GATEWAY CASINOS INCOME FUND
MANAGEMENT’S DISCUSSION & ANALYSIS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007
The Vernon Casino is currently located in 12,000 square feet at the Village Green Hotel. It was opened in 1998 and no longer reflects the populations’ expectations for casinos. The Fund’s plans envision relocating the facility to a newly developed 300,000 square foot neighborhood shopping center located on Highway 97 in the north end of Vernon. This is a high traffic location in the middle of a new large-scale retail and business park development, convenient to the city population and the North Okanagan trading areas.In the third quarter of 2006, the Fund finalized negotiations and entered into a long-term lease for the property. This development was purchased by a new developer in late 2006 and the lease was renegotiated to the Fund’s benefit. During the first quarter of 2007, Lake City Casinos entered into an offer to lease a 30,000 sq. ft. single purpose building to be constructed at the Silverstar Shopping Center located at 100-400 Anderson Way in Vernon. The lease term will be 10 years with 2 renewal terms of 10 years, beginning when Lake City takes possession of the property. The landlord shall provide 265 parking stalls on the property for our exclusive use plus an additional 35 non-dedicated parking stalls on the adjacent lot. The offer includes an option for Gateway to purchase the casino property. The building is expected to be completed in the summer of 2008 and the new casino is anticipated to contain up to 400 slot machines, 6 live tables, 2 electronic tables and a small poker room with 2 poker tables. Site preparation has commenced and permits are expected in Fall 2007.
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Facility Development Commission
Gateway’s agreements with the BCLC include a provision for additional compensation equal to eligible capital and operating expenses from Facility Development Compensation (“FDC”) equal to 3% of the total net win generated at the six B.C. casinos. This compensation is in addition to the fee paid for operating the casinos. Accumulated funds are held in trust in accounts managed by Gateway and additional compensation is issued from these accounts. During the first quarter of 2007, Gateway received preliminary approval for recovery of up to $35 million of the costs incurred on the redevelopment of the Burnaby Casino and drew $11.0 million from the Burnaby FDC account to recover against costs incurred on the project to date. The preliminary approval was increased to $43.1 million in June, 2007. During the second quarter of 2007, Gateway drew a further $2.2 million from the account. Final approval from the BCLC is subject to agreement on the basis for allocating the cost of the acquisition of land to the various project components. Once this has been finalized, the percentage of the budget eligible for FDC recovery will be determined.During the first six months of 2007, the Fund has received a total of $13.2 million of FDC recoveries related to the redevelopment of the Burnaby Casino. In accordance with our definition of distributable cash, these amounts have not been included in the calculation above. However, only approximately $8.0 million of this has been needed to fund development costs, as the remaining amounts have been financed through the credit facilities, leaving $5.3 million of cash available. This has been used to fund the shortfall in distributable cash for the first six months, as well as leaving cash available for future use.
Accelerated Facility Development Commission
During the fourth quarter of 2006, the BCLC unveiled an initiative to improve the economic model of casino redevelopment in the province, which was developed in consultation with casino service providers to recognize the recent significant increases in development costs. The Accelerated Facility Development Commission (“AFDC”) provides for an additional amount equal to 2% of the gross win (in addition to the 3% FDC) to recover the capital costs of the redeveloped casino property, and is applicable to projects approved by the BCLC after July 1, 2006. AFDC payments will be payable weekly beginning on the later of April 1, 2007 or the opening of the redeveloped property. The AFDC is a one-time initiative that is limited to the initial redevelopment of a property. Once the approved eligible costs of the redevelopment are recovered through the existing FDC and the AFDC, the service provider is no longer eligible for AFDC on the project and recovery will revert back to the 3% FDC only. Although the AFDC applies only to projects approved by the BCLC after July 1, 2006, Gateway has received written confirmation from the BCLC that the program will apply to the Burnaby Casino.
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Casino Operational Services Agreements
The Burnaby Casino, Cascades Casino and the Lake City Casinos are operated pursuant to Casino Operational Services Agreements (“COSAs”) between the Partnership and the British Columbia Lottery Corporation (“BCLC”). The Palace Casino is operated pursuant to a Casino Facility License, a Casino Gaming Retailer Agreement, and a Video Lottery Retailer Agreement between the Partnership and the Alberta Gaming and Liquor Commission (“AGLC”). The COSAs for the Burnaby Casino and the Lake City Casinos provide for a 10-year term commencing in 2001 (except for the Penticton Casino, which commenced in 2000), with an option to extend for an additional 10 years, subject to certain conditions. The COSA for the Cascades Casino also provides for a 10-year term, with an option to extend for an additional 10 years, subject to certain conditions, commencing in 2005.
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