Florida Gaming Corporation

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Florida Gaming Corporation

3500 NW 37th Avenue
Miami, Florida 33142
U.S.A.
Telephone: (305) 633-6400
Fax: (305) 633-4386
Web site: http://www.fla-gaming.com

Public Company
Incorporated: 1976 as Lexicon Corp.
Employees: 373
Sales: 12.5 million (2000)
Stock Exchanges: OTC
Ticker Symbol: BETS
NAIC: 711219 Other Spectator Sports

Florida Gaming Corporation bills itself as the world’s largest jai-alai operator in the world. At the company’s Miami and Fort Pierce Jai-Alai facilities, called frontons, customers can wager on live matches as well as on televised horse races and greyhound races. Jai-Alai at Fort Pierce is offered on a seasonal basis, while Miami matches are presented year-round and transmitted by satellite to 62 parimutuel wagering locations in Florida, Connecticut, and Rhode Island, in addition to 25 locations in Mexico, Central America, and Austria. The Miami fronton also houses the Crystal Card Room, where small-stakes poker and dominoes are played.

Origins in 1976

The corporate lineage of Florida Gaming can be traced back to the Lexicon Corporation, which had no connection to jai-alai or gambling. It was cofounded in 1976 by Michael Levy, a Georgia Tech engineering graduate who in the early 1970s was involved in pioneering computer efforts. Working with Harris Corporation he designed a microcomputer-based utility-control system. He then went to work for Miami’s Milgo Electronics, a data modem manufacturer, before striking out on his own with Lexicon, which was established to manufacture a handheld language translator that Levy helped to design and patent. The company went public and Levy, at the age of 32, became president and CEO. Lexicon enjoyed some early success but efforts at developing other products failed to pay off. Among a number of attempts, it tried marketing a talking scale and became a defense contractor selling missile parts. In 1988, Levy created a subsidiary called Sports-Tech, which created a video-editing system for professional and college football coaches. The business secured enough early customers to warrant spinning off Sports-Tech in 1989 and taking it public. In the end, however, Lexicon failed to find a suitable business mix, never managed to top the $20 million mark in annual sales, and slowly faded. By 1993, the company was on its way to being delisted by the NASDAQ. Lexicon was sold to Freedom Financial Corp., and Levy resigned as both an officer and director of the company. Several months later he launched a new company, SportsLine USA, an early Internet business, which would later merge with CBS and become one of the most successful sports web sites.

Freedom Financial was almost exclusively owned by W. Bennett Collett, a businessman with a checkered background. He grew up in Kentucky during the Depression, his family forced to live off the dollar-per-day wages his mother earned as a domestic worker. During high school, Collett toiled in coal mines and saw mills before working his way through Ohio State, where he studied business and accounting. After a turn as an accountant, he struck out on his own, becoming primarily involved in insurance and banking. He served as principal shareholder and chief executive officer of 11 small banks across the country. According to the Miami Herald, “He was sued for fraud by the Securities and Exchange Commission in 1979. The SEC alleged Collett headed a group of investors who acquired companies and gutted them by causing them ’to transfer valuable assets for inadequate consideration.’” Although Collett settled the matter without admitting guilt, he signed an order of permanent injunction, pledging not to violate SEC anti-fraud regulations. At the same time, Collett, according to the Herald, was also coming under fire from the Indiana Department of Insurance, which “forced Collett’s Pilgrim Life Insurance into liquidation. In 1981, the department sued Collett personally, claiming he had stripped Pilgrim of its liquid assets.” He reportedly settled the suit for $175,000 two years later. According to the Herald, “Collett says he never paid to settle a suit in Indiana. He does acknowledge paying $75,000 to the estate of an insurance company in Maryland to settle charges against him there. In all, four of Collett’s insurance companies ended up in liquidation.” He established Freedom Financial Corporation in 1985 to serve as a bank holding company, but by 1988 sold off its banking subsidiaries. Collett attempted to take Freedom Financial public in 1990 with the intention of raising $10 million, but, according to the Herald, “state regulators in New Jersey, Indiana, and Kentucky killed” the offering because “the prospectus issued to potential investors failed to disclose that Collett had been the subject of at least six prior legal actions.” According to Indiana Securities Division Commissioner Mark Maddux, as quoted by Business First-Louisville, Collett “had a history of bad relations with people who have invested in his entities. There’s just been a long history of disgruntled investors in this person’s companies.” Despite being unable to take Freedom Financial public, Collett gained the benefits of a publicly traded, listed company when Freedom Financial acquired Lexicon, which by 1993 was nothing more than a shell corporation.

Introduction of Jai-Alai to United States

Collett used Lexicon to enter the jai-alai business, a choice that appeared curious at first glance, since the glory days of the sport were long past. Jai-Alai is derived from the ancient game of handball. The contemporary game traces its origins to the Basque provinces of Spain and France during the 15th century. The Basque version of handball, or “pelota vasca,” was played against a wall called a fronton, from which the name of a modern jai-alai facility is derived. The three-walled jai-alai court is known as the cancha. “Jai-Alai” itself means “merry festival,” alluding to the tradition of playing the games during religious and holiday festivals. As the game evolved, bare hands were protected by leather gloves, then replaced by wooden paddles and ultimately the cesta, a long, hooked woven basket made of birch strips used for catching and throwing, which was introduced in the mid-19th century. It was the cesta that allowed jai-alai players to hurl the ball (“pelota”) at speeds clocked as high as 175 miles per hour. The advent of the cesta completely changed the nature of the game. The ball was extremely hard, requiring granite walls, and the speed necessitated courts that were 172 feet long.

Jai-Alai was introduced in the United States at the St. Louis World’s Fair in 1904, and Florida became the home of the nation’s first Jai-Alai fronton in 1924. Ten years later, wagering on the sport was legalized in the state. In the 1970s, the “spectacular seven” scoring system was introduced to shorten the length of games in order to increase the frequency of wagering. Essentially bettors bet on a player in a singles match, or two-man team in a doubles match, in a round-robin format that featured eight players or teams playing to seven points. As with horse racing, bettors could make win, place, and show wagers, as well as a variety of “gimmick” bets such as the quinella (picking two numbers to finish in the win and place positions), the exacta (picking two numbers to finish in the win and place positions in exact order), and the trifecta (picking three numbers to finish in the win, place, and show positions in exact order).

Although Connecticut and Rhode Island also became havens for jai-alai in the United States, the sport was generally associated with Florida. With little competition from other professional sports or gambling outlets, jai-alai flourished in the state, reaching a peak in popularity in the late 1970s and early 1980s. A number of factors would intervene, however, that severely hurt the business. Jai-Alai suffered a game-fixing scandal in the late 1970s, then in 1988 the players went on strike for two years. Although replacements were brought in, attendance suffered because fans had to cross picket lines to enter the frontons. In addition, major professional sports entered the territory. For a number of years the Miami Dolphins were the lone professional franchise, but they were soon followed by the Tampa Bay Buccaneers and Jacksonville Jaguars in football. The National Basketball League awarded franchises to Miami and Orlando, while Major League Baseball and the National Hockey League expanded to Miami and Tampa Bay. Moreover, jai-alai faced ever-widening competition for gambling dollars. No longer contending with just horse and dog tracks, the fronton also competed against casinos and bingo halls operated by Native American tribes and casino ships that offered gaming three miles offshore. Perhaps the biggest impact, however, was caused by the introduction of the state lottery, which siphoned off many of jai-alai’s traditional blue-collar, two-dollar bettors.

The amount wagered at a gambling facility, termed the “handle,” was in steady decline at Fort Pierce Jai-Alai when Collett and Lexicon agreed to pay $3 million in February 1994 to acquire the inter-track wagering facility. Two months later Lexicon changed its name to Florida Gaming. Collett was not alone in developing a sudden interest in entering the jai-alai business, as within months jai-alai licenses increased dramatically in value. A referendum calling for the creation of 47 casinos, including the state’s 30 parimutuel sites, was on the ballot in the November 1994 election. Twice before, in 1978 and 1986, Florida voters had rejected casino gambling, but in the past the parimutuel forces were left out of the equation and campaigned against the initiatives. Now jai-alai and racing interests were united in support of the referendum known as Proposition 8.

Company Perspectives:

The Florida Gaming Corporation had its various companies produce one mission statement: to provide for over 75 years the very best the sport of jai-alai has to offer. We remain dedicated to this goal. While Florida Gaming offers other forms of wagering, such as poker and dominoes at Miami Jai-Alai, and simulcast betting on horse and dog racing at Ft. Pierce, there is one thing our patrons can count on: the opportunity to see jai-alai played at its highest level. We provide this top-notch sports entertainment for the public’s enjoyment.

Collett told the press, “I’d like to say we knew this casino referendum was a possibility then, but in truth, we had no clue,“adding that the fronton had been purchased because he “thought we could turn this into a very profitable business.” According to SEC filings made by Florida Gaming, however, the company “participated in a Florida lobbying group that collected signatures to place a referendum before the voters of Florida in November 1994 to amend the Florida Constitution to permit casino gaming.” Clearly, Florida Gaming’s interest in jai-alai was related to the possibility of opening a casino, and in October 1994 the company signed a joint venture agreement with Casino America, Inc., to build and operate a casino at the Fort Pierce fronton if the referendum passed. Casino America was one of the nation’s largest operators of riverboat casinos. The forces supporting Proposition 8 launched an advertising campaign in the weeks before the election, but Florida voters again rejected casino gambling.

Florida Gaming did not give up on the possibility of becoming involved in the casino business, retaining hope that the idea would ultimately take hold in Florida while at the same time seeking an alternative entry. In June 1995, the company signed an agreement with Centrum X Corporation, gaining first refusal rights to develop and manage a casino on the Tonkawa Indian Reservation in Oklahoma. Two months later Florida Gaming agreed in principle to acquire Eagle Visions Gaming Group of the Americas Inc., which was headed by the former chief of the Mystic Lake Casino Complex in Minnesota. Also in August 1995, Florida Gaming signed an agreement to run a casino for the Ponca Tribe in Douglas County, Nebraska. None of these efforts to become involved in Native American casinos panned out. In addition, the company attempted in 1997 to become involved in Las Vegas, agreeing to pay $14.5 million for the Bourbon Street Hotel and its shuttered casino, a small property located a block from the famed Las Vegas strip. Collett vowed to spend as much as $6.5 million to renovate Bourbon Street, but the deal was never finalized and the property was sold to another party in 1998.

Approval for Low-Stakes Poker Rooms: 1997

Although Florida voters rejected casino gambling, legislators decided in 1996 to allow parimutuels to open low-stakes poker rooms in their facilities, pending local approval, starting January 1, 1997. The tables only permitted $10 maximum pots, of which the state received 10 percent, yet parimutuels were hopeful that they could make a profit out of poker. On December 31, 1996, Florida Gaming acquired WJA Realty Limited Partnerships, which owned jai-alai facilities in Tampa, Miami, and Ocala. The deal made Florida Gaming the largest jai-alai operator in the world, as well as one of the largest poker room operators in Florida.

Although the company’s handle increased dramatically, from $25 million in 1996 to over $125 million in 1997, Florida Gaming lost over $4 million for the year. Much of that shortfall was due to the cost of building card rooms, but other factors were also involved. Poker played for a maximum $10 pot essentially eliminated raises and hardly generated the kind of enthusiasm necessary from bettors to make the business thrive. More importantly, the health of jai-alai was jeopardized because state taxes were based on the amount wagered rather than the amount of actual revenues. This formula may have worked at a time of much larger handles (which totaled $414 million statewide in 1986–87 and fell to $180 million in 1995–96), but now it was having a devastating effect on jai-alai operations, which might lose money and still have to pay taxes. Rates were lowered but the move still did not solve the problem.

Florida Gaming endured a difficult 1998. In February, the company agreed to sell the real estate of its Tampa Jai-Alai facility, which had been in business since 1953, for $8.3 million. Nevertheless, the company elected to retain the jai-alai license, which could still prove valuable in the event of casinos becoming legal in Florida. The price of Florida Gaming stock, which traded at a high of $17.25 in 1995, dropped below $1.35 in July 1998, shortly before the Miami Herald published a scathing recap of Collett’s past business dealings. The article also questioned the relationship between Freedom Financial and Florida Gaming: “In recent years, money and property has flowed between Florida Gaming and Freedom Financial. The largest deal was last fall, when Freedom sold a Georgia real estate development called Tara Club Estates to Florida Gaming for $6.4 million.” In response, Collett denied any impropriety but promised to sever financial ties between the companies as soon as he was able to finalize the sale of the Tampa Jai-Alai property and pay off some debts. The Miami Herald, however, was not alone in its criticism of the relationship between Freedom Financial and Florida Gaming. The NASDAQ also made note of the situation when announcing that Florida Gaming would be delisted in August 1998.

Florida Gaming in the New Century

Florida changed the tax laws so that jai-alai profits were taxed rather than the handle, but the move came too late to save Tampa Jai-Alai. In fact, the entire jai-alai industry was on the verge of collapse. In 1987, there had been 12 frontons operating in Florida, but by July 1998 there were only five, and Florida Gaming began looking to sell its Ocala operation. It was not until August 2000 that the company was able to complete a sale of the fronton. In the meantime, Florida Gaming lost over $2 million in 1998 but rebounded in 1999, posting a profit of more than $1.5 million.

Key Dates:

1976:: Lexicon Corp. is formed.
1993:: Freedom Financial Corp. acquires Lexicon.
1994:: Fort Pierce jai-alai facility is acquired; the company changes its name to Florida Gaming Corporation.
1996:: Three more jai-alai facilities are acquired.
1998:: Tampa Jai-Alai is sold.
2000:: Ocala Jai-Alai is sold.

Florida Gaming streamlined its business in 2000, operating just two jai-alai frontons, one in Fort Pierce for a summer season and one in Miami that operated year-round. Coupled with further tax breaks from the state, the company, and the sport of jai-alai, appeared to be stabilizing. The halcyon days were definitely in the past but jai-alai remained enough of a draw to stay alive, at least in Miami with its heavy influx of tourists. In addition, technology allowed jai-alai matches to be simulcast for wagering in 62 parimutuel sites in Florida as well as locations in Connecticut, Rhode Island, Mexico, Central America, and Austria. In February 2002, Florida Gaming signed an agreement to broadcast its Miami Jai-Alai matches over the Internet, using streaming video. World Gaming Services would also offer viewers gaming options. In addition to jai-alai, Florida Gaming continued to draw income from its poker and domino tables, as well as inter-track wagering. The company also retained its Tampa Jai-Alai license. It was likely that Florida Gaming would only use the license in the event that the state finally approved casino gambling. Until that time the company would have to be content with the limited possibilities of the jai-alai business and its poker tables.