Financial Statements
 

SKY CITY ENTERTAINMENT GROUP LIMITED ( 1 )

1. STATEMENT OF ACCOUNTING POLICIES

The financial statements presented are for the reporting entity Sky City Entertainment Group Limited(1)(formerly Sky City Limited the parent company) and the consolidated financial statements of the group comprising Sky City Entertainment Group Limited(1), its subsidiaries, associates and joint ventures. Sky City Entertainment Group Limited(1)is a company registered under the Companies Act 1993 and is an issuer in terms of the Securities Act 1978.

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 cashflows 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. Subsidiaries are entities that are controlled, either directly or indirectly, by the parent. Associates are entities in which the parent, either directly or indirectly, has a significant but not controlling interest. All material intercompany transactions, balances and unrealised surpluses and deficits on transactions between group members have been eliminated on consolidation.

The results of subsidiaries or associates acquired or disposed of during the year are included in the consolidated Statements of Financial Performance from the date of acquisition or up to the date of disposal.

(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, cinema 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 between accounting and tax rules. The impact of all timing differences between accounting and taxable income is recognised as a deferred tax liability or asset. 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 575 years Building fitout 10 years Plant and equipment 275 years Fixtures and fittings 320 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) Properties Intended for Sale

Properties intended for sale are recognised at the lower of their net realisable value and cost.

(viii) Year 2000 Expenditure

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

(ix) Deferred Expenditure

Costs directly incurred in obtaining and operating funding arrangements, such as origination, commitment and transaction fees, are amortised to earnings over the period of the funding arrangement. If an arrangement does not proceed, costs incurred in setting up the arrangement are expensed to earnings immediately.

Operator rights are expensed to earnings over the period of each management contract.

(x) Pre-Licence Expenditure

Pre-licence expenditure relates to expenditure incurred to obtain a casino premises licence. Pre-licence expenditure is expensed as incurred.

(xi) 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.

(xii) Investments

The parent companys investment in the shares of its subsidiaries are stated at cost.

(xiii) Joint Ventures

When a member of the group participates in a joint venture arrangement, that member recognises its proportionate interest in the individual assets, liabilities, revenues and expenses of the joint venture. The liabilities recognised indicate its share of those for which it is jointly liable.

(xiv) Goodwill

Goodwill represents the excess of purchase consideration over the fair value of net identifiable assets held by a subsidiary or associate at the time of acquisition of shares in that subsidiary or associate. Goodwill is capitalised and amortised over the period of expected benefit which may be up to twenty years from the time of acquisition.

The directors review the carrying amount annually and adjust the value of goodwill if an impairment in value above normal amortisation has occurred.

(xv) Amortisation of Casino Licences Acquired

Amortisation of casino licences is calculated on a straight line basis so as to expense the cost of the licences over their legal lives. The directors review the carrying amounts annually and adjust the value of amortisation if an impairment in value above normal amortisation has occurred.

(xvi) 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.

(xvii) 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.

(xviii) Foreign Currencies

Transactions
Transactions denominated in a foreign currency are converted to New Zealand dollars at the exchange rate at the dates of the transactions, except when forward currency contracts have been taken out to cover short-term forward currency commitments. Where short-term forward currency contracts have been taken out, the transaction is translated at the rate contained in the contract.

Translations
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, except where monetary liabilities are treated as a hedge against an independent foreign operation.

Foreign Operations
Revenues and expenses of independent foreign operations are translated to New Zealand dollars at the exchange rates in effect at the dates of the transactions, or at rates approximating them. Assets and liabilities are converted to New Zealand dollars at the rates of exchange ruling at balance date.

Exchange differences arising from the translation of independent foreign operations are recognised in the foreign currency translation reserve, together with unrealised gains and losses on foreign currency monetary liabilities that are identified as hedges against these operations.

(xix) 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.

(xx) Financial Instruments

Financial instruments carried on the Statement 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 not recorded in the financial statements. The net differential paid or received is recognised as a component of interest expense over the period of the agreement.

Forward exchange contracts entered into as hedges of foreign exchange assets and liabilities are valued at exchange rates prevailing at period end. Any unrealised gains or losses are offset against foreign exchange gains and losses on the related asset or liability. Premiums paid on currency options are amortised over the period to maturity.

Full disclosure of information about financial instruments to which the group is a party is provided in note 25.

(xxi) Statement 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 and current accounts in banks net of bank overdrafts and short-term deposits.

Investing Activities are those activities relating to the acquisition, holding and disposal of fixed assets 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.

(xxii) Capital Note Interest

Interest on capital notes is expensed to earnings consistent with other interest costs and is included in funding expenses in the Statements of Financial Performance.

(xxiii) Changes in Accounting Policies

Share Option Reserve
During the year the company changed its policy with respect to the share option reserve. Under the new policy no provision will be made through the share option reserve for the remuneration associated with the issue of options and the share option reserve of $399,000 at 30 June 2000 plus the options issued to the half year 31 December 2000 have been reversed. This change in accounting policy has been applied to reflect the generally accepted market practice.

The implementation of this change on the financial consolidated statements for the current year resulted in an increase to post-tax profits of $983,000.

Dividends Proposed After Balance Date
During the year ended 30 June 2001, the company changed its accounting policy for the recognition of dividends proposed after balance date. Under the new policy, dividends proposed after balance date are disclosed in the notes to the financial statements (refer note 26). Previously, all proposed dividends were recognised as liabilities in the Statements of Financial Position. This change has been made to conform to the requirements of the revised FRS5 Events after Balance Date, issued by the Institute of Chartered Accountants of New Zealand, which is effective for financial years ending on or after
30 June 2001.

There have been no other significant changes in accounting policies during the year.

2. OPERATING REVENUE

Fees paid to the principal auditor for other services provided include payments for internal audit services, taxation, technical, and other corporate advisory services.

4. INCOME TAX

The parent company, together with its New Zealand based wholly-owned subsidiary companies, excluding Sky City Management (Auckland) Limited and Sky City Wellington Limited, 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.

(i) Income Tax Expense

(ii) Current Tax Liability

Tax on income has been derived by using tax rates applicable in the country of source.

During the year, discussions with the New Zealand Inland Revenue Department resulted in final settlement of outstanding issues on the deductibility of pre-opening costs in relation to the Auckland casino, covering the years 1994 to 1996. The net tax effect of this settlement after allowable loss offsets in those years culminated in a final tax payment of $1,629,831 (also see note 22) plus use of money interest of $152,169.

At 30 June 2001 the group has pre-paid income tax of $9,628,000 (2000: $11,170,000).

(iii) Deferred Tax Liability

(iv) Imputation Credit Memorandum Account

5. SHARE CAPITAL

(i) Issued and Paid-Up Capital

100,266,631 ordinary shares (2000: 96,279,100)

All ordinary shares rank equally with one vote attached to each fully paid ordinary share.

(ii) Dividend Reinvestment Plan

Pursuant to the Dividend Reinvestment Plan approved by the board of directors on 15 August 2000, 3,046,649 shares were issued in lieu of cash dividend (2000: nil). The strike price was $6.786 for 1,767,164 shares issued on 6 October 2000, and $9.074 for 1,279,485 shares issued on 6 April 2001.

(iii) Executive Share Option Plan 1996 Plan

(iv) Non-Executive Directors Share Option Plan

Pursuant to the Non-Executive Directors Share Option Plan approved by shareholders at the Annual Meeting of the company held on 26 October 2000, 216,216 options were on issue to non-executive directors as at 30 June 2001.

Options are exercisable one year 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. The exercise price of the options issued under this plan is the relevant base exercise price of the option (as defined in the Plan), adjusted for the companys estimated cost of equity and dividends between the issue date and the exercise date of the options.

6. RETAINED EARNINGS AND DIVIDENDS

(i) Retained Earnings

(ii) Dividends

7. RESERVES

A performance pay incentive plan has been introduced where selected employees are eligible for performance-related bonuses in respect of the three financial years ending 30 June 2000, 30 June 2001 and 30 June 2002.

The employee share entitlement reserve represents the value of ordinary shares to be issued in respect of the plan for the years ended 30 June 2000 and 30 June 2001.

Shares are issued in three equal instalments, being one third of the shares on the bonus declaration date, and, provided eligibility criteria continue to be met, one third on the next entitlement date (approximately 12 months later) and one third on the final entitlement date (approximately 24 months later).

Shares are issued at the average closing price of Sky City Entertainment Group Limiteds(1)shares, on the New Zealand Stock Exchange, on the ten business days following the release to the New Zealand Stock Exchange of the Sky City Entertainment Group Limited(1)annual result for the relevant year of the plan.

Shares issued have the same rights as existing ordinary shares and are issued as soon as possible after the tenth business day following the release of Sky City Entertainment Group Limiteds(1)annual result to the New Zealand Stock Exchange for the relevant year of the plan.

8. MINORITY INTERESTS

9. CAPITAL FUNDS

On 5 May 2000 Sky City Limited issued a prospectus offering 150 million unsecured subordinated capital notes at an issue price of $1 per note. At 30 June 2000 60.072 million of capital notes had been issued. The offer closed on 28 July 2000, and 150 million capital notes had been issued at that date. The capital notes offer holders a fixed interest rate until the first election date, being
15 May 2005. Election dates will occur every five years after the first election date.

Prior to the election date, the company must notify holders of the proportion of their capital notes it will redeem (if any), and, if applicable, the new conditions (including as to interest rate, interest dates, new election date, and other modifications to the existing conditions) that will apply to the capital notes from the election date. Holders may then choose either to retain some or all of their capital notes on the new terms, and/or to convert some or all of their capital notes into Sky City Entertainment Group Limited(1)ordinary shares. Sky City Entertainment Group Limited(1)may elect to redeem or purchase some or all of the capital notes that holders have elected to convert, at an amount equal to the principal amount plus any accrued but unpaid interest.

If capital notes are converted, holders will receive ordinary shares equal in value to the aggregate of the principal amount of the notes plus any accrued but unpaid interest. The value of the shares is determined on the basis of 95% of the weighted average sale price of an ordinary share on the New Zealand Stock Exchange during the 15 days prior to the election date.

The capital notes do not carry voting rights. Capital noteholders are not entitled to any distributions made by Sky City Entertainment Group Limited(1)in respect of its ordinary shares prior to the conversion date of the capital notes, and do not participate in any change in value of the issued shares of Sky City Entertainment Group Limited(1).

(ii) Convertible Notes

Convertible notes were issued by the subsidiary company Riverside Casino Limited on 21 March 2000 as follows:

The amount appearing in the consolidated Statements of Financial Position ($9,315,000; 2000: $9,315,000) represents the minority shareholders portion of the notes issued by Riverside Casino Limited.

Interest payable on the convertible notes will accrue after the casino opens to the public.

The convertible notes have been issued on the basis that payments by note holders will be due at such time or times and in such instalments as is determined from time to time by the board of directors of Riverside Casino Limited. The convertible notes are unsecured and rank without any preference among the classes and all classes are pari passu in all respects.

The convertible notes will be converted into ordinary shares on the maturity date (5 December 2007). Riverside Casino Limited may elect that all or some of the notes be converted at an earlier date.

The convertible notes do not carry any voting rights. Convertible notes are not entitled to any distributions made by Riverside Casino Limited in respect of its ordinary shares prior to the conversion date of the convertible notes.

10. RECEIVABLES AND PREPAYMENTS

Current properties intended for sale include the Force Entertainment Centre (over which there is a first ranking registered mortgage (refer note 15)), Domain Terraces and the St James building.

12. PROPERTY, PLANT AND EQUIPMENT

No interest has been capitalised to land and buildings under construction during the current financial year (2000: $354,000). Total capitalised interest and facility fees included in the cost of land and buildings at
30 June 2001 is $32,975,000 (2000: $32,975,000).

Subsequent to 30 June 2000 the fair values of SkyCity Adelaide Pty Limiteds property, plant and equipment were reduced by A$3,822,600 and the casino licence value was increased by A$3,822,600 as a result of the independent valuation being completed.

A memorandum of encumbrance is registered against the title of land for the Auckland casino in favour of Auckland City Council. Prior written consent is required by Auckland City Council before any transfer, assignment or disposition of the land. The intent of the covenant is to protect the councils 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 councils 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 councils interest as lessor of the sub-soil areas.

Part of the Riverside Casino (Hamilton) property (an area of airspace over the land) is held on trust for Perry Developments Limited. This area will be used for strata title apartments to be held by Perry Developments Limited. Drainage rights have been granted over parts of the land appurtenant to Lot 2 Plan 5.23789 (CT22C/1428). There is also a right of way granted over part of Lot 1 and part of Lot 2 DP580554.

The Riverside Casino site is also subject to the normal rights that the Crown reserves in respect of minerals and mining in relation to the sub-soil areas. Furthermore, the land title is subject to Section 27B of the State Owned Enterprises Act 1986 which does not provide for the owner of the land to be heard in relation to any recommendations of the Waitangi Tribunal for the resumption of the land.

A first mortgage is registered against the Fijian cinema complex owned by Force Cinemas (Fiji) Limited and a registered mortgage debenture over Village Rialto Cinemas Limited (refer note 15).

13. INTANGIBLE ASSETS

Casino Licence

Sky City Entertainment Group Limited(1)acquired the Adelaide Casino licence on 30 June 2000 as a result of the acquisition of 100% of the shares in Adelaide Casino Pty Limited, through its wholly-owned subsidiary Sky City Australia Pty Limited on that date. The cost of the casino licence and other assets and liabilities of SkyCity Adelaide Pty Limited have been determined by the directors applying fair value assessments to all assets (including the casino licence) and liabilities acquired as part of the acquisition of SkyCity Adelaide Pty Limited. The casino licence is being amortised over 85 years, being the length of the licence.

14. CREDITORS AND ACCRUALS

15. BORROWINGS

At balance date a bank loan secured by a composite debenture over the assets and undertakings of certain members of the group was outstanding to the amount of $379,154,859 (2000: $478,630,945). This bank loan comprises NZ$206,780,000 (2000: $235,000,000) borrowed in New Zealand and A$137,400,000 (2000: A$188,010,000) borrowed in Australia (converted at balance date using an exchange rate of NZ$1 = A$0.7971) (2000: NZ$1 = A$0.7717).

A total facility of $549,427,723, secured by way of composite debenture, was available to the guaranteeing group as at 30 June 2001 (2000: $573,055,591). The facility comprises:

• A facility of NZ$301,780,000 comprising a fixed term facility of NZ$201,780,000 and a revolving credit facility of NZ$100,000,000 (2000: NZ$210,000,000 and NZ$100,000,000).
• A facility of A$197,400,000 (converted at 0.7971 to NZ$247,647,723), comprising an A$137,400,000 (NZ$172,374,859) (2000:A$143,000,000; NZ$185,305,170) fixed term facility and a revolving credit facility of A$60,000,000 (NZ$75,272,864) (2000:A$60,000,000; NZ$77,750,421).

The fixed term facilities reduced pro-rata by an aggregate amount of NZ$15,000,000 on 31 March 2001. The fixed term facilities are also reduced pro-rata by an aggregate amount of NZ$15,000,000 by 31 March 2002 and NZ$15,000,000 by 31 March 2003. Both facilities mature on 30 November 2003.

At balance date, Queenstown Casinos Limited had a bank facility of $6,000,000, of which $3,500,000 was drawndown. The loan is secured by a debenture (floating charge) over the assets of the company. This facility expires on 31 December 2003.

At balance date, Force Corporation had seven secured loans totalling $90,176,446 (2000: $95,736,000).

The loans are secured by a variety of registered mortgages or debentures over individual properties and the assets and undertakings of the Force group as follows :

• MTM Entertainment Trust of Australia (MTM) loan of $50,000,000 (2000: $50,000,000) secured by first ranking mortgage over the land and a mortgage debenture over Force Entertainment Centre Limited.
• money market loan facility of $29,147,000 (2000: $34,148,000) secured by first registered mortgage debenture from Force Corporation Limited, Force Holdings Limited, Ab Initio Holdings No. 13 Limited and Force Cinemas Limited. This facility expires on, and is subject to negotiation by, 30 September 2001.
• a bank loan facility of $1,725,000 (2000: $3,825,000) to Ab Initio Holdings No. 13 Limited for the development of the Mt Wellington bulk retail development secured by a first registered mortgage over the freehold land of the Mt Wellington development and a first registered mortgage debenture from Ab Initio Holding No. 13 Limited. Subsequent to balance date this loan has been repaid from the proceeds of sale.
• a loan from Harvey Norman Holdings Ltd of $7,400,000 (2000: $6,920,000). $2,750,000 is secured over a Mt Wellington development property by way of a second mortgage and the balance by a second mortgage debenture over Ab Initio Holdings No. 13 Limited, a subsidiary of Force. This facility is to be repaid from proceeds of the Mt Wellington development after all external borrowings of Ab Initio Holdings No. 13 Limited have been repaid.
• a loan facility to Domain Terraces Joint Venture of $300,000 (2000: $Nil) secured by first registered mortgage over commercial and residential units.
• a bank term loan facility of $1,253,000 (2000: $666,000) secured by first mortgage over the Fiji multiplex.
  The final repayment is to be made on 30 September 2003.
• term loan facility to Village Rialto Cinemas Limited of $351,000 (2000: $177,000) secured by registered mortgage debenture over Village Rialto Cinemas Limited. Village Force Cinemas Limited provides a guarantee for 50% of the outstanding facility. The final payment is to be made on 30 September 2004.

The Sky City group has not provided any guarantees in relation to any of the Force group loans.

Weighted Average Interest Rate

The weighted average interest rate on banking facilities (inclusive of margin) on the groups NZ$ debt, incurred during the year ended 30 June 2001, was 7.58% (2000: 7.59%). The weighted average interest rate (inclusive of margin) on the Australian debt incurred during the year ended 30 June 2001, was 7.29% (2000: 6.21%).

16. COMMITMENTS

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 $39,009,106 are outstanding as at 30 June 2001 (2000: $16,564,763). These relate to purchases of plant and equipment for the Auckland complex, construction and fitout costs associated with Riverside Casino completion and Queenstown Casino.

(ii) Non-Cancellable Operating Lease Commitments

Operating lease commitments include a sub-soil lease of $85,000 per annum on the Auckland Casino site (19 years and 6 months remaining), a premises lease for the Adelaide casino site (84 years remaining) and a premises lease for the Queenstown casino site (6 years remaining). The above obligations payable later than five years from balance date reflect the sub-soil lease for the remainder of the term of the Auckland casino premises licence, and the term of the Adelaide casino site lease (comprising a base amount plus an incremental contingent rental based on the movements in the Australian consumer price index) and premises leases for the Queenstown casino site and the Force group.

17. EARNINGS PER SHARE

Earnings per share is calculated by dividing the group operating surplus after income tax and minority interests by the weighted average of the number of ordinary shares on issue during the year.

18. INVESTMENTS IN SUBSIDIARIES

The following companies were wholly-owned subsidiariesof Sky City Entertainment Group Limited(1)as at30 June 2001:

All wholly-owned subsidiary companies have balance dates of 30 June. Prior to 12 July 1999, Sky Tower Limited operated under the name Sky City Nominees Limited.

The following companies were the significant partly-owned subsidiaries of Sky City Entertainment Group Limited(1)as at 30 June 2001:

All significant partly-owned subsidiaries of Sky City Entertainment Group Limited(1) have balance dates of 30 June.

SHAREHOLDING OF SUBSIDIARY COMPANIES

(i) Force Corporation Limited

On 20 March 2001 Sky City Entertainment Group Limited(1)acquired 50.19% of the shares in Force Corporation Limited (a public company listed with the New Zealand Stock Exchange). The shares were transferred to SkyCity Investments Limited on 23 May 2001 following its incorporation on
11 May 2001. The operating result of Force Corporation Limited has been included in the Statements of Financial Performance from 20 March 2001.

Summary of the effect of the acquisition of Force Corporation Limited

Force Corporation Limited Going Concern

Force Corporation Limited has renegotiated its funding facility with ANZ Banking Group (New Zealand) Limited for its New Zealand operations. The facility is subject to conditions including finalisation of documentation that the directors of Force Corporation consider will be satisfied.

Village Cinemas SA is in the process of renegotiating the terms of its Argentina funding arrangements. These negotiations are at an advanced stage and the directors of Force Corporation consider they will be concluded on satisfactory terms.

Both facilities require Force Corporation to undertake an equity raising of NZ$30 million. Sky City has confirmed, subject to the fulfilment of certain conditions to Sky Citys satisfaction and the terms of the capital raising being acceptable to Sky City, that it would be willing to take up its entitlement under a capital raising and to underwrite the capital raising on commercial terms.

The directors of Force Corporation consider that satisfactory terms for a capital raising can be concluded and that conditions to the Sky City confirmations can be satisfied, and that Force Corporation will be pursuing the capital raising on this basis.

The directors of Sky City Entertainment Group Limited(1)are satisfied that there is no permanent impairment to the carrying value of the investment in Force Corporation Limited and goodwill arising on acquisition.

(ii) Other Subsidiaries

SkyCity Action Management Limited was incorporated on 22 March 2001. Queenstown (Hard Rock) Investments Limited was incorporated on 21 March 2001. SkyCity Investments Limited was incorporated on 11 May 2001. Sky City International Holdings Limited was incorporated on 15 December 1999. The shares in Sky City International ApS were acquired on 17 March 2000. Sky City Australia Pty Limited was incorporated on 14 February 2000. On 18 October 1999 Sky City Entertainment Group Limited(1)acquired the shares in Riverside Fund Limited. The operating results of these companies have been included in the Statements of Financial Performance from these dates.

On 30 June 2000 Sky City Entertainment Group Limited(1)acquired the shares in SkyCity Adelaide Pty Limited. Adelaide Casino Pty Limited changed its name to SkyCity Adelaide Pty Limited on 20 March 2001.

Summary of the effect of acquisition of SkyCity Adelaide Pty Limited as at 30 June 2000

Subsequent to 30 June 2000 the fair values of the property, plant and equipment were reduced by A$3,822,600 and the value of the casino licence was increased by A$3,822,600 as a result of an independent valuation of property, plant and equipment being completed.

Summary of net cash paid by the group relating to the investment in Riverside Casino Limited

Sky City Entertainment Group Limited(1)holds a 60% share in Queenstown Casinos Limited which is the holder of a casino premises licence in Queenstown. The casino opened to the public on 7 December 2000. Queenstown Casinos Limited changed its balance date from 31 March to 30 June during the year ended 30 June 2000. Until December 1999 costs in relation to the casino premises licence application were recognised in a joint venture arrangement with Skyline Enterprises Limited. Sky City Entertainment Group Limiteds(1)share of these joint venture costs has been recognised in the Statements of Financial Performance. The joint venture arrangement concluded in December 1999. Queenstown Casinos Limited is now consolidated as part of the Sky City group.

As a result of the acquisition of the shares in Riverside Fund Limited, Sky City Entertainment Group Limited(1)increased its shareholding in Riverside Casino Limited from 35% to 55% in October 1999. The carrying value of the investment held by the parent company of $18,760,369; (2000:$18,759,777), includes shares and convertible notes issued but uncalled of $5,123,027 (2000:$8,165,000) and the deferred expenditure relating to operator rights of $2,250,000; (2000:$2,250,000).

Until March 2000, costs in relation to the casino premises licence were recognised in a cost sharing arrangement with Perry Holdings Limited and Tainui Development Limited. Sky City Entertainment Group Limiteds(1)share of these costs has been recognised in the Statements of Financial Performance. The arrangement concluded in March 2000 and costs are now borne directly by Riverside Casino Limited which is consolidated as part of the Sky City group.

The parent company cost of the investment comprised

19. INVESTMENTS IN ASSOCIATES

All associates have balance dates of 30 June.

On 11 August 2000, Sky City International ApS acquired 6.58% of the shares in Canbet Limited (a public company listed with the Australian Stock Exchange). This shareholding was increased to 21.58% on
7 February 2001.

There is a commitment to acquire a further 48,166,666 shares at A$0.15 cents per share in January 2002. This will increase Sky City International ApSs holding to 33%.

* As a result of acquiring shares in Force Corporation Limited on 20 March 2001, Sky City group indirectly acquired holdings in the Force associate companies, being Village Cinemas (SA) Argentina, Vista Entertainment Solutions Limited and South Pacific Pictures Limited.

In December 2000 the Sky City group entered into a joint venture to operate the Hard Rock Café in Queenstown, New Zealand. The group has a 50% interest. The financial statements of the joint venture are unaudited.

As a result of acquiring shares in Force Corporation Limited on 20 March 2001, the Sky City group has the following indirect joint venture interests:

FINANCIAL PERFORMANCE

The Sky City groups share of operating revenues and expenses, proportionately consolidated from 25 May 2001 for the Hard Rock joint venture and from 20 March 2001 for the indirect joint venture interests, was:

21. RECONCILIATION OF NET SURPLUS WITH CASH FLOW FROM OPERATING ACTIVITIES

22. 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 were deductible for tax purposes.

The Inland Revenue Department has indicated that some or all of the approximately $7,500,000 (2000: $15,000,000) of income tax credit claimed in relation to the Harrahs contract termination fee may be reassessed. The directors have received professional advice that it is not appropriate to recognise a liability and that the company intends to contest any reassessment received.

On 21 May 2001 agreement was reached with the Inland Revenue Department in relation to some of the prior years non-recurring costs (re pre-opening expenses). This resulted in a reduction in contingent liabilities recognised in earlier years by $7,500,000.

Force Entertainment Centre

MTM Trust Australia (MTM) entered into an agreement to purchase the Force Entertainment Centre on completion. Part of this agreement was the advance by MTM of $50 million to cover the cost of construction (refer note 15). The agreement to purchase is now under dispute.

Force Corporations legal advisors have obtained an affidavit from an independent architect that supports a practical completion date of 30 December 1999. Having considered this together with legal advice, for the purpose of these financial statements, the company has assumed that the sale to MTM will proceed and therefore interest from MTM for late settlement has been accrued.

Force Corporation Limited also acts as guarantor for the loan from MTM. At balance date this advance totalled $50 million.

Argentina Debt

Force Corporation Limited is one of the guarantors for a loan facility being utilised by Village Cinemas S.A. (Argentina), an associate company. The maximum liability and exposure at balance date under this guarantee is US$15 million.

Potential Force Corporation Limited Capital Raising

Sky City Entertainment Group Limited(1)(as the holder of 50.19% of the shares in Force Corporation Limited) has provided a letter to Force Corporation confirming that it would, subject to the fulfilment of certain conditions to Sky Citys satisfaction and the terms of a capital raising being acceptable to Sky City, be willing to take up its entitlement under a capital raising and to underwrite the capital raising on commercial terms.

Other

Village Force Cinemas Limited has provided a guarantee in proportion to its shareholding for debt owing by Hawkes Bay Multiplex Cinemas Limited. At balance date the Village Force Cinemas Limited exposure under this guarantee was $122,495.

23. RELATED PARTY INFORMATION

Sky City Entertainment Group Limited(1)is a publicly-listed company on the New Zealand and Australian stock exchanges.

Subsidiaries, Associates and Joint Ventures

All members of the group as listed in notes 18, 19 and 20 are considered to be related parties of the parent company Sky City Entertainment Group Limited(1).

During the year the company advanced and repaid loans and provided accounting and administrative services to its subsidiaries, associates and joint ventures. 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. All transactions with related parties are in the normal course of business and provided on commercial terms.

The surplus is that of the group before income tax and before equity accounted results of associated entities, minority interest and extraordinary items.

Canbet Limited and Village Cinemas SA (Argentina) are associate companies and as such do not form part of the segment information.

Industry Segments

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

25. 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 companys and groups 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.

(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

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 2001. Deposits are held with major banking institutions.

Interest rates on borrowings are a mix of fixed and floating. As at 30 June 2001, 80% (2000: 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 19% (2000: 6%) of the balance of the total borrowing.

Fixed versus Floating Interest Rate – Bank Facility

At 30 June 2001, Sky City group had total borrowings of $415,130,859 (2000: $478,630,945), structured as below:

Rates shown above are inclusive of bank margin.

Maturities

The interest swap maturities are at various dates through July 2007.

The long-term interest rate swap maturities occur between twelve months and six years and ten months from balance date.

Swap Values : Mark to Market

The swaps and forward rate agreements in place as at 30 June 2001 have been valued by the respective banks, on a mark to market basis, at a loss of $6,389,973 (2000: loss $2,029,821).

Forward Exchange Cover

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.

Funds advanced to overseas subsidiaries are hedged against translation risk.

Foreign exchange contracts as at 30 June 2001: A$75,400,000 (2000: $Nil)

26. EVENTS OCCURRING AFTER BALANCE DATE

Provision for Dividend

On 17 August 2001 the directors resolved to provide for a final dividend to be paid in respect of the year ended 30 June 2001. The dividend will be paid at a value of 35 cents per share on issue as at 21 September 2001, with full imputation credits attached.

(1)formerly Sky City Limited