Sky City Limited - Notes to the Financial Statements (1999 Annual Report)

Sky City Limited

1999 Annual Report

Notes to the Financial Statements
for the year ended 30 June 1999

1. STATEMENT OF ACCOUNTING POLICIES

The financial statements presented here are for the reporting entity Sky City Limited (the parent company) and the consolidated financial statements of the group comprising Sky City Limited, its subsidiaries and associates.

The financial statements have been prepared in accordance with the requirements of the Companies Act 1993 and the Financial Reporting Act 1993.

The financial statements have been prepared on the basis of historical cost with the exception of certain items for which specific accounting policies are identified.

Accounting Policies

The financial statements are prepared in accordance with New Zealand generally accepted accounting practice. The accounting policies that materially affect the measurement of financial performance, financial position and cash flows are set out below.

(i) Principles of Consolidation

The consolidated financial statements include those of the parent company and its subsidiaries accounted for using the purchase method and include the results of associates using the equity method. All intercompany transactions, balances and unrealised surpluses and deficits on transactions between group members have been eliminated.

(ii) Goods and Services Tax (GST)

The Statements of Financial Performance and Statements of Cash Flows have been prepared so that all components are stated net of GST. All items in the Statements of Financial Position are stated net of GST, with the exception of receivables and payables which include GST invoiced.

(iii) Operating Revenue Recognition

Revenues include casino, hotel, food and beverage, tower admissions and other revenues. Casino revenues represent the net win to the casino from gaming activities, being the difference between amounts wagered and amounts won by casino patrons.

Revenues exclude the retail value of rooms, food, beverage and other promotional allowances provided on a complimentary basis to customers.

(iv) Income Tax

The company follows the liability method of accounting for deferred taxation. The taxation charge against the surplus for the year is the estimated liability in respect of that surplus after allowance for permanent differences. This is the comprehensive basis for the calculation of deferred taxation. Timing differences relating to interest capitalised to buildings are determined on a net present value basis over the estimated life of the buildings.

A deferred tax asset, or the effect of losses carried forward that exceed the deferred tax liability, is recognised in the financial statements only where there is virtual certainty that the benefit of the timing differences, or losses, will be utilised.

(v) Property, Plant and Equipment

The cost of assets is the value of the consideration paid to acquire the assets and the value of other directly attributable costs which have been incurred in bringing the assets to the location and condition necessary for their intended service. Funding costs incurred during the period of construction are capitalised as part of the total cost of the assets.

(vi) Depreciation

As construction is completed and property, plant and equipment is used in operations, depreciation is charged on a straight line basis so as to write off the cost of the assets to their estimated residual value over their expected useful lives. The estimated economic lives are as follows:

Buildings	75 years	Building fitout	10 years
Plant and equipment	2-20 years	Fixtures and fittings	2-20 years
Vehicles	3 years

Gains and losses on disposals of property, plant and equipment are taken into account in determining the operating result for the year.

(vii) Year 2000 Expenditure

Costs incurred to test and/or modify existing information systems to ensure compatibility with the Year 2000 are expensed when incurred. If modifications are part of a wider project of significant system improvement, including added functionality, the costs incurred will be capitalised in accordance with the policy on property, plant and equipment (Note 1(v)).

(viii) Deferred Expenditures

Borrowing costs associated with the operation of the facility, such as origination, commitment and

transaction fees, are amortised to earnings over the period of the borrowing.

(ix) Pre-licence Expenditure and Pre-opening Expenditure

Pre-licence expenditure relates to expenditure incurred to obtain a casino premises licence. Pre-opening expenditure relates to expenditure incurred subsequent to the issue of a casino premises licence and prior to the opening of any facilities. Pre-opening and pre-licence expenditure is expensed as incurred. The expenditure includes marketing, payroll and other expenditure.

Change in Accounting Policy – Pre-opening Expenditure

A change in accounting policy was made for the year ended 30 June 1998 in order for reported profitability to more closely match the underlying performance of the business on an ongoing basis.

The previous policy deferred pre-opening expenditure until such time as all facilities in a complex were open. Deferred expenditure was then expensed in the Statement of Financial Performance over a five year period. Operating expenses to 30 June 1998 include pre-opening expenditure of $5,261,000 as would have been reported under the previous policy.

The effect of the change in policy was recognised as a non-recurring expense for the year ended 30 June 1998.

(x) Leased Assets

Leases under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Operating lease payments are recognised as an expense in the periods of expected benefit.

Assets under finance leases are recognised and depreciated on the same basis as other property, plant and equipment held by the group. Payment obligations are recorded within total borrowings on the Statements of Financial Position.

(xi) Investments

The parent company’s investment in the shares of its subsidiaries and associates are stated at cost.

(xii) Receivables

Receivables are stated at estimated realisable value after providing against debts where collection is doubtful.

Bad debts are written off during the year in which they are identified.

(xiii) Inventories

Inventories, all of which are finished goods, are stated at the lower of cost or net realisable value determined on a first-in first-out basis.

(xiv) Foreign Currencies

Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Foreign currency receivables and payables at balance date are translated at exchange rates current at balance date. Exchange gains and losses are brought to account in determining the surplus for the year.

(xv) Employee Entitlements

Employee entitlements to salaries and wages, non-monetary benefits, annual leave and other benefits are recognised when they accrue to employees. This includes the estimated liability for salaries and wages and annual leave as a result of services rendered by employees up to balance date.

(xvi) Financial Instruments

Financial instruments carried on the Statements of Financial Position include cash and bank balances, investments, receivables, trade creditors and borrowings. These instruments are carried at their estimated fair value. For example, receivables are carried net of the estimated doubtful receivables. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item.

Where possible, financial assets are supported by collateral or other security. These arrangements are described in the individual policy statements associated with each item.

The parent company and group are also parties to financial instruments that have not been recognised in the financial statements. These instruments reduce exposure to fluctuations in interest rates and include fixed rate borrowings, interest rate swap and forward rate agreements which have been transacted. Any risks associated with these instruments are off balance sheet. However, the purpose of these instruments is to cover interest rate risk.

Full disclosure of information about financial instruments to which the group is a party is provided in Note 18.

(xvii) Statements of Cash Flows

The following are definitions of the terms used in the consolidated and parent company Statements of Cash Flows:

Cash is considered to be cash on hand including cash for use within the casino, short-term deposits and current accounts in banks net of bank overdrafts.

Investing Activities are those activities relating to the acquisition, holding and disposal of property, plant and equipment and of investments. Investments can include securities not falling within the definition of cash.

Financing Activities are those activities which result in changes in the size and composition of the capital structure of the company. This includes both equity and debt not falling within the definition of cash. Share issues/repurchases and dividends paid in relation to the capital structure are included in Financing Activities.

Operating Activities are those activities relating to the trading and management of the business and include all transactions and other events that are not Investing or Financing Activities. Cash receipts from customers are net of complimentaries.

(xviii) Changes in Accounting Policies

As described in Note 1(ix) there was a change in accounting policy adopted for pre-opening expenditure in the year ended 30 June 1998. All other accounting policies have been applied consistently with prior years.

2. OPERATING REVENUE

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000
Continuing Activities - Other Revenue
Interest received	536	556	-	-
Dividends received	38	20	-	-
Foreign exchange gains	11	-	-	-
Gains on disposal of property, plant and equipment	133	-	-	-
Interest received - group companies	-	-	-	1,079
Dividends received - group companies	-	-	45,000	26,000
Administration fees - group companies	-	-	3,599	3,427
Total Other Revenue	718	576	48,599	30,506

3. OPERATING EXPENSES

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000
(i) Included within total expenses are the following expense items:
Employee remuneration	69,703	65,955	2,199	1,568
Depreciation	25,127	23,790	160	166
Impairment of property, plant and equipment	2,840	-	-	-
Losses on disposal of property, plant and equipment	12	159	1	-
Pre-opening expenses	-	5,261	-	-
Bad debts written-off	54	273	-	-
Increase/(Decrease) in estimated doubtful debts	20	(13)	-	-
Foreign exchange losses	21	13	-	-
Financing charges:
Interest paid	23,737	24,079	121	822
Facility fees	327	165	-	64
Interest paid - group companies	-	-	1,776	-
Leasing costs:
Rental expense on operating leases	1,852	1,779	118	119
Amounts paid to auditor:
Audit fees paid to the principal auditor	69	41	15	27
Fees paid for other services provided by the principal auditor	945	581	745	157
(i) Included within total expenses are the following expense items (continued)
Other:
Directors’ fees	210	147	210	147
Community Trust and donations	1,139	803	-	-
(ii) Non-recurring Expenses:
Management termination fee	-	20,370	-	-
Pre-opening expenses	-	23,433	-	-

4. INCOME TAX

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000
(i) Income Tax Expense
Operating surplus before tax	69,103	4,397	41,968	25,437
Permanent differences:
Dividends received	-	-	(45,000)	(26,000)
Imputation credits on assessable dividends	19	10	-	-
Non-deductible expenditure	2,030	2,045	1,126	94
Capitalised expenditure deductible for tax	-	(43)	-	-
Surplus subject to tax	71,152	6,409	(1,906)	(469)
Tax at 33%	23,480	2,115	(629)	(155)
Over/(Under) provision in prior year	86	(95)	-	-
Imputation credits on dividends	(19)	(10)	-	-
Revaluation of long-term timing differences to net present value	(2)	(84)	-	-
Transfer of group losses	-	-	629	155
Income Tax Attributable to Net Operating Surplus	23,545	1,926	-	-
Comprising:
Current tax liability	20,797	140	-	-
Deferred tax liability	2,748	1,786	-	-
	23,545	1,926	-	-
(ii) Current Tax Liability
The group has no tax losses to carry forward at 30 June 1999 (1998: $nil). At 30 June 1999 the company has pre-paid income tax of $6,765,000 (1998: $7,122,000). During the year ended 30 June 1998 the group prepaid income tax pending the resolution of tax deductibility issues as described in Note 15 of the financial statements.

(iii) Deferred Tax Liability
Balance at 30 June 1998	13,413	11,627	-	-
Prior year timing differences not recognised	(1,690)	-	-	-
Current year movement	2,748	1,786	-	-
Balance at 30 June 1999	14,471	13,413	-	-
(iv) Imputation Credit
Memorandum Account
Balance at 30 June 1998 - credit	1,384	23	-	-
Taxation payments made	22,130	7,261	-	1,344
Credits attached to dividends received	19	10	-	-
Credits attached to dividends paid	(16,196)	(5,910)	-	(5,910)
Balance at 30 June 1999 - credit/(debit)	7,337	1,384	-	(4,566)
The parent company together with its wholly-owned subsidiary companies form a consolidated group for income tax purposes. Accordingly income tax payments and imputation credit movements are generally reported on a consolidated basis and are available to shareholders through their shareholding in the parent company.

5. SHARE CAPITAL

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000

Issued and Paid-Up Capital
96,269,100 ordinary shares
(1998: 98,018,300)
Balance at 30 June 1998	175,499	186,000	175,499	186,000
Share repurchase	(8,511)	(10,501)	(8,511)	(10,501)
Exercise of share options	127	-	127	-
Balance at 30 June 1999	167,115	175,499	167,115	175,499

Executive Share Option Plan
Pursuant to the Executive Share Option Plan approved by shareholders at the Annual Meeting held on 5 December 1996 165,000 (1998: 135,000) options are on issue to executive personnel at 30 June 1999. Options are exercisable two years after the date of issue provided the terms and conditions of the Plan are met and lapse if not exercised within five years of issue. A total of 185,000 (1998: 135,000) options have been issued in accordance with the Plan and 20,000 options have been exercised during the year ended 30 June 1999 (1998: nil). On 23 December 1996, 85,000 options were issued at an exercise price of $6.34. On 16 April 1999 20,000 of these options were exercised. On 8 September 1997, 50,000 options were issued at an exercise price of $6.75 and on 10 September 1998 a further 50,000 options were issued at an exercise price of $4.93.

6. RETAINED EARNINGS AND DIVIDENDS

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000
(i) Retained Earnings
Balance at 30 June 1998	(22,604)	3,588	362	3,588
Net surplus for the year	45,558	2,471	41,968	25,437
Dividends paid/provided	(41,254)	(28,663)	(41,254)	(28,663)
Balance at 30 June 1999	(18,300)	(22,604)	1,076	362
(ii) Dividends
Interim dividend paid	16,366	12,000	16,366	12,000
Over-provision of prior period dividend	(142)	-	(142)	-
Final cash dividend provided	25,030	16,663	25,030	16,663
	41,254	28,663	41,254	28,663

7. RECEIVABLES AND PREPAYMENTS

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000
Current
Trade receivables	1,177	1,307	-	-
Estimated doubtful receivables	(81)	(61)	-	-
	1,096	1,246	-	-
Other receivables	810	1,048	494	139
Prepayments	1,562	731	35	35
Total Receivables and Prepayments	3,468	3,025	529	174

The directors consider the carrying amounts of receivables reflect their fair values.

8. PROPERTY, PLANT AND EQUIPMENT

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000

Interest incurred during the year to 30 June 1999 of $255,000 (1998: $504,000) has been capitalised to land and buildings under construction during the financial year. Total capitalised interest and facility fees included in the cost of land and buildings at 30 June 1999 is $32,621,000 (1998: $32,366,000).

Freehold Land
At cost	66,243	63,913	-	-
Buildings (including fitout)
At cost	346,543	340,453	-	-
Accumulated depreciation	(14,749)	(9,572)	-	-
Total carrying amount of buildings	331,794	330,881	-	-
Plant and Equipment
At cost	108,450	100,329	227	207
Accumulated depreciation	(45,229)	(28,605)	(177)	(103)
Total carrying amount of plant and equipment	63,221	71,724	50	104
Motor Vehicles
At cost	216	238	-	-
Accumulated depreciation	(196)	(157)	-	-
Total carrying amount of motor vehicles	20	81	-	-
Fixtures and Fittings
At cost	27,834	27,418	404	400
Accumulated depreciation	(15,640)	(11,382)	(210)	(138)
Total carrying amount of fixtures and fittings	12,194	16,036	194	262
Plant and Equipment - Leased
Capitalised finance leases	143	143	-	-
Accumulated depreciation	(98)	(63)	-	-
Total carrying amount of leased assets	45	80	-	-
Total Carrying Amount of Property, Plant and Equipment	473,517	482,715	244	366

A memorandum of encumbrance is registered against the title of land in favour of Auckland City Council. Prior written consent is required by Auckland City Council before any transfer, assignment or disposition of land. The intent of the covenant is to protect the Council’s rights under the Resource Consent, relating to the provision of the bus terminus, public carpark and the provision of public footpaths around the complex. A further encumbrance records the Council’s interest in relation to the sub-soil areas under Federal and Hobson Streets used by Sky City as carparking and a vehicle tunnel. The encumbrance is to notify any transferee of the Council’s interest as lessor of the sub-soil areas.

9. CREDITORS AND ACCRUALS

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000
Current
Trade/operating creditors	8,031	5,847	555	221
Accrued expenses	12,385	9,873	922	788
Trade payables to Harrah's Entertainment, Inc.	-	23,983	-	-
Employee entitlements	7,289	6,566	453	355
Total Creditors and Accruals	27,705	46,269	1,930	1,364
The directors consider the carrying amounts of payables reflect their fair values.

10. BORROWINGS

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000
Borrowings are recognised as follows:
Current Liabilities
Current finance leases	36	36	-	-
Non-Current Liabilities
Secured bank loan	290,000	277,000	-	-
Non-current finance leases	5	44	-	-
	290,005	277,044	-	-

(i) Secured Bank Loan At balance date a bank loan secured by composite debenture over the assets and undertakings of the group was outstanding to the amount of $290,000,000 (1998: $277,000,000). A total facility of $350,000,000, secured by the composite debenture, was available to the group as at 30 June 1999 (1998: $300,000,000). The facility comprises a fixed cash facility of $250,000,000 and a revolving credit facility of $100,000,000. The fixed cash facility is repayable to a balance of $235,000,000 by 31 March 2000, $220,000,000 by 31 March 2001 and $205,000,000 by 31 March 2002. The total facility matures in July 2003. Weighted Average Interest Rate The weighted average interest rate (inclusive of margin) on the group’s debt, incurred during the year ended 30 June 1999, was 8.08% (1998: 8.62%).

(ii) Analysis of Finance Lease Liabilities
Payable not later than one year	36	36	-	-
Payable later than one, not later than two years	5	36	-	-
Payable later than two, not later than five years	-	8	-	-
Payable later than five years	-	-	-	-
Recognised as a liability	41	80	-	-
Representing lease liabilities:
Current	36	36	-	-
Non-current	5	44	-	-
	41	80	-	-

11. COMMITMENTS

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000

The following amounts have been committed by the group or parent company, but not recognised in the financial statements: (i) Capital Expenditure Contractual commitments of up to $27,200,000 are outstanding as at 30 June 1999 (1998: $2,966,000). These relate to purchases of plant and equipment for the Auckland complex and costs associated with Riverside Casino Limited which is an applicant for a casino premises licence in Hamilton. Prior to 30 June 1999 Sky City entered into agreements to acquire up to 55% of the shares of Riverside Casino Limited. At 30 June 1999 $1,680,000 has been paid in respect of the acquisition of 35% of the shares in Riverside Casino Limited. The remaining commitment in relation to Riverside Casino Limited is contingent upon the issue of a casino premises licence and the terms of the purchase agreements.

(ii) Non-Cancellable Operating Lease Commitments
Payable not later than one year	421	562	123	120
Payable later than one, not later than two years	214	288	55	120
Payable later than two, not later than five years	347	446	87	138
Payable later than five years	1,410	1,495	-	-
	2,392	2,791	265	378
Operating lease commitments include a sub-soil lease of $85,000 per annum. The above obligations payable later than five years from balance date reflect the sub-soil lease for the remainder of the term of the casino premises licence.

12. PRE-OPENING EXPENDITURE

No pre-opening expenditure was incurred in the year ended 30 June 1999 (1998: $1,500,000). In the year ended 30 June 1998 accumulated pre-opening expenditure of $28,694,000 was expensed in the Statement of Financial Performance. In accordance with the original accounting policy for pre-opening expenditure $5,261,000 was expensed during the year and the balance of $23,433,000 was expensed as a non-recurring item.

13. EARNINGS PER SHARE

	Consolidated
	1999	1998
Number of ordinary shares on issue	96,660,508	99,818,060
(weighted average)
Group surplus from operations per share	47.1 cents	32.2 cents
Impact of non-recurring expenses per share	-	(29.7 cents)
Group surplus per share	47.1 cents	2.5 cents
Earnings per share is calculated by dividing the group operating surplus after income tax by the weighted average of the number of ordinary shares on issue during the year.

14. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES

Subsidiaries

The following companies were wholly-owned subsidiaries of Sky City Limited as at 30 June 1999:

Sky City Auckland Holdings Limited	Group funding
Sky City Auckland Limited	Casino premises licence holder
Sky City Casino Management Limited	Casino operator’s licence holder
Sky City Management (Auckland) Limited	Employment of staff
Abdiel Investments Limited	Property owner
Sky City Construction Limited	Non-trading
Sky City Nominees Limited	Non-trading
Sky City Wellington Limited	Non-trading

Amalgamation

On 30 June 1999 Sky Tower Limited, Sky City Properties Limited, Kionis Investments Limited, Lespel Investments Limited and Noorka Investments Limited were amalgamated with Sky City Auckland Limited.

Sky City Anywhere Limited, Sky City Reservations Limited and Sky City Hamilton Limited which were all non-trading subsidiaries were amalgamated with Sky City Limited on 30 June 1999.

Under the above amalgamations Sky City Auckland Limited and Sky City Limited took control of all assets and assumed responsibility for the liabilities of the respective amalgamating subsidiaries.

Subsequent to balance date, Sky City Nominees Limited has been renamed Sky Tower Limited and remains a non-trading subsidiary.

Shareholding of Subsidiary Companies

Other than the transfer of shares in Sky Tower Limited (now amalgamated) from Sky City Auckland Holdings Limited to Sky City Auckland Limited and the amalgamation outlined above, there have been no changes in the shareholdings of the wholly-owned group subsidiary companies since 30 June 1998.

During the year ended 30 June 1998 there were no changes in the shareholding of subsidiary companies other than the incorporation of Sky City Casino Management Limited, Sky City Hamilton Limited and Sky City Wellington Limited.

All wholly-owned subsidiary companies have balance dates of 30 June.

Other Subsidiaries

Sky City Limited holds a 60% share in Queenstown Casinos Limited which is the holder of a casino premises licence in Queenstown. The company has not traded in the year to 30 June 1999 (1998: nil). Costs in relation to the casino premises licence application are recognised in a joint venture arrangement with Skyline Enterprises Limited. Sky City Limited’s share of these joint venture costs is recognised in the Statements of Financial Performance.

Associate Companies

During the year ended 30 June 1999 Sky City has acquired 35% of the shares in Riverside Casino Limited, an applicant for a casino premises licence in Hamilton. An option is in place to increase the holding to 55% upon the granting of a casino premises licence to Riverside Casino Limited.

Riverside Casino Limited has not traded in the year to 30 June 1999 and the carrying value of the investment ($1,680,000; 1998: nil) is dependent on the outcome of the casino premises licence application made by Riverside Casino Limited. If the licence application is unsuccessful the investment made to date will be written-off in the Statement of Financial Performance. Costs in relation to the casino premises licence application are recognised in a cost sharing arrangement with other shareholders.

15. CONTINGENT LIABILITIES

For the year ended 30 June 1998 income tax was recognised in the Statements of Financial Performance on the basis that various non-recurring expenditure items are deductible for tax purposes.

The Inland Revenue Department has indicated that some or all of approximately $15,000,000 of income tax credit claimed in relation to these expenses may be re-assessed. The directors have received professional advice that it is not appropriate to recognise a liability and the company intends to contest any re-assessment received.

There were no other significant contingent liabilities at balance date or 30 June 1998.

16. RELATED PARTY INFORMATION

Sky City Limited is a publicly listed company on the New Zealand and Australian stock exchanges.

For the period prior to 1 April 1999 the immediate holding company of the group was Betony Properties Limited and the ultimate holding company was Brierley Investments Limited which held 63,100,000 shares (1998: 63,100,000). All shares held by Brierley Investments Limited were sold by way of a public instalment receipt offering on 1 April 1999.

Subsidiaries and Associates

All members of the group as listed in Note 14 are considered to be related parties of the parent company Sky City Limited.

In presenting the financial statements of the group the effect of transactions and balances between fellow subsidiaries and those with the parent company have been eliminated. Accordingly, so far as the group is concerned the subsidiaries are not related parties.

Related Party Transactions and Balances

On 2 March 1999 Sky City Limited entered into a deed of indemnity and cost reimbursement with Brierley Investments Limited in relation to the public offer of shares held by Brierley Investments Limited in Sky City Limited.

As agreed the sum of $1,550,000 (plus GST) was received from Brierley Investments Limited to cover certain costs incurred by Sky City Limited in connection with the public offer of shares. These costs included legal and advisory costs associated with the preparation of the offering documents. Additional expenditure relating to the offer of shares such as travel and marketing expenditure were paid by Sky City Limited and are reimbursable by Brierley Investments Limited.

In the year to 30 June 1999 there were no other related party transactions other than the payment of outstanding balances to Harrah’s New Zealand Inc. recognised at 30 June 1998.

Harrah’s Entertainment Inc., the parent company of Harrah’s Operating Company, held 12.5% of the shares in Sky City Limited until the shares were transferred to a subsidiary of Brierley Investments Limited when the management agreement with Harrah’s New Zealand Inc. (a subsidiary of Harrah’s Entertainment Inc.) to operate the Sky City complex was terminated. Under the termination provisions of the management agreement Harrah’s New Zealand Inc. continued to operate the Sky City complex until 30 June 1998.

Expenditure incurred by Harrah’s Entertainment Inc. in support of the business activities was recharged to Sky City Limited in accordance with the management agreement.

The related party expenditure with Harrah’s Entertainment Inc. and its subsidiary Harrah’s New Zealand Inc. included management fees and other expenditure to support the continuing operations of the group. During the year to 30 June 1998 these costs totalled $13,082,000. The amount payable at 30 June 1999 is $nil (30 June 1998: $23,983,000)

Sky City Casino Management Limited, a wholly-owned subsidiary of Sky City Limited, holds a casino operator’s licence and has replaced Harrah’s New Zealand Inc. as operator of the Sky City complex.

17. SEGMENT INFORMATION

The group currently operates in the entertainment, leisure and recreation sector in New Zealand.

18. FINANCIAL INSTRUMENTS

(i) Credit Risk

Financial assets which potentially subject the group and parent company to concentrations of credit risk consist principally of cash, short-term deposits and trade receivables. The parent company’s and group’s cash equivalents and short-term deposits are placed with high credit quality financial institutions. Trade receivables are presented net of the allowance for estimated doubtful receivables. Credit risk with respect to trade receivables is limited due to the relatively low value of receivables at any given time as the nature of the business is cash-oriented. Accordingly the directors believe the group has no significant concentration of credit risk.

Notes to the Financial Statements continued

	Consolidated		Parent Company
	1999	1998	1999	1998
	$’000	$’000	$’000	$’000
(ii) Fair Values The carrying amount of cash and bank balances reflect their fair values. Information on the fair values of all other financial instruments recognised in the financial statements is included in the relevant notes to the financial statements.
Financial Assets and Liabilities
Carrying Amounts
Cash and bank	19,030	11,749	5	27
Receivables and prepayments	3,468	3,025	529	174
Income tax	6,765	7,122	6,765	1,344
Investments	1,680	-	187,681	186,000
Advances to/(from) subsidiaries	-	-	(73)	5,977
Creditors and accruals	(27,705)	(46,269)	(1,930)	(1,364)
Borrowings - short-term	(36)	(36)	-	-
Borrowings - long-term	(290,005)	(277,044)	-	-
Net carrying amount of recognised financial instruments	(286,803)	(301,453)	192,977	192,158
The directors believe the carrying values of the financial assets and liabilities reflect the fair values of those assets and liabilities.

(iii) Currency Risk and Interest Rate Risk

Interest Rate Risk

Short-term deposits were at call as at 30 June 1999. Deposits are held with major banking institutions.

Interest rates on borrowings are a mix of fixed and floating. As at 30 June 1999 59% (1998: 60%) of total borrowings were hedged via long-term (exceeding 12 months) interest rate swap agreements with major banks.

A number of short-term (less than 12 months) interest rate swap agreements of varying maturities, with major banks, were in place over 41% (1998: 28%) of the balance of the total borrowing. In 1998 the remaining 12% was at floating rates.

Fixed versus Floating Interest Rate – Bank Facility

At 30 June 1999, Sky City Limited had total borrowings of $290,000,000 (1998: $277,000,000), structured as below:

	1999			1998
		% of	%		% of	%
	$’000	Total	Rate	$’000	Total	Rate
Term Borrowings (exceeding 12 months)
- fixed by long-term (exceeding 12 months) interest rate swaps	170,000	59	7.83	165,000	60	8.58
- fixed by short-term (less than 12 months) interest rate swaps	120,000	41	7.89	78,000	28	8.16
- floating rate borrowings	-	-	-	34,000	12	9.89
	120,000	41	7.89	112,000	40	8.68
Total Debt Facility	290,000	100	7.86	277,000	100	8.62

Rates shown above are inclusive of bank margin.

Maturities

The interest swap maturities are at various dates through July 2003.

The long term interest rate swap maturities occur between twenty-three months and four years from balance date.

A swap option, in the amount of $20 million, with an exercise right in favour of the bank has been negotiated. The effective date is 1 October 1999. The rate applicable to this swap option of 7.09%, means that given current four year swap rates the option is expected to be exercised by the bank. The option will not be recognised as a long-term swap until it has been exercised, or otherwise, by the bank.

Swap and FRA Values : Mark to Market

The swaps and forward rate agreements in place as at 30 June 1999 have been valued by the respective banks, on a mark to market basis, at a loss of $5,047,000 (1998: gain of $1,433,000).

Forward Exchange Cover

There were no foreign exchange contract positions as at 30 June 1999. Payments to overseas suppliers are made using the currency conversion rate as at the date of payment. The value of such transactions has been and will continue to be at a relatively low level.

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