have elected to adopt the practices of our home country, As a listed company in Hong Kong, we are subject to the requirement under the HKSE Listing Rules that at least three members of our board of directors be independent as determined under the HKSE Listing Rules. In compliance with our home country practices, we currently have three independent directors out of a total of eight directors. The standards for establishing independence under the HKSE Listing Rules also differ from those set forth in the Nasdaq Stock Market Rules.

•

Nasdaq Stock Market Rule 5605(b)(2) requires a Nasdaq listed company to schedule regular executive sessions in which non-management directors meet without management participation. In this regard we have elected to adopt the practices of our home country. Under the applicable Hong Kong law, our board of directors is required to meet regularly and at least four times a year and we are required to ensure that there is active participation by a majority of the directors and afford all directors an opportunity to include matters on the agenda. In addition, when a board meeting considers a matter in which a substantial shareholder or a director has a conflict of interest, the independent directors with no material interest in such matter must be present. In compliance with our home country practices, we do not organize exclusive meetings for our independent non-executive directors on a regular basis.

•

Nasdaq Stock Market Rule 5605(d)(1) requires a Nasdaq listed company to have the compensation of the chief executive officer and the other executive officers be determined, or recommended to the its board of directors for determination, by a compensation committee comprised solely of independent directors. In this regard we have elected to adopt the practices of our home country. Under the HKSE Listing Rules, listed companies are required to establish a remuneration committee with a majority of independent non-executive directors. The compensation of our executive officers is determined by a remuneration committee consisting of six directors, three of whom are independent non-executive directors.

•

Nasdaq Stock Market Rule 5605(e)(1) requires a Nasdaq listed company to have a nominations committee consisting solely of independent directors to select or recommend for selection director nominees. In this regard we have elected to adopt the practices of our home country and do not have a nominations committee consisting solely of independent directors. Under the HKSE Listing Rules, listed companies are recommended but not required to establish a nomination committee consisting of the independent non-executive directors with majority vote. Our director nominees are selected by or recommended for selection by our board of directors. Our current practice is not inconsistent with our home country practices.

Other than the above, we have followed and intend to continue to follow the applicable Nasdaq corporate governance standards.

PART III

ITEM 17 FINANCIAL STATEMENTS

We have elected to provide financial statements pursuant to Item 18.

ITEM 18 FINANCIAL STATEMENTS

See pages F-1 to F-60 following Item 19.

ITEM 19 EXHIBITS

(a)

Exhibit 3.1 — Deed of Covenant.

(b)

Exhibit 12.1 — Section 302 Certifications of the Chief Executive Officer.

(c)

Exhibit 12.2 — Section 302 Certifications of the Chief Financial Officer.

(d)

Exhibit 13 — Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

Index to Consolidated Financial Statements


Audited Consolidated Financial Statements	Pages
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Income Statements		F-2
Consolidated Statement of Comprehensive Income		F-3
Consolidated Balance Sheets		F-4
Consolidated Statements of Changes in Equity		F-5
Consolidated Cash Flow Statements		F-7
Notes to the Consolidated Financial Statements		F-8

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

City Telecom (H.K.) Limited

We have audited the accompanying consolidated balance sheets of City Telecom (H.K.) Limited and its subsidiaries (the “Group”) as of August 31, 2011 and 2010, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity and the consolidated cash flow statements for the each of years in the three-year period ended August 31, 2011. These consolidated financial statements are the responsibility of City Telecom (H.K.) Limited’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of City Telecom (H.K.) Limited and its subsidiaries as of August 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 2011, in conformity with the International Financial Reporting Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), City Telecom (H.K.) Limited’s internal control over financial reporting as of August 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 19, 2011 expressed an unqualified opinion on the effectiveness of the internal control over financial reporting of City Telecom (H.K.) Limited and its subsidiaries.


/s/ KPMG

		Hong Kong, China

		December 19, 2011

F-1

City Telecom (H.K.) Limited and its subsidiaries

Consolidated income statements

(Expressed in Hong Kong dollars)


				For the year ended August 31,
				2011			2010			2009
	Note			HK$’000			HK$’000			HK $’000
Turnover		2			1,681,458			1,574,687			1,478,239
Network costs and costs of sales		3			(212,315	)		(195,292	)		(175,129	)
Other operating expenses		4	(a)		(1,097,164	)		(1,105,604	)		(1,037,964	)
Other income, net		4	(b)		7,249			7,989			41,540
Finance costs		4	(c)		(6,359	)		(22,235	)		(55,127	)

Profit before taxation		4			372,869			259,545			251,559
Income tax expense		5			(58,954	)		(42,679	)		(38,730	)

Profit attributable to shareholders					313,915			216,866			212,829

Basic earnings per share		7			HK40.8 cents			HK30.7 cents			HK32.4 cents

Diluted earnings per share		7			HK39.6 cents			HK29.4 cents			HK31.8 cents

The accompany notes are integral part of these consolidated financial statements.

F-2

City Telecom (H.K.) Limited and its subsidiaries

Consolidated statement of comprehensive income

(Expressed in Hong Kong dollars)


	For the year ended August 31,
	2011		2010			2009
	HK$’000		HK$’000			HK$’000
Profit for the year		313,915		216,866			212,829

Other comprehensive income
Exchange differences on translation of financial statements of overseas subsidiaries		2,383		(97	)		70

Total comprehensive income for the year		316,298		216,769			212,899

The accompany notes are integral part of these consolidated financial statements.

F-3

City Telecom (H.K.) Limited and its subsidiaries

Consolidated balance sheets

(Expressed in Hong Kong dollars)


	As at August 31,
			2011		2010
	Note		HK$’000		HK$’000
Non-current assets

Goodwill		11		1,066		1,066
Fixed assets		12		1,642,701		1,431,813
Long term receivable and prepayment				4,101		5,174
Deferred expenditure		14		15,323		6,626

				1,663,191		1,444,679

Current assets

Accounts receivable		15		71,999		99,729
Other receivables, deposits and prepayments		15		90,984		89,490
Deferred expenditure		14		29,312		28,986
Cash at bank and in hand		16		408,976		588,665

				601,271		806,870
Current liabilities

Bank overdrafts — unsecured				845		10,490
Accounts payable		17		17,419		35,128
Other payables and accrued charges		17		209,585		195,931
Deposits received				26,969		21,822
Current portion — Deferred service revenue		18		85,895		97,248
Tax payable				2,281		1,533
Current portion — obligations under finance leases		22		105		212

				343,099		362,364

Net current assets				258,172		444,506

Total assets less current liabilities				1,921,363		1,889,185

Non-current liabilities

Deferred tax liabilities		20		111,138		55,843
Long-term deferred service revenue				992		9,550
Derivative financial instrument		21		11,564		11,293
Long-term debt and other liabilities		22		288		123,960

Net assets				1,797,381		1,688,539

Capital and reserves
Share capital		19		77,191		76,500
Reserves		19		1,720,190		1,612,039

Total equity attributable to equity shareholders of the Company				1,797,381		1,688,539

The accompany notes are integral part of these consolidated financial statements.

F-4

City Telecom (H.K.) Limited and its subsidiaries

Consolidated statements of changes in equity

(Expressed in Hong Kong dollars)


	Note		Share capital HK$’000		Share premium HK$’000		Capital reserve HK$’000			Capital redemption reserve HK$’000		Retained profits HK$’000			Exchange reserve HK$’000			Total HK$’000
At September 1, 2010				76,500		1,074,997		21,064			7		513,208			2,763			1,688,539
Total comprehensive income for the year				—		—		—			—		313,915			2,383			316,298
Dividend paid in respect of previous year		6		—		—		—			—		(103,735	)		—			(103,735	)
Dividend paid in respect of current year		6		—		—		—			—		(115,605	)		—			(115,605	)
Shares issued upon exercise of share option				691		8,498		(1,957	)		—		—			—			7,232
Equity settled share-based transactions				—		—		4,652			—		—			—			4,652

At August 31, 2011				77,191		1,083,495		23,759			7		607,783			5,146			1,797,381


	Note		Share capital HK$’000		Share premium HK$’000		Capital reserve HK$’000			Capital redemption reserve HK$’000		Retained profits HK$’000			Exchange reserve HK$’000			Total HK$’000
At September 1, 2009				66,418		681,208		23,232			7		454,802			2,860			1,228,527
Total comprehensive income for the year				—		—		—			—		216,866			(97	)		216,769
Dividend paid in respect of previous year		6		—		—		—			—		(108,735	)		—			(108,735	)
Dividend paid in respect of current year		6		—		—		—			—		(49,725	)		—			(49,725	)
Shares issued upon exercise of share option				2,032		22,227		(7,515	)		—		—			—			16,744
Equity settled share-based transactions				—		—		5,347			—		—			—			5,347
Shares issued upon placement				8,050		371,562		—			—		—			—			379,612

At August 31, 2010				76,500		1,074,997		21,064			7		513,208			2,763			1,688,539

F-5

City Telecom (H.K.) Limited and its subsidiaries

Consolidated statements of changes in equity (continued)

(Expressed in Hong Kong dollars)


	Note		Share capital HK$’000			Share premium HK$’000		Capital reserve HK$’000			Capital redemption reserve HK$’000		Retained profits HK$’000			Exchange reserve HK$’000		Total HK$’000
At September 1, 2008				65,062			670,717		19,013			—		275,025			2,790		1,032,607
Total comprehensive income for the year				—			—		—			—		212,829			70		212,899
Dividend paid in respect of previous year		6		—			—		—			—		(3,108	)		—		(3,108	)
Shares issued in respect of scrip dividend of previous year		6		1,221			8,685		—			—		(9,906	)		—		—
Dividend paid in respect of current year				—			—		—			—		(19,904	)		—		(19,904	)
Shares issued upon exercise of share option				142			1,806		(549	)		—		—			—		1,399
Equity settled share-based transactions				—			—		4,768			—		—			—		4,768
Repurchase and cancellation of ordinary shares				(7	)		—		—			7		(134	)		—		(134	)

At August 31, 2009				66,418			681,208		23,232			7		454,802			2,860		1,228,527

The accompany notes are integral part of these consolidated financial statements.

F-6

City Telecom (H.K.) Limited and its subsidiaries

Consolidated cash flow statements

(Expressed in Hong Kong dollars)


				For the year ended August 31,
	Note			2011 HK$’000			2010 HK$’000			2009 HK$’000
Net cash inflow from operations		23	(a)		588,911			488,353			538,503

Hong Kong profits tax paid					—			(456	)		—
Overseas tax paid					(3,012	)		(2,557	)		(1,732	)

Net cash inflow from operating activities					585,899			485,340			536,771

Investing activities

Decrease in pledged bank deposits					—			15,038			72,281
Interest received					3,059			11,372			4,869
Purchases of fixed assets					(437,477	)		(349,076	)		(289,938	)
Net proceeds from maturity of investment in debt securities					—			—			28,051
Proceeds from disposal of fixed assets					20,229			16,412			8,249

Net cash outflow from investing activities					(414,189	)		(306,254	)		(176,488	)

Net cash inflow before financing activities					171,710			179,086			360,283

Financing activities

Repurchase of ordinary shares					—			—			(134	)
Proceeds from issuance of new shares		23	(b)		7,232			396,356			1,399
Proceeds from new bank loans					—			163,375			—
Repayment of bank loan					(125,000	)		(40,000	)		—
Repayment of capital element of finance leases		23	(b)		(212	)		(217	)		(138	)
Interest element of finance leases					(30	)		(42	)		(27	)
Interest paid on bank loans					(1,152	)		(1,166	)		—
Other borrowing costs paid					(4,638	)		(3,260	)		(885	)
Interest paid on 10-year senior notes					—			(5,881	)		(52,670	)
Repurchase of 10-year senior notes		23	(b)		—			(172,423	)		(485,829	)
Dividends paid					(219,312	)		(158,435	)		(23,008	)

Net cash (outflow)/inflow from financing activities					(343,112	)		178,307			(561,292	)

(Decrease)/increase in cash and cash equivalent					(171,402	)		357,393			(201,009	)

Cash and cash equivalent at September 1					578,175			221,052			421,610

Effect of foreign exchange rate changes					1,358			(270	)		451

Cash and cash equivalent at August 31					408,131			578,175			221,052

Analysis of the balances of cash and cash equivalents
Cash at bank and in hand					408,976			588,665			226,416
Bank overdrafts — unsecured					(845	)		(10,490	)		(5,364	)

					408,131			578,175			221,052

The accompany notes are integral part of these consolidated financial statements.

F-7

1	Significant accounting policies

(a)

Statement of compliance

City Telecom (H.K.) Limited (the “Company”) was incorporated in Hong Kong on May 19, 1992 under the Hong Kong Companies Ordinance. City Telecom (H.K.) Limited and its subsidiaries (collectively referred to as the “Group”) are engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada.

The accompanying consolidated financial statements have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”), which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards (“IASs”) and Interpretations issued by the IASB.

The IASB has issued a number a new or revised IFRSs that are first effective or available for early adoption for the current accounting period of the Group and the Company. None of these changes in policies would have a material impact on the Group’s financial statements.

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 31).

The consolidated financial statements were authorized for issue by the Board of Directors on December 19, 2011.

(b)

Basis of preparation of the financial statements

The measurement basis used in the preparation of the financial statements is the historical cost basis except that certain financial assets are stated at their fair values or amortized costs as explained in the accounting policies set out below (see notes 1(j), 1(l), 1(q) and 1(r)).

The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments made by management in the application of IFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in note 30.

(c)

Subsidiaries and controlled entities

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

F-8

1	Significant accounting policies (continued)

(d)

Group accounting

(i)	Consolidation

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases.

Intra-group balances and transactions and any unrealized profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealized losses resulting from intra-group transactions are eliminated in the same way as unrealized gains but only to the extent that there is no evidence of impairment.

(ii)	Translation of foreign currencies

Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in profit or loss.

For consolidation purposes, the balance sheets of subsidiaries denominated in foreign currencies are translated at the rates of exchange ruling at the balance sheet date whilst the income statement is translated at an average rate for the year. Exchange differences are dealt with as a movement in reserves.

The accompanying consolidated financial statements are presented in Hong Kong Dollars, which is the Group’s functional currency. All financial information have been rounded to the nearest thousand.

(e)

Goodwill

Goodwill represents the excess of

(i)

the aggregate of the fair value of the consideration transferred; over

(ii)

the net fair value of the acquiree’s identifiable assets and liabilities measured as at the acquisition date.

When (ii) is greater than (i), then this excess is recognized immediately in profit or loss as a gain on a bargain purchase.

Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit, or groups of cash-generating units, that is expected to benefit from the synergies of the combination and is tested annually for impairment (see note 1(i)).

On disposal of a cash-generating unit during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

(f)

Investment property

Investment properties are land and/or buildings which are owned and held to earn rental income and/or for capital appreciation.

Investment properties are stated in the balance sheet at cost less accumulated depreciation (see note 1(g)) and impairment losses (see note 1(i)) if any. Any gain or loss arising from the retirement or disposal of an investment property is recognized in the income statement. Rental income from investment property is accounted for in accordance with the accounting policy as set out in note 1(s)(v).

F-9

1	Significant accounting policies (continued)

(g)

Fixed assets

(i)

Construction in progress

Construction in progress was carried at cost, which includes development and construction expenditure incurred and interest and direct costs attributable to the development less any accumulated impairment loss (note 1(i)) as considered necessary by the directors. No depreciation was provided for construction in progress. On completion, the associated costs were transferred to leasehold land and building.

(ii)

Other fixed assets

Other fixed assets, comprising building, leasehold improvements, telecommunications, computer and office equipment, furniture, fixtures and fittings and motor vehicles, are stated at cost less accumulated depreciation and accumulated impairment losses (note 1(i)).

•

Buildings situated on leasehold land are depreciated over the shorter of the unexpired term of lease and their estimated useful lives of 50 years


• Furniture, fixtures and fittings			4 years

• Telecommunications, computer and office equipment			4 years — 20 years

• Motor vehicles			4 years

•

Leasehold improvements are depreciated over the shorter of the unexpired term of the leases and their estimated useful lives

•

Leasehold land classified as held under finance leases is depreciated over the unexpired term of leases

•

Investment properties situated on leasehold land are depreciated over the shorter of the unexpired term of lease and their estimated useful lives of 50 years

Where the parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.

Major costs incurred in restoring fixed assets to their normal working condition are charged to profit or loss. Major improvements are capitalized and depreciated over their expected useful lives to the Group.

The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognized in profit or loss on the date of disposal.

F-10

1	Significant accounting policies (continued)

(h)

Assets held under leases

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

(i)	Classification of assets leased to the Group

Assets that are held by Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases.

Land held for own use under an operating lease for which its fair value cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease (see note 1(h)(iii)).

(ii)	Finance leases

Where the Group acquired the use of assets under finance leases, the amounts representing the fair value of the leased asset or, if lower, the present value of the minimum lease payments of such assets, are included in fixed assets with the corresponding liabilities, net of finance charges, recorded as obligations under finance leases. Depreciation and impairment losses are accounted for in accordance with the accounting policy as set out in note 1(g) and note 1(i). Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.

(iii)

Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Receipts and payments made under operating leases net of any incentives received by/from the lessor are credited/charged to profit or loss on a straight-line basis over the lease periods.

(i)

Impairment of assets

(i)	Impairment of investments in debt and equity securities and accounts and other receivables

Investments in debt and equity securities and other current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale securities are reviewed at the end of each reporting period to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events:

•

significant financial difficulty of the debtor;

•

a breach of contract, such as a default or delinquency in interest or principal payments;

•

it becoming probable that the debtor will enter bankruptcy or other financial reorganization;

•

significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and

•

a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

F-11

1	Significant accounting policies (continued)

(i)

Impairment of assets (continued)

(i)	Impairment of investments in debt and equity securities and accounts and other receivables (continued)

If any such evidence exists, any impairment loss is determined and recognized as follows:

•

For trade and other current receivables and other financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets where the effect of discounting is material). This assessment is made collectively where financial assets carried at amortized cost share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that would have been determined had no impairment loss been recognized in prior years.

•

For available-for-sale securities, the cumulative loss that has been in the fair value reserve is classified to profit or loss. The amount of the cumulative loss that is recognized in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that asset previously recognized in profit or loss.

Impairment losses recognized in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognized directly in other comprehensive income.

Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognized. Reversals of impairment losses in such circumstances are recognized in profit and loss.

Impairment losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of accounts receivable, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against accounts receivable and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in profit or loss.

(ii)	Impairment of other assets

Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decreased:

•

fixed assets;

•

investment property; and

•

goodwill.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.

F-12

1	Significant accounting policies (continued)

(i)

Impairment of assets (continued)

(ii)	Impairment of other assets (continued)

•

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

•

Recognition of impairment losses

An impairment loss is recognized in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

•

Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognized.

(iii)

Interim financial reporting and impairment

Under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited, the Group is required to prepare an interim financial report in compliance with IAS 34/HKAS 34, Interim financial reporting, in respect of the first six months of the financial year. At the end of the interim period, the Group applies the same impairment testing, recognition and reversal criteria as it would at the end of the financial year (see note 1(i)(i) and 1(i)(ii)).

Impairment losses recognized in an interim period in respect of goodwill, available-for-sale equity securities and unquoted equity securities carried at costs are not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognized had the impairment been assessed only at the end of the financial year to which the interim period relates. Consequently, if the fair value of an available-for-sale equity security increases in the remainder of the annual period, or in any other period subsequently, the increase is recognized in other comprehensive income and not profit or losses.

(j)

Derivative financial instruments

Derivative financial instruments are recognized initially at fair value. At each balance sheet date, the fair value is remeasured. The gain or loss on remeasurement to fair value is recognized immediately in profit or loss, except where the derivatives qualify for cash flow hedge accounting or hedge of a net investment in a foreign operation, in which case recognition of any resultant gain or loss depends on the nature of the item being hedged. For the years presented in the consolidated financial statements, none of the Group’s derivative financial instruments qualify as hedges or hedge accounting.

(k)

Deferred expenditure

Deferred expenditure represents customer acquisition costs incurred for successful acquisition or origination of a service subscription agreement with a customer. Such costs are deferred and amortized on a straight-line basis over the period of the underlying service subscription agreements.

F-13

1	Significant accounting policies (continued)

(l)

Accounts receivable

Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less allowance for impairment of doubtful debts (see note 1(i)(i)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment of doubtful debts (see note 1(i)(i)).

(m)

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

(n)

Financial guarantees issued, provisions and contingent liabilities

(i)	Financial guarantees issued

Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.

Where the Group issues a financial guarantee, the fair value of the guarantee (being the transaction price, unless the fair value can otherwise be reliably estimated) is initially recognized as deferred income within trade and other payables. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognized in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognized in profit or loss on initial recognition of any deferred income. The amount of the guarantee initially recognized as deferred income is amortized in profit or loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognized in accordance with note 1(n)(ii) if and when (i) it becomes probable that the holder of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognized, less accumulated amortization.

(ii)	Other provisions and contingent liabilities

Provisions are recognized for other liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

F-14

1	Significant accounting policies (continued)

(o)

Talent benefits

(i)	Leave entitlements

Entitlements to annual leave and long service leave are recognized when they accrue to individuals employed by the Group hereinafter (referred to as “Talents”), including directors of the Company. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by Talents up to the balance sheet date. Entitlements to sick leave and maternity or paternity leave are not recognized until the time of leave.

(ii)	Profit sharing and bonus plans

Provisions for profit sharing and bonus plans are recognized when the Group has a present legal or constructive obligation as a result of services rendered by Talents and a reliable estimate of the obligation can be made.

(iii)

Retirement benefit costs

The Group contributes to defined contribution retirement schemes which are available to certain Talents. Contributions to the schemes by the Group are calculated as a percentage of Talents’ basic salaries and charged to profit or loss. The Group’s contributions are reduced by contributions forfeited by those Talents who leave the scheme prior to vesting fully in the contributions.

The assets of the scheme are held in an independently administered fund that is separated from the Group’s assets.

(iv)	Share-based payments

The fair value of share options granted to Talents is recognized as an Talent cost with a corresponding increase in capital reserve within equity. The fair value is measured at grant date using the Black-Scholes option pricing model or Monte Carlo model, taking into account the terms and conditions upon which the options were granted. Where the Talents have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.

During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged/credited to profit or loss, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The amount related to share options expense is recorded in the capital reserve until either the option is exercised or the option expires.

(p)

Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognized in profit or loss except to the extent that they relate to business combinations, or items recognized in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive income or directly in equity, respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

F-15

1	Significant accounting policies (continued)

(p)

Income tax (continued)

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilized, are recognized. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilized.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognized is measured based on the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

•

in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or

•

in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

•

the same taxable entity; or

•

different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current tax liabilities on a net basis or realize and settle simultaneously.

(q)

Interest-bearing borrowings

Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, the interest-bearing borrowings are stated at amortized cost with the difference between amortized cost and redemption value recognized in profit or loss over the period of borrowings using the effective interest method.

F-16

1	Significant accounting policies (continued)

(r)

Trade and other payables

Trade and other payables are initially recognized at fair value. Except for financial guarantee liabilities measured in accordance with note 1(n), trade and other payables are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(s)

Revenue recognition

(i)	Revenue for the provision of international telecommunications and fixed telecommunications network services is recognized, when an arrangement exists, service is rendered, the fee is fixed or determinable, and collectibility is probable.

(ii)	Tariff-free period granted to subscribers of fixed telecommunications network services are recognized in profit or loss ratably over the term of the service subscription agreement.

(iii)

Amount received in advance for the provision of fixed telecommunications network services is deferred and included under deferred service revenue, and subsequently recognized as revenue on a straight-line basis over the related service period.

(iv)	Interest income is recognized as it accrues using the effective interest method.

(v)	Rental income receivable under operating leases is recognized in profit or loss in equal installments over the periods covered by the lease term. Lease incentives granted are recognized in profit or loss as an integral part of the aggregate net lease payments receivable.

(t)

Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset.

All other borrowing costs are charged to profit or loss in the year in which they are incurred.

(u)

Segment reporting

Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of, the Group’s two lines of business.

Geographical information is not presented as the majority of the Group’s revenue is attributed to customers in Hong Kong and the majority of the assets are located in Hong Kong.

(v)

Accounting for barter transactions

When goods or services are exchanged for goods or services which are of a similar nature and value, the exchange is not regarded as a revenue generating transaction.

When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services rendered, adjusted by the amount of any cash or cash equivalents transferred.

F-17

1	Significant accounting policies (continued)

(w)

Related parties

For the purposes of these financial statements, a party is considered to be related to the Group if:

(i)

the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group;

(ii)

the Group and the party are subject to common control;

(iii)

the party is an associate of the Group or a joint venture in which the Group is a venturer;

(iv)

the party is a member of key management personnel of the Group or the Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;

(v)

the party is a close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or

(vi)

the party is a post-employment benefit plan which is for the benefit of Talents of the Group or of any entity that is a related party of the Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

2	Turnover and segment information

The Group is principally engaged in the provision of international telecommunications services and fixed telecommunications network services to customers in Hong Kong and Canada. Revenues recognized during the year are as follows:


	2011 HK$’000		2010 HK$’000		2009 HK$’000
*Turnover*

International telecommunications services		197,134		218,589		247,359
Fixed telecommunications network services (note 2(b))		1,484,324		1,356,098		1,230,880

		1,681,458		1,574,687		1,478,239

F-18

2	Turnover and segment information (continued)

(a)

Segmental information

The Group is organized on a worldwide basis into two business segments:


• International telecommunications	:	provision of international long distance calls services

• Fixed telecommunications network	:	provision of dial up and broadband Internet access services , local voice-over-IP services, IP-TV services and corporate data services

The Group’s inter-segment transactions mainly consist of provision of leased lines services. These transactions were entered into on similar terms as those contracted with third parties.


	2011
	International tele- communications services HK$’000		Fixed tele- communications network services HK$’000		Elimination HK$’000			Group HK$’000
Turnover
- External sales		197,134		1,484,324		—			1,681,458
- Inter-segment sales		3,814		14,837		(18,651	)		—

		200,948		1,499,161		(18,651	)		1,681,458

Segment results		65,832		306,147					371,979

Other net income, excluding interest income									3,883
Interest income									3,366
Finance costs									(6,359	)

Profit before taxation									372,869
Income tax expense									(58,954	)

Net profit									313,915

F-19

2	Turnover and segment information (continued)

(a)

Segmental information (continued)


	2010
	International tele- communications services HK$’000		Fixed tele- communications network services HK$’000		Elimination HK$’000			Group HK$’000
Turnover
- External sales		218,589		1,356,098		—			1,574,687
- Inter-segment sales		5,673		16,673		(22,346	)		—

		224,262		1,372,771		(22,346	)		1,574,687

Segment results		54,173		219,618					273,791

Other net income, excluding interest income									(3,383	)
Interest income									11,372
Finance costs									(22,235	)

Profit before taxation									259,545
Income tax expense									(42,679	)

Net profit									216,866


	2009
	International tele- communications services HK$’000		Fixed tele- communications network services HK$’000		Elimination HK$’000			Group HK$’000
Turnover
- External sales		247,359		1,230,880		—			1,478,239
- Inter-segment sales		5,669		19,784		(25,453	)		—

		253,028		1,250,664		(25,453	)		1,478,239

Segment results		61,631		203,515					265,146

Other net income, excluding interest income									36,671
Interest income									4,869
Finance costs									(55,127	)

Profit before taxation									251,559
Income tax expense									(38,730	)

Net profit									212,829

F-20

2	Turnover and segment information (continued)

(a)

Segmental information (continued)


	2011
	International tele- communications services HK$’000		Fixed tele- communications network services HK$’000		Group HK$’000
Segment assets		432,716		1,831,746		2,264,462

Segment liabilities		79,459		274,203		353,662
Tax payable						2,281
Deferred tax liabilities						111,138

Total liabilities						467,081

Capital expenditure incurred during the year		1,631		447,565		449,196
Depreciation for the year		11,499		206,698		218,197


	2010
	International tele- communications services HK$’000		Fixed tele- communications network services HK$’000		Group HK$’000
Segment assets		590,888		1,660,661		2,251,549

Segment liabilities		92,982		289,085		382,067
Tax payable						1,533
Deferred tax liabilities						55,843
Long-term bank loan						123,567

Total liabilities						563,010

Capital expenditure incurred during the year		5,223		339,621		344,844
Depreciation for the year		12,637		186,392		199,029

F-21

2	Turnover and segment information (continued)

(b)

Hong Kong Broadband Network Limited (“HKBN”), a wholly-owned subsidiary of the Company, is a Fixed Telecommunications Network Services (“FTNS”) licensee and provides interconnection services to enable delivery of telecommunications service to customers of different operators. Since the FTNS license was granted by the Telecommunication Authority (“TA”) and interconnection services have been provided, HKBN has been billing mobile operators for the interconnection services provided to them and recognizing revenue (“mobile interconnection charges”) based on management’s best estimate of the amounts to be collected. In prior years, majority of the mobile operators rejected HKBN’s demand for payment of the mobile interconnection charges. As a result of non-payment by certain mobile operators, in 2004, the Group requested the TA to make a determination (the “2004 Determination”) on the level of mobile interconnection charges payable by one of the mobile operators (“mobile operator under dispute”) to HKBN; and the effective date of the determined mobile interconnection charges.

In June 2007, the TA issued the 2004 Determination which set out the rates of mobile interconnection charge payable by the mobile operator under dispute for interconnection services provided by HKBN for the period from April 1, 2002 to August 31, 2004 and the mobile operator under dispute paid mobile interconnection charge for the relevant period accordingly.

Subsequent to June 2007, HKBN entered into contractual agreements with several mobile operators which agreed to pay mobile interconnection charges based on the 2004 Determination for the period from April 1, 2002 to August 31, 2004 and with respect to the period after August 31, 2004 at the interim rate stated in the contractual agreements. The interim rate was subject to adjustment based on further determination to be issued by the TA.

In February 2008, since certain mobile operators had still not yet settled their mobile interconnection charges for interconnection services provided by HKBN, HKBN requested TA to make a new determination on the rate of mobile interconnection charge and interest thereon with the four mobile operators.

In September 2008, the TA accepted HKBN’s request for determination on the rate of mobile interconnection charges for the period from April 1, 2002 to April 26, 2009 payable by the mobile operators that had not reached contractual agreements with HKBN, and the rate for the period from September 1, 2004 to April 26, 2009 payable by those mobile operators that have reached contractual agreements with HKBN, and the interest rate thereon (the “2008 Determination”).

In May 2010, the TA issued its decision on the 2008 Determination which set out the rates of mobile interconnection charges payable by the mobile operators under dispute.

Based on the 2008 determination, the Group reversed approximately HK$19,706,000 revenue related to mobile interconnection charges and recognized approximately HK$10,053,000 interest income during the year ended August 31, 2010.

Included in the accounts receivable balance as at August 31, 2011 were receivable relating to mobile interconnection charges of HK$23,000 (August 31, 2010: HK$39,763,000).

3	Network costs and costs of sales

Network costs and costs of sales mainly include interconnection charges paid to local and overseas carriers, leased line rentals, program fees, and production costs for the IP-TV service, and do not include depreciation charge which is included in other operating expenses.

F-22

4	Profit before taxation

Profit before taxation is arrived at after charging/(crediting) the following:

(a)

Other operating expenses


	2011 HK$’000		2010 HK$’000			2009 HK$’000
Advertising and marketing expenses		344,136		372,727			299,794
Amortization of deferred expenditure (note 14)		37,873		48,621			53,160
Auditors’ remuneration		2,777		2,910			3,455
Depreciation of owned fixed assets		217,790		198,323			205,624
Depreciation of fixed assets held under finance lease		407		706			617
Operating lease charges in respect of land and buildings		28,426		22,669			17,010
Operating lease charges in respect of equipment		—		39			42
Provision for doubtful debts (note 15(b))		13,636		14,742			12,103
Impairment loss on other receivable		1,587		—			—
Loss / (gain) on disposal of fixed assets		1,008		(1,375	)		1,016
Talent costs (note 4(d))		311,355		301,760			302,279
Others		138,169		144,482			142,864

		1,097,164		1,105,604			1,037,964

(b)

Other income, net


	2011 HK$’000			2010 HK$’000			2009 HK$’000
Interest income		(3,366	)		(11,372	)		(4,869	)
Loss/(gain) on extinguishment of 10-year senior notes		—			9,650			(31,371	)
Net exchange gain		(995	)		(324	)		(3,038	)
Others		(2,888	)		(5,943	)		(2,262	)

		(7,249	)		(7,989	)		(41,540	)

(c)

Finance costs


	2011 HK$’000		2010 HK$’000		2009 HK$’000
Interest element of finance leases		30		42		27
Interest on 10-year senior notes		—		5,881		52,670
Amortization of incidental issuance costs		—		188		1,545
Interest on bank borrowings		1,152		1,379		—
Amortization of upfront costs on long-term bank loan		182		192		—
Change in fair value of derivative financial instrument		271		11,293		—
Write-off of upfront costs upon settlement of long-term bank loan		1,251		—		—
Other borrowing costs		3,473		3,260		885

		6,359		22,235		55,127

F-23

4	Profit before taxation (continued)

(d)

Talent costs


	2011 HK$’000			2010 HK$’000			2009 HK$’000
Wages and salaries		517,609			518,380			506,638
Provision for annual leave		612			561			613
Equity settled share-based transaction		4,652			5,347			4,768
Retirement benefit costs — defined contribution plans (note 8)		43,872			38,820			34,614
Less: Talent costs capitalized as fixed assets		(22,206	)		(20,851	)		(16,621	)
Talent costs incurred in network costs and costs of sales		(10,843	)		(11,098	)		(13,461	)
Talent cost incurred in advertising and marketing expenses		(222,341	)		(229,399	)		(214,272	)

		311,355			301,760			302,279

Talent costs include all compensation and benefits paid to and accrued for all individuals employed by the Group, including directors.

(e)

Other items


	2011 HK$’000		2010 HK$’000		2009 HK$’000
Realized and unrealized gain on other financial assets		—		—		(189	)

5	Income tax expense

Hong Kong Profits Tax rate is 16.5%. There was no provision for Hong Kong Profits Tax for 2009, 2010 and 2011 as the Group’s Hong Kong subsidiaries which were subject to Hong Kong Profits Tax sustained tax losses. The statutory income tax rate in the People’s Republic of China (“PRC”) is 25%. CTI Guangzhou Customer Services Co., Ltd., a wholly owned subsidiary of the Company, being a recognized Advanced Technology Service Enterprise, is subject to income tax at a reduced rate of 15% from calendar years 2010 to 2012. The provision of PRC income tax was calculated at 25% for calendar year 2009. Non-Hong Kong current taxation is mainly related to the PRC income tax.

The amount of income tax expense in the consolidated income statement represents:


	2011 HK$’000			2010 HK$’000			2009 HK$’000
Current taxation:

Hong Kong
- Over-provision in prior years		—			40			—
Non-Hong Kong
- Provision for the year		(3,524	)		(2,585	)		(1,622	)
- Under-provision in prior years		(135	)		—			—

Deferred taxation:

- Origination and reversal of temporary differences (note 20)		(55,295	)		(40,134	)		(37,108	)
- Recognition of previously unrecognized tax losses (note 20)		—			—			—

Income tax expense		(58,954	)		(42,679	)		(38,730	)

F-24

5	Income tax expense (continued)

The Group’s income tax expense differs from the theoretical amount that would arise using the profits before taxation at applicable tax rates as follows:


	2011 HK$’000			2010 HK$’000			2009 HK$’000
Profit before taxation		372,869			259,545			251,559

Notional tax on profit before taxation, calculated at the prevailing tax rates applicable to profit in the jurisdictions concerned		(63,606	)		(43,781	)		(42,240	)
Effect of non-taxable income		535			4,692			1,466
Effect of (loss)/gain on extinguishment of 10-year senior notes not subject to taxation		—			(1,592	)		5,176
Effect of non-deductible expenses		(4,975	)		(2,367	)		(3,648	)
(Under)/over-provision in prior years		(135	)		40			—
Utilization of tax loss related to prior years		6,872			—			—
PRC income tax concession		2,406			—			—
Others		(51	)		329			516

Income tax expense		(58,954	)		(42,679	)		(38,730	)

6	Dividends

(a)

Dividends payable to equity shareholders of the Company attributable to the year


	2011 HK$’000		2010 HK$’000		2009 HK$’000
Interim dividend declared and paid of HK15 cents per ordinary share (2010: HK6.5 cents per ordinary share , 2009: HK3 cents per ordinary share)		115,605		49,725		19,904
Final dividend proposed after the balance sheet date, of HK15 cents per ordinary share (2010: HK13.5 cents per ordinary share, 2009: HK16 cents per ordinary share)		115,787		103,275		106,269

		231,392		153,000		126,173

The final dividend proposed after the balance sheet date has not been recognized as a liability at the balance sheet date.

(b)

Dividends attributable to the previous financial year, approved and paid during the year:


	2011 HK$’000		2010 HK$’000		2009 HK$’000
Final dividend in respect of the financial year ended August 31, 2010, approved and paid of HK13.5 cents per ordinary share (2010: HK16 cents per ordinary share in respect of financial year ended August 31, 2009, 2009: HK2 cents per ordinary share in respect of financial year ended August 31, 2008)		103,735		108,735		13,014

During the year ended August 31, 2009, a scrip dividend option was offered to all shareholders of the Company, excluding shareholders with registered addresses outside Hong Kong, who were entitled to the final dividend in respect of the financial year ended August 31, 2008. 12,212,142 shares were issued during the year ended August 31, 2009 to the shareholders of the Company who had elected to receive all or part of their entitlement to dividends in the form of scrip.

F-25

7	Earnings per share


	2011 HK$’000		2010 HK$’000		2009 HK$’000
Profit attributable to shareholders		313,915		216,866		212,829

Weighted average number of ordinary shares


	2011 Number of shares ‘000			2010 Number of shares ‘000			2009 Number of shares ‘000
Issued ordinary shares at the beginning of the year		764,997			664,180			650,622
Effect of scrip dividend issued		—			—			6,256
Effect of share options exercised		3,810			14,856			329
Effect of placement		—			27,569			—
Effect of shares repurchased and cancelled		—			—			(6	)

Weighted average number of ordinary shares at the end of the year (basic)		768,807			706,605			657,201
Incremental shares from assumed exercise of share options		23,992			30,011			11,183

Weighted average number of ordinary shares at the end of the year (diluted)		792,799			736,616			668,384

Basic earnings per share		HK40.8	cents		HK30.7	cents		HK32.4	cents

Diluted earnings per share		HK39.6	cents		HK29.4	cents		HK31.8	cents

F-26

8	Retirement benefit costs

The Group contributes to an Occupational Retirement Scheme (the “ORSO Scheme”), a defined contribution retirement scheme, which is available to some of its Talents in Hong Kong. Under the ORSO Scheme, the Talents are required to contribute 5% of their monthly salaries, while the Group’s contributions are calculated at 10% and 5% of the monthly salaries of senior management Talents and all other Talents respectively. The Talents are entitled to 100% of the employer’s contributions after 10 years of completed service, or at a reduced scale after completion of 3 to 9 years’ service. Contributions to the ORSO Scheme are reduced by contributions forfeited by those Talents who leave the ORSO Scheme prior to vesting fully in the Group’s contributions.

A mandatory provident fund scheme (the “MPF Scheme”) has been established under the Hong Kong Mandatory Provident Fund Scheme Ordinance in December 2000. The then existing Talents of the Group in Hong Kong could elect to join the MPF Scheme, while all new Talents joining the Group in Hong Kong from then onwards are required to join the MPF Scheme. Both the Group and the Talents are required to contribute 5% of each individual’s relevant income with a maximum amount of HK$1,000 per month as a mandatory contribution. Employer’s mandatory contributions are 100% vested in the Talents as soon as they are paid to the MPF Scheme. Senior Talents may also elect to join a Mutual Voluntary Plan (the “Mutual Plan”) in which both the Group and the Talent, on top of the MPF Scheme mandatory contributions, make a voluntary contribution to the extent of contributions that would have been made under the ORSO Scheme.

Pursuant to the relevant regulations in the PRC, the Group contributes to a defined contribution retirement scheme organized by the local social security bureau for each Talent of the subsidiary in the PRC at the rate of 20% of a standard salary base as determined by the local social security bureau. The Group has no other obligation to make payments in respect of retirement benefits of these Talents.

The retirement schemes for Talents of the Group in other countries follow the local statutory requirements of the respective countries.

The aggregate employer’s contributions, net of forfeited contributions, which have been dealt with in the consolidated income statement during the year are as follows:


	2011 HK$’000		2010 HK$’000		2009 HK$’000
Gross contributions		43,872		38,820		34,614

At August 31, 2011, there was no forfeited contribution available to offset future contributions by the Group to the ORSO Scheme (2010 and 2009: Nil).

9	Directors’ and senior management’s emoluments

(a)

Directors’ remuneration

The remuneration of each director for the year ended August 31, 2011 is set out below:


Name of director	Fee HK$’000		Salary HK$’000		Discretionary bonuses HK$’000		Share-based payment HK$’000		Employer’s contribution to defined contribution scheme HK$’000		Total HK$’000
Wong Wai Kay, Ricky		—		6,704		1,000		—		670		8,374
Cheung Chi Kin, Paul		—		6,706		1,000		—		670		8,376
Yeung Chu Kwong, William		—		9,733		1,310		3,006		456		14,505
Lai Ni Quiaque		—		2,762		635		1,906		276		5,579
Cheng Mo Chi, Moses		176		—		—		—		—		176
Lee Hon Ying, John		195		—		—		—		—		195
Chan Kin Man		182		—		—		—		—		182
Peh Jefferson Tun Lu		182		—		—		—		—		182

Total		735		25,905		3,945		4,912		2,072		37,569

F-27

9 Directors’ and senior management’s emoluments (continued)

(a)

Directors’ remuneration (continued)

The remuneration of each director for the year ended August 31, 2010 is set out below:


Name of director	Fee HK$’000		Salary HK$’000		Discretionary bonuses HK$’000		Share-based payment HK$’000		Employer’s contribution to defined contribution scheme HK$’000		Total HK$’000
Wong Wai Kay, Ricky		—		6,707		1,800		—		670		9,177
Cheung Chi Kin, Paul		—		6,709		1,800		—		670		9,179
Yeung Chu Kwong, William		—		8,264		2,400		2,526		456		13,646
Lai Ni Quiaque		—		2,642		750		2,455		264		6,111
Cheng Mo Chi, Moses		168		—		—		—		—		168
Lee Hon Ying, John		185		—		—		—		—		185
Chan Kin Man		174		—		—		—		—		174
Peh Jefferson Tun Lu		174		—		—		—		—		174

Total		701		24,322		6,750		4,981		2,060		38,814

No Director waived any emoluments in respect of the years ended August 31, 2010 and 2011.

The share-based payment represents the expenses determined based on the fair value of share options granted to certain directors under the Company’s share option scheme. Fair value of share options is estimated in accordance with the Group’s significant accounting policies in note 1. The details of the share-based payment are disclosed in note 10.

(b)

Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year include four (2010: four) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining one (2010: one) individual during the year are as follows:


	2011 HK$’000		2010 HK$’000
Basic salaries, other allowances and benefits in kind		2,523		2,492
Discretionary bonuses		300		300
Retirement benefit costs — defined contribution plans		181		181

		3,004		2,973

The emoluments fell within the following band:


	Number of individual
	2011		2010
HK$2,500,001 — HK$3,000,000		—		1
HK$3,000,001 — HK$3,500,000		1		—

F-28

10	Equity settled share-based transactions

The Company operates a share option scheme (the “2002 Share Option Scheme”) which was adopted by shareholders of the Company on December 23, 2002 whereby the directors may, at their discretion, invite eligible participants to receive options to subscribe for shares subject to the terms and conditions stipulated therein.

Under the 2002 Share Option Scheme, the Company may grant options to Talents (including executive, non-executive and independent non-executive directors), suppliers and professional advisers to subscribe for shares of the Company. The maximum number of options authorized under the 2002 Share Option Scheme may not, when aggregated with any shares subject to any other executive and Talent share option scheme, exceed 10% of the Company’s issued share capital on the date of adoption. The exercise price of the option is determined by the Company’s board of directors at a price not less than the highest of (a) the par value of a share; (b) the average closing price of the Company’s shares for five trading days preceding the grant date; and (c) the closing price of the Company’s shares on the date of grant. The 2002 Share Option Scheme is valid and effective for a ten year period up to December 22, 2012 subject to earlier termination by the Company by resolution in general meeting or by the board of directors. The period during which the option may be exercised will be determined by the board of directors at its discretion, save that no option may be exercised after more than ten years from the date of grant.

(a)

The terms and conditions of the options

Options that existed during the year ended August 31, 2011 are as follows, whereby all options are settled by physical delivery of shares:


	Number of option		Vesting conditions	Exercisable period
2002 Share Option Scheme

Options granted to directors:

-January 5, 2005		16,183,208	Condition 1		On or prior to October 20, 2014
-May 22, 2006		2,023,064	Condition 1		On or prior to May 21, 2016
-February 6, 2008		5,542,791	Condition 3 /6		On or prior to February 5, 2018
-February 11, 2008		6,044,791	Condition 2 /6		On or prior to February 10, 2018
-February 5, 2010		6,000,000	Condition 4		On or prior to February 4, 2020

Options granted to Talents excluding Directors:

-October 21, 2004		4,158,680	Condition 1		On or prior to October 20, 2014
-May 22, 2006		3,160,379	Condition 1		On or prior to May 21, 2016
-February 15, 2008		604,479	Condition 5		On or prior to December 23, 2012
-May 2, 2008		932,465	Condition 5 /6		On or prior to May 1, 2018

Total share options		44,649,857

F-29

10	Equity settled share-based transactions (continued)

(a)

The terms and conditions of the options (continued)

Options that existed during the year ended August 31, 2010 are as follows, whereby all options are settled by physical delivery of shares:


	Number of option		Vesting conditions		Exercisable period
2002 Share Option Scheme

Options granted to directors:

-January 5, 2005		16,183,208		Condition 1	On or prior to October 20, 2014
-May 22, 2006		15,178,466		Condition 1	On or prior to May 21, 2016
-February 6, 2008		6,044,791		Condition 3	On or prior to December 23, 2012
-February 11, 2008		6,044,791		Condition 2	On or prior to December 23, 2012
-February 5, 2010		6,000,000		Condition 4	On or prior to February 4, 2020

Options granted to Talents excluding Directors:

-October 21, 2004		6,909,527		Condition 1	On or prior to October 20, 2014
-May 22, 2006		6,414,433		Condition 1	On or prior to May 21, 2016
-August 3, 2006		40,540		Condition 1	On or prior to August 2, 2016
-November 22, 2006		136,545		Condition 1	On or prior to November 14, 2016
-February 15, 2008		1,007,465		Condition 5	On or prior to December 23, 2012
-May 2, 2008		1,007,465		Condition 5	On or prior to December 23, 2012

Total share options		64,967,231

F-30

10	Equity settled share-based transactions (continued)

(a)

The terms and conditions of the options (continued)

The vesting conditions of the respective share option grant are as follows:

Condition 1

Options granted are vested in one year or evenly vested over a period of two to three years. Options are awarded without performance conditions and are exercisable provided the participants have remained employed by the end of respective vesting periods.

Condition 2

Vesting of the options is conditional upon the performance of the Company’s shares over the period from the close of trading in Hong Kong on November 22, 2007 to November 21, 2010.

Upon fulfillment of the market conditions, certain options granted vest immediately, while other options affected by the same market conditions vest evenly over a period of three years.

During the year ended August 31, 2010, one of the market conditions in the option agreement has been replaced and the vesting of certain options is now conditional upon the Company reaching a non-market performance condition. Upon fulfillment of this non-market performance condition, a portion of the options affected by this condition vest immediately, while other options affected by this condition vest evenly over a period of three years.

The Group has accounted for the modification in accordance with IFRS/HKFRS 2 “Share-based payment” by measuring the incremental fair value which is the difference between the fair value of the modified share options and that of the original share options, both estimated as at the date of the modification, and recognizing the incremental fair value over the period from the modification date until the date when the modified share options vest. The balance of the original grant-date fair value as at the date of modification continues to be recognized over remaining original vesting period. The total incremental fair value arisen from this modification amounts to HK$4,278,000.

Condition 3

Vesting of the options is conditional upon the performance of the participants. Options granted are vested over a period of three to four years from the date of fulfillment of certain key performance indicators.

During the year ended August 31, 2010, one of the performance conditions has been modified. Such modification does not result in any incremental fair value, and therefore, there is no financial impact in the financial statements.

Condition 4

Vesting of the options is conditional upon the performance of the participants. Options granted are vested immediately from the date of fulfillment of the certain key performance indicators.

Condition 5

Condition 6

During the year ended August 31, 2011, one of the clauses in the option agreement has been modified. As a result of this modification, the expiry period of the share option has been extended to 10 years from the grant date of share options. The Group has accounted for the modification in accordance with IFRS/HKFRS 2 “ Share-based payment” by measuring the incremental fair value which is the difference between the fair value of the modified share options and that of the original share options, both estimated as at the date of the modification, and recognizing the incremental fair value over the period from the modification date until the date when the modified share options vest. If the modification occurs after vesting date, the incremental fair value granted is recognized immediately. The balance of the original grant-date fair value as at the date of modification continues to be recognized over the remaining original vesting period. The total incremental fair value arisen from this modification amounts to HK$276,000.

F-31

10	Equity settled share-based transactions (continued)

(b)

The number and weighted average exercise prices of share options are as follows:


	2011					2010
	Weighted average exercise price HK$		Number of options			Weighted average exercise price HK$		Number of options
2002 Share Option Scheme

Outstanding at the beginning of the year		1.87		44,649,857			1.27		58,967,231
Granted during the year		—		—			4.24		6,000,000
Exercised during the year		1.05		(6,914,509	)		0.82		(20,317,374	)
Forfeited during the year		1.79		(629,665	)		—		—

Outstanding at the end of the year		2.03		37,105,683			1.87		44,649,857

Exercisable at the end of the year		1.47		19,217,594			1.35		25,603,183

The weighted average share price at the date of exercise for the share options exercised during the year was HK$5.63 (2010: HK$3.85).

The options outstanding at August 31, 2011 had a weighted exercise price of HK$2.03 (2010: HK$1.87) and a weighted average remaining contractual life of 3 years (2010: 4 years).

(c)

Fair value of share options and assumptions

In determining the value of the share options granted during the year ended August 31, 2010 and share option modified during the year ended August 31, 2011 and August 31, 2010, the Black-Scholes option pricing model (the “Black-Scholes Model”) and Monte Carlo option pricing model (“Monte Carlo Model”) have been used. Both models are among the most generally accepted methodologies used to calculate the value of options. The variables of the models include expected life of the options, risk-free interest rate, expected volatility and expected dividend yield of the shares of the Company.

In determining the value of the share options granted during the year ended August 31, 2010, the following variables have been applied to the Black-Scholes Model:


*Measurement date*	*February* *5, 2010*
Variables
-Expected life		8 years
-Risk-free rate		2.33	%
-Expected volatility		61.49	%
-Expected dividend yield		2.99	%

F-32

10	Equity settled share-based transactions (continued)

(c)

Fair value of share options and assumptions (continued)

The above variables were determined as follows:

(i)

The expected life is estimated to be 8 years from the date of grant (the “Date of grant”).

(ii)

The risk-fee rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as at the Date of grant.

(iii)

The expected volatility represents the annualized standard deviation of the return on the daily share price of the Company over the period commensurate to the expected life of the options (taking into account the remaining contractual life of the option and the effect of the expected early exercise of the option).

(iv)

The expected dividend yield was based on the historical dividend yield over the last eight years.

The fair value of the options granted was estimated as below:


Date of grant			February 5, 2010
Fair value per share option			HK$1.94

In determining the value of the share options modified during the year ended August 31, 2010, the Black-Scholes Model and Monte Carlo Model had been used.

The following variables of original share option and modified share option had been applied to the Monte Carlo Model and Black-Scholes Model respectively:


*Measurement date*	*January 20, 2010*
	Original share option			Modified share option
Variables
-Expected life		3 years			3 years
-Risk-free rate		0.96	%		0.96	%
-Expected volatility		74.73	%		74.73	%
-Expected dividend yield		6.09	%		6.09	%

The above variables were determined as follows:

(i)

The expected life was estimated to be 3 years from the date of modification (the “Modification Date 1”).

(ii)

The risk-fee rate represented the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as at the Modification Date 1.

(iii)

The expected volatility represented the annualized standard deviation of the return on the daily share price of the Company over the period commensurate to the expected life of the options (taking into account the remaining contractual life of the option and the effect of the expected early exercise of the option).

(iv)

The expected dividend yield was based on the historical dividend yield over the last three years.

The fair value of the options modified was estimated as below:


Modification Date 1			January 20, 2010
Incremental fair value per share option			HK$2.123

F-33

10	Equity settled share-based transactions (continued)

(c)

Fair value of share options and assumptions (continued)

In determining the value of the share options modified during the year ended August 31, 2011, the Black-Scholes Model had been used.

The following variables had been applied to the Black-Scholes Model:


*Measurement date*	*December 21, 2010*
	Original share option			Modified share option
Variables
-Expected life		2 years			4 years
-Risk-free rate		0.56	%		1.18	%
-Expected volatility		51.20	%		66.85	%
-Expected dividend yield		6.94	%		5.90	%

The above variables were determined as follows:

(i)

The expected life is estimated to be 2 years/4 years from the date of modification (the “Modification Date 2”).

(ii)

The risk-fee rate represents the yield of the Hong Kong Exchange Fund Notes corresponding to the expected life of the options as at the Modification Date 2.

(iii)

(iv)

The expected dividend yield is based on the historical dividend yield over the last two years/four years.

The fair value of the options modified during the year is estimated as below:


Modification Date 2			December 21, 2010
Incremental fair value per share option			HK$0.001 —HK$0.039

The Group recognizes the fair value of granted share options and incremental fair value of modified share options as an expense in the income statement over the vesting period. The fair value of the granted share options and incremental fair value of modified share options are measured at the date of grant and date of modification respectively.

The Black-Scholes Model and Monte Carlo Model applied for the determination of the estimated value of the options granted under 2002 Share Option Scheme require input of highly subjective assumptions, including the expected stock volatility. Changes in subjective inputs may materially affect the estimated fair value of the options granted.

F-34

11	Goodwill


	HK$’000
*Cost and carrying amount:*
At August 31, 2011/2010		1,066

Impairment tests for cash-generating units containing goodwill

Goodwill is allocated to the Group’s cash-generating units (“CGU”) identified according to business segment as follows:


	2011		2010
	HK$’000		HK$’000
Fixed telecommunications network service segment		1,066		1,066

The recoverable amount of the CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows for the five-year period are estimated based on average growth rates of 14% and a pre-tax discount rate of 16%. Cash flows beyond the five year period are assumed to remain constant. The estimated growth rates used are comparable to the growth rate for the industry.

The key assumption used in the value-in-use calculation is the annual growth rate of the turnover of the fixed telecommunications network services, which are determined based on the past performance and management’s expectation for market development. The discount rate used is pre-tax and reflects specific risks relating to the fixed telecommunications services segment.

Any adverse change in the key assumptions could reduce the recoverable amount below carrying amount.

F-35

12	Fixed assets


	Construction in progress		Investment property			Leasehold land and buildings		Leasehold improvements			Furniture, fixtures and fittings			Telecom- munications, computer and office equipment			Motor vehicles			Total
	HK$’000		HK$’000			HK$’000		HK$’000			HK$’000			HK$’000			HK$’000			HK$’000
*Cost:*

At September 1, 2010		—		5,197			90,911		113,286			21,191			3,130,209			12,948			3,373,742
Additions		51,111		—			1,576		6,851			203			388,828			627			449,196
Disposals		—		—			—		—			(42	)		(57,268	)		(1,356	)		(58,666	)
Exchange adjustments		—		—			—		1,461			484			4,593			—			6,538
Transfer of investment property		—		(5,197	)		5,197		—			—			—			—			—

At August 31, 2011		51,111		—			97,684		121,598			21,836			3,466,362			12,219			3,770,810

*Accumulated depreciation:*

At September 1, 2010		—		2,413			14,284		80,316			18,132			1,816,942			9,842			1,941,929
Charge for the year		—		104			1,850		10,349			1,121			203,009			1,764			218,197
Disposals		—		—			—		—			(42	)		(36,098	)		(1,356	)		(37,496	)
Exchange adjustments		—		—			—		1,272			450			3,757			—			5,479
Transfer of investment property		—		(2,517	)		2,517		—			—			—			—			—

At August 31, 2011		—		—			18,651		91,937			19,661			1,987,610			10,250			2,128,109

*Net book value:*

At August 31, 2011		51,111		—			79,033		29,661			2,175			1,478,752			1,969			1,642,701

*Cost:*

At September 1, 2009		—		5,197			90,911		100,447			19,885			2,850,444			12,773			3,079,657
Additions		—		—			—		12,885			1,343			330,441			175			344,844
Disposals		—		—			—		(212	)		(109	)		(51,906	)		—			(52,227	)
Exchange adjustments		—		—			—		166			72			1,230			—			1,468

At August 31, 2010		—		5,197			90,911		113,286			21,191			3,130,209			12,948			3,373,742

*Accumulated depreciation:*

At September 1, 2009		—		2,309			12,466		69,102			17,017			1,668,160			8,223			1,777,277
Charge for the year		—		104			1,818		11,270			1,166			183,052			1,619			199,029
Disposals		—		—			—		(212	)		(109	)		(35,344	)		—			(35,665	)
Exchange adjustments		—		—			—		156			58			1,074			—			1,288

At August 31, 2010		—		2,413			14,284		80,316			18,132			1,816,942			9,842			1,941,929

*Net book value:*

At August 31, 2010		—		2,784			76,627		32,970			3,059			1,313,267			3,106			1,431,813

F-36

12	Fixed assets (continued)

(a)

The Group’s total future aggregate lease income receivable under non-cancellable operating lease are as follows:


	2011 HK$’000		2010 HK$’000
Leases in respect of investment property which are receivable:
- Within 1 year		—		108
- After 1 year but within 5 years		—		—

		—		108

Leases in respect of telecommunications facilities and computer equipment which are receivable:
- Within 1 year		3,604		2,335
- After 1 year but within 5 years		2,653		607

		6,257		2,942

		6,257		3,050

(b)

At August 31, 2011, the fair value of the investment property was HK$6,390,000 (2010: HK$5,300,000). Management estimated the fair value of the investment property based on its open market value.

During the year ended August 31, 2011, the lease of the investment property to a third party expired and the property has then been leased to a group entity for self-use. Upon this change in use, the Group transferred the investment property into leasehold land and buildings.

(c)

The net book value of interests in leasehold land and buildings and investment property situated in Hong Kong are analyzed as follows:


	2011 HK$’000		2010 HK$’000
Leases of between 10 to 50 years		130,144		79,411

Representing:

Construction in progress carried at cost		51,111		—
Leasehold land and building carried at cost		79,033		76,627
Investment property carried at cost less impairment loss		—		2,784

		130,144		79,411

(d)

In addition to the leasehold land and buildings classified as being held under a finance lease, the Group leases telecommunications, computer and office equipment under finance leases expiring from one to five years. At the end of the lease term the Group has the option to purchase the equipment at a price deemed to be a bargain purchase option. None of the leases included contingent rental.

At August 31, 2011, the net book value of telecommunications, computer and office equipment under finance lease held by the Group amounted to HK$267,000 (2010: HK$674,000).

F-37

12	Fixed assets (continued)

(e)

The cost of construction in progress comprises premium paid for the land registered in Hong Kong with a lease term of about 36 years and expenditure incurred on the development of buildings not yet completed at the year-end.

13	Principal subsidiaries

The following is a list of the principal subsidiaries which principally affected the results, assets or liabilities of the Group at August 31, 2011:


Name	Place of incorporation	Principal activities and place of operations	Particulars of issued share capital	Percentage of interest held
Attitude Holdings Limited	British Virgin Islands	Inactive	Ordinary US$1		100
Automedia Holdings Limited	British Virgin Islands	Investment holding in Hong Kong	Ordinary US$1		* 100
Best Intellect Limited	British Virgin Islands	Investment holding in Hong Kong	Ordinary US$1		* 100
City Telecom (B.C.) Inc.	Canada	Provision of international telecommunications and dial-up internet access services in Canada	Common Canadian dollar (“CAD”) 501,000		100
City Telecom (Canada) Inc.	Canada	Leasing and maintenance of switching equipment and provision of operational services in Canada	Common CAD100		100
City Telecom Inc.	Canada	Provision of international telecommunications and dial-up internet access services in Canada	Common CAD1,000		100
City Telecom International Limited	British Virgin Islands	Investment holding in Hong Kong	Ordinary US$5,294		* 100
Credibility Holdings Limited	British Virgin Islands	Investment holding in Hong Kong	Ordinary US$1		* 100

F-38

13	Principal subsidiaries (continued)

The following is a list of the principal subsidiaries which principally affected the results, assets or liabilities of the Group at August 31, 2011: (continued)


Name	Place of incorporation	Principal activities and place of operations	Particulars of issued share capital	Percentage of interest held
CTI Guangzhou Customer Services Co. Ltd. (translated from the registered name in Chinese)	PRC	Provision of administrative support services in the PRC	Paid in capital of HK$8,000,000		* 100
CTI Marketing Company Limited	Hong Kong	Inactive	Ordinary HK$10,000		100
Golden Trinity Holdings Limited	British Virgin Islands	Investment holding in Hong Kong	Ordinary US$1		* 100
Hong Kong Broadband Network Limited	Hong Kong	Provision of international telecommunications and fixed telecommunications network services in Hong Kong	Ordinary HK$383,049		100
Hong Kong Media Production Company Limited (formerly known as Global Courier Company Limited)	Hong Kong	Provision of ,multimedia production and distribution services	Ordinary HK$10,000		100
IDD1600 Company Limited	Hong Kong	Provision of international telecommunications services in Hong Kong	Ordinary HK$2		100

*	Shares held directly by the Company.

14	Deferred expenditure


	2011 HK$’000			2010 HK$’000
Balance as at the beginning of the year		35,612			49,460
Additions during the year		46,896			34,773
Less: amortization charge for the year (note 4(a))		(37,873	)		(48,621	)

		44,635			35,612
Current portion		(29,312	)		(28,986	)

Balance as at the end of the year		15,323			6,626

Deferred expenditure represents costs incurred to acquire subscribers of the services offered by the Group, which is treated as customer acquisition costs and are amortized over the period of the underlying service subscription agreements.

F-39

15	Accounts receivable, other receivables, deposits and prepayments


	2011			2010
	HK$’000			HK$’000
Accounts receivable		78,529			105,552
Less: Allowance for doubtful debts		(6,530	)		(5,823	)

		71,999			99,729
Other receivables, deposits and prepayments		90,984			89,490

		162,983			189,219

(a)

Aging analysis

The aging analysis of accounts receivable is as follows:


	2011		2010
	HK$’000		HK$’000
Current — 30 days		44,949		41,244
31 — 60 days		16,417		9,024
61 — 90 days		6,861		5,245
Over 90 days		10,302		50,039

		78,529		105,552

The majority of the Group’s accounts receivable are due within 30 days from the date of billings. Subscribers with receivable that are more than 3 months overdue are requested to settle all outstanding balance before further credit is granted.

(b)

Impairment of accounts receivable

Impairment losses in respect of accounts receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly (see note 1(i)(i)).

The movement in the allowance for doubtful debts during the year including both specific and collective loss components is as follows:


	2011			2010			2009
	HK$’000			HK$’000			HK$’000
Balance as at the beginning of the year		5,823			3,160			11,944
Impairment loss recognized		13,636			14,742			12,103
Uncollectible amounts written off		(12,929	)		(12,079	)		(20,887	)

Balance as at the end of the year		6,530			5,823			3,160

(c)

Accounts receivable that are not impaired

The aging analysis of accounts receivable that are neither individually nor collectively considered to be impaired are as follows:


	2011		2010
	HK$’000		HK$’000
Neither past due nor impaired		44,949		41,244
0 — 30 past due		16,417		9,024
31 — 60 past due		6,861		5,245
Over 60 past due		3,772		44,216

		71,999		99,729

F-40

15	Accounts receivable, other receivables, deposits and prepayments (continued)

(c)

Accounts receivable that are not impaired (continued)

Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default.

The amounts over 60 days past due for the Group included receivable relating to mobile interconnection charges of HK$23,000 as at August 31, 2011 (August 31, 2010: HK$39,763,000) (see note 2(b)).

Other accounts receivable that were past due but not impaired relate to a number of independent customers that have a good track record of payment. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold collateral over these balances.

(d)

Other receivables, deposits and prepayments

Other receivables, deposits and prepayments consist of deposits for purchase of fixed assets, rental deposit, interest receivable, unbilled revenue, prepayment and other receivables. All of the other receivables, except rental deposits and others amounted to HK$9,026,000 (2010: HK$8,643,000), are expected to be recovered within one year.

16	Cash at bank and in hand


	2011		2010
	HK$’000		HK$’000
Time deposits with banks and other financial institutions		263,270		262,280
Cash at bank and in hand		145,706		326,385

Cash at bank and in hand in the balance sheet		408,976		588,665

17	Accounts payable, other payables and accrued charges


	2011		2010
	HK$’000		HK$’000
Accounts payable		17,419		35,128
Other payables and accrued charges		209,585		195,931

		227,004		231,059

(a)

The aging analysis of the accounts payable was as follows:


	2011		2010
	HK$’000		HK$’000
Current — 30 days		11,719		6,838
31 — 60 days		245		1,982
61 — 90 days		733		1,647
Over 90 days		4,722		24,661

		17,419		35,128

(b)

Other payables and accrued charges

Other payables primarily consist of accrual for Talents salaries and bonus, carrier fees and charges, payable for purchase of fixed assets, advertising and promotional expenses as well as interest payable.

F-41

18	Deferred service revenue

Deferred service revenue primarily includes service fees received from customers in advance for the Group’s fixed telecommunications network services. Service fees received in advance is deferred and recognized as revenue on a straight-line basis over the related contract period.

19	Capital and reserves

(a)

Share capital


	2011 No. of Shares		Amount HK$’000		2010 No. of shares		Amount HK$’000
Authorized:
Ordinary shares of HK$0.10 each		2,000,000,000		200,000		2,000,000,000		200,000

Issued and fully paid:
Ordinary shares of HK$0.10 each
At the beginning of the year		764,997,344		76,500		664,179,970		66,418
Shares issued upon exercise of share options (note (i))		6,914,509		691		20,317,374		2,032
Shares issued upon placement (note (ii))		—		—		80,500,000		8,050

At the end of the year		771,911,853		77,191		764,997,344		76,500

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per ordinary share at meetings of the Company. All ordinary shares rank equally with regard to the Company’s residual assets.

Notes:

(i)

During the year ended August 31, 2011, 6,914,509 ordinary shares (2010: 20,317,374 ordinary shares) were issued at a weighted average price of HK$1.05 per ordinary share (2010: HK$0.82 per ordinary share) to share option holders who had exercised their options. These shares so issued rank pari passu with the then existing ordinary shares in issue.

(ii)

On April 28, 2010, the Company completed its public offering of 4,025,000 American Depositary Shares (ADSs). An aggregate of 80,500,000 ordinary shares (4,025,000 ADSs) were issued at a price of HK$5.0455 per ordinary share (US$13.00 per ADS) to independent professional, institutional and private investors. The Company raised net proceeds of approximately HK$379,612,000 from the ADS offering.

(iii)

The movement of outstanding share options during the year was as follows:


Date of grant	Exercise price per share		Number of share options outstanding at September 1, 2010		Granted		Exercised			Forfeited			Number of share options outstanding at August 31, 2011
October 21, 2004	HK$	1.5224		4,158,680		—		(350,709	)		—			3,807,971
January 5, 2005	HK$	1.5224		16,183,208		—		(2,000,000	)		—			14,183,208
May 22, 2006	HK$	0.6523		5,183,443		—		(3,958,760	)		—			1,224,683
February 6, 2008	HK$	1.7568		5,542,791		—		—			—			5,542,791
February 11, 2008	HK$	1.8660		6,044,791		—		—			—			6,044,791
February 15, 2008	HK$	1.7568		604,479		—		(302,240	)		—			302,239
May 2, 2008	HK$	1.7866		932,465		—		(302,800	)		(629,665	)		—
February 5, 2010	HK$	4.2400		6,000,000		—		—			—			6,000,000

				44,649,857		—		(6,914,509	)		(629,665	)		37,105,683

Each option entitles the holder to subscribe for one ordinary share of HK$0.10 each in the Company at a predetermined exercise price.

F-42

19	Capital and reserves (continued)

(b)

Nature and purpose of reserves

(i)	Share premium

The application of the share premium account is governed by Sections 48B of the Hong Kong Companies Ordinance.

(ii)	Capital reserve

The capital reserve comprises the fair value of the actual or estimated number of unexercised share options granted to Talents of the Group that was recognized in accordance with the accounting policy adopted for share based payment in note 1(o).

(iii)

PRC statutory reserve

In accordance with Accounting Regulations for Business Enterprises, foreign investment enterprises in the PRC are required to transfer at least 10% of their profit after taxation, as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to the general reserve until the balance of the general reserve is equal to 50% of their registered capital.

For the year ended August 31, 2011, CTI Guangzhou Customer Services Co Ltd (“CTIGZ”), a wholly-owned subsidiary of the Group, made appropriation to the statutory reserve of RMB951,000 (2010: RMB597,000). The accumulated balance of the statutory reserve maintained at the CTIGZ as at August 31, 2011 was RMB2,963,000 (2010: RMB2,012,000). The statutory reserve can be used to reduce previous years’ losses and to increase the capital of the subsidiary.

(iv)	Exchange reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 1(d)(ii).

(c)

Capital management

The Group’s primary objectives when managing capital are to maintain a reasonable capital structure, safeguard the Group’s ability to continue as a going concern, and to provide returns for shareholders.

The Group manages the amount of capital in proportion to risk, and makes adjustments to its capital structure through the amount of dividend payment to shareholders, issuance of scrip and new shares, and managing its debt portfolio in conjunction with cash flow requirements, taking into account its future financial obligations and commitments.

The Group monitors its capital structure by reviewing its net debt to net asset gearing ratio. For this purpose, the Group defines net debt as total loans less cash at bank and in hand and after adding back bank overdraft - unsecured.

The net debt to net asset gearing ratio as at August 31, 2011 and 2010 are as follows:


	2011			2010
	HK$’000			HK$’000
Unsecured
- Long-term bank loan		—			123,567
- Obligations under finance leases		393			605

Total loans		393			124,172
Less: Cash at bank and in hand		(408,976	)		(588,665	)
Add: Bank overdrafts — unsecured		845			10,490

Net cash		(407,738	)		(454,003	)
Net asset		1,797,381			1,688,539

Net debt to net asset gearing ratio		—			—

Neither the Company nor any of its subsidiaries are currently subject to externally imposed capital requirements.

F-43

20	Deferred taxation

(a)

Deferred tax assets and liabilities recognized

(i)	The components of deferred tax (liabilities)/assets recognized in the consolidated balance sheet and the movement during the year are as follows:


	Depreciation allowances in excess of the related depreciation			Tax losses carried forward			Total
Deferred tax arising from:	HK$’000			HK$’000			HK$’000
At September 1, 2008		(126,447	)		147,845			21,398
Charged to consolidate income statement		(5,326	)		(31,782	)		(37,108	)
Exchange differences		7			(6	)		1

At August 31, 2009		(131,766	)		116,057			(15,709	)

At September 1, 2009		(131,766	)		116,057			(15,709	)
Charged to consolidate income statement		(15,027	)		(25,107	)		(40,134	)
Exchange differences		(6	)		6			—

At August 31, 2010		(146,799	)		90,956			(55,843	)

At September 1, 2010		(146,799	)		90,956			(55,843	)
Charged to consolidate income statement		(21,185	)		(34,110	)		(55,295	)
Exchange differences		(7	)		7			—

At August 31, 2011		(167,991	)		56,853			(111,138	)

(ii)	Reconciliation to the consolidated balance sheet


	The Group
	2011			2010
	HK$’000			HK$’000
Net deferred tax asset recognized in the balance sheet		—			—
Net deferred tax liabilities recognized in the balance sheet		(111,138	)		(55,843	)

		(111,138	)		(55,843	)

F-44

20	Deferred taxation (continued)

(b)

Deferred tax assets not recognized

As at August 31, 2011, the Group did not recognize deferred tax assets in respect of unused tax losses of HK$8,087,000 (2010: HK$8,242,000) as it was not probable that future taxable profits against which the losses could be utilized would be available in the relevant tax jurisdictions.


	The Group
	2011		2010
	HK$’000		HK$’000
Expiry in 15-20 years		2,412		2,553
No expiry date		5,675		5,689

		8,087		8,242

(c)

Deferred tax liabilities not recognized

As at August 31, 2011, the Group has not recognized deferred tax liabilities in respect of the 10% (or 5% if tax treaty relief is available) PRC dividend withholding tax on temporary differences relating to the undistributed profits of its PRC subsidiary amounted to HK$31,550,000 (2010: HK$12,283,000), as the Group controls the dividend policy of the subsidiary and it has been determined that it is probable that profits will not be distributed in the foreseeable future.

21	Derivative financial instrument


	2011		2010
	HK$’000		HK$’000
Non-current liability

Interest rate swap, at fair value through profit or loss		11,564		11,293

As at August 31, 2011 and August 31, 2010, the Group has a 5-year interest rate swap contract with a HK$175,000,000 notional amount to hedge against interest rate risk. Under this arrangement, the Group will pay a fixed rate interest on the notional amount on a quarterly basis, and receive a floating interest rate at HIBOR rate. The contract is recognized initially at fair value and is remeasured at each balance sheet date.

The Interest rate swap does not quality for hedge accounting under IAS/HKAS 39, Financial instruments: Recognition and measurement , and therefore changes in its fair value is recognized immediately in profit or loss.

22	Long-term debt and other liabilities


	2011			2010
	HK$’000			HK$’000
Long-term bank loan — unsecured (note (a))		—			123,567
Obligations under finance leases (note (b))		393			605

		393			124,172

Current portion of — obligations under finance leases		(105	)		(212	)

		288			123,960

F-45

22	Long-term debt and other liabilities (continued)

At August 31, 2011, the Group’s long-term debt and other liabilities were repayable as follows:


	2011			2010
	HK$’000			HK$’000
Long-term debt
- after 2 years but within 5 years		—			123,567

Obligations under finance leases
- Within 1 year		105			212
- After 1 year but within 2 years		105			105
- After 2 years but within 5 years		183			288

		393			605
Less: Current portion of obligations under finance leases		(105	)		(212	)

		288			393

		288			123,960

Notes:

(a)	In March 2011, the floating interest rate bank borrowing was fully repaid. Before the borrowing was fully repaid, none of the covenants relating to drawn down facilities was breached.

(b)	At August 31, 2011, the Group had obligations under finance leases repayable as follows:


	2011						2010
	Present value of the minimum lease payments		Interest expense relating to future periods		Total minimum lease payments		Present value of the minimum lease payments		Interest expense relating to future periods		Total minimum lease payments
	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Within 1 year		105		20		125		212		30		242

After 1 year but within 2 years		105		14		119		105		20		125
After 2 years but within 5 years		183		8		191		288		22		310

		288		22		310		393		42		435

		393		42		435		605		72		677

F-46

23	Notes to the consolidated cash flow statement

(a)

Reconciliation of profit before taxation to net cash inflow generated from operations


	2011 HK$’000			2010 HK$’000			2009 HK$’000
Profit before taxation		372,869			259,545			251,559
Depreciation of owned fixed assets		217,790			198,323			205,624
Depreciation of fixed assets held under finance lease		407			706			617
Amortization of deferred expenditure		37,873			48,621			53,160
Interest income		(3,366	)		(11,372	)		(4,869	)
Interest element of finance lease		30			42			27
Loss/(gain) on disposal of fixed assets		1,008			(1,375	)		1,016
Realized and unrealized gain on other financial assets		—			—			(189	)
Equity settled share-based transactions		4,652			5,347			4,768
Loss/(gain) on extinguishment of 10-year senior notes		—			9,650			(31,371	)
Change in fair value of derivative financial instruments		271			11,293			—
Interest, amortization and exchange difference on 10-year senior notes		—			6,069			49,214
Other borrowings costs		3,473			3,260			885
Amortization of upfront cost on long-term bank loan		182			192			—
Interest on bank borrowings		1,152			1,379			—
Write-off of upfront costs upon settlement of long-term bank loan		1,251			—			—

Net cash inflow before working capital changes		637,592			531,680			530,441
Decrease/(increase) in long-term receivable and prepayment		1,073			917			(505	)
Decrease in accounts receivable, other receivables, deposits and prepayments		26,543			738			33,052
Increase in deferred expenditure		(46,896	)		(34,773	)		(46,525	)
(Decrease)/increase in accounts payable, other payables, accrued charges and deposits received		(9,490	)		(1,937	)		17,419
(Decrease)/increase in deferred service revenue		(19,911	)		(8,272	)		4,621

Net cash inflow generated from operations		588,911			488,353			538,503

F-47

23	Notes to the consolidated cash flow statement (continued)

(b)

Analysis of financing activities during the year


	Share capital (including share premium and capital reserve) HK$’000			Obligations under finance leases HK$’000			10-year senior notes HK$’000			Long-term bank loan HK$’000
Balance at September 1, 2008		754,792			376			683,242			—
Share issued upon exercise of share options		1,399			—			—			—
Repurchase and cancellation of ordinary shares		(7	)		—			—			—
Share issued in respect of scrip dividend		9,906			—			—			—
Purchase of fixed assets under finance lease		—			494			—			—
Repayment of capital element of finance lease		—			(138	)		—			—
Repurchase of 10-year senior notes		—			—			(485,829	)		—
Gain on extinguishment of 10-year senior notes		—			—			(31,371	)		—
Amortization of incidental issuance costs		—			—			1,545			—
Equity settled share-based transactions		4,768			—			—			—
Effect of foreign exchange rate changes		—			—			(5,001	)		—

Balance at August 31, 2009		770,858			732			162,586			—

Balance at September 1, 2009		770,858			732			162,586			—
Share issued upon exercise of share options		16,744			—			—			—
Shares issued upon placement		379,612			—			—			—
Purchase of fixed assets under finance lease		—			90			—			—
Repayment of capital element of finance lease		—			(217	)		—			—
Repurchase and redemption of 10-year senior notes		—			—			(172,423	)		—
Loss on extinguishment of 10-year senior notes		—			—			9,650			—
Amortization of incidental issuance costs		—			—			188			—
Net proceeds from new bank loan		—			—			—			123,375
Amortization of upfront costs on long-term bank loan		—			—			—			192
Equity settled share-based transactions		5,347			—			—			—
Effect of foreign exchange rate changes		—			—			(1	)		—

Balance at August 31, 2010		1,172,561			605			—			123,567

Balance at September 1, 2010		1,172,561			605			—			123,567
Share issued upon exercise of share options		7,232			—			—			—
Repayment of capital element of finance lease		—			(212	)		—			—
Repayment of long-term bank loan		—			—			—			(125,000	)
Write-off of upfront costs upon settlement of long-term bank loan		—			—			—			1,251
Amortization of upfront cost of bank loan		—			—			—			182
Equity settled share-based transactions		4,652			—			—			—

Balance at August 31, 2011		1,184,445			393			—			—

F-48

24	Financial instruments

Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Group’s business. These risks are limited by the Group’s financial management policies and practices described below.

(a)

Credit risk

The Group’s credit risk is primarily attributable to accounts receivable and other receivables. Management has a credit policy in place and the exposure to the credit risk is monitored on an ongoing basis.

In respect of accounts receivable and other receivables, credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer locates. These receivables are due within 30 days from the date of billing. Subscribers with receivables that are more than 3 months overdue are requested to settle all outstanding balances before any further credit is granted. The Group generally does not obtain collateral from customers.

The Group’s exposure to credit risk is influenced mainly by individual characteristics of each customer. The default risk of the country in which customer locates also has an influence on credit risk but to a lesser extent. Concentrations of credit risk with respect to accounts receivable are limited due to the Group’s customer base being large and unrelated. As such, management does not expect any significant losses of accounts receivable that have not been provided for by way of allowances as disclosed in note 15.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset after deducting any impairment allowance, in the balance sheet. Except for the financial guarantee given by the Group as disclosed in note 25, the Group does not provide any other guarantees which expose the Group to credit risk. The maximum exposure to credit risk in respect of these financial guarantees at the balance sheet date is disclosed in note 25.

Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from accounts receivable are set out in note 15.

F-49

24	Financial instruments (continued)

(b)

Liquidity risk

The Group has a cash management policy, which includes the short term investment of cash surpluses and the raising of loans and other borrowings to cover expected cash demands. The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient cash and readily realizable marketable securities and adequate amount of committed credit facilities from major financial institutions to meet its liquidity requirements in the short and long term. Due to the dynamic nature of the underlying business, the Group aims to maintain flexibility in funding by maintaining committed credit lines available.

The following table details the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on undiscounted cash flows (including interest) and the earliest date the Group are required to pay.


	2011										2010
	Carrying amount HK$’000		Total contractual undiscounted cash flow HK$’000		Within 1 year or on demand HK$’000		More than 1 year but less than 2 years HK$’000		More than 2 years but less than 5 years HK$’000		Carrying amount HK$’000		Total contractual undiscounted cash flow HK$’000		Within 1 year or on demand HK$’000		More than 1 year but less than 2 years HK$’000		More than 2 years but Less than 5 years HK$’000
Current liabilities

Bank overdrafts - unsecured		845		845		845		—		—		10,490		10,490		10,490		—		—
Accounts payable		17,419		17,419		17,419		—		—		35,128		35,128		35,128		—		—
Other payables and accrued charges		209,585		209,585		209,585		—		—		195,931		195,931		195,931		—		—
Deposits received		26,969		26,969		26,969		—		—		21,822		21,822		21,822		—		—
Obligations under finance leases		105		125		125		—		—		212		242		242		—		—
Tax payable		2,281		2,281		2,281		—		—		1,533		1,533		1,533		—		—

Non-current liabilities

Long-term bank loan		—		—		—		—		—		123,567		133,996		1,829		2,166		130,001
Derivative financial instrument		11,564		12,590		4,716		4,000		3,874		11,293		11,435		4,580		3,441		3,414
Obligations under finance leases		288		310		—		119		191		393		435		—		125		310

		269,056		270,124		261,940		4,119		4,065		400,369		411,012		271,555		5,732		133,725

F-50

24	Financial instruments (continued)

(c)

Interest rate risk

The Group’s interest-rate risk arose mainly from the HK$125,000,000 long-term bank loan as at August 31, 2010 which bore floating interest rate. Bank loans at variable rates exposed the Group to cash flow interest rate risk. The long-term bank loan was fully repaid in the year ended August 31, 2011. The Group has a 5-year interest rate swap contract with a HK$175,000,000 notional amount as at August 31, 2011 and 2010. The Group will pay a fixed rate interest on the notional amount on a quarterly basis, and receive a floating interest rate at HIBOR rate.

(i)	Interest rate profile

The following table details the interest rate profile of the Group’s borrowings at the balance sheet date.


	2011				2010
	Effective interest rate %		HK$’000		Effective interest rate %		HK$’000
Fixed rate borrowings:

Obligations under finance leases		5.6		393		5.6		605

Floating rate borrowings:

Bank overdrafts — unsecured		6.3		845		5.3		10,490
Long-term bank loan		—		—		1.7		123,567

(ii)	Sensitivity analysis

The Group’s profit attributable to shareholders would decrease by approximately HK$1,750,000 (2010: HK$1,250,000) in response to a 100 basis-points increase in market interest rates applicable as at August 31, 2011, with all other variables held constant. The analysis performed including the effect of the Group’s interest rate swap contract as disclosed in note 21 to the financial statements.

F-51

24	Financial instruments (continued)

(d)

Foreign currency risk

All the Group’s monetary assets and liabilities are primarily denominated in either Hong Kong dollars or United States dollars. Given the exchange rate of the Hong Kong dollar to the U.S. dollar has remained close to the current pegged rate of HKD7.80 = USD1.00 since 1983, management does not expect significant foreign exchange gains or losses between the two currencies.

The Group is also exposed to a certain amount of foreign exchange risk based on fluctuations between the Hong Kong dollars and the Renminbi arising from its operations in the PRC. In order to limit this foreign currency risk exposure, the Group maintained Renminbi cash balance that approximates two to three months’ of operating cash flows.

(i)	Exposure to currency risk

The following table details the Group’s exposure at the balance sheet date to currency risk arising from recognized assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate.


	2011									2010
	United States Dollars ‘000			Japanese Yen ‘000			Canadian Dollars ‘000			United States Dollars ‘000			Japanese Yen ‘000		Canadian Dollars ‘000
Cash at bank and in hand		3,240			252			526			30,443			591		435
Bank overdrafts — unsecured		(107	)		—			—			(294	)		—		—
Accounts payable		(795	)		(168	)		(5	)		(1,350	)		—		—
Other payables and accrued charges		(291	)		—			—			(1,075	)		—		—

Overall net exposure		2,047			84			521			27,724			591		435

(ii)	Sensitivity analysis

Management determines that the Group’s exposure of foreign currency risk was not significant and hence no sensitivity analysis is prepared.

F-52

24	Financial instruments (continued)

(e)

Fair values

Financial instrument carried at fair value

The following table presents the carrying value of financial instrument measured at fair value at the balance sheet date across the three levels of the fair value hierarchy defined in IFRS/HKFRS 7, Financial Instruments: Disclosures , with the fair value of each financial instrument categorized in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:

•

Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets for identical financial instruments

•

Level 2: fair values measured using quoted prices in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data

•

Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data

2011


	Level 1 HK$’000		Level 2 HK$’000		Level 3 HK$’000		Total HK$’000
Liability

Derivative financial instrument: - Interest rate swap		—		11,564		—		11,564

2010


	Level 1 HK$’000		Level 2 HK$’000		Level 3 HK$’000		Total HK$’000
Liability

Derivative financial instrument: - Interest rate swap		—		11,293		—		11,293

(f)

Estimation of fair values

Fair value of financial instruments is estimated as follows:

(i)

Trade receivables less impairment provision and account payables are assumed to approximate their fair values.

(ii)

The fair value of the long-term bank loan as at August 31, 2010 was estimated as the present value of future cash flows, discounted at current market interest rate for similar financial instruments.

(iii)

The fair value of the interest rate swap is determined based on the discounted cash flow technique which takes into account estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date.

F-53

25	Contingent liabilities


	2011 HK$’000		2010 HK$’000
Bank guarantees provided to suppliers		1,330		2,770
Bank guarantee in lieu of payment of utility deposits		5,572		5,572

		6,902		8,342

At August 31, 2011, HK$6,902,000 (2010: HK$133,342,000) of the HK$38,900,000 (2010: HK$353,840,000) total banking facility was utilized by the Company and the subsidiary.

26	Commitments

(a)

Capital commitments


	2011 HK$’000		2010 HK$’000
Purchase of telecommunications, computer and office equipment - contracted but not provided for		141,432		132,340

Construction of multimedia production and distribution city - authorized but not provided for		600,000		—

Others - contracted but not provided for		5,000		—

(b)

Commitments under operating leases

At August 31, 2011 and 2010, the Group has future aggregate minimum lease payments under non-cancellable operating leases as follows:


	2011 HK$’000		2010 HK$’000
Leases in respect of land and buildings which are payable:
- Within 1 year		27,679		24,873
- After 1 year but within 5 years		20,642		16,417

		48,321		41,290

Leases in respect of telecommunications facilities and computer equipment which are payable
- Within 1 year		63,300		63,948
- After 1 year but within 5 years		17,103		14,200
- After 5 years		3,211		4,849

		83,614		82,997

		131,935		124,287

F-54

26	Commitments (continued)

(c)

Program fee commitments

The Group entered into several long-term agreements with program content providers for the rights to use certain program contents in the Group’s IP-TV services. Minimum amounts of program fees to be paid by the Group are as follows:


	2011 HK$’000		2010 HK$’000
Program fee in respect of program rights which are payable:
- Within 1 year		25,777		25,539
- After 1 year but within 5 years		27,197		48,087

		52,974		73,626

27	Barter transaction

During the year ended August 31, 2010, HKBN entered into an agreement with a third party (the “Contract Party”). Pursuant to the agreement, HKBN would provide network capacity to the Contract Party for a service term of 10 years commencing on May 1, 2010 or after the respective activation of the relevant network capacity, and in exchange, the Contract Party would provide HKBN the right to use telecommunications facilities for a term of 10 years commencing on May 1, 2010 or after the respective activation of the relevant network capacity. The transaction has been entered into on a barter basis with no consideration being exchange. The agreement expires on April 30, 2020.

The Directors of the Company made an assessment and determined that since the arrangement above involves exchange of services of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. Accordingly, the network capacity of the Contract Party under the assessment have not been recognized as an asset and no revenue or deferred revenue have been recognized in the financial statements of the Group since inception of the arrangement.

28	Material related party transactions

In addition to the transactions and balances disclosed elsewhere in these financial statements, the Group entered into the following material related party transactions.

Key management personnel remuneration

Remuneration for key management personnel, including amounts paid to the Company’s Directors as disclosed in note 9(a) and certain of the highest paid Talents as disclosed in note 9(b), is as follows:


	2011 HK$’000		2010 HK$’000		2009 HK$’000
Short-term Talent benefits		35,979		40,716		34,687
Post-employment benefits		2,616		2,725		2,614
Equity compensation benefits		4,652		5,347		4,071

		43,247		48,788		41,372

29	Reclassification of Fiscal 2010 figures

During the year, management performed a review of the classification of the Group’s deferred service revenue balance. As a result of the review, the Group’s “deferred service revenue” balance amounting to HK$9,550,000 which was previously included in the current liabilities balance at August 31, 2010 have been reclassified as a non-current liability. This change in classification had no effect on the reported results of the prior year.

F-55

30	Accounting estimates and judgments

(a)	*Key sources of estimation uncertainty*

Notes 10 and 24 contain information about the assumptions and risk factors relating to fair value of share options and financial instruments. Other key sources of estimation uncertainty are as follows:

(b)	*Impairment loss for doubtful accounts*

The Group maintains impairment loss for doubtful accounts based upon evaluation of the recoverability of the accounts receivable and other receivables which takes into account the historical write-off experience and recovery rates. If the financial condition of the customers were to deteriorate, additional impairment may be required.

(c)	*Depreciation*

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The Group reviews the estimated useful lives of the assets annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and takes into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

(d)	*Income taxes*

Determining income tax provisions involves judgment on the future tax treatment of certain transactions and interpretation of tax rules. The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislation and practices.

Deferred tax assets are recognized for certain unused tax losses as set out in note 20. In assessing the recognition of deferred tax assets, management considers all available evidence, including available taxable temporary differences, projected future taxable income, tax planning strategies, historical taxable income, and the expiration periods of the tax losses. For certain subsidiaries, deferred tax assets can only be recognized to the extent that it is probable that future taxable profits will be available against which they can be utilized. Management’s judgment is thus required to assess the probability of future taxable profits and this assessment is constantly reviewed and additional deferred tax assets are recognized if it becomes probable that future taxable profits will allow the deferred tax assets to be recovered.

F-56

31	Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended August 31, 2011

Up to the date of issue of these financial statements, the IASB/HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended August 31, 2011 and which have not been adopted in these financial statements.


		Effective for accounting periods beginning on or after
IFRSs/HKFRSs (Amendments)	Improvement to IFRSs/HKFRSs (2010)		January 1, 2011

IAS/HKAS 24 (Revised)	Related party disclosures		January 1, 2011

Amendments to IFRS/HKFRS 7	Financial instruments: Disclosures — Transfer of financial assets		July 1, 2011

IFRS/HKFRS 9	Financial instruments		January 1, 2013

IFRS/HKFRS 12	Disclosure of interests in other entities		January 1, 2013

IFRS/HKFRS 13	Fair value measurement		January 1, 2013

IAS/HKAS 19 (2011)	Employee benefits		January 1, 2013

The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far the Group is not yet in a position to state whether they would have a significant impact on the Group’s results of operations and financial position.

32	Supplemental guarantors consolidated financial information

The 10-year senior notes mentioned above were fully, irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the subsidiaries of City Telecom (H.K.) Limited (collectively defined as “Guarantor Subsidiaries”), except CTI Guangzhou Customer Services Co. Ltd. in the PRC (“Non-guarantor Subsidiary”).

The condensed consolidated financial information is presented below and should be read in connection with the consolidated financial statements of City Telecom (H.K.) Limited prepared under IFRSs. Separate financial statements of the Guarantor Subsidiaries are not presented because the Guarantor Subsidiaries are wholly-owned and have had fully and unconditionally guaranteed the Notes on a joint and several basis.

On February 1, 2010, the Company redeemed all the outstanding 10-year senior notes with a cumulative principal amount of HK$153.9 million (US$19.9 million) at the redemption price equal to 104.375% of the principal amount.

Since as of August 31, 2010, all the outstanding 10-year senior notes has been fully redeemed, the following condensed consolidated financial information is limited to the year ended August 31, 2009.

The following condensed consolidated financial information presents the consolidated balance sheets as of August 31, 2009 and the related consolidated income statements and cash flow statements for the years ended August 31, 2009 of (a) City Telecom (H.K.) Limited, the parent; (b) the Guarantor Subsidiaries on a combined basis; (c) the Non-guarantor Subsidiary; (d) eliminating entries; and (e) the total consolidated amounts.

F-57

32	Supplemental guarantors consolidated financial information (continued)

Consolidated balance sheet as of August 31, 2009


	*City* *Telecom* *(H.K.)* *Limited*		*Guarantor* *subsidiaries*			*Non-* *guarantor* *subsidiary*		*Eliminating* *entries*			*Consolidated* *total*
	HK$’000		HK$’000			HK$’000		HK$’000			HK$’000
Non-current assets

Investments in subsidiaries (note)		1,258,726		228,875			—		(1,487,601	)		—
Goodwill		—		—			—		1,066			1,066
Fixed assets		74,688		1,221,172			6,520					1,302,380
Long term receivable and prepayment		—		16,573			—		(10,482	)		6,091
Deferred expenditure		—		12,786			—					12,786

		1,333,414		1,479,406			6,520					1,322,323

Current assets

Accounts receivable		9,220		110,972			—					120,192
Other receivables, deposits and prepayments		3,393		67,584			2,492		(3,704	)		69,765
Deferred expenditure		—		36,674			—					36,674
Pledged bank deposits		15,038		—			—					15,038
Cash at bank and in hand		120,315		78,665			27,436					226,416

		147,966		293,895			29,928					468,085

Current liabilities

Bank overdrafts — unsecured		896		4,468			—					5,364
Amounts due to subsidiaries/ fellow subsidiaries		10,830		905,460			4,427		(920,717	)		—
Accounts payable		20,484		17,071			—					37,555
Other payables and accrued charges		23,530		172,676			10,281					206,487
Deposits received		7,886		8,499			—					16,385
Deferred service revenue		10,848		107,904			—		(3,682	)		115,070
Tax payable		356		496			1,141					1,993
Current portion — obligation under finance leases		193		9			—					202

		75,023		1,216,583			15,849					383,056

Net current assets/(liabilities)		72,943		(922,688	)		14,079					85,029

F-58

32	Supplemental guarantors consolidated financial information (continued)

Consolidated balance sheet as of August 31, 2009 (continued)


	*City* *Telecom* *(H.K.)* *Limited*		Guarantor subsidiaries		Non- guarantor subsidiary		Eliminating entries			Consolidated total
	HK$’000		HK$’000		HK$’000		HK$’000			HK$’000
Total assets less current liabilities		1,406,357		556,718		20,599					1,407,352

Non-current liabilities
Deferred tax liabilities		7,047		8,662		—					15,709
Long-term deferred service revenue		10,535		—		—		(10,535	)		—
Long-term debt and other liabilities		163,108		8		—					163,116

		180,690		8,670		—					178,825

Net assets		1,225,667		548,048		20,599					1,228,527

Capital and reserves

Share capital		66,418		15,485		8,131		(23,616	)		66,418
Reserves		1,159,249		532,563		12,468		(542,171	)		1,162,109

Total equity attributable to equity shareholders of the Company		1,225,667		548,048		20,599					1,228,527

Note:

The amounts of investment in subsidiaries and retained profits at City Telecom (H.K.) Limited level have included the share of net assets of its subsidiaries using the equity method of accounting.

Consolidated income statement for the year ended August 31, 2009


	*City* *Telecom* *(H.K.)* *Limited*			Guarantor subsidiaries			*Non-* guarantor subsidiary			Eliminating entries			Consolidated Total
	HK$’000			HK$’000			HK$’000			HK$’000			HK$’000
Revenue		95,386			1,390,697			142,603			(150,447	)		1,478,239
Network costs		(29,973	)		(177,655	)		—			32,499			(175,129	)
Other operating expenses		(90,557	)		(959,960	)		(136,750	)		149,303			(1,037,964	)
Other income, net		108,933			31,684			576			(99,653	)		41,540
Finance costs		(54,241	)		(69,017	)		—			68,131			(55,127	)
Share of net profit from subsidiaries (note)		185,391			—			—			(185,391	)		—

Profit before taxation		214,939			215,749			6,429						251,559
Income tax expense		(2,110	)		(34,998	)		(1,622	)					(38,730	)

Net profit		212,829			180,751			4,807						212,829

Note:

The net profit amounts at City Telecom (H.K.) Limited level have included the share of net profit of its subsidiaries using the equity method of accounting.

F-59

32	Supplemental guarantors consolidated financial information (continued)

Condensed consolidated cash flow statement for the year ended August 31, 2009


	City Telecom (H.K.) Limited			Guarantor subsidiaries			Non- guarantor subsidiary			Eliminating entries			Consolidated total
	HK$’000			HK$’000			HK$’000			HK$’000			HK$’000
Net cash inflow/(outflow) from operating activities		487,691			88,243			(38,930	)		(233	)		536,771
Net cash inflow/(outflow) from investing activities		101,605			(276,843	)		(1,250	)					(176,488	)
Net cash outflow from financing activities		(560,397	)		(895	)		—						(561,292	)

Increase/(decrease) in cash at bank and in hand		28,899			(189,495	)		(40,180	)					(201,009	)
Cash at bank in hand at September 1, 2008		90,386			263,386			67,838						421,610
Effects of foreign exchange rates changes		134			306			(222	)		233			451

Cash at bank and in hand at August 31, 2009		119,419			74,197			27,436						221,052

Analysis of the balances of cash and cash equivalent:

Cash at bank and in hand		120,315			78,665			27,436						226,416
Bank overdrafts — unsecured		(896	)		(4,468	)		—						(5,364	)

		119,419			74,197			27,436						221,052

F-60

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


CITY TELECOM (H.K.) LIMITED

By:		/s/ Yeung Chu Kwong, William
		Name: Yeung Chu Kwong, William
		Title: Chief Executive Officer

By:		/s/ Lai Ni Quiaque
		Name: Lai Ni Quiaque
		Title: Chief Financial Officer