Robert L. Johnson, Majority Owner of Caribbean CAGE LLC, Proposes a $14 Billion Dollar Revenue Solution to the Congressionally Appointed Puerto Rico Control Board to Help Address Puerto Rico's Financial Crisis by Eliminating Illegal and Non-Taxable Gambli

SAN JUAN, Puerto Rico, Oct. 26, 2016 /PRNewswire/ -- Robert L. Johnson, Founder of Black Entertainment Television and Majority Owner of Caribbean CAGE LLC, in a letter dated October 25, 2016 to the Puerto Rican Control Board, outlined a $14 Billion Dollar revenue plan over the next 20 years which the Puerto Rico Department of Treasury can immediately implement.  The proposal calls for the elimination and conversion of approximately 100,000 illegal gambling machines to be replaced with approximately 30,000 fully regulated and government authorized Video Lottery Terminals connected by a system to the Puerto Rico Treasury Department for tax transparency, compliance and collection purposes. [Please see attached letter.]

Mr. Johnson's letter details the financial capability and professional expertise of the CAGE Team which includes four of the largest gaming companies in the world – Scientific Games, IGT/GTECH, Aristocrat Gaming, and Inspire Gaming.  In addition, the CAGE proposal includes local Puerto Rico firms including Banco Popular and telecommunications company Claro. Robert L. Johnson stated, "The CAGE Team has spent several years researching and developing a legal VLT-gaming platform and operational system for Puerto Rico, much like those that exist in 12 States in the United States.  Not only is the CAGE Team committed to investing in Puerto Rico and the people of Puerto Rico, we are also encouraged by the political and business leaders in Puerto Rico who recognize the necessity for Puerto Rico to rid itself of its underground economy, like non-taxable gambling, and deploy a legal system that would generate much-needed revenue for economic development, job creation, and improve education and social services.  I am convinced that the government of Puerto Rico is committed to a transparent and accountable economic and financial system and will welcome the business opportunity we propose."

For the timeline of events related to the VLT Project, click this link: http://origin-qps.onstreammedia.com/origin/multivu_archive/PRNA/ENR/RLJ-CAGE-VLT-TIMELINE.pdf

Media inquiries contact: Traci Otey Blunt, 240.743.7620 or press@rljcompanies.com

October 25, 2016

Chairman and Members of the Board

Puerto Rico Financial Oversight and Management Board

Re: CAGE $14B Solution for Puerto Rico Over 20-Term of the VLT Project

Dear Members of the Board:

I write this letter in the interest of updating the Financial Oversight and Management Board (the "Board"), established in accordance with section 101 of the Puerto Rico Oversight and Management and Economic Stability Act ("PROMESA") on the recent events that impact the viability of the CAGE Puerto Rico Inc., ("CAGE") $14B New Revenue Solution for the Commonwealth of Puerto Rico.

As you all know by now, the Puerto Rico Department of Treasury ("Treasury") has halted the implementation the Treasury VLT Project contained in the Governor's 5-Year Fiscal Plan which converts 30,000 of the estimated 100,000 illegally operated gaming machines from the underground economy to the official economy of Puerto Rico ("the "VLT Project").  Said delay has deprived the government of Puerto Rico from obtaining these much needed additional revenues to deal with the current fiscal crisis. (Please see the attached chart of the relevant times and dates for a complete understanding of the massive delays in implementing the Treasury VLT Project).

In September 2014, the Puerto Rico Treasury Department put in motion a rigorous procurement process to select the potential Operator of the VLT Project with Direct Negotiations under Act 10 of May 24, 1989, as amended ("Act 10"), the submission by CAGE of detailed confidential information and financial models and culminated in the negotiation of 34 versions of a Professional Services Contract ("PSC").  The Commonwealth was represented in the Direct Negotiations by various consultants and lawyers including the law firm of Kirkland & Ellis LLP and PFM as its financial advisor. 

After extensive negotiations, the Secretary of Treasury advised CAGE in early July 2015, that he had received additional offers and wanted to carry out a competitive procurement process. In July/August 2015, two (2) cases were filed challenging the VLT Regulations.¹ While the two cases were pending, Treasury commenced an RFQ procurement process with a letter dated September 23, 2015 to CAGE requesting potential Operators to appear before the Treasury Selection Panel on October 1, 2015 with each member of their respective teams represented by an officer of the company and with a written certification that said company was exclusively part of the CAGE team. 

The CAGE team in attendance at the October 1, 2015 meeting including representatives of each company and their respective certifications was as follows:

During the meeting with the Treasury Selection Panel on October 1, 2015, Morgan Stanley was requested to also participate in another meeting that afternoon at the Government Development Bank ("GDB") with the Secretary of Treasury, the Deputy Secretary of Treasury and other senior members of Treasury and its consultants including PFM. 

During the second meeting, Morgan Stanley made a presentation and answered questions about its ability to arrange the $650M upfront payment to the Commonwealth on the basis of the sale of a portion of the Commonwealth's share of the accounts receivable generated by the Treasury VLT Project.  The transaction would be structured as a sale of assets and not a loan and therefore, would not involve the Full Faith and Credit of the Commonwealth.  During early 2016, Secretary Zaragoza again contacted Morgan Stanley to confirm that it was still prepared to arrange the $650M upfront payment and was provided the appropriate assurance by Morgan Stanley.

During the meeting of October 1, 2015, CAGE was provided with a written document requiring CAGE and its team members to submit to Treasury on October 14, 2015 a number of documents including five (5) years of certified financial statements and other qualification documentation.  The required documentation of October 1, 2015 was filed by the CAGE team with Treasury on October 14, 2015, thus meeting the established deadline.

Since October 14, 2015 and up through today, Treasury has refused to provide any update or documentation to CAGE concerning the status of the RFQ process including, but not limited to, a list of those Operators which complied with the RFQ requirements.

Recently, Secretary Zaragoza made public statements to the effect and Treasury Deputy Secretary Flores has told the US Senate Majority staff that Treasury was prepared to implement the VLT Project, but for, the pending legal cases which allegedly prevented Treasury from selecting the Operator and executing the PSC. 

The first of the two pending cases - Jorge Torres Martinez v. Department of the Treasury was dismissed on May 31, 2016.  On Friday, October 21, 2016, the PR Court of Appeals dismissed the only pending case – Puerto Rico Hotel and Tourism Association v. Department of the Treasury - thereby removing any impediments or legal obstacles for the Secretary of Treasury to select the VLT Operator and signing the PSC to implement the VLT Project.  To be sure, the PRHTA mere filing of a writ of certiorari to the PR Supreme Court challenging the Court of Appeals decision is not a legal basis for further delaying the signing of the PSC, particularly, under the dire condition of the island's economy.  Furthermore,, the PROMESA Act does not mandate the Secretary of the Treasury to submit all contracts to the Board for its prior approval. 

Specifically, section 204(b)(2) of PROMESA states:

            (2) AUTHORITY TO REVIEW CERTAIN CONTRACTS. – The Oversight Board may establish policies to require Oversight Board approval of certain contracts…." (Emphasis Added)  

I wanted to make certain that the Board understood that Secretary Zaragoza has initiated two procurement processes (Direct Negotiations and RFQ to select an Operator of the VLT Project) and informed the Trial Court, in December 2015, in the PRHTA case about the existing procurement process to select an Operator and also filed the Christiansen Capital Advisors LLC Report. And, more recently in his statements, reported in the Tuesday, October 25, 2016, issue of El Vocero newspaper of Puerto Rico, that he may yet again obtain other proposals from potential VLT Operators which, effectively and unnecessarily further delaying the implementation of the VLT Project.

In light of these facts, everyone interested in the stability of Puerto Rico's economy, we must ask: WHY?

Secretary Zaragoza's dilatory tactics including seeking other proposals or offers have direct and palpable financial consequences on getting much needed revenues to the Commonwealth, the University of Puerto Rico ("UPR") and the other beneficiaries under Act 10 during the current fiscal year which ends on June 30, 2017.

If the PSC is signed during October 2016, the Commonwealth, the UPR and the other beneficiaries will start to receive weekly payments from the Treasury VLT Project in April 2017, still within this fiscal year 2017.  The CAGE Team is still prepared to offer the $650M advance payment on the basis of the sale of some of the accounts receivable due and owing the Commonwealth and not a loan nor supported by the Full Faith and Credit of ELA.  CAGE clearly understands that the proposed $650M upfront payment will required the prior approval of the PROMESA Board.

If Secretary Zaragoza fails to act, it is clear that no revenue will be generated during FY 2017 and the near certainty of a new process with new players and more litigation will further delay the ultimate startup of the new games until 2018, at best.

A brief review of the numbers may assist Members of the Oversight Board in recognizing the magnitude and importance of the VLT Project. 

The Christiansen Report, commissioned and submitted to the Puerto Rico Courts by Secretary Zaragoza, projected a daily Net Win of $153 per day, per terminal with a base allocation of 15,000 terminals.  The Projected revenue is: an estimated $826,200,000 in new VLT revenue per year.

Under the assumption that the Government's share is 30% of Net Win, The Commonwealth would receive $247,860,000 per year in additional income on the basis of 15,000 terminals or $495,720,000 on the basis of 30,000 terminals.²   

When you add the gaming tax/fee of 30%, additional sliding scale revenue (5%) and the other taxes (15%) directly related to the VLT Project, it raises the government's share to an estimated 50% of annual revenue (same as casinos today) or $413,000,000 per year at 15,000 terminals and $826,000,000 per year on the basis of 30,000 terminals deployed and operating under Act 10 and managed by the CAGE Team.

Thus, over the 20-year term of the PSC, under the 15,000 terminal model (Christiansen Report model) and assuming all taxes and fees collected, the government's share is $8,262,000,000.

Under the 30,000 terminal deployment model (using Christiansen Report Net Win model), over the 20-year term of the PSC and assuming all taxes and fees are collected, the government's share is $16,524,000,000.   We have, of course, discounted the revenue over the 20-year term to the $14B rather than the $16.5B.

The CAGE team is prepared to sign the PSC and commence operations to ensure that weekly payments to the Commonwealth, the UPR and other beneficiaries under Act 10 starts in April 2017.

Finally, the CAGE Team, under the PSC (version 34 with the sliding scale) negotiated with Secretary Zaragoza in January 2015, requires the CAGE Team to assume the risk and provide the required capital to startup and operate this important project on behalf of the Electronic Lottery of Puerto Rico.  The Commonwealth is not required to invest in the VLT Project and CAGE has also agreed to make an additional monthly payment of $125,000 per month to Treasury to hire additional Internal Revenue Officers to enforce the laws of Puerto Rico in respect of the Games of Chance Law of 1933, as amended. 

In light of these facts, we respectfully urge the Oversight Board to request that the Puerto Rico Treasury Department move ahead with the selection of a VLT Operator and the execution of the PSC.

Should the Oversight Board require additional information we are available to meet and discuss all related matters at your earliest convenience.

Thank you.

                                                                        Respectfully submitted,

                                                                        Robert L Johnson
                                                                        Majority Owner

CC:      Hon Juan Zaragoza Gomez
           Robert B. Washington

¹ Jorge Torres Martinez et al v. Department of the Treasury KLAN201500807 and Puerto Rico Hotel and Tourism Association v. Department of the Treasury KLAN201601086.

² The projection of 15,000 terminals is unrealistic because there are at least 100,000 illegally operated terminals in an estimated 12,000 to 15,000 local businesses around Puerto Rico.  If you deploy such a low number of terminals you are inviting the continuation of illegally operated gaming machines. It is important to note that the projected revenue whether operating 15,000 or 30,000 terminals, is the government's gaming tax/fee revenue and does not include additional revenue generated by the sliding scale additional revenue, any other taxes including without limitation, corporate taxes on the Operator, withholding taxes on transfers outside of Puerto Rico, Alternative Minimum Taxes, taxes on the Retailers, property taxes, income taxes on over 700 direct employee and 5,000 indirect employees working at Retailer locations.

SOURCE Caribbean CAGE