TABCORP Holdings Limited

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TABCORP Holdings Limited

5 Bowen Crescent
Melbourne, Victoria 3004
Australia
Telephone: ( + 61) 398682100
Fax: ( + 61)398682100
Web site: http://www.tabcorp.com.au

Public Company
Incorporated: 1994
Employees: 6,000
Sales: A$1.62 billion (U.S. $976 million) (2000)
Stock Exchanges: Australian
Ticker Symbol: TABCY
NA1C: 71321 Casinos (Except Casino Hotels); 711212 Racetracks

TABCORP Holdings Limited offers a variety of gambling products and services, such as sports and race wagering and machine gaming, primarily in the Australian state of Victoria. TABCORP provides and monitors gaming machines to nearly 300 club and hotel venues throughout Victoria, with several venues in Queensland, as well. Wagering on thoroughbred, harness, and greyhound racing is available at over 600 on-course and off-course outlets along with betting on sports such as rugby, tennis, and cricket. Sports and race betting is also available through telephone and Internet wagering. TABCORP owns and operates the Star City casino complex in Sydney, the only such facility in New South Wales.

TABCORP Replaces Government-operated Gaming and Wagering

TABCORP formed under the Gaming and Betting Act of 1994, which privatized government operated gaming and wagering in the state of Victoria. The government entity, the Totalizator Agency Board (TAB), had been in existence since 1961 when it began to conduct off-course totalizator betting on harness and thoroughbred horse racing. “Totalizator betting,” a pari-mutuel system, meant that all bets were pooled and redistributed to winning bettors based on final odds when betting closed, less a commission for the bookmaker. In 1992, TAB received a license that allowed it to provide gaming machines to licensed venues, such as nightclubs and hotels, within the state of Victoria.

In preparation for private operation of the wagering division, TABCORP formed a joint venture with VicRacing Pty Ltd. in May 1994. Under the agreement TABCORP owned 75 percent of the joint venture, TABCORP Participant Pty Ltd., and the license for wagering in Victoria. TABCORP agreed to pay fees plus 25 percent of wagering revenues to VicRacing for conducting the thoroughbred, harness, and greyhound races. Wagering took place at 680 on-course or off-course outlets, including PubTabs and ClubTabs, found in clubs and entertainment centers. At this time wagering included fixed-odds betting on sporting events, such as Australian football, tennis, cricket, and golf, under the brand Sportsbet. Telephone betting, called National Sportsbet, allowed bets to be placed from Victoria, all over Australia, as well as from overseas; TABCORP debited and credited prepaid customer accounts according to bets placed and won. Also, at the time of privatization the TAB operated and monitored 7,413 gaming machines in 152 venues under the brand name TABERET.

TABCORP did not begin official operation until August 15, 1994, after it became a public company with a listing on the Australian Stock Exchange in July. The public offering, or “float” as it is commonly called in Australia, of 300 million shares sold for A$2.25 to institutional buyers to A$2.70 per share for individual investors. The Gaming and Betting Act restricted stock ownership to a maximum of five percent of voting shares for any one person and an aggregate total of 40 percent of voting shares for non-residents. The company promised a dividend of 5.4 percent, approximately A$0.145 per share. TABCORP encouraged investment from Victoria’s citizens by distributing a prospectus through the major daily newspapers, including circulation to 700,000 households throughout Victoria.

With the potential for capitalization of A$810 million, the stock offering raised A$675 million in capital. TABCORP paid A$78 million to acquire the assets, liabilities, and businesses of the TAB and A$597.2 million to the State of Victoria for two gambling licenses. The gaming license allowed the company to license gaming machines and Club Keno. Only one other company in Victoria held a gaming license, Tattersall’s. Each licensee was allowed to operate 50 percent of the total games permitted in the state, at 27,500, except for the Melbourne Crown Casino. The wagering license allowed TABCORP to offer totalizator betting for racing and fixed odds betting on sporting events. The two licenses will expire in 2012.

With leadership bringing a mix of experience from the private sector and from involvement with TABs in Australia, TABCORP management applied principles of private enterprise to refine gaming and wagering operations. The company sought to improve customer service and accessibility to its products, to develop new products, to control costs, and through a focus on human resources management, to attract motivated employees. During the first year of operation, TABCORP opened 83 new TABARET venues, for a total of 235 venues, 115 at hotels and 120 at nightclubs.

The company invested A$25 million to add 2,632 gaming machines, for a total of 10,045 machines. The company introduced nine new card games as well as popular slot machines, such as “Hawaii” and “Lightning Strike.” The wagering division launched television coverage of harness racing on Saturday evenings to encourage telephone betting from home. TABCORP offered new forms of betting for Sportsbook and planned to introduce betting on more sporting events. The new CrossPay program allowed customers to cash winning tickets at any outlet, regardless of where a customer placed a bet. Also, TABCORP planned to upgrade its wagering computer systems for easier and more effective use by customers and managers.

During the first ten and a half months under TABCORP management, for fiscal year ended July 31,1995, gaming operations generated A$283.2 million in revenues and wagering operations garnered A$273.8 million in revenues; TABCORP recorded total revenues of A$557 million. Gaming and wagering operations generated A$4.5 billion in betting activity, or “turnover,” a 34 percent increase over the same period in 1993-94 under the TAB. Wagering revenues declined due to inclement weather for racing and low participation in Club Keno; however, gaming revenues increased 25.5 percent. TABCORP paid A$134 million in fees and revenue sharing to the racing industry and $A247.8 million in taxes to the Victorian government. In addition to tax payments, TABCORP contributed to local communities through a variety of assistance programs. While TABCORP recorded revenues and turnover lower than predicted in the prospectus, net profit, at A$63.4 million, was 7.8 percent higher than forecast and 60.5 percent higher than the previous partial year.

An essential aspect of operation as a private enterprise involved the development of a corporate identity. In 1996, TABCORP completed development on new logos for its brand products TABARET, FootyBet, National Sportsbet, and Club Keno, as well as the main, TABCORP logo, a seven-pointed star with an arm swirled around it, as has been used in Australia as a symbol of entertainment.

TABCORP Focuses on Gambling as Part of Entertainment Experience during the Mid-1990s

TABCORP sought to improve all aspects of its gaming products as well as to create a complete entertainment and gaming experience. TABCORP upgraded the atmosphere of its wagering outlets, particularly the PubTabs, opened new ClubTabs and Sportsbet outlets, and integrated wagering into several gaming venues. New wagering outlets, strategically located to attract new customers, offered merchandise and different kinds of betting as well as displayed the results of racing and sporting events on a large screen. TABCORP expanded wagering opportunities as the number of Sunday races increased by 8 days to 24 Sundays and night racing was introduced. Television coverage of horse and greyhound racing continued to expand as well. The company launched Bet Line, a telephone betting service designed to make betting and access to telephone betting account information easier through interactive touchtone or voice response. By the Spring Racing Carnival in 1997 (autumn in the northern hemisphere) the transfer of wagering to a new computer system had begun.

The gaming division initiated the Venue Performance System to provide consistent and high standards of customer service at all gaming venues and to enhance the TABARET atmosphere. TABCORP continued to add new gaming machines and to open new venues. By summer 1997, TABCORP counted 278 venues and 13,004 gaming machines generating daily average revenue of A$150 per machine. In October 1997, TABCORP installed Advanced Gaming Systems, state-of-the-art technology for progressive jackpot networks over a wide area. The system provided management and control software as well. The new Wild Cash jackpot system added a mystery jackpot to generate excitement in the gaming venues. In addition to refurbishing several venues, the company began to systematically replace older and less popular gaming machines and to place new machines in more profitable locations. Also, in early 1998, TABCORP received a gaming license for the state of Queensland, giving the company a new area of expansion as the number of gaming machines allowed in Victoria neared its limit.

Key Dates:

1994:: Privatization of gaming and wagering in Victoria leads to formation of TABCORP.
1996:: TABCORP defines corporate identity with completion of brand logos.
1998:: The company pays a dividend of A$0.38 per share plus return of capital at A$0.33 cents per ordinary share.
1999:: Acquisition of Star City Casino complex completed.
2000:: Internet gaming initiated with sports betting.
2001:: TABCORP halts high-roller program.

Through expansion of gaming and wagering outlets and enhancements to products and services, TABCORP recorded revenues of A$938 million for fiscal 1998. Gaming revenues increased 20.8 percent over 1997, to A$608.7 million, with 13,345 machines in operation. Average revenue per machine increased 12.7 percent to A$ 168.75 per day. Wagering revenues increased 5.6 percent to A$329.3 million. Both divisions experienced greater operational efficiency with a 25 percent increase in operating profit in gaming at A$ 146.3 million, and a 13 percent increase in operating profit in wagering, to A$37.5 million. The company recorded a net profit of A$121.3 million, a 20.4 percent increase over the previous year. TABCORP attributed its strong financial position to its growing customer base in an expanding gambling market as well its ability to compete with new gambling outlets. Dividend payments for fiscal 1998 reached A$0.38 per share, including a special A$0.11 per share dividend. Additionally, a return of capital at A$ 100.4 million paid ordinary shareholders A$0.33 per share. At this time, TABCORP stock was valued at $8.25 per share.

1999 Acquisition of Star City Diversifies TABCORP’s Operations and Geographical Range

In 1999, TABCORP made an offer to purchase the Star City Casino in Sydney. The only casino in New South Wales, Star City opened in temporary facilities in 1995 and moved to its permanent location on Darling Harbor in 1997. The casino gaming area provided 1,500 gaming machines and 200 gaming tables, including 45 tables in private gaming room for high rollers. The casino complex contained seven restaurants; nine bars; retail shops; two theaters seating 3,000 people; a 480-room hotel and apartment building; and a conference and banquet facility. Star City held a gaming license valid for 99 years, with exclusive casino gaming in New South Wales until September 2007. With Star City revenues at A$599 million in 1998, TABCORP expected annual revenues of the combined companies to exceed A$1.5 billion. Combined net assets amounted to A$1.4 billion, making TABCORP one of the largest leisure and entertainment companies in Australia.

The initial phase of the offer began in April with an agreement to acquire 110 million ordinary shares at A$ 1.60 per share, a 19.9 percent interest in Star City Holdings Ltd., from Harrah’s Entertainment, Inc. The agreement involved options for 37.4 million unissued ordinary shares. For A$131 million TABCORP acquired an 85 percent interest in the Star City management contract owned by Showboat Australia Pty. Ltd., a subsidiary of Harrah’s. Leighton Holdings Ltd., an Australian construction firm involved in the development of Star City, held a 15 percent interest in the contract. According to the three-year contract, Showboat paid its own expenses for managing the complex and TABCORP paid fees based on revenues. Fees comprised a total of 1.5 percent of casino revenue, six percent of casino gross operating profit, 3.5 percent of non-casino revenue and ten percent of non-casino gross operating profit. Depending on which services TABCORP determined that Showboat perform, the contract was valued from A$7 million to A$10 million.

In June TABCORP followed its offer to Harrah’s with an offer to Star City shareholders, one TABCORP share plus A$ 1.49 for eight shares in Star City Holdings. Shifting value of TABCORP’s stock prompted the Board of Directors at Star City to reject the bid. TABCORP raised the bid to one share plus A$1.97, an overall increase of A$30 million to the bid, valued at A$1.7 billion. Shareholders accepted the bid and the offer closed in early October. The New South Wales Casino Control Authority approved the merger. Three board directors from Star City, including Philip Satre, Chairman and CEO of Harrah’s Entertainment, joined the TABCORP board. TABCORP allocated A$21 million to upgrade facilities at Star City and to develop the complex into a premier entertainment complex. The company earmarked A$2 million for bars and entertainment facilities to be upgraded in time for the Summer Olympics, held in Sydney in September 2000. The addition of 10 gaming tables introduced new baccarat and blackjack games at the casino.

TABCORP Continues Expansion of Products and Services in Late 1990s

TABCORP continued its plan to create a complete entertainment and leisure atmosphere at its wagering outlets and gaming venues. The company opened new wagering outlets, added Sportsbet to services at most of its wagering outlets, and ran Club Keno at more than 100 gaming venues. New coverage of thoroughbred, harness, and greyhound races on Pay TV and Sky Channel led to greater participation in telephone betting. TABCORP added twilight, night, and Sunday racing to attract customers during the more usual leisure times. TABCORP refurbished several gaming venues and replaced 7,400 gaming machines in 2000, introducing 26 new games. Also, in August 1999, TABCORP began to sell books management services for fixed odds wagering on Sportsbet to TABs in Queensland, Tasmania, and Western Australia; accordingly, TABCORP renamed the service TAB Sportsbet. The company completed the last stage of computer system replacement in late 1999. In September TABCORP installed a new wagering system at its retail outlets and in December completed implementation of its gaming machine monitoring system and general management information systems.

TABCORP sought to expand its product offerings with the April 2000 acquisition of Structured Data Systems (SDS), a company that designed and maintained networked wagering systems. SDS products included a games platform, Club Keno systems, and, of particular interest, Trackside. Trackside applied high-resolution graphics and digital sound to create high impact, realistic, simulated racing on a big screen. Before purchasing the company TABCORP field tested Trackside at five locations, obtaining a positive response from customers. TABCORP added Trackside to 70 wagering outlets during the following year, including Star City and Melbourne Crown Casino. TABCORP planned to introduce Trackside to other Australian gaming markets, as well as international markets.

In May 2000, TABCORP introduced sports betting on the Internet, using a betting account like that used for telephone betting. A gaming license in Tasmania allowed TABCORP to offer Internet wagering to residents there. TABCORP planned to add pari-mutuel betting online and to offer self-service wagering at kiosks installed at licensed businesses.

For fiscal 2000, TABCORP reported A$1.63 billion in revenue, including eight and a half months of revenue from Star City. Star City revenue increased 16.5 percent to A$468.3 million, with most new revenue being generated in the main gaming area. TABCORP recorded average daily per table revenue of A$5,457 and average daily machine play of A$296 at Star City. TABCORP reported wagering revenue at A$362.1 million from 588 TAB outlets, and gaming revenue of A$794.4 million from 272 TABARET outlets, with average daily revenue at A$212 per machine. Profit after tax reached A$174.8 million, with taxes to the Victorian government at A$636.8 million. The Victoria state government increased the levy on gaming in April 2001 from A$ 1,200 per machine to A$ 1,533 per machine effective for fiscal 2001.

In June, TABCORP suspended the high-roller program at Star City casino due to its instability and low profit margins. High roller programs were very competitive, with offers of rebates and incentives to attract international players from Hong Kong, Taiwan, Singapore, and other countries. These players placed bets in the thousands of dollars, but expected wins often fluctuated wildly. In one extreme example, a player won A$11 million in October 1999. By suspending the program, TABCORP saved A$6 million in annual tax as well as the volatility of such high stakes gambling.

TABCORP continued to improve its products and services. TAB Sportsbet became available at all wagering outlets. The company upgraded Bet Line telephone betting with a speech recognition system that detected subtle nuances of different human voices. TABCORP planned to open new gaming venues and new electronic gaming machines were being added to existing venues.