October 9, 1996
Xx. Xxxxx X. Xxxxxxx, Xx.
General Partner
WJA Realty Limited Partnership
P.O. Box 1439
Tulsa, Oklahoma 74110
Dear Xxxxx:
This letter sets forth in the form of a letter of intent the
terms of the transaction pursuant to which Florida Gaming
Corporation, a Delaware Corporation, ("FGC") proposes to acquire
(the "Acquisition") all of the tangible and intangible properties
and assets (collectively, the "Assets") owned by WJA Realty Limited
Partnership, a Massachusetts limited partnership, ("WJA") or used
in the operation of Xxx Xxxx (and related businesses, including
inter track wagering) in Miami, Tampa, and Ocala, Florida (the
"Business"), and to assume certain liabilities related to the
Business.
Subject to the negotiation, signing and delivery by WJA and
FGC of a definitive acquisition agreement (the "Agreement") and the
"Understandings" stated below, we propose an aggregate purchase
price (the "Purchase Price") for the Assets as provided below:
(a) the cancellation of WJA's bank notes and related
obligations recently acquired by FGC from the Bank of
Oklahoma, National Association (the "WJA Notes"), and
(b) the exclusion from the Assets (permitting WJA to retain)
the 200,000 shares of FGC common stock currently owned by
WJA, and
(c) a profit sharing arrangement described in more detail
below (the "Profit Sharing Arrangement") pursuant to
which, for the first ten years after the closing, WJA
would receive a portion of the net profits before income
taxes of the Business (plus the similar business
conducted at the Ft. Xxxxxx facility previously purchased
by FGC from WJA) ("Net Profits"), and
(d) Assumption by FGC and agreement to pay the following
items (the "Assumed Liabilities")
1. The principal amount outstanding under a
$500,000 promissory note owed to Xxxxxxx-Phoenix,
Inc., with the terms amended to provide for
repayment of principal over a ten year period
following the closing in equal annual installments
and an annual interest rate of 6%.
2. All liabilities of WJA arising in the ordinary
course of the Business whether in contract,
tort, or otherwise subject to certain limits
and subject to a specific definition of
"ordinary course of the Business."
Purpose. The purpose of this letter of intent is (a) to
confirm that it would be worthwhile to complete a detailed
evaluation (the "Review") by FGC of the Business, the Assets and
the Assumed Liabilities to determine that no material, appropriate
adjustments to the Purchase Price are required, (b) to commence the
preparation of the Agreement, (c) to undertake the process of
obtaining regulatory approval for the Acquisition, and (d) to
provide a basis for review of the Acquisition by our Board of
Directors.
The Transaction. We propose either (a) that the Acquisition
be structured as a transfer of the Assets to a subsidiary (the
"FGC Subsidiary") to be formed by FGC to effect the Acquisition
(the assets previously obtained from WJA relating to the Ft.
Xxxxxx, Florida Xxx Xxxx operation will also be contributed by FGC
to the FGC Subsidiary), or (b) that the Acquisition be structured
in such other fashion as our and your legal, accounting and tax
advisers may suggest so long as the transaction is not less
favorable to FGC and to you and your shareholders and partners than
if the Acquisition were structured as described in clause (a)
above.
The Profit Sharing Arrangement. The Profit Sharing
Arrangement will provide for a payment of 20% (the "20% Payment")
of the cumulative Net Profits of the FGC Subsidiary (a) for each
of the first ten full calendar years after the closing (the "Ten
Year Period"), subject to a cumulative $1,000,000 per year cap for
the 20% Payment, plus (b) payment of 5% (the "5% Payment") of the
amount by which Net Profits in any of the full calendar years
during the Ten Year Period exceed $5,000,000. No Net Profit
payments will be due for any year after the Ten Year Period.
To determine the amount of the 20% Payment, the following
calculation shall be made as of the end of each of the calendar
years during the Ten Year Period:
(A) The Net Profits for the FGC Subsidiary for each
completed year during the Ten Year Period shall be
added together; if this results in a negative
number, there will be no profit sharing payment
with respect to the year most recently completed.
(B) If the result of (A) is positive, that result shall
be multiplied by 20 percent.
(C) The sum of all amounts previously paid in profit
sharing will then be subtracted from the result of
(B); if this results in a negative number, there
will be no profit sharing payment with respect to
the year most recently completed.
(D) If the result of (C) is positive, the profit
sharing payment will be the lesser of the result
of (C) and the annual cap. The annual cap for each
year shall be equal to (a) the product of
$1,000,000 multiplied by the number of years of the
Ten Year Period then completed, minus (b) the sum
of all amounts previously paid in profit sharing.
Examples:
Example 1 Example 2
20% 20%
Net Profit 20% Payment 5% Net Profit 20% Payment %5
Year (Cumulative) Payment Explanation Payment (Cumulative) Payment Explanation Payment
1 $2,500,000 $6,000,000
($2,500,000) $500,000 $-0- ($6,000,000) $1,000,000 Annual Cap $50,000
2 $4,000,000 $4,000,000
($6,500,000) $800,000 $-0- ($10,000,000) $1,000,000 20% of $-0-
$10,000,000
minus
$1,000,000
paid in
previous year
3 $9,000,000 Annual Cap $200,000 $7,500,000 $1,000,000 Annual Cap $125,000
($15,500,000) $1,700,000 ($3,000,000 ($17,500,000) ($3,000,000
minus minus
$1,300,000) $2,000,000)
Net Profits for the FGC Subsidiary shall be determined (a) in
accordance with generally accepted accounting principles, applied
consistently with those previously applied to FGC, but (b) as if
the FGC Subsidiary was a stand alone entity and not part of a
consolidated group or subject to other similar tax and accounting
treatments. The Agreement will provide for approval mechanisms for
WJA to confirm the correctness of Net Profit calculations, and for
resolving disputes covering Net Profit calculations. The Agreement
shall also provide for limitations to preserve the integrity of the
FGC Subsidiary as a separate business and accounting entity, and to
limit transactions with, and distributions to, affiliates of FGC.
If during the Ten Year Period, the FGC Subsidiary disposes of
any of its significant assets or operations, then WJA shall be
entitled to receive an amount equal to ten percent of the FGC
Subsidiary's gain, if any, on the disposition (a "Disposition
Payment"). The FGC's Subsidiary's gain, if any, on a disposition
shall not be included in determining Net Profits for purposes of
determining the amount of 20% Payments and 5% Payments. There will
be no cap or limit on the amount of any Disposition Payment.
However, Disposition Payments shall count as 20% Payments in
determining the cumulative annual cap on 20% Payments.
The FGC Subsidiary
A pro forma opening (i.e., immediately after the closing of
the WJA asset acquisition and the contribution of the Fort Xxxxxx
Xxx Alai assets) balance sheet is attached to this letter as
Exhibit A.
Officers and employees of the FGC subsidiary will be paid fair
compensation (including fringe benefits) regardless of whether the
officer or employee is an affiliate of Florida Gaming, based upon
a comparison to similarly situated officers and employees in the
parimutuel and gaming industry. Expenses incurred by FGC that are
attributable to the FGC Subsidiary (including a fair allocation of
general and administrative expenses) will be passed through to the
FGC Subsidiary without any add-ons or mark-ups. The FGC Subsidiary
may have debt to FGC and/or unaffiliated lenders. Any debt to FGC
will be at rates and terms that are the same as those available to
FGC from unaffiliated lenders. Any debt to unaffiliated lenders
will be at whatever rates and terms can be negotiated with those
lenders. All accounting for the FGC Subsidiary will be according
to GAAP applied in a manner consistent with the accounting for FGC.
The Agreement may contain further guidelines regarding these
matters.
The Agreement. We contemplate that, among other things, the
Agreement will
(1) Set forth appropriate and customary representations
and warranties by WJA and its general partners with respect to WJA
and the Assets, and by FGC with respect to its authority, with
provision for verification of those representations and warranties.
(2) Provide effectively for the indemnification of FGC
and WJA with respect to any material undisclosed liabilities,
contracts or commitments, any material breach of any covenant and
any inaccuracy in any representation or warranty.
(3) Require that pending the closing of the Acquisition
and related transactions, except as specifically provided in the
Agreement, the business of WJA will be conducted strictly in the
ordinary course, with specific provisions concerning specific
aspects of the ordinary course such as the nonpayment by WJA of
distributions.
(4) Establish as conditions of the closing, among others
(a) The accuracy and verification of
representations and warranties as of the date of the execution of
the Agreement and the closing.
(b) The receipt of customary certificates and
opinions and current financial statements.
(c) The absence of material adverse changes between
the execution of the Agreement and the closing.
(d) The approval, or absence of disapproval as
applicable, of all relevant government agencies and bodies,
including without limitation and as required, the Florida
Department of Business Regulation, Division of Para-mutuel
Wagering.
(e) The execution by FGC of consulting agreements
with Xxxxxxx X. Xxxxxxx and Xxxxx X. Xxxxxxx, Xx.
(5) Provide that neither FGC nor the FGC Subsidiary will
assume or become responsible for any other liabilities (whether
known or unknown, contingent or otherwise) of WJA other than the
Assumed Liabilities and WJA's obligations under the contracts which
FGC determines to assume.
(6) Provide that FGC shall provide WJA with the data and
reports that it has in its possession as may be necessary for WJA
to prepare its tax return for the period ending at the Acquisition.
Understandings. Without in any way limiting the generality of
the further negotiated provisions to be included in the Agreement,
we understand ("Understandings") that
(1) There are no agents or brokers representing you or
us with respect to the Acquisition who or which will be entitled to
any payment from you or us, and we shall promptly notify each other
if any agent or broker suggests to either of us that the agent or
broker is so representing you or us and will be entitled to any
payment from you or us. Each of WJA and FGC will pay its own
accounting and legal fees and expenses.
(2) From the date of this letter of intent, FGC and its
employees and agents will, upon reasonable notice during normal
business hours, have complete and unfettered access to all of WJA's
books and records and outside accountants' work papers, and to all
of the Assets and the premises of WJA, and WJA and its employees
and agents will cooperate fully with us and our employees and
agents to prepare for a smooth assumption of ownership by us;
provided, however, that we will keep any non-public information
received or learned by us in connection with your granting us
access to WJA's books and records strictly confidential if the
Acquisition is not consummated.
(3) WJA will cooperate fully and expeditiously in
providing FGC with all of the information, and verification
thereof, which we request for the preparation of applications for
regulatory approval and required for appropriate notifications and
disclosures.
(4) FGC will conduct and complete its initial review on
or before October 18, 1996. On or before October 18, 1996, FGC
shall report to WJA on the results of FGC's initial review and on
whether the initial review indicates to FGC that any adjustments to
the purchase price are appropriate. If such report of FGC asserts
that such an adjustment is appropriate, and WJA does not agree, or
if FGC fails to timely make such a report on or before October
18,1996, either WJA or FGC may terminate this Agreement in
Principle on or before October 23, 1996.
(5) We shall each have an opportunity to comment in
advance of release on the other's public announcement of this
letter of intent.
(6) Except for the Understandings which by their terms
survive termination of this letter of intent, this letter of intent
will terminate October 28, 1996, unless extended by agreement, if
the Agreement has not been entered into by that date. The
Acquisition should be consummated on or about November 30, 1996.
So long as this letter of intent remains in effect, you will not
solicit, authorize the solicitation of, or enter into any
discussions with any third party concerning (a) a purchase, lease
or other acquisition of any of the Assets or any shares or
interests in WJA, any option or warrant to purchase any shares or
interests in WJA or any securities convertible into such shares or
interests or (b) a merger, consolidation or other combination with
WJA.
(7) Neither FGC nor any affiliate of FGC is a party to
any understanding, agreement or arrangement which would materially
inhibit FGC's ability to consummate the Acquisition. Subject to
any contrary provision of state law, neither WJA nor any affiliate
or partner of WJA is a party to any understanding, agreement or
arrangement which would materially inhibit WJA's ability to
consummate the Acquisition.
* * * * *
You understand that this letter of intent is not intended to
create a legal obligation upon either you or us or any of the
undersigned, except with respect to the foregoing Understandings.
No other obligations will be created except by the contemplated
Agreement among you, us and the undersigned.
Although it is understood this letter of intent is not the
Agreement, and that the Agreement would be evidenced only in
definitive agreements in writing along the general lines proposed
herein, if the foregoing correctly sets forth your understanding of
our mutual statement of current intent and of our agreement as to
the Understandings, please indicate your approval in the space
provided below and return one fully executed copy of this letter to
the undersigned. This letter of intent shall have no effect on
either of us unless the enclosed copy of this letter has been
signed where indicated on behalf of WJA and by the undersigned
partners and shareholders and returned to FGC by October 9, 1996.
Very truly yours,
/s/ X. Xxxxxxx Xxxxxxx
X. Xxxxxxx Xxxxxxx,
Chairman and CEO
WJA Realty Limited Partnership,
By /s/ Xxxxx X. Xxxxxxx, Xx.
Title: General Partner
Date: 10/9/96
EXHIBIT A
FGC SUB-BALANCE SHEET (AFTER ACQUISITION OF WJA.)
FGC Sub. WJA Adjusting FGC/
6/30/96 5/31/96 Entries WJA
ASSETS Note 1 Note 2 Note 3 & 4 Subsidiary
Current Assets
Cash $2,600,000 $429,000 ($2,302,500) $726,500
Notes and Receivables 85,924 167,000 (100,000) 152,924
Inventories 32,616 79,000 111,616
Prepaid Expense & Other 39,303 151,000 190,303
Total Current Assets $2,757,853 $826,000 $2,402,500 $1,181,343
Investments/Gaming Venture 344,000 134,000 478,000
Total Investments $344,000 $134,000 - $478,000
Investment WJA Note
Land $1,127,221 $6,456,000 $7,583,221
Buildings/Improvements 1,937,418 24,177,000 26,114,418
Furn/Fix/Equip 668,985 3,735,000 $2,302,500 6,706,485
Construction WIP 47,000 47,000
Subtotal $3,733,624 $34,415,000 $2,302,500 $40,451,124
Less Accum. Depreciation (432,694) (21,466,000) (21,898,694)
$3,300,930 $12,949,000 $18,552,430
Other Assets $ 20,148 $ 980,000 $ (700,000) $ 300,148
Subtotal $ 20,148 $ 980,000 $ (700,000) $ 300,148
TOTAL ASSETS $6,422,921 $14,889,000 ($800,000) $20,511,921
FGC SUB-BALANCE SHEET (AFTER ACQUISITION OF WJA)
FGC Sub. WJA Adjusting FGC/
6/30/96 5/31/96 Entries WJA
LIABILITIES & CAPITAL Note 1 Note 2 Note 3 & 4 Subsidiary
Current Liabilities
Accounts Payable $117,591 $2,199,000 $2,316,591
Accrued Expenses $245,661 $489,101 734,762
Short Term/Current Portion L.T. Debt $100,000 $12,000,003 (100,000) 12,000,003
Total Current Liabilities $463,252 $14,688,104 ($100,000) $15,051,356
Long Term Liabilities
Long Term Debt $700,000 $500,000 (700,000) $500,000
New Long Term Debt $0
Total Long Term Debt $700,000 $500,000 (700,000) $500,000
Contingent Purchase Liability $0
Stockholders Equity
Class A. Preferred, Convertible - 0
Class B. Preferred, Convertible - 0
Common Stock $5,259,669 5,259,669
Treasury Stock -
Capital in Excess of Par - 0
Retained Earnings/Accum. Deficit - (299,104) 299,104
Total Equity $5,259,669 $(299,104) $4,960,565
TOTAL LIABILITIES & CAPITAL $6,422,921 $14,889,000 - $20,511,921
NOTES TO SUBSIDIARY FORMATION ENTRIES/WJA COMBINATION
Note (1) - Reflects the contribution by FGC of its assets to the subsidiary
excluding excess land valued @ Approx. $1.6 Million and Contributing $2.6
Million in cash for improvements and operating cash and also excluding
intercompany receivables.
Note (2) - Reflects the contribution of WJA assets and assumption of
liabilities, however the BOK debt and accrued int. of approximately $20.4
have been replaced with a $12 Million obligation to Florida Gaming (Parent).
This also reflects to 200,000 of Florida Gaming Shares remaining in the hands
of WJA beneficial owners.
Note (3) - Reflects monies spent by the subsidiary for poker and other
improvements.
Note (4) - Reflects the cancellation of the Mortgage Debt of the Subsidiary
to WJA.
*Goodwill and asset writeups booked at parent level. Adjustments for the
Bank Debt purchased at discount and any combination adjustments. Actual
financials may reflect adjustments depending on the final structure of the
transaction.
