Sky City Limited

Chairman's Report

A great deal has happened at Sky City since July 1998 when we became the operator as well as the owner of the Sky City complex in Auckland.

The management team, recruited and led by Evan Davies, responded to the challenge of taking full control of the Sky City operation with a record profit for the 1999 financial year. This was reflected in our earnings per share of 47.1 cents, up 46%, and dividend per share of 43 cents, up 48%.

The focus was strong revenue growth, especially in gaming, whilst maintaining good results in those parts of the business impacted by reduced tourism visitation.

Looking forward, we are well positioned to take advantage of the many opportunities that arise from the start of the new millennium and the major events centred on Auckland, including the America’s Cup and the spill-over benefits of the Sydney Olympics.

I would like to comment on a few key events that occurred during the year as well as some other issues that impacted the company’s performance.

Sell-down by the major shareholder

In January, Brierley Investments Limited (BIL) notified the company that it intended to sell its 66% shareholding in Sky City, by way of a public offer of instalment receipts.

The board and a number of senior personnel were closely involved in the structuring of the offer and the domestic and international marketing of what proved to be a very successful transaction for both BIL and Sky City. All costs incurred by Sky City in connection with the sell-down were reimbursed by BIL.

Following the sell-down, Sky City’s register increased from 2,000 to 22,000 shareholders, of whom we estimate approximately 65% are New Zealand residents.

At the same time as the Sky City instalment receipts listed in New Zealand, Sky City’s shares and instalment receipts were also listed in Australia. Our dual New Zealand Stock Exchange (NZSE) and Australian Stock Exchange (ASX) listings create a wider potential investor base for the shares, making the Sky City stock more visible and more attractive in both countries.

With its strong financial performance to date and its potential future opportunities, Sky City is positioned as a leading Australasian gaming stock.

Board of directors

During and since the BIL sell-down, we have maintained board continuity. Sky City’s directors have developed a high level of knowledge and understanding of the company’s existing business operations and of the requirements and opportunities of the New Zealand gaming and entertainment sector.

It is our intention to appoint two new directors as soon as the necessary Casino Control Authority (CCA) approvals have been obtained. This will ensure that we retain the expertise and experience of our existing directors but add fresh input to our boardroom debates and discussions.

I would like to thank my fellow directors for their contributions during 1999 and for their ongoing commitment to the development of the Sky City business.

Share buyback

Following announcement of our 1998 financial result, the company bought back a further 1.75 million shares, to make a total of 3.75 million shares purchased during the 1998 calendar year, at an average price of $5.07. This confirms our commitment to shareholder value through the efficient use of our free cashflows. The reduced number of shares, as a consequence of the buyback, resulted in a 4% increase in earnings per share.

Since last November, when the buyback concluded, the price of Sky City shares has outperformed the NZSE 40 Gross Index, with the share price showing significant strength in response to the company’s financial results and to the improved liquidity of the stock resulting from the increased shareholder base.

Sky City’s people

In July last year we introduced to you a number of new management personnel. Since then our team has demonstrated its capability by producing an excellent financial result for shareholders.

Our 2,500 employees are committed to providing a quality experience at Sky City and many of our staff are now well-experienced in the gaming entertainment industry. Sky City people are continuously trained to provide the excellent customer service which is so essential to the success of our business. We are also strongly focused on a performance culture within the organisation, with the introduction of appropriate incentives for key staff at various levels of the business.

From 1 July 1999, over 550 Sky City personnel are incentivised under a performance bonus plan which is tied to the company’s financial results. If the company’s target performance is achieved, the eligible employees will receive a bonus paid 40% in cash and 60% in Sky City shares. As a consequence, participants are motivated to deliver enhanced company performance and to become stakeholders in the future performance of the company’s shares.

At this year’s annual meeting, we are seeking shareholder approval to increase participation by senior executives in the shares of the company through an option plan which has been designed to reward value added to the company’s share price in excess of the company’s cost of equity capital. The cost of equity capital basis for determining the option pricing avoids the vagaries of a formula linked to a multi-company market index. Rather it relies on the return that is expected by Sky City equity holders. The directors are satisfied that the option plan is appropriately structured in the best interests of shareholders and that it is fair to the company. We therefore recommend the proposed executive option plan to shareholders.

Corporate governance

Sky City operates under a comprehensive regime of corporate governance protocols that are regularly monitored and compared with international standards. When measured against such benchmarks, we are confident that our governance procedures are at the forefront of best practice.

Within the business, we have developed a "Code of Business Practice" which sets out the standards and ethics expected of our people in their dealings with customers, suppliers, regulators and fellow employees. The board’s Corporate Governance Committee monitors compliance with the Code of Business Practice.

The board’s Audit Committee regularly monitors the internal control environment within the operation and ensures that Sky City’s comprehensive risk management programme and business continuity planning is effective across all business units.

Our operational management maintains a co-operative relationship with the CCA, which is responsible for casino licensing in New Zealand, and with the Department of Internal Affairs’ casino inspectorate, which supervises the operation of casinos on behalf of the CCA. Sky City has maintained an excellent record of regulatory and licence compliance since the complex was opened some three and a half years ago.

Year 2000

Sky City is confident it is Year 2000 (Y2K) ready. Until 1 January 2000 there remains a question mark over all computer systems and computer-controlled equipment, but all our significant applications, equipment and systems have been assessed, remedied where necessary, tested, and proven to be Y2K ready. Business continuity plans are in place and have been tried and tested for all core operations.

We have also assessed our reliance on external suppliers and vendors and are satisfied that our critical suppliers expect to be Y2K ready. We are very aware of our reliance on the providers of utility supplies such as gas, electricity, water, waste water, and telecommunications. Wherever possible, the potential risks associated with these essential external supplies have been mitigated by the implementation of contingency plans, with additional resources already in place or programmed to be in place at date-sensitive times over the next six months.

New opportunities

In December 1998, we were pleased to announce our participation in the consortium application for a casino premises licence in Hamilton. The licence hearings were concluded in August and a decision from the CCA is currently awaited.

In June we were pleased to report that a casino premises licence for Queenstown had been awarded. We expect to open in Queenstown with a 12 table, 70 machine casino early in 2001. Sky City will be a 60% owner of the Queenstown casino and will be the operator of the facility.

Looking forward

Looking forward, we see opportunities for Sky City to grow and to add value. The events scheduled for the 2000 financial year will provide an immediate opportunity for increased Sky City revenues and profits. The challenge for Sky City will be to build on these opportunities into the new millennium.

On reflection

Three and a half years after opening in February 1996, we reflect with real satisfaction on a sequence of strong financial results and significant distributions and value gains to our shareholders - a sequence we expect to continue into the future.

JON HARTLEY
Chairman

[ 1999 Annual Report Index | Current & Prior Annual Reports | Return to Home ]