Gateway Casinos Income Fund
TSX : GCI.UN

Gateway Casinos Income Fund

May 15, 2006 16:54 ET

Gateway Casinos Income Fund Reports First Quarter Financial Results

BURNABY, BRITISH COLUMBIA--(CCNMatthews - May 15, 2006) - Gateway Casinos Income Fund (the "Fund" or "Gateway") (TSX:GCI.UN), one of the largest casino operators in Western Canada, today reported its first quarter financial results for the three month period ended March 31, 2006.

Q1 2006 Highlights

- Revenue increased to $26.7 million from $25.2 million in Q1 2005

- EBITDA totaled $10.7 million compared to $10.3 in Q1 2005

- The Fund generated distributable cash of $10.3 million and declared distributions totaling $9.1 million, representing a payout ratio of 88.7%

- On April 3, the Fund entered into a letter of intent to acquire all of the operating assets of the Cascades Langley Casino and Hotel

- On May 1, 2006, Gateway entered a fixed price construction contract with PCL Constructors Westcoast Inc. for the redevelopment of the Burnaby Casino

Revenue for the Fund in the first quarter of 2006 increased 5.9% to $26.7 million compared to $25.2 million in the first quarter of 2005. The Fund's increase in revenue resulted primarily from continued growth of slot machine revenue in the Burnaby and Lake City Casinos, which increased $1.3 million, or 8.6%, over the same period a year ago.

For the three months ended March 31, 2006, the Fund generated EBITDA of $10.7 million compared to $10.3 million in the first quarter 2005, representing an increase of 3.9%. Net earnings for the quarter were $9.2 million, or $0.35 per unit compared to $8.7 million or $0.33 per unit in the first quarter of 2005.

During the quarter, the Fund generated distributable cash of $10.3 million, or $0.389 per unit, and paid distributions of $9.1 million or $0.345 per unit, representing 88.7% of cash available for distributions.

Subsequent to quarter end, the Fund achieved a number of significant milestones. On April 3, the Fund entered into a letter of intent to acquire all of the operating assets of the Cascades Langley Casino and Hotel in Langley, British Columbia. The transaction, valued at approximately $106.3 million, will be immediately accretive to unitholders, will provide enhanced geographic and operational diversification and, upon closing, will result in an increase in the Fund's monthly distribution by $0.0045 per unit to $0.1195 per unit per month. The acquisition is subject to disinterested unitholder approval at a special meeting of unitholders to be held on May 17, 2006.

On May 1, 2006, Gateway entered a fixed price construction contract with PCL Constructors Westcoast Inc. for the redevelopment of the Burnaby Casino that guarantees both price and substantial completion of construction. Concurrently, Gateway entered into an agreement with a syndicate of Canadian chartered banks to provide debt funding for the Burnaby redevelopment.

"Our operations continue to perform well," said Dave Gadhia, CEO of Gateway Casinos G.P. Inc. "The first quarter of 2006 outperformed the first quarter of 2005 by a healthy margin. All of our operating segments continue to meet our expectations and the growth in their revenues support our expansion plans."

Notice of Conference Call

Management of Gateway Casinos Income Fund will host a conference call on Tuesday, May 16, 2006 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern) to discuss first quarter 2006 results. The call can be accessed by dialing: 1.877.323.2011 or 416.695.5299. A replay will be available until April 10, 2006 at:

1.888.509.0081 or 416.695.5275 (access code: 621673).

About the Fund

The Fund is an unincorporated, open-ended limited purpose trust established under the laws of British Columbia, which operates the Burnaby Casino in Greater Vancouver, BC, the Palace Casino in Edmonton, Alberta and the Lake City Casinos in Kamloops, Kelowna, Penticton and Vernon, BC. Headquartered in Burnaby, BC, the Fund is one of the largest casino operators in Western Canada.

To find out more about Gateway Casinos Income Fund (TSX: GCI.UN), visit our website at http://www.gatewaycasinosincomefund.com.

GATEWAY CASINOS INCOME FUND

MANAGEMENT'S DISCUSSION & ANALYSIS

FOR THE THREE MONTHS ENDED MARCH 31, 2006

Management's Discussion and Analysis

This management's discussion and analysis ("MD&A") of our operating results and financial position is dated as of May 15, 2006, and should be read in conjunction with the unaudited interim consolidated financial statements of Gateway Casinos Income Fund (the "Fund") for the three months ended March 31, 2006 (the "Quarterly Financial Statements"), the audited consolidated financial statements of the Fund for the year ended December 31, 2005 (the "2005 Financial Statements"), as well as the accompanying notes to both, and the management's discussion and analysis for the year ended December 31, 2005, dated March 20, 2006 (the "2005 MD&A"). The Quarterly Financial Statements are reported in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles for interim financial statements.

Forward-looking statements

This management's discussion and analysis may contain forward-looking statements, which reflect management's expectations regarding the future growth, results of operations, performance and business prospects and opportunities of the Fund and its subsidiaries. Forward-looking statements typically contain words such as "anticipates", "believes", "continue", "could", "expects", "indicates", "plans" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including the effects, as well as changes in: national and local business and economic conditions; competition within the gaming business; consumer preferences, spending patterns and demographic trends; legislation and governmental regulation. Although the forward-looking statements contained in this management's discussion and analysis are based upon what management believes to be reasonable assumptions, the Fund cannot assure readers that actual results will be consistent with these forward-looking statements.

Structure of the Fund

The structure of the Fund has not changed from that presented in the 2005 MD&A. The Fund had 26,417,687 units outstanding as at March 31, 2006 and as at the date of this management's discussion and analysis. On April 25, 2006, the Fund issued $35 million of extendible convertible debentures, which are discussed further in the Capital Resources section below. The debentures are convertible into units of the Fund at the option of the holders at a price of $19.10 per unit, representing 52.3560 units per $1,000 principal amount.

General

Gateway operates six casinos in Western Canada; five in British Columbia and one in Alberta. The location of each casino and the number of slot machines and table games at March 31, 2006, is listed in the table below:



Number of slot
machines & Number of
Casino Location electronic games table games

Gateway Casino - Burnaby Burnaby, B.C. 679 32
Lake City Casinos
Kamloops Kamloops, B.C. 300 8
Kelowna Kelowna, B.C. 342 11
Penticton Penticton, B.C. 224 10
Vernon Vernon, B.C. 210 8

Palace Casino Edmonton, AB 706(1) 31(2)
(1) As at December 31, 2005, the Palace Casino operated 711 slot
machines and electronic games. On Feb 1st 2006, five electronic
poker games were removed by AGLC upon completion of their trial
period.
(2) The Palace Casino also operates a 7-table poker room.


In Canada, most gaming activities, including casino operations, are conducted and managed by the provincial governments. They retain the majority of the revenue generated after pay out to customers, and use these funds to support charitable organizations and government initiatives. The gaming industry is generally considered to include lotteries, bingo games, pari-mutuel wagering (such as horse racing) and games typically associated with casinos, such as table games and slot machines. Casino revenue is measured in terms of "win", which is the amounts wagered on gaming activities, less pay out to customers.

Economic and industry factors affecting the Western Canadian gaming market are substantially unchanged from those presented in the 2005 MD&A.

Industry Definitions

"Win" is the amounts wagered on gaming activities, less payout to customers.

"Drop" is the amount players buy in at a table.

"Hold percentage" is equal to the win.



Financial Performance
Summary of Quarterly Results
(C$ in thousands except per unit figures.)
-------------------------------------------------------
2006 2005 2004
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------

Revenue
Table
games
revenue 7,116 7,175 6,916 7,043 7,517 7,495 6,921 6,587
Slot
machines
and
other
electronic
games
revenue 17,027 16,902 16,959 16,839 15,684 14,729 15,182 14,733
Hotel
revenue - - - - - 692 2,337 -
Other
revenue 2,570 2,044 1,641 1,982 2,025 1,351 1,622 1,732
-------------------------------------------------------
Total
revenue 26,713 26,121 25,516 25,864 25,226 24,267 26,062 23,052


Expenses 15,992 16,271 14,207 14,897 14,899 15,740 15,052 13,232
-------------------------------------------------------
EBITDA(1) 10,721 9,850 11,309 10,967 10,327 8,527 11,010 9,820
-------------------------------------------------------
-------------------------------------------------------

Net
earnings 9,197 8,716 10,175 8,194 8,668 6,249 8,044 8,558
-------------------------------------------------------
-------------------------------------------------------
Basic
and
diluted
earnings
per
unit 0.35 0.33 0.39 0.31 0.33 0.24 0.30 0.32
-------------------------------------------------------
-------------------------------------------------------

Distributable
Cash 10,263 8,940 10,536 9,956 9,367 9,299 9,715 8,902
-------------------------------------------------------
-------------------------------------------------------
Per
unit 0.389 0.338 0.399 0.377 0.355 0.351 0.368 0.337
-------------------------------------------------------
-------------------------------------------------------

(1) EBITDA is not a defined term under Canadian generally accepted
accounting principles. See discussion under "EBITDA and Net
Earnings".


Results of Operations

Revenue

Gateway's revenue is primarily earned through fees paid by the British Columbia Lottery Corporation (BCLC) for operating the five BC casinos and by the Alberta Gaming and Liquor Commission (AGLC) for operating the Palace Casino. The Fund also generates revenue by providing related casino services such as food and beverage, parking, foreign exchange services, and automated teller machines.



Three months
C$ in thousands ended March 31,
2006 2005 % change
----------------------------

Table games revenue 7,116 7,517
Slot machines and other electronic
games revenue 17,027 15,684
Other revenue 2,570 2,025
---------------
26,713 25,226 5.9%
---------------
---------------


Total revenue in the first quarter of 2006 was up $1.5 million, or 5.9% from the same period in 2005. The majority of the increase was due to continued growth of slot machine revenue in Burnaby and Lake City, which increased $1.3 million, or 8.6%, over the same quarter in 2005. The decrease in table game revenues from the first quarter of 2006 occurred primarily at Burnaby and is discussed below in the Operating Segments section. However, table games revenue for the first quarter of 2006 is consistent with the previous three quarters.

The following table compares our total revenue in the first quarter of 2006 with each of the four previous quarters.



C$ in thousands Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
--------------------------------------

Table games revenue 7,116 7,175 6,916 7,043 7,517
Slot machines and other
electronic games revenue 17,027 16,902 16,959 16,839 15,684
Hotel revenue - - - - -
Other revenue 2,570 2,044 1,641 1,982 2,025
--------------------------------------
26,713 26,121 25,516 25,864 25,226
--------------------------------------
--------------------------------------


Discussion of the first quarter's results is included in the Operating Segments section below.

Expenses

Total expenses for the first quarter were $16.0 million or 59.9% of total revenue.



Three months
C$ in thousands ended March 31,
2006 2005 % change
----------------------------

Corporate and general administration 1,114 1,214
Cost of food & beverage services 821 581
Human resources 10,650 10,281
Marketing and promotions 1,236 844
Occupancy 770 715
Operating 1,401 1,264
---------------
15,992 14,899 7.3%
---------------
---------------

Percentage of total revenue 59.9% 59.0%
---------------
---------------


Total expenses for the first quarter of 2006 were $1.1 million or 7.3% higher than the first quarter of 2005.

The increased marketing and promotions expenses are due primarily to BC Gold Card player points program that began in Q1 2006.

As discussed in our 2005 MD&A, the BCLC introduced a number of new revenue-building initiatives in BC casinos. In January 2006, the BCLC enhanced the BC Gold Card, the recently launched player loyalty program, to include a points for play program. Members receive one BC Gold point for every dollar played in a slot machine. Each point is worth $0.005 and members can redeem their points for cash once they have accumulated a minimum of 1,000 points. Casino operators are responsible for 25% of the cost of this program and it is anticipated that the expected increase in slot revenue will more than offset the cost.

Human resources increased by $369,000 due primarily to labour on food and beverage service initiated in the first quarter of 2006. This is discussed further in our Operating Segments section below.

The following table compares the expenses of the first quarter of 2006 with each of the last four quarters.



C$ in thousands Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
--------------------------------------

Corporate and general
administration 1,114 1,112 686 1,431 1,214
Cost of food & beverage
services 821 867 504 564 581
Human resources 10,650 11,062 10,460 10,362 10,281
Marketing and promotions 1,236 1,017 870 779 844
Occupancy 770 875 780 758 715
Operating 1,401 1,338 907 1,003 1,264
--------------------------------------
15,992 16,271 14,207 14,897 14,899
--------------------------------------
--------------------------------------

Percentage of total revenue 59.9% 62.3% 55.7% 57.6% 59.1%
--------------------------------------
--------------------------------------


Total expenses in the first quarter of 2006 were approximately $278,000 lower than in the fourth quarter of 2005. Q1 2006 Human resources expense decreased by $412,000 less than Q4 2005 due mainly to expected year-end costs normally incurred in the fourth quarter such as year-end performance payouts and additional statutory days. This quarter's human resources expenditures are consistent with other quarters of 2005, as shown in the table above. As mentioned above, the marketing and promotions increase of $219,000 over last quarter was due primary to the BC Gold Card player points program. These matters are discussed in more detail in the Operating Segments discussion below.

EBITDA and Net Earnings

EBITDA is not a defined term under Canadian Generally Accepted Accounting Principles, nor does it have a standard, agreed upon meaning. Accordingly, the Fund's EBITDA may not be directly comparable to EBITDA reported by other issuers. Management has determined EBITDA is a useful supplemental measure in evaluating the Fund's performance as it provides investors with an indication of cash available for debt service, working capital needs and capital expenditures. This non-GAAP measure is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

The Fund generated earnings before loss on sale of assets, interest, income allocation on Class A units, amortization and unrealized loss on interest rate swap contract ("EBITDA") of $10.7 million for the first quarter of 2006, resulting in an EBITDA margin of 40.1%. This is comparable to the first quarter of 2005 at 40.9% and is below the EBITDA margin of 41.3% in all of 2005.

After amortization and net interest expense, the Fund generated net earnings of $9.2 million, or $0.35 per unit, for the first quarter. This compares to $8.7 million, or $0.33 per unit, in the first quarter of 2005.

The reconciliation between EBITDA and net earnings is:



Three months ended
C$ in thousands March 31,
2006 2005
------------------

EBITDA 10,721 10,327
Interest income on secured loans 2,397 2,397
Income allocation on Class A Partnership Units (2,400) (2,400)
Interest expense, net (673) (757)
Unrealized loss on interest rate swap contracts 274 (28)
Loss on sale of property and equipment (129) -
Amortization (993) (871)
------------------
Net Earnings 9,197 8,668
------------------
------------------


Loss on sale of property and equipment was related to the disposal of obsolete hotel assets acquired with the purchase of the Villa Hotel on June 30, 2004.

Operating Segments

The Partnership has three primary operating segments based on geographic markets. These are the Burnaby Casino, the Lake City Casinos and the Palace Casino.

Although the Consolidated Statement of Earnings for the three months ended March 31, 2006 includes corporate and general administration expenses, interest income on secured loans, income allocation on Class A Partnership Units, interest expense, unrealized loss on interest rate swap contract and loss on sale of assets in determining net earnings, these items are not expenses of any one operating segment, and have not been included in the following discussion.

Burnaby Casino



Three months
C$ in thousands ended March 31,
2006 2005 % change
----------------------------
Revenue
Table games revenue 4,273 4,658
Slot machine revenue 7,190 6,434
Food & beverage revenue 652 122
Other revenue 229 437
----------------------------
12,344 11,651 6.0%
----------------------------

Operating expenses
Human resources 4,017 3,771
Occupancy 108 101
Food & beverage 286 57
Other operating expenses 1,220 1,299
----------------------------
5,631 5,228 7.7%
----------------------------

Operating earnings before amortization 6,713 6,421
---------------
---------------


Total revenue at the Burnaby Casino in the first quarter of 2006 increased $693,000 over the same period in 2005. This was due primarily to increased slot machine revenue of $756,000, which reflected the continuation of a general growth trend that we recorded throughout 2005. Food and beverage increased by $530,000 over the same quarter last year as a result of introducing liquor service in the first quarter of 2005, and taking over the operation of the food and beverage services in the first quarter of 2005 that was formerly operated by a third party.

Offsetting the increase in slot machine revenues was a decrease in table games revenue of $385,000, or 8.2% which is directly related to a decrease of 10% in the drop when compared to the fourth quarter of 2005. The decrease in drop is primarily related to high limit table play and may reflect an influence from the Boulevard Casino expansion in Coquitlam which opened in November 2005. Subsequent to the end of the quarter, drop levels in April and May increased to levels experienced prior to the opening of the Boulevard casino expansion.

Total expenses for the first quarter of 2006 were approximately $402,000 higher than during the same period in 2005, resulting in a rise in expenses as a percentage of revenue from 44.8% in 2005 to 45.6% in 2006. The $245,000 increase in human resources costs relates primarily to food and beverage wages associated with operating the food and bar services previously discussed.

The following table compares the Burnaby Casino's results for the first quarter of 2006 with the each of the previous four quarters.



C$ in thousands Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
--------------------------------------
Revenue
Table games revenue 4,273 4,107 4,090 4,363 4,658
Slot machine revenue 7,190 7,053 6,827 6,724 6,434
Food & beverage revenue 652 635 129 133 122
Other revenue 229 (6) 216 295 437
--------------------------------------
12,344 11,789 11,262 11,515 11,651
--------------------------------------

Operating expenses
Human resources 4,017 4,039 3,872 3,615 3,771
Occupancy 108 156 94 95 101
Food & beverage 286 330 48 55 57
Other operating expenses 1,220 1,129 1,102 1,096 1,299
--------------------------------------
5,631 5,654 5,116 4,861 5,228
--------------------------------------

Operating earnings before
amortization 6,713 6,135 6,146 6,654 6,423
--------------------------------------
--------------------------------------


Slot machine revenue continued to increase during the first quarter of 2006, with average win per day per machine for the first quarter up slightly over the fourth quarter of 2005. Table games revenue increased by $166,000 over the fourth quarter 2005, as a result of a rise in the win percentage from 17.2% to 19.2%. However, the table game drop decreased by 9.5% when compared to the fourth quarter of 2005 which may have been caused by the opening of the Boulevard Casino in Coquitlam.

In our year-end 2005 MD&A, the decrease in hold percentage was discussed and specifically, two games, blackjack and baccarat were identified as accounting for much of the decrease in hold percentage. To counter these effects, changes were made to both games. In December 2005, all of our blackjack tables were converted to "Lucky Lady" blackjack, which combines traditional blackjack with an optional bonus that typically improves the hold percent over traditional blackjack. During the fourth quarter of 2005, two of our baccarat tables were replaced with a seven spot table, versus the nine spot tables historically used in the Burnaby Casino. This allows for a faster speed of play, which should increase hands per hour and thus increase win percentage and revenue.

Total expenses in the first quarter of 2006 were comparable to all four quarters of 2005. As mentioned previously, a rise in food and beverage costs related to the take over of the restaurant and beverage services previously operated by a third party and new liquor service on the gaming floor both started in the fourth quarter of 2005.

Lake City Casinos



Three months
C$ in thousands ended March 31,
2006 2005 % change
----------------------------

Revenue
Table games revenue 1,002 960
Slot machines revenue 7,288 6,528
Food & beverage revenue 413 166
Other revenue 136 120
----------------------------
8,839 7,774 13.7%
----------------------------

Operating expenses
Human resources 3,886 3,900
Occupancy 358 300
Food & beverage 184 111
Other operating expenses 1,076 786
FDF expense recovery (340) (582)
----------------------------
5,163 4,515 14.4%
----------------------------

Operating earnings before amortization 3,676 3,259
---------------
---------------


Revenue at the Lake City Casinos for the first quarter of 2006 was up approximately 13.7% from the same period of 2005. Most of the growth in the quarter came from an increase in slot machine revenue, reflecting the continuation of a general growth trend that we recorded throughout 2004 and 2005.

A food and beverage revenue increase of $247,000 over the first quarter of 2005 resulted from the take over of an existing restaurant and liquor service previously operated by a third party and from obtaining a license to serve liquor on the gaming floor. The rise in other operating costs for the quarter is primarily related to $107,000 of costs associated with the BC Gold Card player points program and the anniversary increase in our lease costs on May 2005 of approximately $24,000 per quarter.

The following table compares the Lake City Casinos' results for the first quarter of 2006 with each of the last four quarters.



C$ in thousands Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
--------------------------------------
Revenue
Table games revenue 1,002 975 1,140 1,014 960
Slot machines revenue 7,288 7,209 7,579 7,183 6,528
Food & beverage revenue 413 280 208 178 166
Other revenue 136 7 83 226 120
--------------------------------------
8,839 8,471 9,010 8,601 7,774
--------------------------------------

Operating expenses
Human resources 3,886 4,241 3,980 3,951 3,900
Occupancy 358 387 369 338 300
Food & beverage 184 147 127 114 111
Other operating expenses 1,076 1,141 847 764 786
FDF expense recovery (340) (483) (721) (663) (582)
--------------------------------------
5,163 5,433 4,602 4,504 4,515
--------------------------------------

Operating earnings before
amortization 3,676 3,038 4,408 4,097 3,259
--------------------------------------
--------------------------------------


Total operating expenses in the first quarter of 2006 were down by $270,000 compared to the fourth quarter of 2005. Human resources decreased by $354,000 as a result of expected fourth quarter influences such as more statutory days and year-end performance payouts at year-end. Facility Development Fund (FDF) expense recovery decreased in the quarter due to recovery of capital expenditures.

During first quarter of 2006, the BCLC began conversion of slot machines in Penticton to an integrated voucher system (or "IVS") technology and completed the conversion of 73 machines. By the end of April 2006, 162 had been converted reaching a 73% conversion rate. In Vernon, an additional 58 machines were converted by the BCLC bringing the total to a 74% conversion by the end of the quarter. Kelowna had 47 machines converted in the quarter and reached a 80% conversion by March 31, 2006. Over the same quarter, Kamloops converted 66 machines reaching a 75% conversion.

Palace Casino



Three months
C$ in thousands ended March 31,
2006 2005 % change
----------------------------
Revenue
Table Games revenue 1,841 1,901
Slot machines and other electronic
games revenue 2,549 2,721
Food & beverage revenue 1,002 1,073
Other revenue 138 106
----------------------------
5,530 5,801 (4.7%)
----------------------------

Operating expenses
Human resources 2,373 2,317
Occupancy 303 314
Food & beverage 351 414
Other operating expenses 682 604
----------------------------
3,709 3,649 3.8%
----------------------------

Operating earnings before amortization 1,821 2,152
---------------
---------------


Total revenue in the first quarter of 2006 was down 4.7% from the same period last year due to the continued impact of a smoking ban that came into effect on July 1, 2005 in the City of Edmonton affecting all bars, lounges bingo halls and casinos. As has been previously indicated and based on experience in other jurisdictions where similar bans were implemented, we indicated that revenue at the Palace Casinos could be immediately impacted by up to 15%, with this recovering to pre-ban levels within nine to 12 months of the ban's implementation.

The main impact of the ban has been a decrease in revenue from slot machines and other electronic games, which initially fell by 5.5%. Revenue began to recover almost immediately and was fully recovered by the end of January 2006. However, slot machine and electronic games revenue for the full quarter was down 6.3% from the same period in 2005. This is primarily due to unusually high revenue realized in February and March of 2005. Slot machine and electronic games revenue is consistent with that earned in the first quarter of 2004, which is more representative of expected results.

In contrast to the decrease in slot machine revenues, table games revenue has not been impacted and is consistent with the previous year.

Total expenses for the first quarter of 2006 were $3.7 million, compared to $3.6 million in the first quarter of 2005. The increase was due primarily to approximately $90,000 in legal and consulting expense over union negotiations. All other expense categories were consistent with last year.

The following table compares the Palace Casino's results for the first quarter of 2006 with each of the last five quarters.



C$ in thousands Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
--------------------------------------
Revenue
Table games revenue 1,841 2,092 1,687 1,665 1,901
Slot machines and other
electronic games revenue 2,549 2,641 2,553 2,933 2,721
Food & beverage revenue 1,002 1,039 909 1,030 1,073
Other revenue 138 89 95 120 106
--------------------------------------
5,530 5,861 5,244 5,748 5,801
--------------------------------------

Operating expenses
Human resources 2,373 2,410 2,360 2,410 2,317
Occupancy 303 332 316 325 314
Food & beverage 351 390 328 394 414
Other operating expenses 682 561 551 586 604
--------------------------------------
3,709 3,693 3,555 3,715 3,649
--------------------------------------

Operating earnings before
amortization 1,821 2,168 1,689 2,033 2,152
--------------------------------------
--------------------------------------


As can be seen, first quarter revenue at Palace Casino decreased by 5.6% from the fourth quarter of 2005, however it was consistent with the first quarter of 2005. Historically, at the Palace Casino, the first quarter is the slowest quarter of the year. Expenses in the first quarter of 2006 were consistent with previous quarters.

On Feb 15, 2005, an on-site Responsible Gaming Centre was installed at the Palace Casino as required by the Alberta Gaming and Liquor Commission and operated by the Alberta Alcohol and Drug Abuse Commission. This on-site center is manned by an addictions counselor and is meant as part of an overall strategy to raise awareness of problem gambling and encourage responsible behaviours. These centres are to be installed at other Alberta casinos and on May 4, 2006, the Deerfoot Casino in Calgary opened their Responsible Gaming Centre.

Outlook

There were no significant changes to the competitive landscape in British Columbia and Alberta during the first quarter of 2006. However, looking forward, the Fund expects to see additional growth in the market from the following projects:

1. The introduction of 600 slot machines at the Hastings Racecourse in Vancouver, which was previously expected in the fourth quarter of 2005, has now been delayed. Although no specific opening date has been given, it is expected that this will open no earlier than late 2006.

2. The opening of the second phase of the expansion of the Boulevard Casino in Coquitlam is anticipated for the third quarter of 2006. This phase includes a 1,200-seat theater, plus meeting and convention space.

3. The opening of a new 100,000 square foot casino in the Queensborough area of New Westminister. This facility will provide 600 slot machines, up to 60 table games, a large poker room and a high-limit gaming area, as well as a variety of food and beverage options. The completion date is targeted for the fourth quarter of 2007.

4. The opening of the redeveloped Burnaby Casino, expected in late spring of 2008.

Both of the Hastings and Coquitlam operations are relatively close to the Burnaby location and will increase the available gaming supply in the market. The new Queensborough Casino is not expected to impact the Burnaby Casino, as they generally draw patrons from different market areas. As we have discussed in the past, Gateway has developed a two-stage response to these threats, with the completed expansion of the Burnaby Casino at the end of 2004 and the development of a new facility at the Radisson Hotel in Burnaby by late spring of 2008.

The new Burnaby facility includes a 100,000 square foot casino, a full-service restaurant, a new lobby for the hotel and a convention center, as well as upgrades to the 200 rooms in the tower portion of the hotel. The new casino will house up to 1,000 slot machines, up to 60 table games, a high-limit gaming area and the necessary back-of-house amenities. The casino will also expand on the food and beverage alternatives currently offered at the Burnaby Casino by providing a number of quick serve food choices, an entertainment lounge with bar and a central bar on the main floor of the casino. Once the new facility is opened, the existing casino will be converted back into a parkade, with an additional level and a half of parking constructed. This structure will be connected to the new casino by a covered overhead walkway, allowing easy and comfortable access to the casino.

On April 30, 2006, Gateway entered into a fixed price construction contact with PCL Constructors Westcoast Inc ("PCL") for the redevelopment of the Burnaby Casino. The contract awarded to PCL has a value of $73.1 million and covers approximately 68% of the total construction costs of the Burnaby project. Including design and preliminary costs incurred to date, approximately 76% of the total construction costs have been fixed. Under the terms of the contract, which includes all base construction of the casino and convention centre, and enhancements to the exterior of the existing hotel tower, PCL has provided a guarantee of substantial completion of construction and has guaranteed the price for this construction work. Given the time required for interior finishing, installation of gaming devices and other commissioning activities, the Fund anticipates the redeveloped casino, hotel and convention centre will open in the late spring of 2008.

In addition to the work included in the contract with PCL, the project construction will include the completion of a restaurant, interior finishings for the hotel, including executive level suites, and the renovation and expansion of the existing parkade structure. These additions have an estimated value of $25 million and contracts for the completion of the majority of these components will be awarded as required, once all design specifications have been finalized. With the exception of the renovation and expansion of the parkade, all construction is expected to be completed by the scheduled opening. Work on the parkade will begin immediately after the opening of the new casino and is expected to take six months to complete.

Excluding the cost of the acquisition of the property in June 2004, the total redevelopment project for the Burnaby Casino is now estimated at approximately $125 million including pre-opening costs, recruitment, training, furniture and equipment. The figure also includes standard construction contingencies to allow for any potential cost increases related to those components of the project not yet awarded. Although the new budget represents a 19% increase from the previously announced budget of $105 million, signing of the PCL contract mitigates future cost increases. The Fund estimates that approximately 80% of the total budget will be eligible for recovery under BCLC FDF.

Potential redevelopments of the Lake City Casinos

The existing Lake City Casinos were opened in 1998 through 2000, with the Kamloops Casinos undergoing an update in June 2003. Operations in the region continue to perform well and customer feedback and reviews have been very positive. In addition, there has been significant growth in the region in past years and the rate of population growth has continued to accelerate, with current forecasts at 2% per annum. The Fund believes now is an opportune time to address longer term needs and intends to make an investment in the area ensuring our long-term commitment to each of the communities it serves. The strategy's focus is to meet growing demand for gaming offerings and provide a more complete entertainment experience for customers. The Fund believes that opportunities exist for expansion or relocation of the casinos in Kelowna, Kamloops and Vernon. Preliminary plans for each are detailed below, which are subject to approval by BCLC and the relevant municipalities.

Kelowna Casino

The Kelowna Casino is currently 21,000 square feet and hosts 342 slot machines and 10 table games. The facility includes limited food and beverage services, including liquor service that was added in the first quarter of 2006. Management believes that the Kelowna market can support a larger facility and is investigating alternatives to approximately double the size of the facility to increase the size of the gaming floor, as well as to provide for enhanced food and beverage services and live entertainment.

Kamloops Casino

The Kamloops Casino is located within the Executive Inn in downtown Kamloops. The current facility is 14,400 square feet and hosts 300 slot machines and 8 table games. Our initial plans are to purchase a 1.24 acre site immediately to the north of the hotel building and a new 30,000-sq ft freestanding casino with up to 400 slot machines, 12 tables and a 6 table poker room. In addition, we are looking to incorporate a small pub style restaurant/lounge with stage area into the design. The plan also includes an underground parking garage with approximately 225 designated spaces for casino guests.

The Executive Inn is currently under contract to be purchased by a third party. This will provide the casino with a potential new customer base.We are excited at the prospect of expanding our casino and working with this group to upgrade the quality of this destination.

Vernon Casino

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. 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.

The new casino is anticipated to be located in approximately 20,000 to 25,000 sq. ft of leased space on the ground floor of a brand new three-story building. The Fund is contemplating a facility with up to 400 slot machines and electronic games, a pub style restaurant/lounge with stage area to host entertainment and promotional events. Negotiations regarding an acceptable lease with the developer are currently in progress. Assuming completion of successful negotiations, the relocation is expected to take approximately 12 to 14 months.

Liquidity

Distributable Cash

Distributable cash is not a defined term under Canadian Generally Accepted Accounting Principles, nor does it have a standard, agreed upon meaning. As such, the Fund's distributable cash may not be directly comparable to distributable cash reported by other income funds or similar issuers. Distributable cash is presented because the Fund's policy is to pay distributable cash to unitholders on a monthly basis to the maximum extent possible. Management believes that distributable cash is a useful measure as it provides investors with an indication of cash available for distribution. This non-GAAP measure is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Distributable cash is defined as the Fund's cash flow from operating activities before changes in non-cash working capital items, less required principal payments on debt, less maintenance capital expenditures, net of recoveries from the FDF, plus proceeds from sales of assets, less any reserves determined by the Trustees to be reasonable and necessary for the operations of the Fund.

Consistent with previous periods, costs incurred for the redevelopment of the Burnaby Casino have been excluded from the calculation of distributable cash, as they will be funded solely from debt and/or recoveries from the Facility Development Fund. Debt financing and any associated FDF received will also be excluded in the calculation.

Distributable cash for the three months ended March 31, 2006 and March 31, 2005 was as follows:



Three months ended
C$ in thousands March 31,
2006 2005
$ $

Cash flows from operating activities before
changes in non-cash working capital items 10,420 9,567

Maintenance capital expenditures(1) (521) (118)
FDF reimbursement received for property and
equipment purchases(2) 316 -
Payments on long-term debt, net - (82)
Proceeds on Sale of property and equipment 48 -
------------------

Distributable cash for the period 10,263 9,367
------------------
------------------
Per unit 0.389 0.355
------------------
------------------
(1) Maintenance capital expenditures include only those costs related
to ongoing operation of existing casinos and exclude costs
associated with expansions and new developments that are funded
by debt.
(2) Excludes FDF reimbursements received for costs associated with
expansions and new developments that are funded by debt.


Distributions were made on a monthly basis in 2006 as follows:



Distribution
per unit Payment Date
-----------------------------------
January 2006 0.115 February 28, 2006
February 2006 0.115 March 31, 2006
March 2006 0.115 April 30, 2006
-------------
$ 0.345
-------------
-------------


Management anticipates that the Fund will generate sufficient distributable cash in the remainder of 2006 to maintain its current monthly distribution level.

Subject to closing of the acquisition of the Cascades Langley Casino and Hotel, the Board of Trustees has agreed to increase the monthly distribution by $0.0045 per unit, per month beginning with the distribution for June 2006.

Contractual Obligations

The Fund had the following contractual obligations outstanding at March 31, 2006.



Less than After
C$ in thousands Total 1 year 1-3 years 4-5 Years 5 years

Long-term debt
Promissory note 900 0 180 180 540
Credit Facilities - - - - -
Long term notes 47,500 - - - 47,500
Lease obligations(1) 15,300 2,717 5,039 2,691 4,853
-----------------------------------------------
63,700 2,717 5,219 2,871 52,893
-----------------------------------------------
-----------------------------------------------
(1) for the Partnership's casino locations, as well as certain office
equipment and office space


Letters of Credit

As of March 31, 2006, the Fund had $12.6 million in letters of credit outstanding of which $10.5 million relates to BCLC. The letters of credit were issued against our Facility A that provides a maximum of $20 million. See 2005 MD&A for complete details on our credit facilities.

Capital Resources

Capital Expenditures

Capital expenditures for the three months ended March 31, 2006 totaled $1,666,000. Of that amount, $1,145,000 were costs associated with the redevelopment of the Burnaby Casino in the first quarter of 2006. The remaining $521,000 represents maintenance capital expenditures for Gateway's operations. During the quarter, the Fund received $316,000 in FDF compensation, all of which is related to capital expenditures of Lake City. The Fund applies FDF recoveries to these expenditures on a first-in-first-out basis. The balance of unrecovered eligible expenditures for the Lake City Casinos as at March 31, 2006 was:



C$ in thousands

Balance as at December 31, 2005 4,503
Eligible expense incurred in 2006 350
FDF Capital recoveries in 2006 (316)
FDF Expense recoveries in 2006 (614)
-----
Balance as at March 31, 2006 3,923
-----
-----


Other than the planned redevelopment of the Burnaby Casino, there are currently no other commitments for capital expenditures in 2006. Management anticipates the maintenance capital expenditures required in 2006 will almost double the total expenditures incurred during 2005.

Bank Credit Facilities

On May 1, 2006, the Fund entered into an agreement with a syndicate of Canadian chartered banks to provide total debt financing of $220 million. Funds will be used to provide construction financing for the Burnaby redevelopment and the potential expansion/relocation of the Lake city Casinos in Kamloops, Kelowna and Vernon. The total financing comprises a $30 million revolving credit facility, a $175 million committed construction facility and $15 million committed contingency facility.

Interest on all facilities will be paid monthly in arrears and is based on Gateway's ratio of debt to EBITDA for the period. The Fund's debt to Last Twelve Months (LTM) EBITDA ratio must not exceed certain thresholds. These thresholds start at a maximum of 3.75:1 and step down in increments of 0.25, reaching 2.5:1 by the end of the fourth quarter of 2010. The Fund must also maintain a fixed charge coverage ratio of not less than one to one, on a rolling four quarter basis. Additionally, the agreement requires that the amounts outstanding under the construction and contingency facilities be reduced by $70 million at substantial completion.

The revolving credit facility has a term of three years and requires interest only payments, while the committed construction and contingency facilities have three year terms commencing at the end of an estimated two-year construction period. During the construction period the Fund is required to make interest-only payments, which will be capitalized as part of the construction loan, after which principal becomes payable in monthly instalments equal to the amount of funds received from the FDF. Mandatory principal payments will cease once the Fund's debt to EBITDA ratio falls below 2.5:1.

The financing is subject to completion of a formal loan agreement, which, upon completion, will be filed on SEDAR. The Fund believes that the new credit facilities will provide sufficient resources to finance the complete Burnaby redevelopment and the potential expansion/relocation of the Lake City Casinos in Kamloops, Kelowna and Vernon.

Long-Term Notes Shelf Facility

Gateway currently has approximately US$40 million available under its existing long-term note shelf facility and is currently in negotiations to increase that amount to provide for the required $70 million minimum reduction under the new bank facilities.

Issue of Convertible Debentures

On April 25, 2006 the Fund issued $35 million of extendible convertible debentures. The maturity date of the debentures is initially June 30, 2006. If the acquisition of Cascades closes prior to this date, the maturity date will automatically extend to June 30, 2011. The debentures bear interest at 5.35% payable semi-annually in arrears on June 30 and December 31, in each year, commencing December 31, 2006. The debentures are convertible into units of the Fund at the option of the holders at a price of $19.10 per unit, representing 52.3560 units per $1,000 principal amount. The debentures are not redeemable by the Fund prior to June 30, 2009. Subsequent to this date, the debentures may be redeemed in whole or in part at the option of the Fund, at a price equal to their principal amount plus accrued and unpaid interest, provided that the market price preceding the date on which the notice of redemption is given is at least 125% of the conversion price.

Transactions with Related Parties

The Fund had the following transactions with related parties during the current year:

1. The Fund provides management and administrative services to Gateway Casinos Inc. (GCI) with respect to its casino operations. Pursuant to the terms of the management agreement, the Fund charges a fee to GCI equivalent to GCI's proportionate share of management and administrative expenses incurred by the Fund. The proportionate share is determined annually, based upon a combination of factors including revenue, with consideration given to time spent by senior executives of the Fund on GCI matters relating to sourcing and developing opportunities in the gaming industry. The Fund charged a fee of $442,000 (2005 - $522,000) to GCI for the three months ended March 31, 2006 which is recorded in the Quarterly Financial Statements as a reduction of administration expenses.

2. The Partnership has entered into a contract with a subsidiary of GCI for Automated Teller Machine ("ATM") services at the Burnaby Casino. The Partnership manages the vault cash and provides first line service, and receives a flat fee of $750,000 per annum, payable in equal monthly instalments. During the first quarter of 2006 the Partnership earned a fee of $187,500 (2005 - $187,500), which is included in other revenue.

3. Effective November 5, 2003, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Palace Casino. The Partnership provides all required services, including providing the vault cash, and receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the three months ended March 31, 2006, the Partnership earned a fee of $24,000 (2005 - $27,000), which is included in other revenue.

4. Effective February 17, 2004, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Kamloops Casino. The Partnership provides all required services, including providing the vault cash, and receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the three months ended March 31, 2006, the Partnership earned a fee of $73,000 (2005 - $52,000), which is included in other revenue.

5. On May 1, 2005, a company controlled by the Chairman and former Chief Executive Officer of Gateway Casinos G.P. Inc, signed a lease for office space from the Fund with a monthly rent of $3,500 inclusive of all operating costs and taxes. The lease was terminated on March 31, 2006 and the Fund received leasing income of $10,500 during the first quarter of 2006 which is recorded as a reduction of the occupancy costs.

Acquisition of Cascades Langley Casino and Hotel

On April 3rd, 2006, the Fund announced that its operating entity, Gateway Casinos Limited Partnership ("LP") had entered into a letter of intent with a subsidiary of Gateway Casinos Inc ("GCI"), a private company and related party, to acquire all of the operating assets of the Cascades Langley Casino and Hotel in the Vancouver suburb of Langley, British Columbia. The transaction is valued at approximately $106.3 million and is anticipated to be closed on May 19, 2006. The purchase price will be satisfied through the issue of 4,692,689 units of the Fund and approximately $32.6 million in cash.

The transaction value of $106.3 million is based on an estimate of distributable cash, before interest expense, to be generated by Cascades for the twelve months ended December 31, 2006 of $10.8 million. The agreement provides for an adjustment to the purchase price in early 2007, based on the actual distributable cash generated by Cascades in the twelve months ended December 31, 2006. If the actual distributable cash is less than the estimated distributable cash, then units issued to GCI in connection with the transaction will be surrendered to the Fund at a price of $15.70 per unit and distributions paid on the surrendered units will be repaid to the Fund in full. If the actual distributable cash is greater than the estimated distributable cash, the Fund will issue additional units at a price equal to the 10-day volume weighted average price of the units on the date of issue. Any adjustment to the purchase price will be subject to a maximum of 10% of the initial transaction value, or $10.63 million.

On closing, GCI will indirectly retain the right to receive approximately $27.4 million from the BCLC under its FDF program relating to costs incurred in connection with the construction and development of the Cascades Casino. This arrangement will have no impact on the distributable cash of the Fund or the estimated (or actual) distributable cash of Cascades.

In connection with the transaction, GCI has also agreed to fund the construction of a 500-stall parkade for the Cascades Casino. Construction began in January 2006 and is expected to be completed by the end of August 2006 at a total cost of approximately $9.0 million. In consideration for GCI funding the construction, the Fund has agreed to assign the related FDF receivable from the BCLC to GCI and will make payments to GCI if and when these funds are received from the BCLC.

The acquisition will be a related party transaction for purposes of OSC Rule 61-501. The indirect owners of GCI, who include certain members of senior management and the Board of Trustees of the Fund, collectively hold 20% of the issued and outstanding units of the Fund. Following the completion of the transaction, and prior to any purchase price adjustment, this group will hold approximately 32% of the issued and outstanding units of the Fund. GCI and the related parties have agreed not to offer, sell, contract to sell, or otherwise dispose of any of the units issued in connection with the transaction for a period of 90 days from the date of closing of the acquisition.

A committee of independent trustees (the "Special Committee") was formed to review the proposal from GCI and to negotiate the acquisition. The Special Committee obtained independent financial and legal advice to assist it with this mandate. Raymond James Ltd. was retained as financial adviser to the Special Committee and provided the Special Committee with a formal valuation of the Cascades Casino. Raymond James Ltd. has also provided the Special Committee with its opinion that the acquisition is fair, from a financial point of view, to the unitholders of the Fund other than those unitholders interested in the transaction.

The acquisition is subject to approval by a majority vote of the disinterested unitholders of the Fund attending in person or by proxy at the Fund's annual and special meeting being held May 17, 2006.

Critical Accounting Estimates

Fair Value of Net Assets Acquired in Business Acquisitions

As part of the accounting for acquisitions made during the year, management estimates the fair market value of assets acquired for the purpose of allocating the purchase price. Where necessary, management supplements its estimates with opinions of independent third party advisors.

Goodwill Impairment Test

Goodwill is tested for impairment at least on an annual basis, normally at year-end, or when other conditions exist that may indicate that impairment could exist in the carrying value of goodwill. To identify whether goodwill impairment exists, the Fund compares the fair value of the reporting unit to which the goodwill relates to its carrying amount. When the carrying amount of the reporting unit exceeds its fair value, the carrying value is reduced to the fair value. Any excess of the carrying value of the goodwill over its fair value is charged to operations in the period the impairment occurred.

Additional Information

Additional information relating to the Fund is available on SEDAR (www.sedar.com) and on the Fund's website (www.gatewaycasinosincomefund.com), including its Annual Information Form dated March 17, 2005 and all public filings.

Gateway Casinos Income Fund

Consolidated Financial Statements

1st Quarter Report 2006

For the three months ended March 31, 2006

(Unaudited - expressed in thousands of dollars)

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim consolidated financial statements of the Fund have been prepared by and are the responsibility of the Fund's management.

The Fund's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



Gateway Casinos Income Fund
Consolidated Balance Sheets
--------------------------------------------------------------------

(expressed in thousands of dollars)

March 31, December 31,
2006 2005
$ $

Assets

Current assets
Cash and cash equivalents 18,711 22,631
Accounts receivable 1,326 596
Facility development fund receivable 65 65
Due from related parties 576 662
Inventory 185 185
Prepaid expenses 615 515
Prepaid employee compensation 115 145
Current portion of prepaid rent 804 804
---------- ----------

22,397 25,603

Prepaid rent 4,757 4,957

Property and equipment 18,482 18,891

Deferred financing costs 617 687

Deferred development costs 5,369 4,225

Goodwill 17,182 17,182

Intangible assets 16,840 17,123

Secured loans 121,508 121,508
---------- ----------

207,152 210,176
---------- ----------
---------- ----------

Liabilities

Current liabilities
Gaming revenue payable to BCLC and AGLC 4,138 7,336
Accounts payable and accrued liabilities 7,560 6,798
Distribution payable to unitholders - 3,434
---------- ----------

11,698 17,568

Interest rate swap contract 1,022 1,297

Long-term debt 48,400 48,400

Class A Partnership Units 121,508 121,508
---------- ----------

182,628 188,773
---------- ----------

Unitholders' Equity

Issuance of trust units - net
of issue costs 22,993 22,993

Cumulative earnings 114,393 105,196

Cumulative distributions
declared (112,862) (106,786)
---------- ----------

24,524 21,403
---------- ----------

207,152 210,176
---------- ----------
---------- ----------

Organization and nature of operations (note 1)
Basis of presentation (note 2)
Subsequent event (note 6)

Approved by the Board of Trustees of Gateway Casinos Income Fund

Trustee Trustee

The accompanying notes are an intergral part of these interim
consolidated financial statements


Gateway Casinos Income Fund
Consolidated Statements of Earnings and Cumulative Earnings
--------------------------------------------------------------------

(Unaudited - expressed in thousands of dollars, except per unit and
number of units figures)

Three-month Three-month
period ended period ended
March 31, March 31,
2006 2005
$ $

Revenue
Table games 7,116 7,517
Slot machines and other electronic
games 17,027 15,684
Food and beverage 2,068 1,362
Other 502 663
---------- ----------

26,713 25,226
---------- ----------

Expenses
Corporate and general administration 1,114 1,214
Cost of food and beverage services 821 581
Human resources 10,650 10,281
Marketing and promotions 1,236 844
Occupancy 770 715
Operating 1,401 1,264
---------- ----------

15,992 14,899
---------- ----------

Earnings before the following 10,721 10,327

Interest income on secured loans 2,397 2,397
Income allocation on Class A
Partnership Units (2,400) (2,400)
Interest expense - net (673) (757)
Unrealized mark-to-market gain
(loss) on interest rate swap 274 (28)
Amortization
Property and equipment (437) (324)
Intangible assets (284) (284)
Prepaid rent (201) (201)
Deferred financing costs (71) (62)
Loss on sale of property and equipment (129) -
---------- ----------

Net earnings for the period 9,197 8,668

Cumulative earnings -
Beginning of period 105,196 21,446
Distributions declared during the period (6,076) (5,812)
---------- ----------

Cumulative earnings - End of period 99,120 24,302
---------- ----------
---------- ----------

Basic and fully diluted earnings
per unit .35 .33
---------- ----------
---------- ----------

Weighted average number of units 26,417,687 26,417,687
---------- ----------
---------- ----------

The accompanying notes are an intergral part of these interim
consolidated financial statements

Gateway Casinos Income Fund
Consolidated Statements of Cash Flows
--------------------------------------------------------------------

(Unaudited - expressed in thousands of dollars, except per unit and
number of units figures.)

Three-month Three-month
period ended period ended
March 31, March 31,
2006 2005
$ $

Cash flows from operating activities
Net earnings for the period 9,197 8,668
Items not affecting cash
Long-term incentive plan
compensation 375 -
Unrealized mark-to-market
(gain) loss on interest rate
swap (274) 28
Amortization of property and
equipment 437 324
Amortization of intangible assets 284 284
Amortization of prepaid rent 201 201
Amortization of deferred
financing costs 71 62
Loss on sale of property and
equipment 129 -
---------- ----------

10,420 9,567
Changes in non-cash working capital
items (3,614) (1,238)
---------- ----------

6,806 8,329
---------- ----------

Cash flows from investing activities
Purchase of property and equipment (521) (316)
Facility development funds received for
property and equipment purchases 316 855
Proceeds on sale of asset 48 4
Development costs (1,144) (273)
---------- ----------

(1,301) 270
---------- ----------

Cash flows from financing activities
Distributions paid (9,510) (9,410)
Repayment of long-term debt - (82)
Due from related parties - net 86 318
Financing costs (1) (13)
---------- ----------

(9,425) (9,187)
---------- ----------

Decrease in cash and cash equivalents (3,920) (588)

Cash and cash equivalents
- Beginning of period 22,631 20,171
---------- ----------

Cash and cash equivalents
- End of period 18,711 19,583
---------- ----------
---------- ----------

Supplemental cash flow information
Interest paid 884 816
---------- ----------
---------- ----------


Gateway Casinos Income Fund

Notes to Consolidated Financial Statements

March 31, 2006

1 Organization and nature of operations

Organization

The Gateway Casinos Income Fund (the "Fund") is an unincorporated open-ended limited purpose trust established under the laws of the Province of British Columbia pursuant to the Declaration of Trust made as of October 10, 2002, as amended and restated on November 14, 2002. The Fund was established to invest indirectly, through the Gateway Casinos Trust (the "Trust"), in all of the Class B Partnership Units of the Gateway Casinos Limited Partnership (the "Partnership"), which operates the Burnaby Casino in Greater Vancouver, British Columbia, the four Lake City Casinos in the Thompson/Okanagan region of British Columbia and the Palace Casino in Edmonton, Alberta. In 2004, the Fund acquired the net assets of Villa Hotels Ltd. in Burnaby, B.C. (note 4), which it operated from July to October 2004 and is currently redeveloping.

Nature of operations

The Burnaby 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 Casino Facility License from the AGLC has a one-year term that expires on October 31, 2006 and has been renewed annually since 1996. During 2005, the AGLC advised casino operators that it was implementing a new licensing arrangement whereby all licenses would be issued for a term of three years, subject to annual ownership reviews. The Fund has been advised that its license will be renewed for three years once the current license expires. Prior to 1996, the Palace Casino (from its opening in 1989) operated under casino support agreements with individual charities. The other agreements with the AGLC have no specified term and are effective until terminated, at the AGLC's discretion or for certain specified reasons. The Partnership earns gaming revenues based on an agreed percentage of the total win from table games, slot machines and other electronic games as consideration for providing operational services to the BCLC and AGLC.

The operating agreements related to the Partnership's casinos provide that the applicable governing body may suspend or terminate the rights of the Partnership to provide services under the agreements for certain specified reasons. The future operations of the casinos depend on the continuation of the operating agreements.

2 Basis of presentation

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles for interim financial statements and include the accounts of the Fund, the Trust, the Partnership and its general partner, Gateway Casinos G.P. Inc., and the Lake City Limited Partnership and its general partner, Lake City Casinos Limited. Intercompany transaction and balances have been eliminated. The disclosures contained in these unaudited interim consolidated financial statements do not include all the requirements of generally accepted accounting principles for annual financial statements.

These interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements for the Fund for the year ended December 31, 2005.

Effective January 1, 2005, the Fund adopted Canadian Institute of Chartered Accountants ("CICA") Accounting Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15"). AcG-15 establishes a new framework for consolidation based on an enterprise's participation in the risks and rewards of the entity to be consolidated. Implementation of this guideline did not have any impact on the consolidated financial statements of the Fund.

3 Significant accounting policies

These interim consolidated financial statements follow the same accounting principles and methods of their application as the annual audited consolidated financial statements of the Fund.

4 Distributions to unitholders

During the three month period ended March 31, 2006, the Fund declared distributions to its unitholders of $6,076, or $ 0.115 per unit. Subsequent to the end of the period, the Fund declared a distribution of $3,038 or $0.115 per unit, related to the operations of March 2006. The amounts and record dates of these distributions are as follows:



Amount Per unit
$ $

Declared during the period
February 24 3,038 0.115
March 24 3,038 0.115
---------- ----------

6,076 0.230
---------- ----------
---------- ----------


Amount Per unit
$ $

Declared subsequent to the period,
related to the periodApril 25 3,038 0.115
---------- ----------

3,038 0.115
---------- ----------
---------- ----------


5 Segmented information

The Fund has three reporting segments: the Burnaby Casino, the Lake City Casinos, and the Palace Casino. The accounting policies for the segments are as described in note 3. All business of the Fund is conducted in Canada.



Three-month Three-month
period ended period ended
March 31, March 31,
2006 2005
$ $

Revenue
Burnaby Casino 12,344 11,651
Lake City Casinos 8,839 7,774
Palace Casino 5,530 5,801
---------- ----------

26,713 25,226
---------- ----------
---------- ----------

Earnings before long-term
incentive plan compensation
expense, corporate and general
administration, amortization,
interest, income allocation on
Class A Partnership Units,
unrealized mark-to-market gain
(loss) on interest rate swap
and gain on sale of assets
Burnaby Casino 6,713 6,422
Lake City Casinos 3,676 3,259
Palace Casino 1,821 2,152
---------- ----------

12,210 11,833
Long-term incentive plan
compensation expense (375) (292)
Corporate and general
administration (1,114) (1,214)
---------- ----------

10,721 10,327
---------- ----------

Amortization
Burnaby Casino (102) (87)
Lake City Casinos (559) (569)
Palace Casino (309) (201)
---------- ----------
(970) (857)
---------- ----------

Interest income on secured loans 2,397 2,397
Income allocation on Class A
Partnership Units (2,400) (2,400)
Unrealized mark-to-market gain
(loss) on interest rate swap 274 (28)
Amortization of corporate
property and equipment (23) (14)
Interest expense - net (673) (757)
Loss on sale of property and
equipment (129) -
---------- ----------

(1,524) (1,659)
---------- ----------

Net earnings for the period 9,197 8,668
---------- ----------
---------- ----------

Property and equipment
additions (1)
Burnaby Casino 19 222
Lake City Casinos 389 36
Palace Casino 25 48
Corporate 87 10
---------- ----------

521 316
---------- ----------
---------- ----------

(1) Excluding recoveries from FDF.


6 Subsequent event

Acquisition of Cascades Langley Hotel and Casino

On April 3rd, 2006, the Partnership entered into a letter of intent with a subsidiary of Gateway Casinos Inc ("GCI"), a private company and a related party, to acquire all of the operating assets of the Cascades Langley Hotel and Casino in the Vancouver suburb of Langley, British Columbia. The transaction is valued at approximately $106.3 million and is anticipated to be closed on May 19, 2006. The purchase price will be satisfied through the issue of 4,692,689 units of the Fund and approximately $32.6 million in cash.

The transaction value of $106.3 million is based on an estimate of distributable cash, before interest expense, to be generated by Cascades for the twelve months ended December 31, 2006. The agreement provides for an adjustment to the purchase price in early 2007, based on the actual distributable cash generated by Cascades in the twelve months ended December 31, 2006. If the actual distributable cash is less than the estimated distributable cash, then units issued to GCI in connection with the transaction will be surrendered to the Fund at a price of $15.70 per unit and distributions paid on the surrendered units will be repaid in full. If the actual distributable cash is greater than the estimated distributable cash, the Fund will issue additional units at a price equal to the 10-day volume weighted average price of the units on the date of issue. Any adjustment to the purchase price will be subject to a maximum of 10% of the initial transaction value, or $10.63 million.

The transaction is subject to the approval of a majority of the non-interested unitholders at a meeting to be held on May 17, 2006.

Issue of Convertible Debentures

On April 25, 2006, the Fund issued $35 million of extendible convertible debentures. The maturity date of the debentures initially is June 30, 2006. If the acquisition of Cascades closes prior to this date, the maturity date will automatically extend to June 30, 2011.

The debentures bear interest at 5.35% payable semi-annually in arrears on June 30 and December 31, each year, commencing December 31, 2006. The debentures are convertible into units of the Fund at the option of the holders at a price of $19.10 per unit, representing 52.3560 units per $1,000 principal amount.

The debentures are not redeemable by the Fund prior to June 30, 2009. Subsequent to this date, the debentures may be redeemed in whole or in part at the option of the Fund, at a price equal to their principal amount plus accrued and unpaid interest, provided that the market price preceding the date on which the notice of redemption is given is at least 125% of the conversion price.

Credit Facilities

On May 1, 2006, the Fund entered into an agreement with a syndicate of Canadian chartered banks to provide total debt financing of $220 million. Funds will be used to provide construction financing for the Burnaby redevelopment and the potential expansion/relocation of the Lake City Casinos in Kamloops, Kelowna and Vernon. The total financing comprises a $30 million revolving credit facility, a $175 million committed construction facility and $15 million committed contingency facility.

Interest on all facilities will be paid monthly in arrears and is based on Gateway's ratio of debt to EBITDA for the period. The Fund's debt to Last Twelve Months (LTM) EBITDA ratio must not exceed certain thresholds. These thresholds start at a maximum of 3.75:1 and step down in increments of 0.25, reaching 2.5:1 by the end of the fourth quarter of 2010. The Fund must also maintain a fixed charge coverage ratio of not less than one to one, on a rolling four quarter basis. Additionally, the agreement requires that the amounts outstanding under the construction and contingency facilities be reduced by $70 million at substantial completion.

The revolving credit facility has a term of three years and requires interest only payments, while the committed construction and contingency facilities have three year terms commencing at the end of an estimated two-year construction period. During the construction period the Fund is required to make interest-only payments, which will be capitalized as part of the construction loan, after which principal becomes payable in monthly instalments equal to the amount of funds received from the FDF. Mandatory principal payments will cease once the Fund's debt to EBITDA ratio falls below 2.5:1.

The financing is subject to completion of a formal loan agreement.

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