Financial Statements
 

SKY CITY ENTERTAINMENT GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 June 2002

1. STATEMENT OF ACCOUNTING POLICIES

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

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) 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.

(ix) Pre-Licence Expenditure

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

(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.

(xi) Investments

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

(xii) 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.

(xiii) 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.

(xiv) 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.

(xv) 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.

(xvi) 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.

(xvii) Foreign Currencies
Transactions
Transactions denominated in a foreign currency are converted to New Zealand dollars at the exchange rate at the date 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 date 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.

(xviii) 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.

(xix) Financial Instruments Recognised

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.

(xix) Financial Instruments (continued) Unrecognised

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.

(xx) Statements of Cash Flows

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

• 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.
• 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.
• 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.

(xxi) 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.

(xxii) Share Options

No remuneration expense is recognised in respect of share options issued pursuant to Executive and Non-executive Director Share Option Plans. When the options are exercised, the proceeds received are credited to share capital.

(xxiii) Impairment

Annually, the directors assess the carrying value of each asset. Where the estimated recoverable amount of the asset is less than its carrying amount, the asset is written down. The impairment loss is recognised in the Statements of Financial Performance.

(xxiv) Comparatives

Subsequent to the share split all share values and share numbers for the previous financial year have been restated to be on an equivalent basis with the current year.

(xxv) Changes in Accounting Policies

Early Adoption of Financial Reporting Standards
FRS37 Consolidating Investments in Subsidiaries is applicable to periods ending on or after
31 December 2002.

The Board of Directors has elected the requirements of FRS37 in the preparation of these financial statements. Consequently, the policy for accounting for minority interests has been changed so that negative amounts of minority interest are recognised separately as a negative component of equity in the Statements of Financial Position. The effect of this change is to recognise a further $292,874 as a negative amount of minority interest.

Capital Notes
Sky City Entertainment Group Limited issued long-term fixed interest unsecured subordinated capital notes during the period between May 2000 and July 2000. Historically these have been classified in the Statements of Financial Position as a component of equity and capital funds. Subsequent to the issue of the capital notes, the International Accounting Standard IAS39 “Financial Instruments: Recognition and Measurement” has come into effect. This pronouncement, which is an applicable source of New Zealand generally accepted accounting practice, requires instruments such as capital notes to be classified as debt.

Accordingly, the company has reclassified its capital notes and associated costs from equity to debt in the financial statements for the year ended 30 June 2002. Comparative figures have been adjusted to comply with the new policy to assist readers of the financial statements.

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

2. OPERATING REVENUE

3. OPERATING EXPENSES

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.

5. SHARE CAPITAL

(i) Issued and Paid-up Capital

On 16 November 2001 the company had a 1 for 1 share split. Comparatives have been restated where appropriate to reflect the increase in shares on issue.

207,593,422 ordinary shares issued and fully paid (2001: 200,533,262 (restated))

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

(ii) Dividend Reinvestment Scheme

Pursuant to the Dividend Reinvestment Plan approved by the board of directors on 15 August 2000, 4,323,582 shares were issued in lieu of cash dividend (2001: 6,093,298). The strike price was $5.167 (2001: $3.393) for 2,364,674 shares issued on 5 October 2001 (2001: 3,534,328), and $5.620 (2001: $4.537) for 1,958,908 shares issued on 5 April 2002 (2001: 2,558,970).

(iii) Executive Share Option Plan
1996 Plan

All options issued pursuant to the Executive Share Option Plan approved by shareholders at the Annual Meeting of the company held on 5 December 1996 had been exercised by 30 June 2001. All options were exercised under the terms and conditions of the Plan, being exercisable two years after the date of issue.

The last 155,000 options were exercised in the year ending 30 June 2001 at an average price of $3.01.

1999 Plan
All options issued pursuant to the Executive Share Option Plan approved by shareholders at the Annual Meeting of the company held on 28 October 1999 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 the 1999 Plan is the relevant base exercise price of the option (as defined in the Plan), adjusted for the company’s estimated cost of equity and dividends between the issue date and the exercise date of the options.

Subsequent to the share split all options exercised will receive 2 shares.

(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, 85,365 options are on issue to non-executive directors as at 30 June 2002 (2001: 216,216).

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 company’s estimated cost of equity and dividends between the issue date and the exercise date of the options.

Subsequent to the share split all options exercised will receive 2 shares.

(v) Option Valuation

The options are valued using the Black-Scholes model. This calculation is prepared by First NZ Capital Group Limited, and reviewed by PricewaterhouseCoopers as auditors. Under this calculation the value of all options issued during the year was $796,519 (2001: $584,000).

6. RETAINED EARNINGS AND DIVIDENDS

7. RESERVES

Under the Sky City Performance Pay Incentive Plan, selected employees have been eligible for performance related bonuses in respect of the three financial years ending 30 June 2000,30 June 2001and 30June 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, 30 June 2001, and 30 June 2002.

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 Limited’s 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 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 Limited’s annual result to the New Zealand Stock Exchange for the relevant year of the Plan.

8. MINORITY INTERESTS

Subsequent to 30 June 2001 the fair values of Force Corporation Limited’s receivables was reduced by $1,575,000 and creditors and accruals were reduced by $4,556,000 as a result of the settlement with MTM Entertainment Trust of Australia in respect of the Force Entertainment Centre.

9. CAPITAL NOTES AND CONVERTIBLE NOTES

(i) Capital Notes

On 5 May 2000 Sky City Entertainment Group Limited issued a prospectus offering up to 150 million unsecured subordinated capital notes at an issue price of $1.00 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 ordinary shares. Sky City Entertainment Group Limited 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 notes are not entitled to any distributions made by Sky City Entertainment Group Limited 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.

(ii) Convertible Notes

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

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.

(iii) Mandatory Convertible Notes

On 1 March 2002 the subsidiary company Force Corporation Limited issued 30,980,023 Mandatory Convertible Notes (MCNs) for every five ordinary shares held at an issue price of $1.00 per MCN. Each MCN converts to ordinary shares on the earlier of the maturity date (31 December 2006) and the date selected by Force Corporation Limited following an election by a holder to convert as a result of a take-over offer. At this date each MCN will convert to 50 ordinary shares or such a number that is equal in value to the principal amount of MCNs converted, whichever is greater. 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 20 days prior to maturity date.

Each MCN carries an interest coupon equivalent to (i) the amount of the dividend paid in respect of each ordinary share multiplied by (ii) the sum of ordinary shares which a note would convert to if conversion occurred on that interest payment date, including any bonus issue the holder may have been entitled to. This interest is payable at the option of Force Corporation Limited.

Upon consolidation, the MCNs are eliminated and represented by the assets and liabilities of Force Corporation group as included in the consolidated Statement of Financial Position.

10. RECEIVABLES AND REPAYMENTS

Subsequent to the acquisition of Force Corporation Limited and during the year ending 30 June 2002, the fair value of Force Corporation Limited's receivables was reduced by $1,575,000 as a result of the settlement with MTM Entertainment Trust of Australia in respect of the Force Entertainment Centre.

11. PROPERTIES INTENDED FOR SALE

Properties intended for sale as at 30 June 2001 included the Force Entertainment Centre (over which there was a first ranking registered mortgage (refer note 15)), Domain Terraces and the St James building.

As a result of the settlement reached with MTM Entertainment Trust of Australia during the year the Force Entertainment Centre has been classified as property, plant and equipment.

12. PROPERTY, PLANT AND EQUIPMENT

No interest has been capitalised to land and buildings under construction during the current financial year (2001: $nil). Total capitalised interest and facility fees included in the cost of land and buildings at 30 June 2002 is $32,975,000 (2001: $32,975,000).

As a result of the settlement with MTM Entertainment Trust of Australia, the Force Entertainment Centre is now classified as property, plant and equipment.

Subsequent to the acquisition of Sky City Adelaide Pty Limited on 30 June 2000 and during the year ending 30 June 2001, the fair values of Sky City Adelaide Pty Limited's property, plant and equipment were reduced by A$ 3,822,600 and the casino licence 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 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 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 council's 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 acquired the Adelaide Casino licence on 30 June 2000 as a result of the acquisition of 100% of the shares in Sky City Adelaide 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 Sky City 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 Sky City Adelaide Pty Limited. The casino licence is being amortised over 85 years, being the length of the licence.

14. CREDITORS AND ACCRUALS

Subsequent to the acquisition of Force Corporation Limited and during the year ended 30 June 2002, the fair value of Force Corporation Limited's creditors and accruals was reduced by $4,556,000 as a result of the settlement with MTM Entertainment Trust of Australia in respect of the Force Entertainment Centre.

15. BORROWINGS

Borrowings are recognised as follows:

Sky City Funding Group

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 $344,533,654 (2001: $379,154,859). This bank loan comprises NZ$ 193,560,000 (2001: $206,780,000) borrowed in New Zealand and A$ 131,800,000 (2001: A$ 137,400,000) borrowed in Australia (converted at balance date using an exchange rate of NZ$ 1 = A$ 0.8730) (2001: NZ$ 1 = A$ 0.7971). The interest rates, inclusive of bank margin, at 30 June 2002 were 7.26% on the New Zealand borrowings and 7.31% on the Australian borrowings.

A total facility of $513,262,176, secured by way of composite debenture, was available to the guaranteeing group as at 30 June 2002 (2001: $549,427,723). The facility comprises:

A facility of NZ$ 293,560,000 (2001: NZ$ 301,780,000) comprising a fixed term facility of NZ$ 193,560,000 and a revolving credit facility of NZ$ 100,000,000 (2001: NZ$ 201,780,000 and NZ$ 100,000,000).

A facility of A$ 191,800,000 (converted at 0.8730 to NZ$ 219,702,176; 2001: A$ 197,400,000 converted at 0.7971 to NZ$ 247,647,723), comprising a A$ 131,800,000 (NZ$ 150,973,654) (2001: A$ 137,400,000; NZ$ 172,374,859) fixed term facility and a revolving credit facility of A$ 60,000,000 (NZ$ 68,728,522) (2001: A$ 60,000,000; NZ$ 75,272,864).

The fixed term facilities reduced pro-rata by an aggregate amount of NZ$ 15,000,000 on 31 March 2001 and NZ$ 15,000,000 on 31 March 2002. The fixed term facilities will also be reduced pro-rata by an aggregate amount of NZ$ 15,000,000 on 31 March 2003, 31 March 2004, and 31 March 2005. Both facilities mature on 30 November 2005.

Queenstown Casinos Limited

At balance date, Queenstown Casinos Limited had a bank facility of $6,000,000 (2001: $6,000,000), of which $3,000,000 was drawn down (2001: $3,500,000). The loan is secured by a debenture (floating charge) over the assets of the company. This facility expires on 31 December 2003.

Force Corporation Group

At balance date, Force Corporation Limited had four secured loans totalling $61,706,850 (2001: seven secured loans totalling $90,176,446).

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:

A new bank loan facility of $40,000,000 secured by an assignment by way of security of Force's interest in the New Zealand and Fiji cinema joint ventures, assignment by way of security of Force's interest in Planet Hollywood (Civic Centre) Limited, a first registered mortgage over and assignment by way of security of all lease agreements of the Force Entertainment Centre, and a first registered mortgage over 82 Symonds Street, Auckland. The interest rate at 30 June 2002 was 7.14%. Reductions to the facility are to be made half yearly based on the net rental of the Force Entertainment Centre.

A new bank cash advance facility with a limit of $22,000,000, drawn to $20,500,000 as at 30 June 2002. This facility has the same security as the new bank term loan facility above. There are no scheduled amortisations and the interest rate at 30 June 2002 was 6.32%.

A bank term loan facility of $1,127,000 (2001: $1,253,000) secured by first mortgage over the Fiji multiplex. The interest rate at 30 June 2002 was 7.75%. The final repayment is to be made on 30 September 2003.

Term loan facility from ANZ to Village Rialto Cinemas Limited of $80,000 (2001: $351,000) 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.

During the period the Force group of companies repaid the following loans: Force Entertainment Centre Limited repaid MTM Entertainment Trust of Australia as part of the settlement of matters relating to the Force Entertainment Centre (2001: $50,000,000).

Ab Initio Holdings No. 13 Limited repaid Harvey Norman Holdings Limited and the ANZ from the final proceeds of the Mt. Wellington development (2001: $9,125,000).

Force's share of a loan to Domain Terraces joint venture was transferred to the purchaser of Force's 25% in the joint venture (2001: $300,000).

As part of the restructure of Force Corporation Limited's debt facilities a bank loan was repaid and was replaced by the new bank loans above (2001: $29,147,000).

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 group's NZ$ debt, incurred during the year ended 30 June 2002, was 7.20% (2001: 7.58%). The weighted average interest rate (inclusive of margin) on the Australian debt incurred during the year ended 30 June 2002, was 7.13% (2001: 7.29%).

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 $16,512,315 are outstanding as at 30 June 2002 (2001: $39,009,106). These relate to purchases of plant and equipment for the Auckland, Adelaide and Queenstown complexes and construction and fitout costs associated with the Sky Riverside (Hamilton) complex.

(ii) Non-Cancellable Operating Lease Commitments

Operating lease commitments include a sub-soil lease on the Auckland Casino site (18 years and 6 months remaining), a premises lease for the Adelaide Casino site (83 years remaining) and a premises lease for the Queenstown Casino site (5 years remaining).

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 subsidiaries of Sky City Entertainment Group Limited as at 30 June 2002:

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

The following companies were the significant partly or indirectly owned subsidiaries of Sky City Entertainment Group Limited as at 30 June 2002:

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

On 26 November 2001, Force Cinema Investments Limited (100% owned by Force Cinemas Limited) and Force Investments Limited (100% owned by Force Corporation Limited) were wound up.

On 18 September 2002 Force Corporation Limited changed its registered company name to Sky City Leisure Limited.

SHAREHOLDING OF SUBSIDIARY COMPANIES

Force Corporation Limited

On 20 March 2001 Sky City Entertainment Group Limited 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 Sky City Investments Limited on 23 May 2001 following its incorporation on 11 May 2001. Sky City Investments Limited purchased 23,784,375 Mandatory Convertible Notes issued by Force Corporation Limited on 1 March 2002 for the consideration of $23,784,375. This takes the effective equity investment in Force Corporation Limited to 74.36%. The voting rights held in Force Corporation Limited remain at 50.19%. The net cash impact of acquisition was $23,784,375 with goodwill of $4,711,755.

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 acquisition of initial 50.19% Force Corporation Limited on 20 March 2001

Subsequent to 30 June 2001 the fair value of receivables was reduced by $1,575,000 and the fair value of creditors and accruals was reduced by $4,556,000 as a result of the settlement with MTM Entertainment Trust of Australia in respect of the Force Entertainment Centre.

Other Subsidiaries

Sky City Action Management Limited was incorporated on 22 March 2001. Queenstown (Hard Rock) Investments Limited was incorporated on 21 March 2001. Sky City Investments Limited was incorporated on 11 May 2001. The operating results of these companies have been included in the Statements of Financial Performance from these dates.

On 20 March 2001 Adelaide Casino Pty Limited changed its name to Sky City Adelaide Pty Limited. Sky City Entertainment Group Limited 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 9 December 2000.

The carrying value of the investment in Riverside Casino Limited of $18,760,369; (2001: $18,760,369), includes the deferred expenditure relating to operator rights of $2,250,000 (2001: $2,250,000). The shares and convertible notes issued but uncalled of $5,123,027 as at 30 June 2001 were called and paid during the 2002 year.

Cost of investment in Riverside Casino Limited comprised:

19. INVESTMENTS IN ASSOCIATES

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

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 on the Australian Stock Exchange). This shareholding was increased to 21. 58% on 7 February 2001, and further increased to 32.41% on 8 March 2002.

South Pacific Pictures Limited was disposed of during the year.

20. JOINT VENTURES

In December 2000 the 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. The joint venture has a balance date of 30 June.

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

All of the above joint ventures have been audited.

Financial Performance

The Sky City group's share of operating revenues and expenses, proportionately consolidated for the Hard Rock joint venture and for the indirect joint venture interests was:

For the year ended 30 June 2001, the group's share of operating revenues and expenses proportionately consolidated were for the period from 25 May 2001 for the Hard Rock venture and from 20 March 2001 for the indirect joint venture interests.

Financial Position

The group's share of assets and liabilities, proportionately consolidated, is:

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

22. CONTINGENT LIABLITLIES

Taxation

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 $6,700,000 (2001: $7,500,000) of income tax credit claimed in relation to the Harrah's contract termination fee may be reassessed. The directors have received professional advice that it is not appropriate to recognise a liability and 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.

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$ 4 million (2001: US$ 15 million).

23. RELATED PARTY INFORMATION

Sky City Entertainment Group Limited 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.

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.

As a result of the restructure of Planet Hollywood (Civic Centre) Limited during the year, the debt of $835,000 owed by Planet Hollywood Asia was forgiven (2001: $835,000). In return, Force Holdings Limited acquired the remaining shareholding in Planet Hollywood (Civic Centre) Limited of 20% on 28 June 2002.

Interest of Directors in Certain Transactions

Each company within the group maintains an interests register in which members of its board record all parties and transactions in which they may have a potential or actual self-interest (refer Interests Register in the Additional Information section of this Report). Fees were paid to First NZ Capital Group Limited (previously Credit Suisse First Boston NZ Limited), of which W R Trotter is a director, for advisory work and were made on normal commercial terms.

24. SEGMENT INFORMATION

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

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

25. FINANCIAL INSTRUMENTS

(i) Credit Risk

inancial assets which potentially subject the group and parent company to concentrations of credit risk consist principally of cash, short-term deposits, trade receivables and tax receivable. 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. The tax receivable is expected to be refunded by the Inland Revenue Department. 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.

Within the above carrying amounts of financial assets and liabilities, to the extent they are not hedged, the following values are denominated in Australian dollars:

The directors believe the carrying values of the financial assets and liabilities reflect the fair values of those assets and liabilities.

The group was party to a financial instrument in respect of a guarantee not recognised above and this is disclosed in Note 22 at its fair value.

iii) Currency Risk and Interest Rate Risk Interest Rate Risk

Short-term deposits were at call as at 30 June 2002. Deposits are held with major banking institutions.

Interest rates on borrowings are a mix of fixed and floating. As at 30 June 2002 81% (2001: 80%) of total borrowings were hedged via long-term (exceeding 12 months) interest rate swap agreements with major banking institutions.

A number of short-term (less than 12 months) interest rate swap agreements of varying maturities, with major banks, were in place over 10% (2001: 19%) of the balance of the total borrowing.

Fixed versus Floating Interest Rate - Bank Facility

At 30 June 2002, Sky City group had total borrowings of $409,240,654 (2001: $415,130,859), structured as below:

Maturities

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

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

Interest Rate Swap Values: Mark to Market

The swaps and forward rate agreements in place as at 30 June 2002 have been valued by the respective banks, on a mark to market basis, at a loss of $5,389,101 (2001: loss $6,389,973).

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 2002: AU$ 15,900,000 (2001: $75,400,000).

26. EVENTS OCCURRING AFTER BALANCE DATE