as drugstores, grocery stores, and the McCarran airport in Las Vegas. The proprietors of these machines may have as many machines as they want; each machine must be registered with the State Gaming Commission and that registration must include a statement of the percentage of payout. The payouts returned to the players approximate 85 percent of the volume played, with the range varying from 78 percent to 97 percent; the higher payouts are designed to increase the amount of play. The payout ratio, which is not subject to State regulations, is set by each proprietor.

In contrast, the gaming board of Great Britain has placed strict limitations on the availability and location of slot machines; for example, casinos are allocated no more than two "fruit"-i.e., slot-machines. All clubs, including

sporting and drinking clubs, are permitted to have up to two machines. Because of the popularity of this form of gambling in Great Britain, these restrictions are intended to limit play by the public. Further, it is required that the percentage of payout be posted on the machine.

In the Bahamas, as in Nevada, large banks of slot machines are permitted in the casinos; however, permission must be obtained from the gaming board before the number of machines can be increased at any one place.

Table 5-7 shows the number of games and slot machines and the percentage of revenue produced by each in four areas of Nevada-Downtown Las Vegas, the Las Vegas Strip, South Lake Tahoe, and Reno/Sparks. Twenty-one, craps, and the 5¢ slot machine are the top three revenue

producers in these areas. In the smaller communities, such as Elko, Reno, and Tahoe, keno and bingo account for a higher percentage of the total gaming revenue than they do on the Strip.

Casino Profitability

An investor looking for get-rich-quick schemes and easy money is bound to be disappointed by the realities of the casino gambling business. Although the successful casinos provide a high rate of return on their investments, the profits of the industry as a whole are less spectacular. Table 5-8 compares fiscal year 1975 income versus expenses for four areas of Nevada-Downtown Las Vegas, the Las Vegas Strip, South Lake Tahoe (Douglas County), and Reno/Sparks. By law, the statistics for individual establishments must be kept confidential. The aggregate figures contained in this table thus conceal the fact that some of the casinos may actually operate at a loss, as was the case with some of the Hughes Tool Co. casino holdings from 1968 to 1971.

Although gaming is the primary source of revenue in all four of the locations shown in table 5-8, the ratio of gaming to total revenue is somewhat lower on the Las Vegas Strip, where room revenues are significantly higher than at the three other locations. In the “expenses" category, the Strip casinos allocate a higher percentage of their operating budgets than the other locations to the provision of complimentary items (food, rooms, drinks), a result of the Strip casinos' efforts to attract the high rollers, many of whom come to Las Vegas on junkets. Comparing the average gross revenue per casino among the four locations indicates that the Lake Tahoe

creditors had been paid, and that casino produces a net operating income of $1 million in a given year, then the percentage return on equity capital for that year would be 20 percent before Federal taxes. If the casino were a corporation, as many are, the rate of return on investment after Federal taxes would be about half that amount, or 10 percent.

On the Las Vegas Strip, the investment returns ranged from 14.2 percent to 58.5 percent, or an average of 26.3 percent before Federal taxes and 13.2 percent after taxes. This rate is comparable to that of high-seller concentration industries in the manufacturing sector.14 There are a number of explanations for the sharp year-toyear fluctuations in the Las Vegas Strip figures. According to one economist, the depressed state of the economy has affected the Strip casinos in particular because of their heavy reliance on big spenders, many of whom have become reluctant to gamble away huge sums of money.' Other factors cited included the intensification of competition caused by the addition of new hotels, and the failure of management to hold down various expenses in light of the unfavorable economic conditions, particularly the expenditures for "complimentaries."

establishments slightly outearned the Strip casinos during fiscal year 1975. The most likely explanation is that competition is less keen at Lake Tahoe than on the Strip, where funds available for expansion may be nearly exhausted.

15

Table 5-9 shows the percentage return (before Federal taxes) on equity capital investments by the casinos in the same four areas as above for fiscal years 1967 through 1975. The figures in table 5-9 were derived by dividing the net operating income of the casinos by their net (equity) capital (assets minus liabilities). For example, if the total value of a casino were estimated at $5 million after all

•Before Federal income taxes and extraordinary items. **Includes all of Douglas County.

(1) Computations not meaningful. Source: Nevada Gaming Abstract and 1972, 1973, and 1974 Supplements, published by the State Gaming Control Board.

In many respects, the casinos of Nevada operate like any other business that has a product or service to sell. What makes casinos unique is that their principal stock in trade is cash, and that dozens of transactions may take place before a single “sale” is complete. A customer may enter a casino with $500 in his pocket. Two hours later he may have only $300; after 3 hours he may have $600. The sale is complete when the customer leaves the casino

with either more or less than the $500 he had intially.

Complex procedures have been developed to keep an accurate account of the thousands of exchanges of cash, chips, and credit that take place daily between the casino and its customers. Many of these procedures are in the form of State regulations designed to insure that all credit transactions are properly recorded, that revenues are

accurately counted, and that the State receives its fair share of the proceeds.

The larger casinos offer a number of services in addition to gambling-namely, food, drinks, entertainment, and rooms. All of these operations are interrelated, and the quality of service offered in one division can significantly affect the volume of business in the others.

Although no two casinos operate in exactly the same manner, State regulations, similarities in services offered, and standard business practices tend to minimize operational differences. The description of the internal casino organization and operation that follows is based on hearing testimony, on information supplied to the Commission at a presentation by one of the large Las Vegas Strip casinos, and on sections of the Stateprescribed accounting procedures. The casino described below is not modeled after a particular hote. Casino but represents, instead, a selection of features from several of the Strip's larger gaming establishments.

The Golden Grotto Casino

The Golden Grotto is a fictitious hotel/casino complex with 1.100 rooms, 2 show lounges, 4 restaurants, an 18,000square-foot casino, 25,000 square feet of convention facilities, and 2,500 employees. In 1975, its gross revenue from all sources exceeded $77 million. Approximately 60 percent of that amount consisted of gaming revenue. Its The operating income for 1975 was 0.9 million. The Golden Grotto is a corporation whose stock is publicly traded and whose assets are valued at $99 million.

The Casino Department at the Golden Grotto consists of three divisions-Operational, Marketing, and Financial. The Operational Division is responsible for the operation of all casino games, and the hiring and assignment of personnel to staff gaming positions. The Marketing Division's responsibilities include the granting of credit, customer relations, coordination of group activities such as junkets and conventions, identification and handling of VIP customers, supervision of complimentary provisions, and supervision of the company's branch office. The Financial Division is responsible for the casino's system of internal controls and for insuring that all revenue is properly recorded. Chart 5-2 shows the organization and staffing of the Casino Department.

CREDIT. One of the most important aspects of the casino's business involves the granting of credit to casino customers. At the Golden Grotto, one-third of all gaming transactions involve some form of credit-credit cards, checks, or markers (IOU's). Registered guests at the hotel and other patrons are generally permitted to cash checks in amounts not exceeding $500, provided they have the proper credit cards and personal identification. Other persons who wish to gamble on credit or to exceed the $500 amount must complete a credit application and furnish certain personal and financial information to the casino. The casino credit manager verifies the information on the application by contacting the customer's banks and through the use of a central credit bureau, a commercial

enterprise that supplies the casinos with information concerning the customer's previous gambling experience throughout Nevada and in other areas of the world. On the basis of this information, the customer's request for credit will either be granted in full, in a lesser amount, or denied completely. In cases where particularly large sums of credit are requested, more extensive checks are conducted. In some cases, customers request an extension in the amount of credit they are normally allowed. Such extensions, if granted, are generally limited during a single visit to 25 percent over the customer's original limit. Daily computer printouts are issued showing all changes in credit limits, the amount of unused credit available to each customer, the frequency of visits to the casino, and the promptness of payment.

When a customer first establishes credit at the casino, he is asked how he intends to settle his obligations. Many customers pay their entire debt upon their departure; some request that their markers be converted to a bank check to be deposited upon their departure. Still others request that a statement be mailed to them at their home or business. Debts not paid upon the customer's departure are handled by the casino's collection department, which employs standard collection techniques such as billing and telephoning to remind the customer of his obligations. In the case of delinquent debts, personal visits may be made or telegrams sent requesting payment. Accounts that have not been settled within 6 months are sent to a collection agency or to an attorney who will attempt to make the collection. (Nevada law stipulates that gambling debts are not legally enforceable in that State.) If these methods fail, the debts have to be written off as uncollectable. Approximately 3 percent of all credit extended by the casino results in bad debts. The casino has recently designed new computer printouts that show the State of residence of the customer, the casino employee who initially granted the credit, and various other information designed ultimately to minimize these losses.

Once a customer has established his credit rating, he may, upon approval of the appropriate pit boss, receive cash or chips on credit during the course of actual play.

COMPLIMENTARIES. The Golden Grotto, like most of the Strip casinos, spends a large portion of its operating budget (about 15 percent) on the provision of complimentary rooms, drinks, food, entertainment, and air transportation to its preferred customers—the high rollers. The Strip casinos depend upon a steady flow of upper-middle class and wealthy customers. Without such a clientele, they could not maintain the high quality of entertainment, food, and other services for which they have become famous. The casino's complimentary policy is continually scrutinized to determine whether the costs involved are producing the desired results. Formal written policy specifies who may receive complimentaries, how much they may receive, and by whom such privileges may be granted. The activities of customers who have received complimentaries are closely monitored, and the cost of the complimentaries is measured against the value of the

chips purchased, the length and frequency of the customer's gambling activities, and the dollar amounts wagered. This information, along with additional data supplied by a computer, is translated into a rating of the customer's overall profitability. If the cost of the complimentaries becomes excessive in relation to the customer's gambling activity, the customer may be politely advised that he risks losing his complimentary privileges. If such a customer is part of a group, the group organizer will be asked not to reinvite the guest. The cost of the complimentaries is recorded as an expense of the Casino Department and as revenue for the departments providing the service. Approximately 11 percent of the restaurant and hotel revenues consist of complimentaries charged to the casino.

JUNKETS. Junkets-organized group trips to Nevada casinos-are an important source of income for the Golden Grotto and some of the other Strip casinos. They account for approximately 13 percent of the hotel's occupancy rate and are particularly useful along with conventions in filling the hotel and casino during those times of the year when business is normally slower. Not all of the Strip casinos actively promote junket business, however, partly because of the difficulty of operating them profitably. Since junket participants receive free rooms, food, and beverages, the casino stands to lose money unless the participants gamble fairly heavily. No one is invited on a junket unless the casino has assured itself of the customer's ability (if not his intention) to satisfy the gambling and credit obligations that are implicit in the invitation. Theoretically, out of each $1,000 a customer loses through wagering, the casino's profit is about $200, or 20 percent. Thus, for a junket that costs the casino $500 per customer, each participant must gamble at least $2,500. Junket customers who gamble too conservatively are not reinvited.

Establishments that accept junkets are always alert to attempts by junket operators to defraud the casino. As discussed earlier, some casinos have incurred heavy losses as a result of clever and complex junket schemes. In some cases, the organizer alone is responsible for the fraud; in others, the participants are accomplices. Because such schemes generally involve interstate travel, the Federal Government-principally the FBI-is actively involved in investigations of suspected junket fraud.

TIPPING. Casino employees are permitted to accept tips from gaming customers. However, as a precaution against collusion between individual employees and customers, all gratuities are combined into a single pool and divided equally among employees. It is not uncommon for dealers, croupiers, and other gaming employees in the larger casinos to earn more from tips than from their basic salaries.

INTERNAL CONTROL. The methods a casino uses to count its winnings, insure the integrity of its employees, and monitor the movement of cash, chips, and credit comprise

its system of internal control. State gaming regulations require that casinos submit for approval and thereafter follow the specific accounting and internal control procedures they have developed. These procedures must conform with standards set by the American Institute of Certified Public Accountants.

The cashier's cage is the hub of the casino operation. It is accountable at any time of the day for a specific inventory consisting of cash and chips, credit markers, fill requisitions (showing chips brought to tables), and credit slips (showing chips removed from tables).

A unique aspect of casino operations is that the determination of "sales" (wins or losses) must be made on the basis of an inventory accounting rather than on the basis of individual sales transactions. Cash and credit markers received at each gaming table are deposited by the dealer into a locked box attached to the table to which no one in the pit has access. Security guards remove the box at the end of the shift and take it to the "count room." In order to determine how much money has been won or lost, cash, chips, and credit markers from each table are inventoried for each 8-hour shift and compared against the beginning inventory of chips for each table (see table 5-10). On this basis, a win/loss percentage is derived. In order to insure the accuracy of the inventory, detailed procedures have been developed to control all of the different types of transactions possible at the gaming tables-e.g., the exchange of cash for chips or credit, the processing of fill and credit slips, and the movement of cash from the tables and slot machines to the count room.