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| Sky City Limited |
| 1998 Annual Report |
Chairman's Report
 JON HARTLEY Chairman |
THE QUALITY OF THE SKY CITY BUSINESS AND ITS RESILIENCE TO EXTERNAL ECONOMIC FACTORS HAS BEEN DEMONSTRATED THIS YEAR IN THE FACE OF SIGNIFICANT PRESSURES FROM A COMBINATION OF INTERNAL AND EXTERNAL EVENTS.
Internally, the management team was focused on facilitating a smooth transition from Harrah's management to being a New Zealand-owned and operated company.
Externally, we have been tested by several events, most notably the Asian economic shock and the Auckland CBD power crisis.
Asian Economic Downturn
Recognising the Asian economic distress, we had anticipated a reduction in premium table play activity compared with the initial opening volumes. Whilst we had no exposure to the Asian junket market, the most significant effect of the downturn was a reduced level of consumer confidence, especially amongst our premium players who have close ties to Asia.
Inbound tourism from the key Asian markets dropped significantly. However, we responded quickly with marketing initiatives aimed at the local and domestic markets as well as the traditional overseas tourism markets, including Australia, the United States and Britain.
Auckland Power Crisis
The second major test came when the lights went out in Auckland's central business district. Thanks to contingency plans, operational capabilities and back-up power supply equipment, Sky City was able to function with relatively few problems.
However the effective state of emergency was accompanied by official requests to stay out of the city and inevitably, this led to slower revenues and visitation for several weeks in the late February/early March period.
1998 Performance
Against this backdrop we are pleased to report 5% revenue growth with no change in operating expenses when compared to the previous year.
This is a very satisfying result and one which reinforces the board's view about the quality of our franchise, our management team and staff, and our cashflows.
It was this confidence in the business that led to a comprehensive review of strategy and shareholder distribution policies in the first half of calendar 1998.
Strategic Review
Starting with a review of strategy, we confirmed our focus on Sky City's core business of gaming and entertainment. We discounted diversification into non-gaming and peripheral activities and reconfirmed our focus on cashflow generation and the return of cash to our shareholders.
A pre-condition to this was the board's satisfaction that the transition from the Harrah's management contract to operating the business ourselves was not only on track, but was also without real or perceived problems. It had to be seamless and it was; a tremendous achievement for Evan Davies and his team.
Sky City Results 1998
We also had to have confidence in our results. In summary, actual 1998 results were in line with our projections at the time of the review:
The financial result is detailed more fully elsewhere in this report and I commend you to its review. In addition to a great result in difficult circumstances, the following highlights are worthy of note:
Casino Operator's Licence
In March, Sky City was awarded a casino operator's licence. This is a strategic asset for the company. The operator's licence is not site-specific so can be used at more than one location in New Zealand. It allows Sky City to manage its own operations in Auckland with effect from 1 July 1998.
Corporate Governance
Sky City has a rigorous approach to corporate governance. In addition to statutory and casino licence compliance requirements, we have a comprehensive set of programmes and procedures in place covering all aspects of risk management and internal control. A separate section of this report provides information on the company's internal governance structures.
John Hood, formerly Chief Executive of Fletcher Challenge Paper Limited, was appointed a director of Sky City on 24 August 1998. John's commercial expertise and experience is welcomed by the board of the company. Having been appointed during the year, John retires at the annual meeting and stands for re-election. The board recommends John Hood's re-election as a director of the company.
Community Involvement and Corporate Leadership
We continue a strong commitment to the community in which we operate through a range of sponsorships and donations to sporting, community and charitable projects, to problem gambling initiatives and to local and national initiatives in the tourism area.
As we draw nearer to three years of operating the Sky City complex, we can be confident that the objects of the Casino Control Act, which were 'to promote tourism, employment and economic development generally', have been met or exceeded.
Regulatory Status
Our relationships with the government's regulatory agencies, the Casino Control Authority and the Department of Internal Affairs, are sound with no issues outstanding at the date of this report. We are not aware of any regulatory matters pending which could have a significant impact on Sky City's existing business operations or prospects.
Queenstown Casino Premises Licence Application
The Queenstown casino licence hearings are expected to be concluded by December. We are confident that our joint venture proposal for a boutique-sized casino is well-suited to the Queenstown environment and deserves to be favourably regarded by the Casino Control Authority.
Sky City People
The focus on management transition has amplified the board's appreciation of Sky City people.
We have successfully replaced the Harrah's gaming expertise by recruiting experienced senior executives, most of whom have joined us from Australian casinos and are familiar with gaming operations similar to our own.
However, what has grabbed our attention is the sheer energy and enthusiasm of our staff. After 21/2 years of operation, the company has built a tremendous internal culture and capability, which we are confident can be harnessed for growth in the coming years.
I was impressed recently by an amazing 'backstage' celebration of our staff's cultural diversity called 'Around the World with Sky City'. Over several weeks, our people shared their cultures in a variety of ways, including visual displays and a series of concert presentations. This programme is one of several initiatives 'by Sky City for Sky City about Sky City', and is receiving some attention from other gaming companies around the world.
Whilst the current economic environment in New Zealand is somewhat difficult and international circumstances are at best uncertain, Sky City's financial performance reflects the quality of our core business.
Since 1 July our share price has out-performed the NZSE Top 40 Index, as the markets focus on the cash-based strength of our business and see the stock as a strong defensive play in an uncertain equities environment.
We look forward to the future with some optimism. We are well-placed going forward, with the millennium opportunities in front of us. We can use our strong franchise and our quality resources of people and cashflow to deliver great results from what is increasingly being recognised as one of the better run casinos in the world.
" This is a very satisfying result which reinforces the board's view about the quality of our franchise, our management team and staff, and our cashflows. "
JON HARTLEY
Chairman
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